SALT TALKS

[00:00:00] John Darsie: Hello everyone and welcome back to Salt Talks. My name is John Darcy. I'm the managing director of Salt as well as a partner at SkyBridge Capital. Salt is a global thought leadership forum and capital introductions platform. SkyBridge is a global alternative asset management firm. Salt Talks is our digital interview series with leading investors, creators, and thinkers.

And our goal on these SALT Talks is the same as our goal at our global SALT conferences, which is to provide a window into the mind of subject matter experts. As well as provide a platform for what we think are big ideas that are shaping the future And in addition to our ongoing series of salt talks, we're excited for our next in person conference Which is november 14th to the 16th at marina bay sands in singapore We're very excited today to welcome dan vanay to salt talks Dan is a co founder and managing partner of icapital which is a leading alternative investing fintech platform Dan today leads iCapital marketplace, which is the largest global platform that connects predominantly wealth managers with the world's leading alternative asset managers.

And we're excited to learn more about the continued evolution and growth of iCapital today. Dan, it's a pleasure to have you on before we get into more of the meat of the conversation. I talked a little bit about your current position and your background, but very quickly, could you give us a little bit more context into.

Sort of your career and the inspiration that led you to co found iCapital.

[00:01:34] Dan Vene: Sure. Sure. Happy to. And very nice to see you again, John. So we founded iCapital just over a decade ago. I personally and the other founders have been deep believers, alternatives, and, The positive benefits they can bring to client portfolios and have spent over the last 20 years myself in the asset class.

We'll get into a little bit later, some of the reasons for our deep belief in alternatives, and then also some observations about public markets they obviously have their place in a client's portfolio. But I think generally speaking, most clients are likely overexposed to the large indices today.

And maybe even, as it turns out, some specific names within the indices and alternatives can help provide specific exposures that help, with correlations lower volatility, enhanced returns over time. Founded the company about 10 years ago. Today we're about 1200 team members.

We spent hundreds of millions of dollars on building the industry's alternative infrastructure. And that's used by several hundred leading asset managers in the alternative space. And really just about every form of wealth manager from the largest wire houses. The Wall Street wire houses to independent broker dealers, independent RAAs, family offices, and the have come to adopt the iCapital technology and operational footprint to help their clients achieve their objectives.

[00:02:53] John Darsie: One of the interesting things, obviously everybody knows about the RIA marketplace being very fragmented and you guys have filled a void there and providing technology and a suite of alternative investment products to fill the needs within those portfolios, but you've also, as you mentioned, partnered with large wire houses and you guys have built.

We're the best in class technology to help solve needs for them. Why do you think that iCapital has been able to fill that void among large banks that obviously are well resourced, but it's still leaned on iCapital to meet those solutions?

[00:03:27] Dan Vene: Yeah I think it comes down to some of the the nuances and complexities of owning alternatives.

And also just the fact that alternatives as an asset class are very broad and the structures range very significantly. The ability to provide consistent updated reporting that's comprehensive, that, that actually shows a level of transparency. And is digestible by the average financial advisor or client requires a very significant investment in technology.

And I guess I, I've going back to when we founded the company. We figured if we could get some of the leading asset managers, the Blackstones, Apollos, KKRs of the world. To adopt our technology we would have we'd have a very easy time of getting investors to see the benefits of alternatives.

And what we found was that premise was actually incorrect. We needed to spend, I used to say tens of millions, but these days it's hundreds of millions of dollars wiring up the entire alternative infrastructure, all the third parties. So when you think about custodians, transfer agents, fund administrators, tax and audit providers.

None of their systems talk to each other. Everybody's built in and in many of them are still actually operating on Excel files. There's been some adoption of technology, but Even when one firm adopts a technology standard, it doesn't interplay with all the others that it needs to in order to give a, an end to end transparency to the advisor and ultimately to their client.

I didn't even mention performance management systems or performance reporting platforms of which most of them are third party in nature. That most RAs and wirehouses outsource that activity. And so what you wind up with is this large web of very complicated software platforms in order to provide clients the visibility into their performance, but none of them speak to each other.

And so we massively underestimated the work that would be involved in getting all the systems to, to work with each other, we've actually had to build components of fund administrators and work with them to adopt some standards we've had to. Rewrite the rules around sub doc remediation, electro, obviously all of our sub docs are electronic today, but just having an electronic sub doc, whether it's DocuSign some proprietary format, doesn't really matter if the document can't be remediated.

It's through the KYC and AML process and incorporating all of the clients legal identification and suitability standards, et cetera. There's just every piece of the puzzle from understanding all it's the education process to the transaction component to the ownership life cycle.

