另类投资：人人都能投的另类资产——[Business Breakdowns，EP.234]

This is Matt Reustle, and today we are back to talk about increased access to alternative investing. My guest is Josh Clarkson, managing director at Prosek Partners. You may remember Josh joined us last year in our primer series on private credit. He is back today to cover what this development and the momentum here could mean for all of the various counterparties involved.

We put some numbers around the opportunity, cover what asset managers might be best positioned to capture it, the strategies that would most naturally fit, and some of the risks to the investor base. It’s an incredibly interesting theme that I expect to continue to gain momentum, so please enjoy this breakdown with Josh Clarkson.

Josh, it is great to have you back. Your last appearance ended up being quoted by an SEC commissioner in her speech several times, so you’ve set a high bar for yourself. But I think we have an equally important theme in the market to discuss: the increasing access we might have to alternative investments and the expansion of the universe of who can invest in these things.

It’s a relevant topic for individuals from their personal standpoint, but also for a lot of the businesses in this space. We’ll pull on all the threads, but I thought the best place to start was at the highest level. If you can scope out what this opportunity could mean in terms of any numbers you can put around it, or why it’s garnering so much attention beyond the retail client base having access.

1. The Four Trillion Dollar Opportunity

My pleasure, Matt, and I’m thrilled to be back here again. $4 trillion is a pretty big number. It’s the GDP of Japan, actually. It’s also where Morgan Stanley analysts put the opportunity for the large alternative asset managers in terms of AUM growth over the next few years, if retail private wealth—however you want to define that channel—expands its holdings of alternatives to be anywhere close to where institutions are.

For reference, institutions are at 20% to 30%+, while individuals are currently at 2% to 5%, depending on what you look at and how you define it. If individuals could get closer to a 15% to 20% allocation, that would be $4 trillion in AUM, using round numbers, for a lot of the big alternatives managers to divvy up.

$4 trillion is also the shortfall that at least one think tank has identified between what Americans have saved for retirement and what they need for a comfortable retirement. The goal of introducing these new assets and investment strategies into those people’s investment menus is so that they can better meet that shortfall and have a better retirement through access to better investment strategies and better assets.

2. Separating Liquid From Private Risk

I think I’ve read that AUM of alternative managers is somewhere around $20 trillion to the low $20 trillions today. That alone represents a material step-up in terms of what the AUM base could be, so you can understand why those businesses are interested.

From the investor standpoint, it’s worth mentioning that we’re here in October 2025. There have been some headlines out there in the market that would naturally lead one to say, if they’re fear-mongering, “Oh, it’s coming,” right when we have a canary in the coal mine. Maybe you can touch on the headlines that are out there, what they mean for the system, and how you would respond to someone who said, “Right when we have the signals that the bad things are finally starting to play out, this is when we’re going to bring it to the rest of the world and the retail investor.”

These are really important points that matter for a lot of people. I definitely want to confront them head-on. Taking a bit of a step back, it’s important to bear in mind that individual investors have had access to many of these strategies, such as private credit, for quite a long time. Publicly listed BDCs have outperformed liquid benchmarks since the financial crisis, and private semi-liquid alternatives have been available in the private wealth channel for 5 or 6 years now at real scale. That’s gone generally pretty well.

Recently, coinciding with this greater move to expand the aperture of the retail base and get these into 401(k) plans, there have been a few idiosyncratic situations. An auto-parts supplier named First Brands Group and a subprime auto lender named Tricolor Holdings are 2 of the biggest. There have been a few others that some commentators have positioned as private-markets deals gone bad, or canaries in the coal mine of private markets.

However, what’s really important to bear in mind is that neither of these companies was PE-owned, and neither was primarily financed by private credit. They both primarily raised financing, especially at the corporate level, in the liquid markets. First Brands Group was a massive BSL issuer.

In fact, when First Brands Group went to refinance, and there was potentially going to be some private-credit involvement in the second lien, the private-credit firms were the ones pushing for a quality-of-earnings review, along with other funds that were potentially going to be involved. It wasn’t all private credit, but it was many private-credit firms pushing for greater transparency and deeper diligence that brought the house of cards down, so to speak.

Although these are bad, idiosyncratic situations that, according to a lot of the reporting, likely involve fraud, it’s really important to understand the delineation between liquid and private markets. Just because these companies used somewhat more off-the-run financing structures or didn’t issue regular-way bonds, that doesn’t make it a private-markets issue.

I’d say, if anything, especially in the area of credit, this only makes the case stronger that to access sub-investment-grade corporate credit and the high-single-digit, low-double-digit yields that direct lending and private credit can deliver for an income-seeking investor, direct lending and private credit are a far better, far safer way to do it than the liquid markets.

