Future of Finance 2024: The Allure of Alternative Investments
Andrew Shapiro, Managing Director, PJT Partners Tripp Shriner, Managing Partner, Point72 Private Investments Moderator: Diane Brady, FORTUNE
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00:00 The allure of alternative investments.
00:02 I feel like I should say Van Gogh up down.
00:05 Let's do, I want to start with a lightning round first.
00:07 Nice to see you, Andy Tripp.
00:09 I feel like any, this is such a vast space.
00:12 Let's start with, you know, what do you think's overhyped?
00:15 You know, where is the dumb money going?
00:17 I'm just gonna start with you.
00:20 Kick us off right.
00:21 - Very provocative.
00:23 - Sneakers.
00:23 - I'm not a fan of any of the D to C,
00:25 so direct to consumer retail alternatives.
00:28 So that's sneakers, art, royalties, collectibles,
00:33 even real estate.
00:34 That, it's just rife with fraud and it makes me nervous.
00:38 - Okay, so that's the dumb category.
00:40 How about for you, Tripp?
00:41 - I mean, I have a slightly different view
00:43 that a lot of these things are sort of point in time
00:45 as to whether or not they're overvalued or undervalued,
00:48 but I think the challenging thing about alts
00:50 is they're not liquid.
00:51 And so I think for a lot of people out there,
00:53 you need to be very aware of where you are in the cycle
00:56 and when you're entering,
00:57 because unlike a stock or a bond that trades down,
01:01 you can't get out once you're in,
01:02 at least for not, not for the foreseeable future.
01:04 - So you're recusing yourself
01:06 from making a direct answer on that one.
01:08 So that's fair.
01:08 - My view's very over time.
01:10 - So let's talk the other,
01:11 then let's talk about underappreciate,
01:12 maybe rising on your radar.
01:14 How about that instead?
01:15 - So I think your question implies
01:20 like rising is a good thing.
01:21 I see like rising as a bad thing.
01:23 So I'm gonna answer it that way.
01:25 I get nervous.
01:26 There's a lot of money right now flowing into private credit
01:28 and that's, these are kind of asset managers
01:31 that are taking the place of banks, right?
01:33 - Yeah, we talked about that this morning actually,
01:35 huge category.
01:36 - And so I'm worried about all the assets flowing
01:39 into that market and kind of a lot of money chasing
01:42 maybe less and less quality, right?
01:44 And loosening of credit terms
01:46 that maybe a bank wouldn't do.
01:47 And then if I wanna drill down
01:48 into that specific asset class,
01:50 there's an emerging asset class out there
01:52 that called NAV lending or net asset value lending.
01:54 And that's effectively a loan
01:56 that institutional investors make
01:58 to other private equity firms on top of their portfolio.
02:02 So basically the portfolio of several investments
02:05 takes out a loan on top of it.
02:07 So you're basically putting leverage on top
02:09 of a portfolio of levered companies.
02:12 And so you're double leverage.
02:14 - Is it the leverage that makes you nervous
02:16 or is it the fact that it's kind of an unregulated space
02:19 relative to the formal system?
02:21 - It's both, but it's really,
02:22 it's a coy way to put more leverage into a system
02:26 and really a product that feeds off of leverage.
02:29 And so it just takes one bad asset
02:31 or one kind of bankruptcy
02:33 and it could have a real kind of domino effect.
02:35 - Okay.
02:36 - I think we've seen that before.
02:37 - I love the way you're answering each question.
02:39 That's rising on the radar, but not a good thing.
02:42 Is there anything rising on the radar
02:43 that you like or don't like?
02:46 - Well, I mean, keep in mind,
02:47 I'm primarily a technology investor.
02:48 And so that's the lens through which I view alts.
02:52 And one of the things that I think is interesting,
02:54 albeit in the early stages,
02:56 is whether you want to call it tokenization
02:58 or securitization, just the fractionalization of alts.
03:03 I mean, it's always been an area that,
03:05 as I alluded to earlier, has been relatively illiquid.
03:07 It's also been one that's hard to access
03:09 for a lot of people.