So your private capital partners, account statements. Your tax and audit, your K 1 statements or 1099s through to that, that, that last document that you receive in 12 or 15 years, it all needed to be incorporated and it all needed to be engaged. And so we're very fortunate that we've had strategic partners that have funded the company and have a very long term vision.

I think that'll be a theme through this discussion is the long term nature of alternatives, But there's also a longterm nature of building the right industry infrastructure. It can't be built in a year or two. It takes time and it takes cooperation from the asset managers, the wealth managers, and all the third party service providers that are part of that process as well.

[00:06:45] John Darsie: Yeah. And putting on my skybridge hat for a second, I can certainly attest to the fact that 15 or so years ago when skybridge was started, there wasn't a lot of knowledge or education within the financial advisory community where we do a lot of our distribution and have historically done a lot of our distribution and systems like I capital have done wonders in terms of growing adoption of alternatives, educating advisors about the benefits of diversification of alternatives within portfolios.

So it's been exciting to see. As people who support the growth of the alternative investing ecosystem to see the impact that I capital has made within the financial advisor community. And speaking of the alt space, on a more macro level, you've obviously been in the industry for a long time.

How has this space evolved over the last, let's say 20 years? And then what do you think the next 20 years is going to look like in terms of where we'll go from here?

[00:07:39] Dan Vene: Yeah, great. And so obviously a great question. And it's been fascinating being, being part of it as you have been as well. I guess maybe if we just zoom out a level there's a sort of fundamental question.

And I just talked about all the. difficulty of wiring together the industry infrastructure and transparency that we need to provide to advisors and clients. So you naturally, the question will be why would I go through all that, right? Why even bother with alternatives, particularly when the S& P 500 Has performed so well for me over time.

And I think I'll just make a couple of observations. I own public stocks in my portfolio. I happen to own a lot more alternative exposures than I do public for a variety of reasons. But there, there is certainly a role for public equities in a cloud. portfolio. I think the issue with public equities and it's all over the news every day today.

I was just listening to some of Ray Dalio's comments on, what he thinks is going to happen to long term yields. It just because of all the structural imbalance that we have because of all the government debt that we've taken on effectively shifting private sector debt. To the government, and that sets a pretty precarious backdrop for equity performance at least in, in my view.

And I've lived through, I'm, mid forties, but I've lived through several major market corrections just in the 25 years that I've been a market participant. In fact, I've lived through it a decade of lost performance from March of 2000 to March of 2010 when the s and p 500 returned exactly 0% return on an annualized compounded basis from March of 2000 to March of 2010.

That's not particularly helpful if you're trying to grow wealth, right? Or if you were at a life event where you needed to pay for college or buy a new home to have a lost decade in the best managed, best company index in the world, right? The S and P 500. Nasdaq was even worse. Nasdaq took 15 years to make a new high for March of 2000 to March of 2015.

So There can be these very long protracted periods of underperformance or no performance in the public markets, as well as if you want to pick individual stocks that's all about their, podcast, but individual stocks have incredibly volatile histories. If you just look at, say, for example, a meta over the last 24 months and the round trip that's done, or even even incredibly managed resource company like Exxon mogul having moved around and, cut in half and then doubling and, over the same time period, these are dramatic moves that have real impacts on people's net worth if their core positions and so alternatives can bring.

Current yield into a portfolio. They can reduce correlations that you're trying to reduce. They can reduce volatility that you're experiencing. They can protect from inflation, right? And so no one basket of alternatives is appropriate for everybody. Everybody has their own, objectives and their own starting point.

But we've developed tools. I think we'll talk about a little bit later, like the I capital architect and the I capital marketplace, where we try to bring forward. A truly diverse spectrum of alternatives so that advisors can actually take specific exposures and add specific exposures to their client's existing portfolio of bonds, stocks, ETFs, and cash to create the best outcome for them.

And so we think a lot about that when we, why would you go through all the effort? The reason is you have persistent outperformance, right? So if we just look at, and I'll just wrap on some data we, we published some data recently that over five years, if you take the average private equity index.

So this is a broad spectrum of, if you look at buyout growth, secondaries real estate venture that portfolio has returned 18. 8 percent over the last five years. It's been an incredible 4 percent for the S and P. No, it's not always, 900 basis points of alpha that you're getting for alternatives, but over longer time periods, say a 20 year time period the track record again for the median fund in these indices is 13.