3. The Regulatory Path To Retail

It’s a fair rebuttal. It points to the idea of the diligence that actually does happen with these firms, and they don’t last for long if they’re not doing some of that. Let’s step back and capture some of the dynamics with the regulatory changes and what is happening.

You mentioned this isn’t a completely new phenomenon. There’s been increasing access. Can you provide some background or backstory on how we’ve led up to this point?

Let’s get the elephant in the room out of the way, if you will. The most notable recent regulatory step is President Trump’s executive order mandating that ERISA look into adding private markets to 401(k) and DC plans and facilitating that change. That was the big bang recently that really set a lot of this off, and it countermanded a Biden executive order that said they were probably not a fit.

There had been attempts at this before, but the Trump executive order, which had been long anticipated, is certainly viewed as the largest recent change that opens a whole new market. Beyond that, there have been other more recent regulatory changes, such as no-action letters around marketing rules and some changes to how many illiquid assets certain types of funds, like interval funds and closed-end funds, can hold. I think some of those are more around the edges.

If you go back much further, the beginning of U.S. securities regulation as we know it today was really in response to the Great Depression. In the Great Depression, and in the run-up that preceded it in the ’20s, there were lots of investment trusts that were leveraged investment vehicles investing in hot stocks, and they performed very poorly.

The SEC was very focused on regulating what types of commingled investment products could be brought to market for the retail market. They created the world of registered securities, which includes both individual securities and mutual funds. Over time, certain exemptions to that evolved, including private-markets exemptions and certain other types of structures.

Yeah, maybe you could elaborate on some of the products that did become available to retail investors and how some of those played out. Maybe they can instruct what’s going to happen in the future.

In the pre-2020 era, pre-2015 era, there were private markets available for retail in a variety of structures. There were certainly non-traded REITs that had been around for a while, not necessarily brought to market by top-tier operators and not necessarily with the most shareholder-friendly structures. There had been various ETFs that tried to mimic alternative asset management returns. There had also been reinsurers set up by some big-name hedge funds, where the investment portion would be handled by that big-name hedge fund, and you were supposed to be able to get that exposure.

Bill Ackman certainly has a well-known closed-end fund listed in Amsterdam. But these had all been relatively niche products. Where you really saw momentum get behind this in the private wealth channel was when BREIT and BCRED were rolled out by Blackstone about 5 or 6 years ago. Then many other top-tier alternative asset management firms brought out similar products: non-traded BDCs, non-traded REITs, and interval funds are the 3 main categories.

That’s what turned on the modern semi-liquid wealth-channel private-markets experience, if you will. Generally, it’s proceeded pretty well. Investors have enjoyed really strong returns and really strong downside protection. When there have been issues, such as BREIT in 2022, the managers have stepped in to structure transactions like what they did with UC Regents to ensure that investors were able to get access to the liquidity that they were promised, which, generally speaking, is about 5% of NAV per quarter and can vary a little bit by fund.

Investor education is a really important part of this. The alts managers are doing a great job of being very clear about this. They’re sometimes dependent on that intermediary being clear about it, but I do think it’s very important that the investors in these products acknowledge that they are essentially illiquid compared to an ETF, where you could sell your entire position in a minute, and should think about that appropriately in terms of their liquidity needs and financial portfolio.

I’m not terribly close to that situation. I was not directly involved in it. I only know what I read, so I do want to caveat all of this. My recollection is that in 2022, when rates were going up—maybe it was early 2023—BREIT received redemptions in excess of that 5% of NAV that they generally distribute.

My understanding is that the majority of those redemptions were from leveraged Asian private-bank clients that were holding this on margin, which nobody really does with these instruments anymore. It’s not done with interval funds. I have not read any story of a widow, orphan, or parent who suffered harm due to BREIT distributing assets as it always said it would. Some people referred to it as gating. I think that was a bit unfair because it just did what it said on the tin.

They then struck a deal with UC Regents. I’ll admit, I don’t recall the specifics of it, but that essentially ensured they had plenty of liquidity to meet those investor redemption requests, and they’ve done so. Performance has been improving, and net flows have been improving. So while certainly the media made a big storm of it, it really did exactly what it was supposed to do.

Now, again, it’s important that investors realize that these are less-liquid structures. I would counterpose that to an incident that happened quite a few years before now. I think this was in the 2010s, when a firm called Third Avenue had set up what was essentially a distressed-debt fund in a mutual-fund wrapper that would have daily liquidity.

Even if these were liquid securities, they were generally pretty thinly traded because, if you’re in the middle of a bankruptcy for a mid-sized capital structure, those loans or bonds are not trading very frequently. They’re certainly not trading in any size without moving the price. When they got a lot of redemptions, they did have to gate the fund in a way that had either never been contemplated or certainly had not been as broadly advertised to potential investors as being possible. That did lead to some really unfortunate outcomes for investors who did take quite a while to get their investments back.

