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Welcome to Animal Spirits, a show about markets, life, and investing.
Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing, and watching.
All opinions expressed by Michael and Ben are solely their own opinion
and do not reflect the opinion of RedHole's wealth management.
This podcast is for informational purposes only and should not be relied upon for any investment decisions.
Clients of RedHole's wealth management may maintain positions in the securities discussed in this podcast.
Welcome to Animal Spirits with Michael and Ben.
Michael, I've talked before how I grew up in the institutional investments out of the world.
It was Endowments and Foundations and Pensions and they all puffed their chest out like they
were kings of the world, kings and queens of the world.
And we're the only ones who have the ability to invest in alt because we have this money,
we have scale, we have expertise, and it was kind of like anyone else who gets who wants
alternatives, they get seconds, they get our, you know, whatever's left, they get our leftovers.
Yeah, I get the table scraps.
And I think that's changed since I left that that side of the world where I was managing
money exclusively for a foundation in these billion dollar funds that now wealth managers are
having gaining access to these funds that aren't just like the also rants or the giant 50 billion
dollar fund that it's just trying to to bring in fee revenue.
Did it start with the fund of funds? Was that how retail first access this?
Yes, which is a scale, which is rarely if ever a good deal, if you're paying fees on top of fees.
And so then came along some of the platforms where you can access these via, you know,
a menu for lack of a better word and had the options to get some education and information.
And then along came companies like the one that we're about to talk about to talk with today,
where they're tech enabled and it's more than just access. It's actually working with the
REAs and their advisors to facilitate a better experience.
As someone who worked in the operational aspects of things like private equity and hedge funds
and venture capital back in the day in a very small team, that was always my biggest problem with it
is the operational headaches are so is such a big hurdle for anyone, whether they're institutions
or wealth managers that it's almost not worth it. But these new platforms are actually coming in
and doing the operational stuff for you. So you can just kind of focus on the funds, which is kind
of interesting. So we talked to Brett Hillier today, Brett is the CIO of Glass Funds and we're
going to get into more all of this stuff and more. So here's our conversation with Brett.
We're joined again today by Brett Hillier, Brett is a CIO at Glass Funds. Welcome back.
Yeah, glad to be back. Quick reminder, you're on the show back in May, but for those that missed
that, who is Glass Funds, what are you guys all about? Sure. We are an alternative aggregation
platform. So we help wealth managers scale and allocate alternative allocations across our
client base, including hedge and private capital strategies. So there's a bunch of of these
in the industry. One of the things that's unique about you is that unlike some of the competitors,
you guys are not a feeder fund. Can you explain what that is and how that separates you from some
of the competition? Yeah, so we have two main binatities and onshore and offshore fund.
And each underlying strategy is essentially a side pocket that's legally walled off from all
the other side pockets. So that allows advisor firms to create fully bespoke portfolios across
hedge and private capital. And there are a number of efficiencies due to our legal structure.
One is they only need to subscribe and LP one time. That takes about five to eight minutes.
And then we save all that data. And then if they six months later want to allocate to another
private capital fund, that probably takes another two minutes. And then it also allows
for lower frictions to allocate to underlying strategies because we're not spinning up a new
feeder fund. We can allocate to a manager for as little as a million dollars in the aggregate.
Where spinning up a new legal entity may you may want to get at least 30 million to spread out
those startup costs. And then also time to market is much quicker. As it's really just contingent
on how fast we can get through our review period. There's really no lags due to the creation of
a new legal entity. And then lastly, we also offer aggregated reporting, including aggregated
tax reporting. So an investor can ultimately own 20 things at the end of the year. They'll get
a single aggregated K one. And my background with investing in private funds was mainly from
the institutional side of things. It was with endowments and foundations and those types of
plans. And I always had a hard time wrapping my mind around alternatives because
we had a small team at the endowment I worked for. And it was just a lot of paperwork,
a lot of due diligence. And frankly, if you weren't a huge Ivy League school or one of these
really huge pensions, you were kind of at the lower end of things and you didn't get a lot of
attention. But even then it seemed like institutional investors were head and shoulders above
everyone else in terms of their place in the hierarchy. It was easier to get allocations
of these funds if you were an institution. This is 10 years ago or so. How have things changed?
And at that time it was mainly, I guess maybe like Merrill Lynch and Morgan Stanley would have
offered their Goldman Sachs would have offered some hedge fund allocation of their clients. But
maybe you could talk to me about how things have changed in that time in terms of
wealth management industry investing in private funds versus institutions and some of the pros and
cons there. Yeah, there's been a lot of technology advancement and disruption in trying to
democratize alternatives and it's making it easier for wealth managers to allocate.
What's been around a long time is just digitizing the subscription process. So turning those
100 to 200 page description documents into a more easily digestible online questionnaire.
Also aggregating small tickets to big tickets to make institutional level,
private funds or hedge funds more accessible. But then I think where glass funds is really
iterated on is now that the subscription process has been digitized and minimums have been solved
to a large extent. We're seeing advisor firms have challenges managing diversified portfolios
of alternatives across a large client base. And that's where we think our platform can offer a
lot of efficiencies and allow the advisor firm with more limited operational professionals on
their side being able to implement cover and manage existing and new allocations within
diversified portfolios as opposed to just viewing an allocation one by one by one.
Can you talk about the existing part of it? I'm curious because often advisors will
will onboard a client from a wirehouse or wherever they're coming from and they might have
existing alternatives that the advisor do not recommend. The onboarding advisor does not
recommend. But maybe they can't get out of for various reasons. How does glass funds help in a
situation like that? Yeah, so we have the ability to transfer those positions onto our platform.