9 percent against an SMP of nine point. 8%. So you're still getting, in the range of 400, 500 basis points of annual alpha from the alternative index. And that's just, if you're picking the average alternative fund, if you're picking top quartile managers, You have the help of, someone who's on the diligent side, who's been investing in private equity for their career, and they can actually do a little better than the average.

You might be enjoying a thousand basis points or 10 percent of annual return over the publicly available indices. And it really helps smooth out some of those. Lumpy returns that we all experienced in the public market. And that's why we think it's worth it. That's why we think it's worth getting educated and using the right tools to bring these exposures into your client portfolio.

[00:12:18] John Darsie: Before we get into more sort of analysis of the current investment outlook or landscape, I want to talk a little bit more about I Capital Marketplace and I Capital Architect, which you referenced. Obviously the company, as you mentioned, has been around for a decade, but recently you. Made a lot of fanfare about the relaunch of the marketplace and architect.

Could you talk about how those represent a significant evolution and growth and what you guys have already built and why you're excited about those two products?

[00:12:46] Dan Vene: Absolutely. And I'm personally super excited about both marketplace. I couple of marketplace and I got more architect really because it, we could never even imagined this 10 years ago that we'd be at a point where we could tie together the industry and provide tools like this.

They take tremendous amounts of resources. We have staffs of PhDs on, at iCapital And we work with our partners like Blackstone and KKR and Apollo and many others on thought leadership. And you've probably seen a lot of the stuff that we produce there. It takes a tremendous amount of resources and we simply wouldn't be able to provide these tools to the market if we didn't have those strategic backers.

So very fortunate for that. I'll give you just a sound bite or two on each. So marketplace. Today it takes all of the asset managers that we've been working with, which is numbers in the, in several hundred unique, discrete asset managers. And it brings it to one platform where we have over a hundred thousand financial advisors across the I Capital properties.

And we allow those financial advisors to view. And do deep dives on track record, competitive positioning team the data room has all that, the PPM the LPA, all the pitch books, everything on the digital platform. And we allow them to make their own decisions. And we've been doing that for the better part of the decade.

But the really unique thing about marketplaces, we've introduced an entirely new advisory client experience with tools to look at funds in a more analytical nature to track funds. So we have a followable fund feature. Let's say you're interested in private credit funds. You could take all the, say, eight or 10 private credit funds we have on the platform available today.

You can follow them and you'll get updates directly from the manager about new portfolio additions, distribution activity, why they think, they're excited about the marketplace. Maybe it's a rising yield environment and they have a hundred percent floating rate book. So they're actually benefiting while many other asset classes are starting to show some signs of issues, increased delinquencies and higher death loads.

Private credit funds for the most part are perfectly set up for this type of environment, right? So you have the ability to line up and follow those funds, get the insights directly from those managers through the I Capital marketplace. And that really dovetails into the I Capital Architect.

So what is I Capital Architect? In a punchline, it is the industry's first analytical tool that allows advisors to better understand how alternative investments and structured investments fit within their client portfolio to better align to their client objectives. So that's a mouthful. What does that really mean day to day?

A client and their advisor can pull in their existing exposures. So they can pull in their stocks, their bonds or cash or ETFs, and then they can actually add specific alternative exposure. So by name, they could add a fund and they could see how that fund would change their client's objectives. on a factor based analysis over a couple of different dimensions.

Those dimensions might be volatility, liquidity, protection characteristics, and obviously no one, again, no one exposure, no one fund is appropriate for everybody. But what architect does is it moves you away from just saying I'm going to try and buy top quartile funds and invest in things that do, 25 percent IRR every year.

And it moves the analysis into how does this fund look in my current portfolio? Maybe I'm very heavy in tech and in, in the magnificent seven, as everyone keeps talking about, right? So I would want exposures to alternatives that provide different characteristics, right? Maybe. Inflation protection, maybe things that do better in a rising interest rate environment, because most people would suggest that mega cap tech will do, worse in a rising interest rate environment, right?

As you discount those, that growth that those companies provide. And so you are able to look at this in an analytical, again, factor based way and provide your client with those insights to help make better decisions. And that's ultimately why we're so excited about the iCapital Architect.

[00:16:39] John Darsie: Yeah, that's fascinating. Especially on the architect side, it's almost like giving independent financial advisors and wealth advisors that exist in the larger bulge bracket firms, the tools that exist at larger institutions where they have these large and diverse investment teams that are always analyzing risk, but you're putting those tools in the hands of the smaller advisors, as well as the wire house advisors.