The products you see today largely solve for that type of risk by having limited liquidity and, in many cases, maintaining liquidity sleeves so that they can be sure they always meet that liquidity. It’s very important that investors understand that you are trading liquidity for lower downside risk and potentially better returns, and that that is a trade-off you’re making. It needs to be viewed in the context of an entire portfolio that has plenty of liquidity for your near-term needs.

But if you have some money that you can put aside and think about as a little less liquid, then it opens up an opportunity to have potentially much more attractive, consistent returns, limited volatility, and, in many cases, very strong income distributions. Those yield-oriented investments are where we’ve seen a lot of the initial interest in these alts for the private wealth channel. I predict—and I want to caveat that a lot here because I certainly don’t have a crystal ball—that you would see most of the initial interest in a defined-contribution market in 401(k)s. I’ll tell you right now that if I could invest in a private-credit or CLO-equity option in my daughter Emma’s 529 plan, I’d do it in a heartbeat.

It’s tax-sheltered, it’s long-term, and it’s really the perfect home for an investment that produces very high ordinary-income yields.

4. Marketing Builds The Retail Brand

The Third Avenue example feels like a design problem where you’re offering daily liquidity connected to highly illiquid distressed bonds, whereas investor education around the liquidity dynamics here with these funds, in theory, if the design is set up right and the education is provided, can lead to a much cleaner process and better outcomes. To your last point, having these in retirement accounts, there is a natural friction in retirement accounts to actually withdrawing them because of the penalties that you would face.

Therefore, I can understand why there’s almost a built-in barrier protection against liquidity pulls like that. You mentioned some of the changes around marketing rules, or potential changes around marketing rules. It does feel like we’re seeing a bit of a push now on the marketing side, or that things are changing a bit.

Can you get into that and what the developments have been there, and maybe what some of the impact could, in theory, be? Why are people out there marketing? What’s the interest in marketing? Talk a little bit more about that.

I do think it’s worth exploring that a little further, as it is related to some of the things that we’re going to talk about here in terms of how winners will establish themselves in this market, and the importance of brand and profile and media engagement and those types of tools in winning in the wealth or retail market.

Specifically, that change was regarding 506(b) and 506(c), as they’re called, which are 2 oft-used exemptions to the registration requirement for funds that firms avail themselves of to avoid registration. In exchange, they will only solicit investments from, and only allow investments from, accredited investors. Now, 506(b) has historically been the one that was most often used, but that bars general solicitation.

That’s the famous reason why you often hear that a fund can’t disclose its returns or its specific investments, or otherwise has to be rather tight-lipped. 506(c) allows general solicitation, so that means you can announce the launch of a fund, not just its closing. You can talk about the fund while it’s in market in deep detail. Historically, 506(c) was viewed as having additional burdens in terms of verifying investors’ accredited status.

But this no-action letter that was issued in March of this year greatly leveled the playing field between 506(b) and 506(c) in terms of what’s needed to verify someone is accredited and what a manager can rely on in making that determination safely within the bounds of the law.

That, in turn, makes it much easier for managers who would so choose to use 506(c) and be able to communicate that they’ve launched this fund—a new private-credit fund, a new asset-based fund, a new private-equity fund, a new structured-credit fund, a new real-estate or infrastructure fund, whatever it may be. So it lets them talk about that. It creates opportunities to engage with the media and other external stakeholders, and allows them to talk about that as it’s in market with a lot of specificity.

Now, that fund itself may be one that’s pursuing investors in the wealth channel, for example, a new evergreen fund or the like. Or that fund itself could be more institutionally focused, but the strategy’s very similar to what they’re raising money for on the wealth side, and it gives them a way to talk about that strategy out there in the world that they otherwise wouldn’t be able to.

We’ll talk more about this later, about what will separate winners from losers in this market and the importance of establishing and building a brand and a positive profile, being viewed as an expert in your space—someone that somebody’s going to entrust their capital with. One of the lowest-cost, easiest ways to do that is media engagement.

There's all this great owned content you can develop and the like, but just engaging with the media, putting news out when you have good things happening, and being an expert voice on relevant trends is a relatively light lift compared to some of these other things. But it can pay huge dividends in terms of positive name recognition across a really broad audience. If you're now able to talk about your fund when it launches, that's a really low-lift way to get some really positive narrative points out there in the market. So I do think that more managers will avail themselves of 506(c), and you'll see more people out there talking about funds that they are launching or while they're in market, because not only will it benefit the fundraising campaigns for that specific fund, but it can do an absolute ton in terms of elevating the firm overall, which is really going to be the name of the game to ensure that you're in a position to win this market.