03:10 And so I think if you can take an office building
03:13 and offer fractional opportunities around that
03:16 or a private equity fund or private credit,
03:19 although you may think that's not a good idea at this point,
03:22 I think that could really open up the space
03:24 and democratize it to a certain degree.
03:26 I think right now we're kind of in the pilot phase of that.
03:29 But to your question, I think that's an area
03:31 that I'm particularly interested in tracking.
03:34 - And really, one of the reasons
03:35 we're having this conversation
03:37 is that we're in this pilot phase.
03:38 We're talking about the democratization,
03:41 basically opening up this asset class to retail investors.
03:45 Let me go back to you a second.
03:47 You don't like this phenomena.
03:49 Is it an education problem
03:52 or is it a consequence problem, regulation?
03:55 What is it that--
03:56 - I don't like some of the fluffy stuff.
03:58 I'd say I agree with Trip that the democratization
04:01 of alternatives for retail investors
04:03 is a very exciting place to be.
04:06 And if you think about the typical financial advisor
04:08 pushing the 60/40 portfolio, 60% equity, 40% fixed income,
04:12 and now a piece of that pie
04:14 is gonna be taken up by alternatives.
04:16 If you wanna look at the data,
04:17 the average retail investor has between kind of five
04:20 and 8% of their portfolio in alternatives.
04:24 The average institutional investor is closer to 20%.
04:27 And so if you just do the back of the envelope math,
04:30 getting from that five to seven up to 20
04:32 is trillions of dollars of assets
04:34 that could go into alternatives.
04:36 - And should it be 20?
04:37 I mean, again, it depends.
04:39 But if we're talking to retail investors,
04:40 should our portfolio be about 20% in alternatives?
04:46 Comparable to institutional?
04:47 - I think it should.
04:48 I think it provides an uncorrelated market exposure.
04:52 And despite the kind of low interest rate environment
04:55 we're not in anymore, it still provides a lot of yield.
04:57 And so as the nation ages and you have baby boomers
05:00 retiring and transferring assets,
05:02 the assets that you do hold on to,
05:03 you could argue should be more of an alternative
05:07 form factor.
05:08 - What do you think?
05:08 - Yeah, well, I think there's a difference
05:10 between what should be done and what's practical right now.
05:13 I mean, the fact of the matter is
05:15 it's still relatively hard to access alts.
05:17 For a lot of the alternatives platforms,
05:19 they view the RIA channels as sort of the next lever
05:23 of growth right now.
05:24 But there's a lot of work to be done there.
05:27 First and foremost, and you alluded to this earlier,
05:29 is education, not only for the end customer,
05:31 but for the advisors.
05:32 A lot of them have never been familiar with this space.
05:34 So that's hurdle one to overcome.
05:35 And then hurdle two, again, I go back to
05:39 sort of technology and infrastructure.
05:41 Being involved with alts, whether it's doing due diligence,
05:45 subscribing, managing your portfolio,
05:47 those are really challenging things.
05:48 And by and large, we don't have a lot of that
05:50 infrastructure built up right now.
05:52 And so while I agree with Andy,
05:53 the ideal state is for there to be more exposure
05:58 for individuals.
05:59 I just think it's gonna take a little bit of time
06:01 for us to get there.
06:02 - What would you prioritize for us to get
06:03 where we need to go?
06:04 Put on different hats.
06:07 - The technology piece first.
06:09 I mean, that really is the friction here
06:11 in terms of accessibility.
06:13 And then I think once you have that
06:14 and people understand how you can do it,
06:16 it then goes to education and being informed
06:19 of why you should be doing it.
06:21 - I mean, remember, this is an asset class
06:22 that was designed for institutional investors.
06:24 So when we talk about the state of New York
06:27 that's used to putting $100 million in a Blackstone fund,
06:29 now you're talking about an individual
06:30 that wants to put 10,000 in.
06:32 All the infrastructure needs to be designed
06:34 around that investor being able to access their portfolio,
06:38 monitor it, have redemptions, capital calls,
06:41 and none of the infrastructure is designed
06:43 for checks that size.