That's fascinating. As we've seen AI really grow and capture more attention, how much of the growth of chat, GPT and open AI has informed the build out of I capital architect. Cause as I look at different applications for AI, I've always thought that AI as a specifically compelling application towards asset management and sort of some of what architect does, which is.

Identifying blind spots in portfolios and helping based on market conditions, based on individual portfolios, make projections about where an investor or a client might want to reinforce their portfolio. How much of the growth of chat GPT has informed your, your build out architect?

[00:17:45] Dan Vene: We're doing a lot of work on it right now.

I liken it to people get super excited about, the potential, and obviously there's people a lot smarter than me that are spending, all of their time now thinking about the potential good that will come from AI, as well as the potential, potential harm or things we need to look out for we have a team working on AI internally.

To help clients digest materials that we provide. And we're doing so in a constrained or closed environment, right? So we'll feed the machine learning and generative AI models. The fund documents, right? So this is all compliance approved. It's been signed off by the general partner. It's been signed up by eye capital compliance.

And so the entirety of the result set is from the documents that advisor or that investor already has access to in the dip in the data room or on our website, right? So that's one way that we're starting to use AI, but it makes for a really natural, fast engagement. With the platform to be able to ask, certain questions like, show me the track record.

Should, show me the international exposure show, show me whatever it might be for a particular fund and get a very succinct answer with a link back to the document, for more comprehensive feedback. The other way that we're using machine based tools like robotic process automation or overall machine learning and OCR is in data ingestion.

So one of the biggest problems with alternatives and the reason why we've had to spend hundreds of millions of dollars wiring together the entire industry, is It's because almost all of the data lives on PDF documents. And as everyone else, PDF documents are static. They're, once, once they're created, sure it's ultimately zeros and ones that are floating around the internet, but the document itself is static in that.

The performance the fund may have a distribution in between those 90 day marks where you have that PDF sitting in your document room, that PDF is not updating. And so what we've done is we've been able to scrape those documents. And then we are our building in the general ledger directly with the fund administrator so that we could provide more real time insight.

Transcripts provided by Transcription Outsourcing, LLC. The speed that we've need to bring to clients to give them better insights on that next decision. So you have to understand what you own currently, how it's performing, what the exposures are in order to be able to make that next decision.

And so we're ingesting the documents. We're pulling them back into a dataset and a structured format. We're displaying that information, right? Visually, graphically, to make it more comprehensive. And then we're updating it on a far more frequent basis than the industry was ever able to do before.

So that, that's where a lot of this sort of AI and machine learning is

[00:20:27] John Darsie: going for iCapital. It's fascinating. You guys have a content series at iCapital called Beyond 6040. And it talks about, obviously the evolution of portfolios, the fact that we should move away from the 60 percent equity, 40 percent traditional fixed income exposure, do you guys have a, a.

Target that you recommend. Obviously, everybody's situation is different and unique, and you guys are not making recommendations. You're more providing resources and information for people, but as you personally evaluate, what should the the cookie cutter portfolio look like today beyond 6040?

What does that look like in terms of traditional public equities traditional fixed income, and then alternatives?

[00:21:09] Dan Vene: Yeah thanks. Thanks for mentioning that. I certainly would suggest people who are interested in digging a little deeper. Check out that the beyond 6040 series. There's a lot of great content on there.

We bring fund managers on. We bring iCapital professionals who are, specialists in a particular area and to come on and talk about the tools we have available for the community. So I certainly recommend people check it out. But there you hit it on the head. There is no, target allocation for, if you just pick John Smith, he, he don't totally depends on his objectives, his risk tolerance, his suitability level, whether he can even invest in the full swath of products available or not.

Or maybe he can't when he's 30 years old, but he can when he's 40 years old. So these things change over time. But what it does do, and what we do look at is in the decade that I capital has been operating as a company trying to solve this problem. We have seen the allocations to alternatives increase not dramatically, but they are certainly increasing.

So when we founded the company. Most of the data, if you look at Cerelli and others, it would suggest that there was, let's call it one, two, maybe as much as 3% alternatives allocations across the independent RE, RIA universe. And it was higher in the wirehouses, but not materially, maybe, five, 7%.

Most CIOs or home office models would suggest that if someone's a qualified purchaser, they have 5 million or more of investable assets. That they should have, something in the range of 10 to 20%, right? So even if you take where we are today in the highest use cases, we're still significantly materially below where CIOs and home offices of those institutions would invest the appropriate clients percentages.

And we think it comes down to education and tools, and that's why we're investing so heavily in platforms like marketplace and in tools like iCapital Architect. Because we believe you just have to give people the tools to be able to make the right decision or they're not going to spend the time, right?