5. The Best Fit Alternative Assets

I want to dive a little bit deeper into that point about the vehicles that, in theory, would be the best fits or most naturally suited to benefit from a potential wave of demand. You have a pretty good perspective on the broader private landscape. How would you isolate between the different asset classes, the different strategies, or whatever it might be? What fits in the puts and takes of the relative strategies?

I'm really glad to go a little bit more in depth with this, because I do think a lot of what you hear and read about it glosses over it as this homogeneous category of alts or private markets for retail, and it's really important to make those distinctions.

Now, first of all, with the 401(k) market, what's really important to bear in mind is that everybody I've seen discussing this in any level of detail is really talking about adding these to target-date funds. I don't think there's anybody out there who's pushing really aggressively to have standalone options for PE and private credit in your 401(k). Most of the focus right now, which I think is entirely appropriate, is on creating a target-date fund, and “fund” may be a bit of a misnomer because, in many cases, it would probably be an SMA or collective investment trust, especially in larger 401(k) providers, larger corporations, and larger retirement plans that have the ability to do custom glide paths.

You can build that private-market exposure into that target-date fund in a way that you have good forecastability into those cash flows, and the vast majority of the portfolio will remain in liquid assets. So you shouldn't really have that risk of somebody wanting all their money back and you not being able to very easily give it to them.

Shifting gears a little bit into some of the products and asset classes that have long been—and are gaining momentum in—that private-wealth retail channel outside of the retirement-plan context, asset-class-wise, credit has been the strongest grower, the one that has the most product. In many ways, that's because it really makes the most sense for a lot of high-net-worth and mass-affluent investors who are looking for high current income as they are in or approaching retirement, want to minimize volatility, and are willing to trade that liquidity for that potential higher income. Importantly, those products, by having that yield focus, naturally throw off regular distributions, which is somewhat de-risking the investment and preventing a big liquidity squeeze because you have contractual interest payments and maturities that allow the manager to sync that up with the assets they have and give the investor what they want in the form of continuous liquidity.

At the same time, there are also more liquid classes of credit, such as syndicated loans and structured credit, that don't suffer from too much of a return drag compared to that core direct-lending offering and can be maintained in that fund alongside it, providing a liquidity sleeve with very liquid instruments that also doesn't pose too much of a return drag compared to the core strategy of the fund. Other areas have been infrastructure, which is gaining a lot of steam right now and is also in that yield-oriented camp. Real estate was one of the first to take off. As the whole asset class hit some rough patches, you saw some declining interest there.

I would say what's been interesting now is, as you've seen real estate markets rebound—and our mutual friend on Twitter, Elliot, often points this out—you've seen the private markets rebounding much more strongly than the public REIT asset class. There's an argument there that if you want that real estate exposure, you should at least be thinking about it from both sides of the coin. Don't just buy REITs. Look into non-traded or semi-liquid REIT structures, which have begun delivering positive performance in recent quarters, whereas I think the REITs generally have been pretty range-bound.

PE is kind of the emerging new frontier, if you will, of these semi-liquid products for retail, and you've seen them rolling out and getting a lot of strong initial interest. You see them deliver really strong performance out of the gate—mid- to high-teens, I think, for some of the better-performing ones. I think you've seen BXPE cross $1 billion in sales in a month now. I'd have to double-check that, but the general point is that they're getting pretty strong adoption.

Again, I do think that is with that higher-end, ultra-high-net-worth type of investor. I know many of the PE products started out being available to a qualified purchaser, which—not to interject this in the middle of the product discussion, but just to level-set—there's a thing called the accredited-investor standard, which applies to many of these products. That means you have a $200,000-a-year income or a net worth, excluding your primary residence, of $1 million, or you're a financial professional of some kind.

Now, functionally, given the fact that those standards were set a long time ago and not indexed to inflation, it basically captures most of the American public that invests in stock markets today in a substantial way. Above that is the qualified-purchaser standard, which is $5 million in investable assets, so certainly a higher tier of wealth and presumably fewer liquidity needs. Now that they've rolled them out in that channel, they've been making the PE product available to a broader set of folks.

The flip side of that is the structure that they use. The real estate ones pretty obviously go in a REIT. That's a non-traded REIT, and that's pretty well-established. The PE ones, on the other side, use a variety of structures, from LLCs to tender-offer funds, and it is more of a fund-by-fund and strategy-by-strategy decision.