06:44 - Yeah.
06:45 Let me ask about how is the geopolitical landscape
06:47 or even the macroeconomic landscape,
06:49 how do you think that is influencing this category?
06:53 You're nodding, I'm gonna go to you first.
06:55 - Yeah, well, Andy, you mentioned it earlier,
06:57 but interest rates is the obvious one.
07:00 I agree with Andy that alts provide a lot of benefits
07:03 in the way of diversification and lower volatility.
07:05 But the fact of the matter is
07:06 you can't ignore interest rates right now.
07:08 If I'm looking at treasuries that trade at 5%,
07:11 it's great that I'm getting those additional benefits,
07:13 but at a certain point,
07:14 they need to make the returns for me to say,
07:16 okay, the opportunity cost of me being in treasuries
07:19 is offset by being in alts.
07:21 - You know, and we haven't talked about gold, of course,
07:23 but maybe that's such a big category,
07:25 we don't even need to go there.
07:26 But let's talk about some of the other,
07:28 I mean, I wanna ask you,
07:29 we've talked a little bit about private credit.
07:33 There is infrastructure,
07:34 there are real estate, for example.
07:37 Can you look at some of the categories?
07:39 What are you seeing out there in the landscape?
07:41 I'm gonna go to you, Andy,
07:42 'cause I know, again, your technology.
07:44 - So in real estate specifically,
07:49 a lot of the assets are flowing towards
07:51 the distressed and opportunistic investors,
07:53 managers right now.
07:54 And these are the managers that are
07:56 kind of experts at cleaning up buildings
08:00 where they have to hand over the keys, right?
08:01 And there's a ton of capital flowing into that right now.
08:05 Where it's distressed are these kind of
08:08 plain vanilla real estate investors
08:09 that just own office buildings
08:11 that have tenants that are fleeing.
08:14 That's not a very popular asset class right now.
08:16 I'd say infrastructure is also very exciting.
08:20 I mean, again, like any kind of institutional manager,
08:24 a lot of the flows are going to
08:25 a small handful of really mega managers.
08:29 But again, there's a ton of money to be made
08:31 and a ton of assets flowing towards
08:32 what I generally call the energy transition trade.
08:34 So that's basically adding solar panels, things like that.
08:41 The grid enhancements around the country,
08:43 ton of capital going there
08:44 and a ton of institutional capital
08:45 wanting to be put to work there.
08:47 - I want to step back a second,
08:49 more to the 30,000 foot level,
08:50 which is you mentioned these were asset classes
08:54 designed primarily for institutional investors
08:58 or accredited investors,
08:59 which implies that you need a certain level
09:01 of sophistication to invest in these products.
09:04 As we democratize, obviously people talk about protections,
09:09 they talk about education.
09:11 How do you, is it antiquated to still think about this need
09:15 for a certain level of wealth,
09:17 a certain level of sophistication
09:19 to get into these asset classes?
09:21 Because they are basically becoming accessible
09:24 to retail investors much more quickly than that.
09:27 I'm going to go to you first.
09:29 You're flicking back and forth.
09:30 But what do we need to do?
09:33 - I think the other thing you didn't mention
09:35 is the time horizon, right?
09:37 So typically one of the main barriers too
09:40 is and why financial advisors also didn't like pitching these
09:43 they don't want to tie up their clients' assets
09:45 for seven to 10 years, right?
09:47 They're not like a pension fund.
09:48 And so--
09:49 - If it goes to 100, why not?
09:50 - Exactly, but as the technology improves,
09:52 like the companies that trip monitors
09:54 and the form factors change
09:56 and we have things like interval funds or tokenization,
10:00 then it becomes more like a stock, right?
10:02 And then it becomes a lot more liquid
10:03 and then it becomes a lot more investable
10:06 and understandable by the main street investor.
10:08 - But it's still perceived as risky assets, right?
10:11 - Absolutely.
10:12 - Is that fair to say?
10:13 Do you think that's a fair--
10:15 - I think it can be.
10:17 I think that comes down to a certain degree to curation
10:20 and what type of vaults you're exposing people to.