The harder it is for them to understand to transact, and to ultimately own an asset, the less likely they're going to do it. Particularly some of my earlier comments about, we've had an incredibly like buoyant public stock market as a result of 0 percent interest rates as a result from the fed ballooning its balance sheet from 1 trillion to 9 trillion, right?

We've had all these incredibly, stimulus oriented effects on the public market. And we all enjoyed like an unbelievable way above sort of median return rate, right? If you look at 50, 60 years of SMP data, it's 9%, but over the last 30 years, it's closer to 11 percent and even near term it's even higher than that.

And people have really been well served by just buying the SMP and not thinking about anything else, but the average stock in the SMP as of today is actually down on the year. So if you don't own those mega cap techs, you're actually not achieving any return. And everyone's entitled to their own view.

I think it's actually going to get more difficult, right? As the government needs to unwind, 33 debt, or even just service the debt that we've accumulated and the budget deficits that we're running at as a country now in light of all the spending that we need to do for our social programs and infrastructure and other things.

So there's a pretty. There's a pretty scary backdrop. Obviously there's positive things you can talk about with AI and others, but I think for most people, you should sit down with your advisor. You should sit down with your CIO at the home office, take a meeting and understand what alternatives do they have for you?

And do they make sense and use a tool like iCapital Architect to try and understand if they make sense. And for some people they won't, right? If someone says, I simply want daily liquidity or intraday liquidity and I will never lock up my money for more than 24 hours. Okay. A lot of alternatives are not going to work for you and you're just going to have, you're just going to have to, you're going to be a little bit like a jellyfish in the ocean.

You're going to go wherever the index goes, right? I got best, right? Most investors perform worse than the index, right? Cause they have behavioral finance and work, ill time timing decisions but if you're somebody who can deal with some illiquidity in some portion of your portfolio, then maybe it's 15%, 20%.

You can achieve! a set of exposures that give you, 10, 11, 12 percent current yields, inflation protection, non correlated long term, multi strat type return profiles that for most people that are suitable would positively benefit.

[00:25:27] John Darsie: We've talked a lot about private markets, private equity and private credit over the last decade have been on fire.

You've seen a lot of inflows into that space. It seems like today, everybody's talking about private credit. People love the yield that it provides as well as, providing a different exposure than you get from public equity markets in particular. But where today in your view, do hedge funds fit into that equation?

When I say hedge funds, people have different views of what constitutes a hedge fund. But when I say hedge fund, I'm talking about Long, short hedge funds, I'm talking about global macro hedge funds. How do those in your view continue to fit into that sort of new alternative asset mix and the beyond 60 40 portfolio?

[00:26:08] Dan Vene: They certainly play a role. But again, it comes down to individual client objectives, risk tolerances, suitability. And there are some unbelievably high quality managers in the areas you mentioned, multi strats and long, short and global macro and others. There are some incredibly talented managers out there.

And, this is maybe an area where you talk about. You occasionally you'll see an article in the mass media saying Oh, look at what this pension fund paid in fees to all these alternatives managers. And why don't they just own Vanguard? Or, I share, the reality is all the results that you see published are net of all the feats, right?

So like you look at a fun, some of the multi strats, they do have high fee loads because. In order for them to produce the non correlated returns with incredible consistency, they are paying millions of dollars a year for just the data, tens of millions. And they have the people who are PhDs that are trained to interpret that data and to make investment decisions based on it.

Is it right for everybody? No, it's absolutely not right for everybody, but. Yeah. You have to understand that when you look at these return profiles and you look at a tool like iCapital Architect and how it can lower your volatility. And lower your correlations to your existing, traditional portfolio of stocks and bonds, you have to understand that all the returns you're seeing, assuming they're net returns are net of all those fees.

And I think it does. I think global macro long short term. Event driven. I think these hedge fund strategies make a ton of sense for people. Again based upon their individual goals and objectives and suitability. So just like private credit has a role, I think hedge funds have a role.

If you're willing to lock up your money for a little bit longer time period, and you can stomach some illiquidity. Private equity, be it growth equity, venture, even, large cap buyout, those funds have performed incredibly well, right? That was the data I was referencing earlier, four or 5 percent per year, better than the S& P.

And the S and P over the last 20 years has been an incredible wealth creation machine. And there are entire swaths of private equity funds that their entire historical track record, all of this is available on ICAP. I encourage you to go look at it. They've outperformed the S and P every single year by a very large margin.