In the credit universe, there are 2 very compelling products that are a bit different: the semi-liquid, non-traded BDC on the one hand and the interval fund on the other. The differences between them are that the non-traded BDC is a BDC, which generally needs to invest 70% of its assets in private loans to U.S. companies, with a 30% non-qualifying basket. In these structures, that basket is most often used for the liquidity sleeve, but the BDC can also take its leverage up to 2x.

Now, pretty much nobody levers these things 2x, but 1.25x is a pretty normal top end, and many of the private, or non-traded, ones are still ramping to that, whereas the public ones sit there pretty comfortably.

Interval funds, on the other hand, are ’40 Act registered funds. They can trade with a ticker—not in the sense that you can buy them publicly, but in the sense that an RIA without the huge back office needed to process some of the paperwork for a non-traded REIT can more easily buy them on its screen from Schwab or Fidelity or whatever service it uses to manage its RIA practice. They also, importantly, can invest in a broader range of assets than BDCs, including structured credit, less-liquid bonds, or whatever it may be.

You usually see the interval funds having a broader range of credit exposure. They'll often be called a multi-asset credit fund or a tactical-allocation credit fund. They also can't be levered as much. For down-the-middle senior direct lending—very, very safe assets—it might not be the best fit because those assets are very leverageable. They have a very long history of being levered 1.25x and doing quite well.

Whereas in that more diverse portfolio, they can be somewhat leveraged, but you're going to use a little less leverage and have a more diverse pool of assets. Also, one little difference is that for the non-traded REITs and the non-traded BDCs, that 5% liquidity can be limited in an emergency. I doubt any of the big managers would ever do this, but in theory, the board could limit that.

Whereas in interval funds, because they are registered funds, that is an absolutely mandatory thing that cannot be exempted from by the board or anything like that. I know that was a really deep dive into a bunch of different assets and products, but I hope that gave a pretty good and pretty efficient overview of what's what out there in the world of retail alternatives.

My sense from that takeaway is, based on some projections but also some precedent, that this would naturally show up most in those yield-based vehicles, whether it's credit or real estate, and slightly less so when it relates to private equity and then particularly venture capital, where you're moving out on the risk spectrum. When I first hear this, I think of a bunch of retail people getting exposure to venture funds where you can have zeros or very little at the end of the day, and it feels like, based on that response, the positioning that we've historically seen—or the precedent—suggests that the push will be more toward those products that you were referencing.

I think that's fair.

Another way I might say it is that those have been the initial primary focus, and I think they will continue to be most investors’ initial on-ramp to the space. I think some of the fastest growth may actually be in those more PE-focused vehicles, which are just newer to the market and naturally have more of a growth runway. VC is an interesting one, and I’m glad you mentioned it. It is certainly a bit of a different case than regular cash-flow PE.

I’m not talking about some SPV that you get cold-emailed about to buy 200% marked-up OpenAI shares. There’s a firm out there called P10, for example. They have a subsidiary called TrueBridge that has long worked with private wealth platforms and other institutions that aren’t especially large to give them access to a fund of funds of top-tier VC. Again, that’s for a much higher-wealth audience than somebody who’s going to put $10,000 in a non-traded BDC—a much more sophisticated audience.

Other firms also have versions of this, some that combine PE and VC in one fund, but where you have that fund-of-funds approach, you do have more manager diversity and exposure to more situations. Again, that’s to reduce the lottery-ticket dynamic that a multi-$100 billion pension plan may be very well-positioned to bear, but even a very affluent individual may not really want, or maybe shouldn’t have, that much exposure to.

There are also platforms that make these more directly available to the retail market because, traditionally, many of these things I’m referring to are sold through an advisor channel. There are also firms such as Willow Wealth, which was formerly Yieldstreet. They recently rebranded, and they interact more directly with the retail consumer. I think they’re pivoting to a model where they’ll distribute more funds from other managers, but in a way that allows you to pay fees to get access to those funds without having a manager manage your whole portfolio.

I would note that they were one of the only firms that anybody found documented retail exposure to the First Brands asset-based finance part of the capital structure, where a lot of the supposed issues were. However, Yieldstreet had successfully invested in that and exited well over a year before any of the issues or disruption arose. So they actually did exactly what they were supposed to do. They got their investors access to an 8% to 10% return stream, kept a really close eye on it, and, when they saw certain metrics evolving in a way they didn’t like, exited it. I do think that’s actually a case of the guardrails working well for that retail investor.

6. Scale Wins The Distribution Race

Looking at the landscape, the other thing to consider is that there’s a broader menu of options now. What is on that menu? When you think about access—and we could take this from the lens of the alternative asset managers that would theoretically benefit the most here—who’s best positioned and most interested in capturing the opportunity? From the signals that you’ve seen, where is that going to come from?