10:22 I mean, even within a given alternative asset class,
10:25 there's a very big difference between the best manager
10:27 and the worst manager.
10:28 I think actually going back to what Andy was saying earlier,
10:31 a lot of the early access for retail investors
10:34 to this space was more at the lower end of that spectrum.
10:38 And so in that case, I think there was an issue
10:41 with education and sophistication,
10:42 but I think if you can curate the right way
10:44 and bring the right type of assets to bear,
10:47 as an advisor, I believe you would be as comfortable
10:49 as you would anything else.
10:50 - One of the benefits of sitting on stage
10:53 with other people not here, put on a regulator hat.
10:56 If you were a regulator in this sector,
11:00 what are some of the steps that you think need to be taken?
11:03 You mentioned developing infrastructure.
11:06 Any advice you would have?
11:08 - Yeah, I'm gonna take my technology hammer again
11:10 and apply it to this question, which is,
11:12 you need to make sure that people have robust infrastructure
11:15 around everything from data collection,
11:17 to reporting, to valuations.
11:19 Those are things that, depending upon the asset class,
11:21 are at various degrees of maturity.
11:23 If I were looking at that, I'd say,
11:24 what is the infrastructure there?
11:26 How close does this feel to other asset classes
11:29 in terms of the quality of reporting
11:31 and of information that I'm getting around these--
11:33 - How close does it feel to you?
11:35 - Well, we're seeing a lot of companies now emerging
11:38 that are going directly after those specific types
11:41 of pain points, in particular, the data side,
11:43 which I think is sort of underlying a lot
11:45 of the other potential issues that you could have.
11:48 And so if you look at a lot of the larger
11:50 alternative managers, they're working
11:51 with early stage startups to address this problem.
11:54 And a number of those are both gaining traction
11:56 in the market, but as importantly,
11:58 starting to solve some of those issues.
12:00 I get nervous about the self-policing aspect
12:04 of the industry, and specifically,
12:07 if you're a portfolio manager at a public mutual fund,
12:11 you know at the end of the day what the price
12:13 of your portfolio is, and it gets reported out
12:14 in the NAV, and it's not disputed.
12:18 The problem I have with a lot of alternative assets
12:20 are the managers are the ones determining
12:21 the price every quarter and reporting it to their LPs.
12:24 And there's a robust layer of checks and balances
12:27 that they will tell you they use to ensure
12:29 that they're not trying to game the system,
12:30 but it can be gamed.
12:33 And I won't mention names, but there's definitely
12:36 managers that have been in the news recently--
12:37 - Rhymes with--
12:38 - Yeah, exactly.
12:39 Don't understand why an entire asset class
12:43 can be down, but their fund is up,
12:44 because their own marks say that no, no, no,
12:46 our assets are better.
12:47 And so there needs to be a development
12:52 in the technology there in terms of helping
12:53 retail investors better understand,
12:55 a little more transparency into how that all works.
12:57 - And understand their manager is doing his own thing,
13:00 her own thing, potentially.
13:02 I wanna give each of you a chance
13:03 to give some final thoughts.
13:04 What do you want the takeaway to be?
13:05 I'll start with you, Trey.
13:06 - Yeah, I mean, from my perspective,
13:07 it's despite the fact that this is an asset class
13:09 in the trillions of dollars, when you think about
13:11 both the expansion of subsectors within the space,
13:14 as well as the sort of result of the capital flowing in
13:17 and the need for technology, we're still
13:19 in the relatively early innings, I would say.
13:21 - Yeah, completely agree.
13:22 Early innings, I think there's a huge opportunity
13:25 for retail investors to access this market.
13:28 And as they access this market, the technologies around,
13:30 the form factors of how they get into the market,
13:32 how they get out of the market,
13:34 the different types of asset classes
13:35 are all gonna evolve and it's gonna be really exciting.
13:38 - Excellent, please join me in thanking Andy and Tripp.
13:41 More to come on this space, thank you.
13:43 (audience applauding)
13:46 [BLANK_AUDIO]