So again, is it appropriate for everybody? No. Is it appropriate for more people than are taking advantage of it today? I absolutely think yes. And we're trying to build the tools to allow people to make their own decisions.

[00:28:40] John Darsie: So you touched a little bit on the venture capital ecosystem.

Obviously valuations for venture backed companies have taken a significant hit in a rising interest rate environment with significantly higher rates. I would say our observations as both a conference organizer and a fund of funds is that it is a difficult fundraising environment for private equity growth investors or VCs.

How are VCs on your platform approaching fundraising these days in what we deem to be a more challenging environment?

[00:29:13] Dan Vene: Yeah. You have to have a, you have to have a discernible edge. The most and this actually speaks to the whole premise of iCapital around managers looking to private wealth as a new source of capital because many institutions, I'm sure you've read and heard about.

Many institutions are actually reducing the number of managers that they have on their roster. So they're giving more money to a smaller number of managers so that they can understand them better. And also managers on the private side, generally speaking the, the, whether it's private equity, private real estate, private credit.

they've turned into more multi strat shops themselves, right? So they have many different forms of private credit or many different forms of private equity. A firm like Blackstone that was not historically in a, growth equity investing mode that they now have a growth series, right?

And so there are there, you've seen firms get very large into a variety of different exposures. So that institutions can actually reduce the number of managers. So how does that set up for a, 250 million venture fund that's raising their second fund or maybe even their first fund?

Not particularly well, right? Because the traditional sources of institutional capital, endowments, foundations, corporate and public pensions They are for the most part telling these first time emerging managers that, they're full up, they have all the managers they need. Maybe they have an emerging manager program and you can get, you get fortunate and pop in there.

But for the most part it's a lot more, it's a lot more difficult sledding today than it was, over the last 20 years. So what do you do? I think a lot of people are turning to private wealth where a venture fund might resonate really well with a small business owner who may had a liquidity event and made, made a bit of money.

Maybe took, a handful of dollars off the table and now they're looking for exposures. And typically the type of person that has made their wealth running a small business, they're long term oriented, they're patient. They're not interested in the fluctuations in the public market, as I was referring to earlier today.

And so they might be a perfect prospect for a first time venture fund because they sit down the, that, that fund manager will take the time to educate them on what's their edge. How do they think about risk management? There's a lot of different ways to make money in venture. And you actually have the exposure of the time with that fund manager to understand.

We have tools like, video webinars, like we're talking about where we're on right now. We have tools around analytics, like I mentioned, an architect to be able to find these first time or emerging managers and then go spend time with them. Cause they'll take, they'll actually take your call.

If you're a family office or a high net worth individual, they'll actually sit down with you. Whereas, it's more difficult to do that. I guess the last thing I would say is when you think about venture, you think about growth where will returns come from? And, as we look forward if we're in a higher for longer environment which everyone was saying, Oh, no, that's not gonna happen.

Fed's going to start cutting, back half at 23 and they'll cut all 24. Like I, I'm not sure that's going to happen anymore. And so if we are in that environment and corporate balance sheets are going to come under pressure, obviously there's segments of commercial real estate that will come under pretty extreme pressure.

If we're in that kind of environment, where do you go for growth? Where do you go for. Outsized returns or even acceptable returns against a 5 percent treasury, right? So if you can get a risk free rate of 5%, you need to generate twice that to be able to justify taking illiquidity risk or illiquidity as in its own as an attribute.

And so we think yeah, you have to look at how the evolution of companies is changing. So if you look at the United States today and every company that's That produces more than a hundred million of revenue. 87 percent of them are private. So what does that mean? What's the inverse? It means that if you invest in the Wilshire 5000, the S& P 500, the NASDAQ, your entire investable universe is only 13 percent of the growth economy, right?

Of the companies that are innovating, that are coming up with new technologies that are, that are growing 30, 40, 50, a hundred percent a year. That's a great stat. Yeah. 13 percent of them. So like the number one rule of investing is out of the gate. Don't artificially constrain your opportunity set.

And that's what you're doing. If you're only investing in the public market, you're dealing with micro caps, penny stocks, like stuff that probably, very few people should own, or you're investing in major indices that are only capturing 13 percent of of the investable universe of growth companies.

These are scaled growth companies, more than a hundred million, of recurring. Revenue. And so when you think about it you have to dip a toe into private markets. If you just want, your quote, fair share of the growth and innovation that's happening in the U. Today.

[00:33:59] John Darsie: And you mentioned that 5 percent treasury and how that sort of disrupts the landscape. You have the content series beyond 60, 40, the premise of iCapital is that People should have more exposure to alternative investments as opposed to just vanilla exposures to public equities and traditional fixed income.