You mentioned that statistic earlier about $20 trillion or so in AUM in alternatives, which sounds right to me. I do think the winners here, though, will not be evenly distributed across that $20 trillion. It will be the larger, scaled firms—the Blue Owls, the Areses, the Apollos, and the Blackstones of the world—that have the breadth and scale to offer top-tier products across a range of functions and build out sales forces to really go after that opportunity in a concerted way.

Take a firm like Oaktree, for example. While primarily focused on the institutional channel for many years, it has built a very strong public brand anchored in its founder, Howard Marks, and his memos and thought leadership. That has percolated through the firm, and Oaktree has a much higher level of public awareness than many other similarly sized, institutionally oriented, credit-focused managers. That’s certainly a huge asset to them and their partners at Brookfield as they build that business out for the retail channel.

There’s going to be an important role for managers that are really good at a certain thing, like Kennedy Lewis in non-sponsor lending, where you’re bringing something complementary and different to the table. I do think there’s a role for that as well, especially with the more sophisticated consumer who may already have gotten their initial direct-lending exposure and is looking for more private-credit exposure, but not the exact same return streams.

Terribly niche strategies and smaller, non-scalable strategies are not amenable to this treatment, and very often the firms that invest that way are not going to have the scale to really build that out. This has been a continuing trend for a while in the private markets and alternative space: the big keep getting bigger, for lack of a better word. I think that will continue.

You’ve also seen a lot of partnerships struck between traditional asset managers that have the distribution footprint and, in many cases, the 401(k) platform, and alternative asset managers that have the private-markets investing capability. A lot of those are still in the early days, and we haven’t really seen the results.

If I had to guess, I think you’ll probably see a dispersion there in terms of who really gets it humming, delivers the right product to the right people with the right performance, and achieves scale, versus who, for whatever reason, doesn’t have it flow that well. The incentives may not be perfectly aligned; some things may be done through the partnership, while other things are done outside the partnership, and that might gum up the works. Some of those will certainly be successful, and some may not be, but it’s really too early to pick winners and losers, as they’re all very nascent right now.

If you’re a long-only or traditional active manager that doesn’t have that scale, this is just one more headwind you’re facing. In many ways, I think it exacerbates or amplifies a lot of the trends that were already occurring, with returns accruing to scale.

Similarly, even on the RIA platform side, the bigger, more scaled wirehouses and RIA platforms are going to have better access to this product and a better ability to suss out all the back-office work that needs to happen so the client has a seamless experience investing in it. For the 1- to 2-person solo-practitioner financial advisor on an independent broker-dealer platform or the like, or even on a smaller platform—or who doesn’t use a platform and uses Schwab or something—it’s going to be harder to do that.

I think that’s going to be another example of the bigger firms getting this product, getting more access to it, getting more diversified offerings, and having the scale to do it right. For the smaller ones, if they’re going to do it, it’s going to be a much bigger relative lift in terms of their commitment of resources.

Hopefully, the end winner here is the investor, who now has access to a better, more diverse range of investment options. In many cases, they have access to the same investment options as defined-benefit plan investors. You don’t think of them as investors because they’re not picking and choosing what happens; they’re just getting their pension check. That was the start of alternative asset management. They’ve benefited from this for decades.

A lot of people should benefit here, but there will be folks who see the headwinds already facing their business amplified by not being able to capitalize on this opportunity.

We’re solving the inequality issue at the individual level, but maybe worsening the inequality issue at the alternative-manager level.

A lot of it is also brand, because when you’re marketing in this channel, you need brand in a way that you don’t in the institutional channel. In the institutional channel, as long as the right few hundred or few thousand people in the allocator world think well of you and your performance is good, that can build an absolutely incredible business. Whereas in this channel, you do need people to know, recognize, and trust your brand. You need to build up that brand.

Blackstone has been very loud about this. They have TV ads now, speak about it at length on their earnings calls, and I think most of the rest of the large public managers are doing this as well. Blue Owl has certainly done an amazing job with this out of the gate.

For some of those more specialized firms that are real specialists in a sector and have performance that might be better than the big guys, but aren’t terribly well known outside of allocators, sponsor-coverage bankers, and people like you and me who are very close to the markets, they need to find smart ways to invest in that because they’re not going to have the same budget that Blackstone does.

They need to find the right spots to build that overall brand so people know you and think, “Oh, good manager of money,” but then also build the reputation and niche offerings that you’re selectively going to pursue. They need to explain why they’re better positioned to deliver those offerings than more of a private-markets supermarket.

It certainly makes me revisit some of those marketing initiatives, which I admittedly scratched my head at a bit when they were happening. I talked myself into them becoming bigger and needing to have more connective points into the businesspeople of the world. But now I think you can see exactly what was going on there.