But in a world where you have a 5 percent treasury. Does that change the calculus? Do you consider the possibility that people might move more money in back into traditional fixed income and it might lead to a slight retrenchment in the alternative investment space or are you guys viewing higher interest rates and thus higher treasury yields in the context of your overall mission?

It's,

It's obviously very hard to make a forecast on something like that because we obviously don't know where rates are going short or long term, and over any sort of, we're truly reliable midterm time period. And so it's difficult, but I would suggest that you also have risk in fixed income as we saw in 22, right?

There was a very significant drawdown. I think it was about 16 percent in the Barclays, ag or the Bloomberg ag. And so fixed income is not necessarily the safe haven. It was, we have had such a manipulated marketplace. And I'm not, I'm obviously not talking about insider trading or, hedge fund manipulation.

I'm talking about. I'm talking about monetary intervention, right? The things like, the expanding fed balance sheet, 0% interest rates since, since really like 2007, right? 2000, 2008, right? That that's 15 years of effectively 0% interest rates like that is a steroid into. all financial assets for 15 years.

That is likely to unwind in a variety of different ways that I, I'm certainly not smart enough to tell you how it's going to happen, but I think what we all should be smart enough to recognize is that's never happened before. And if you actually look at, 40, 50 year run rate of the 10 year treasury, it looks like a ski slope, right?

Some sort of kind of 15 percent range down to zero where it stayed, until we started raising in May of 22. There was, a couple little blips here and there, but not materially, right? The 10 year was effectively In a downward right slope for 40 years, right? So if you own, for example, real estate and you were able to refinance and recap your investment capital and just ride that growth, for 15, 20 years and constantly, you probably refinance your primary residence.

I I refinanced. The one I'm in right now, three, three times. And so we've only been there for eight years. We've refinanced three times because you've been paid so much to do and then that excess. that excess monthly discretionary income that we've all been enjoying has gone back into the market, right?

That's done now. They're not going, they can't, they're going up. And there's about an 18 to 24 month lag between when the rates go up and you start to see the impacts on corporate. Corporate, the cost of them servicing their debt, real estate, credit cards, auto loans, right? So this stuff is just happening now.

So anyway, get back to your question. Are we going to see people buy less alternative exposures as a result of this? I actually think the asset classes like, or strategies like private credit should be buying more of that, less treasuries because treasuries are more likely, again, I'm not a fixed income, I used to be a bond trader, but who knows, right?

I, there are people out there saying they're going to go to 10, 12, percent on the 10 year. So if you were to buy treasuries today thinking, Oh, like that's a great yield, And then yields gap out from, whatever it is today, four 70 on the 10 year to eight, nine, 10%, you, you're actually losing money.

So you're not making your 4. 7 percent yield. You're losing principal dramatically. So I think I think you need to look at ways to bring non correlated specific exposures to your portfolio. And alternatives are again, an educated advisor and educated investor now has the tools to be able to bring some of those exposures to their client portfolio.

But I think it's a great point is that treasury is historically reviewed as a portfolio stabilizer or a volatility dampener that would generate a fairly predictable yield in the context of, maybe more risk that you take in public equities or other exposures. One is now. Traditional fixed income is almost the most volatile asset class, which is a by product of what you mentioned, the fed intervention, the historic low interest rates that we've had.

And there's no reason to believe that's going to end anytime soon. When you start to withdraw the drug, the body and the system starts to convulse a little bit. And even if yields are elevated from what they've been, it still could be a volatile asset class. Whereas the goal of alternatives in some cases is to.

dampen volatility and provide more predictable yields.

[00:38:52] Dan Vene: And you don't have to, and we're not, we're saying, you have to own 50 percent of your portfolio in all time errors, 15%, 20 percent could have a pretty dramatic impact.

[00:39:00] John Darsie: Yeah, and I would totally echo what you mentioned to about what we're experiencing again, as a capital introductions platform and an events organizer, yes, you're starting to see some smaller and midsize managers have difficulty fundraising, but you're also seeing the big names that traditionally didn't engage.

With the wealth management channels and didn't necessarily engage On the global conference circuit in terms of cap intro events and things like that You're starting to see those players come in and call us and say hey We want to sponsor your conference or we want to tap into the wealth management ecosystem, you know through your events and so it's counterintuitive, but for a business like iCapital I almost think it could be a tailwind is that you're going to start to see more and more people.