On the earlier point that you made around positioning, if I step back and evaluate what you were saying, it feels like the credit franchise for any of these big alternative asset managers is really one of the biggest things here. If you take a huge alternative asset manager without a strong credit franchise, it could be left a bit behind in terms of positioning, or it may simply not be as well positioned.

Is that a fair conclusion from what you were saying?

I think it’s a very fair conclusion. That is true in the broader world of institutions as well, as credit has just become a bigger part of the private markets mix. Having the best vehicle for wealth is one of many reasons why having a really strong credit arm is essential to being a multistrategy private markets manager today.

But I’d say it isn’t necessarily the only or primary one. You’d be hard-pressed to find what most people would consider a megafund private markets operator that doesn’t, just from my public observation. You saw TPG go public and then very quickly add top-tier credit capability through Angelo Gordon, and that integration seems to be going very well. You’ve even seen folks like Blue Owl, who came to market with a really strong direct-lending offering that was their calling card and remains their forte, add those other pieces of the credit puzzle, such as digital infrastructure and asset-based lending, to really deliver the comprehensive credit offering that you need today.

So I definitely think it’s true that you need a top-tier, multifaceted credit offering to be a large, diversified business. You can still be a very successful business without one, but to really hit on all cylinders, I do think you need that. Most of them have that and have seen that writing on the wall for some time.

7. The Cost Of Private Access

As it relates to that earlier comment, just in terms of the offering and how it will be provided—whether it’s some direct linkage, whether it’s through a brokerage platform, or whoever is managing your 401(k)—for the end investor, do you have any sense of what that could mean for fees? I think you brought up earlier that some of the democratized access to private markets now is just higher prices marked up with a ton of fees mixed on top of it, and not all, but certainly some that I see. What’s your expectation, or what are the early signals around that?

Fees are going to be higher, full stop. These are more expensive businesses to run. If you compare direct lending to a liquid bond fund, in direct lending, you need an army of originators going out there and covering the sponsors, covering the nonsponsor borrowers, and finding you those direct deals. In a liquid credit fund, the bank does all that work for you, and you just trade with the bank desk, so there’s a whole half of your business operation that you just don’t need.

Similarly, you’re structuring all the deals in-house and negotiating all the deals in-house, so you need far more in-house legal and structuring expertise than a liquid credit fund does. A liquid credit fund may have some resources to evaluate the legal documents of what they’re investing in—the good ones do—but they don’t necessarily need the resources to negotiate the documents themselves, and that costs more money.

There are higher fees charged for these products because they cost more to run. These managers do run very attractive FRE margins. I’m not going to elide that fact. But I do think that most folks who are experienced in investing in alternatives, because in many cases there is a wider band of outcomes, or at least the band of outcomes is more attributable to skill than to market factors beyond your control, have much more of a focus on net-of-fee performance than there may be in the retail channel for liquid-market investments.

Most private-market managers have a proven track record of beating the liquid alternative in their sector. Obviously, the indexes for private markets are sometimes imprecise, but in direct lending you have Cliffwater’s quarterly private credit data, I think. So there’s stuff out there, and there are quartiles that are assigned for different vintages.

Most of the operations that you see bringing these funds to market that have reached that scale, having that level of higher performance than the market has kind of been a requisite of them getting to the scale where they can do this. So there’s already been almost a natural filtering: to get that big, you had to do something pretty good.

Generally, investors in the space—and I would hope advisors who are working with retail investors in the space—hone in more on net-of-fee performance. Certainly, it’s important to understand the fees of what you’re investing in. I’m not trying to minimize that at all. And certainly, if you’re looking at 2 funds that have generally similar performance and one of them charges 1.0 and 12 over a 7, while the other one charges 1.5 and 17.5 over a 6, sure, you should definitely consider that pretty heavily.

This information should be made available to people. It’s not buried, and it’s not harder to find. But I don’t think the right calculus for people to use is that this costs X more than the BSL ETF. So long as, when you look at the net performance, the alternative option—the private-markets option—is delivering on that versus the cheaper liquid option.

It’s not new. I can remember looking at my 401(k) options, and there would be the mutual funds they offered and their fees, as well as the ETFs. In the public markets, that outperformance didn’t necessarily match, so the ETFs were often the better option, with significantly lower fees associated with them.

On the broader point of disclosure and education, do you have any sense of whether that’s a piece of the regulatory push? It does feel incredibly important, because even if you set up something where it’s capped at 5% of NAV each quarter and it might be clearly disclosed, there can still be an uproar even if that is the case. Do you have any sense of whether that’s a big push that’s coming along with the regulatory changes?