And you've seen it over the last few years, engage with the wealth channels that didn't necessarily have to before. And so it's been an interesting evolution of the marketplace. But the last question I have for you is around regulation. You at iCapital and as alternative investment professional, we're able to serve a small subset of the population because of regulation.

You have accredited investor standards, you have qualified purchasing standards. A lot has been made about the fact that the average American isn't able to access a lot of these asset classes, which provide, better yields potentially lower volatility, all the different benefits that you alluded to.

Again, understanding that everybody's situation is unique and those that have less savings and lower income need to be, more aware of that. You need to invest maybe differently than somebody with a higher net worth. But in your view, are we in the right place in terms of regulation? Are we protecting investors?

Are we preventing smaller investors from enjoying the same returns potentially as wealthier investors? Where do you think we are and where do you think we should go and where do you think we will go?

[00:40:48] Dan Vene: Look, I, I try and remain objective in my answer to your question. I think there's a, we have a lot of work to do.

And I am all for. Suitability being determined by things other than just, your W2, right? Your income or your net worth or how much money you have in stocks and bonds outside because that actually doesn't necessarily, right? It's not a. direct correlation to your ability to understand alternatives, right?

You just because you happen to have 200, 000 of W2 income or 300, 000 with your spouse, which is the current accredited investor litmus test doesn't necessarily mean you're quote suitable to make an informed decision. And I think the current standards while helpful.

From trying to raise some level of sophistication bar, right? Just institutions are able to do things with options and get, custom notes and such from wall street banks that, that, that retail can't get. I, I understand that, that sort of, that threshold that you have to be at to, to, back into some level of sophistication but to your real question, which is, are we preventing or prohibiting?

Some portion of the investing public from investing in exposures that could be good for their portfolio and actually reduce risk and reduce correlation and reduce volatility, which you know, all of us should be interested in enjoying. I think there's a lot of people that are currently yeah, prohibited from investing that likely are suitable, likely are sophisticated and should participate.

Yeah. And so I, and I guess the other thing I would say is. You've seen some of the horror stories of what people have done to their own, balance sheet in the public markets, right? Through options trading or through, shorting stocks or just being massively concentrated into, three stocks and having them get cut in half.

Or worse, right? That's what we should be thinking about. Not, so I think we have a long way to go with regulation. It's okay. Like the industry is evolving. It's growing up. It used to be an entirely institutional asset class, when Henry Kravis and Leon Black and Steve Schwartz were running around there raising their first funds.

It was all institutional, right? Other than, some very wealthy, friends and family that were investing with them. Today, it's changed quite a bit. And platforms like iCapital and others have made. These, these really interesting assets available or exposures available to people.

And so I think regulation just has to, keep pace with that now. And we should sit down as a, as a governing body as market participants and really lay out what might make sense for an accredited investor standard or a qualified purchaser standard.

So that more people might be able to take advantage of of the asset class. So anyway, I could talk all day about that, but I, yeah, I think short answer is there's more work to do. There's a lot of people that are willing and able to get involved in the discussion and have some really thoughtful ideas for consideration retirement plans.

You hear this from before, right? Like retirement plans are the longest duration asset that anybody owns, right? And yet they don't have alternatives in them today, yet alternatives are patient and long term and produce significant, persistent outperformance, but they're not in retirement portfolios, right?

So it's just there's just these massive disconnects in the marketplace today.

[00:44:07] John Darsie: Yeah, totally agree there. I go back to that 13 percent stat that you raised earlier, which is, If you're not a credit investor you don't have access to 87 percent of the growth and innovation in the economy, which seems crazy that you would prevent smaller investors.

Again, maybe there's some other standard suitability that's established through some testing or whatever it may be. But the fact that constituency doesn't have access to 87 percent of the growth and innovation in the economy seems crazy to me, but they can open a Sportsbook account and gamble on sports.

But again, we could talk for hours about that. It's a conversation for another day But dan vanay, thank you again for joining us here on salt talks. It was a pleasure having you At Salt New York in person in May and great to talk to you on here and look forward to Finding ways to collaborate and bring you to our events and platform in the future Just a reminder to everyone who watched today's episode All these episodes are free and on demand on our website and on our youtube channel You can access them at salt.

org or on salt tube, which is our youtube channel They're also available in audio format, which we You we post them all on our podcast feed as a result of inbound interests and those that prefer to consume audio only podcasts. But on social media, you can also keep up with all of our episodes and all things salt at salt conference is where we're most active.

And look forward to seeing everybody, hopefully in Asia in November and at future events and next time on salt talks.

[00:45:34] Dan Vene: Thanks, John.

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