I’m not so sure it’s being taken on by the regulators. It possibly should be. That’s a very good debate to be had. But I do think the managers themselves—you’ve seen this in the Alts Academy from Blue Owl, the Apollo University, or maybe it’s Blackstone University. I’m sorry, I can’t remember all the matches.

The big managers have brought to bear these very comprehensive education platforms aimed mostly at advisors, not so much at individuals. Advisors need to get continuing-education credit, and they get it from these platforms. It’s a very formalized thing.

Certainly, there’s an element of being educated by somebody who is looking to sell you a product. But these are really serious educational programs because the managers want to forestall exactly the crisis you just described. It’s not in the managers’ interest to have any of these things missold, because they’re going to have to pay for it on the back end when somebody doesn’t get the experience they expected.

So I think the managers have taken a lot of that mantle on and invested huge sums in building those educational platforms. It’s partly because the advisors need to know what they’re doing to effectively provide clients with counsel on them. A lot of advisors just really don’t know it.

I heard that there was a poll recently of relatively well-off investors. They were asked to name 3 top private-markets firms, and the most common answer was that nobody could. I’d have to check exactly who they were surveying. I think it was a Bain survey. I’d have to double-check who the respondents were, but I think it was higher-end investors.

There is a lot of education to be done here. The advisors are, for the foreseeable future, going to be the conduit for much of that. I wish that every single individual investor would listen to this podcast and all your wonderful podcasts and read more about private credit like I do. I don’t think that’s necessarily something we can expect of your average mass-affluent consumer, but their advisor needs to get smart on it.

The enforcement factor for that is FINRA’s very vibrant arbitration process. I do think that if advisors are misselling these products, investors should have every right of recourse against that advisor as if they were missold any other product, and they should avail themselves of that. Advisors who missell these things or fall down on the job of educating the investor should be penalized for that. I’m fully supportive of that.

Any time you see the evolution of financialization in markets or unique structures, you’re always going to have people who push the limits. You can hope that the system is able to weed that out and not make it a bigger problem for the market.

While these things sound complicated and whatnot, at their heart, they’re really not. In direct lending, you’re raising some equity, you’re borrowing some money on top of that equity, you have a cost of capital, you’re lending money out to people the same way a bank would, and you’re collecting a net interest margin.

Now, when you consider that the other primary alternative-yield vehicle for many of these mass-affluent folks is a structured note that a large money-center bank has sold to their advisor, with all kinds of options involved and Greek letters, to me, the direct-lending business model is a lot easier for me to understand than a Matt Levine column on structured notes. That’s just my 2 cents.

Once you get past the initial wall of “This is private, this is alternative, this is something I don’t know,” it’s actually way more intuitive than if you have an advisor recommending single stocks, and they’re recommending single-name semiconductor stocks. I can tell you right now, you’re going to have a much easier time understanding the concept of “We buy a company, we make it better, and then we sell it” than you are advanced DRAM packaging or whatever that company may do.

But I do totally get it: there’s a big need for education out there, and that should be something that continues to be invested in.

You’re spot on. Seeing it up close, its actual operation is no more complex and is arguably very similar, just more detailed. The challenge comes from liquidity, but that is something that we’ve addressed.

It's been fascinating. You've actually spelled out some questions that I had, and I think painted a pretty clear picture in terms of how this could evolve. If we were to summarize the true winners, whether you want to put them in order or say who stands out the most, what would you highlight as an expectation? It can be based on what we've seen thus far, or as you look into the future, who wins across the ecosystem?

The alternative asset managers that manage to play this right—certainly the large ones have a natural advantage. There's also a lot of what people would call mid-sized firms, but in many cases we're talking about $50 billion AUM firms, that manage to bring the right complementary products to market. They will be very large beneficiaries of this, and I think that investors who get access to better investment products will also be really large beneficiaries of this.

I'm not going to mince words about the alternative asset management sector and private markets. They have probably reached close to saturation in the institutional channel, so most of the moves there are like share gain. I'm no expert on CPG, but toothpaste: There aren't a lot of people left in America who are net new to toothpaste. It's more of a share battle between Crest and Colgate, private label, and higher-end bougie stuff I bought for $250 a 12-pack off Instagram that I do think actually works and makes my gums better. That's a different conversation.

The institutional channel still has some institutions that have room to grow, but it's generally pretty well covered. This definitely is the greenfield opportunity for these managers to add new clients, add new assets, and expand the pie for all of them.

Well, Josh, this was equally as enjoyable as our first go-around. Thank you again for sharing the knowledge.

It was absolutely my pleasure to be here. It's an area I'm super passionate about and that I think has a lot of benefit for everyday investors to have a better retirement and a better financial portfolio. I just love talking about this stuff, and I love talking with you. It's my favorite podcast. We can leave it there.