You know, that's at the discretion of the end client and the advisor firm. We will,
we cast a wide net on what we'll accept. Now the underlying strategy has to be operationally
sound. Sometimes if the firm that currently holds it, if they view a competitive reason,
they may block transfer, but we don't really have those restrictions on our side.
And then our efficiencies go up the more that the advisor firm and the client
the higher the number of positions they have in our platform, the greater number of the efficiencies.
So if they're able to transfer the existing positions, then it all gets folded under
the ability to do, you know, aggregated reporting, aggregated tax reporting. We have a single
bank that we wire money to and distribute distributions from. So that creates efficiencies.
So trying to, you know, fold as many of these positions onto our platform can offer the advisor
firm a number of efficiencies. But again, the existing holder or custodian of that asset has to
accept the transfer. Do those efficiencies translate it all into liquidity? Because that was always
one of the other things I had that I found that was really challenging in this space is liquidity
where some hedge funds or real estate funds would have a certain window of time where you could
could get your money out. And it maybe was only a certain percentage of the fund. And it was
sometimes it would have to be like a nine to 12 month lead. And so getting your money in was always
way easier than getting it out. Have there been any changes there were things have improved it
all there? And how do you all handle the liquidity? Whether it's just for rebalancing or whether it's
for someone who actually wants to take their money out of a certain fund? Our platform offers the
ability for enhanced liquidity. So an advisor firm, let's say they allocate $10 million to a buy
out fund. And you know, despite all of the education that the advisor firm does to the client,
you know, this is a 10 year plus investment. You know, there's liquidity as they sell down
underlying companies in the portfolio. It's common where an investor will come in to the
advisor firm saying, Hey, look, I know what you told me, but I need liquidity now. So that
advisor firm can come to us and they can either have other clients in their advisor firm saying,
Hey, look, client A wants out, he wants out of his $250,000 commitment. I have clients BC and D
that can assume that position. And at the glass funds level, we can just change the composition
of the ownership. We do not have to go to the GP because at the all what the GP sees is glass
funds and aggregate. They don't know nor do they care how that aggregate is divided on our side.
And in also glass funds, you know, we don't dictate the terms. So the advisor firm and the
transfer earn the transfer ease, they dictate the terms on which the transfer takes place.
We're just helping facilitate that. So there's no like legal structure that's stopping you from
changing that ownership halfway through the fund's life or something. No, it's really just the
ability to source demand for that position. And as long as the advisor firm and or glass funds
can source that demand and as long as both parties agree to the terms, we can easily make that
transfer. So you've created like your own secondary liquidity in some ways? Yes. And we think
the institutional secondary market has grown strongly over the last 10 plus years. We think the
wealth management liquidity or secondary market is behind that. But we do think it's going to
continue to grow and materialize where there's going to be more dedicated secondary investors
targeting this area. Because the early adopters, let's say, you know, in the wealth management
channel, private capital started to become acceptable in the mid 2010s. You know, so now we're
starting to see investors have more mature portfolios. They may have higher allocations to private
capital and then they may run into more liquidity needs and that should spur higher turnover
within secondary liquidity demand. Brett, isn't it hard enough for investors, certainly advisors
to analyze and contemplate whether or not allocating fresh capital into a strategy makes sense.
How are they then supposed to determine, okay, this particular fund has all these underlying
investments. It's been running for four and a half years or whatever the case may be. How are they
getting the knowledge to determine whether or not they're paying the good price for the underlying
investments? Is that something that glass funds is helping with? No, we do, we'll help provide
data, but we do not opine on valuation. Most of the transfers that take place on our platform
are done at the most recent NAV provided by the underlying manager and the reason is typically
the advisor firm is sourcing that liquidity within their own client base. It can get complicated
when we're talking about substantial either discounts or premiums compared to the most recent
NAV, especially when you have clients under the same advisor umbrella. Got it. Do you think about
glass funds as more of an investment firm, more of a technology firm, somewhere in the middle,
or how would you think about your business through that lens? We view it more as a technology firm
and as an enterprise solution. No matter any type of client we have, they interact with our
technology and the efficiencies that they gain from our technology and structure. Research
is just an additional course in the buffet of things that they can decide to utilize and some
advisor firms, they source pretty much all of their own ideas and they're just using the glass
funds architecture to scale that across their client base where we have other advisor firms that
they more heavily rely on glass funds research team of which I lead and getting our ideas across
various alternative categories. So advisors can bring their own their own deals as long as it has
the operational infrastructure to be supported by you guys? Correct. We call those advisor source
funds. We will do an operational overview to make sure there's institutional plumbing on the
administrator in auditor side. And as long as that passes, we will onboard it onto our platform.
We do not opine on the investment merits of advisor source funds.
I'm curious if the efficiencies of scale in your business have have led any changes into fees.
I know a lot of people assume across alternatives whether it's private equity or venture capital
or hedge funds that it's all two and 20 and I'm sure for a lot of the biggest funds it still is
maybe that same fee structure but not everyone in the alternative space charges that I don't know
if you can tell me the average is if it's now I don't know 15 and one and a half or whatever it is
how does the the fee landscape look these days for alternatives?
The fees are drifting lower and I think it will continue to do so as a the space gets more
competitive and that's where I also think where we can help wealth managers use their scale
to get institutional light fee breaks. One common opportunity that we see consistently in the market
are seed deals for private credit platforms. So GPs that are trying to scale up in private credit
they can typically offer a combination of discounted fees or some form of GP economics and those
can be pretty lucrative for the end investors but for them to offer that they're going to want
commitments anywhere from 10 million 25 million and up and they also want to target the wealth
management channel but they don't want to take a bunch of $250,000 checks. So using an aggregation
platform like glass funds advisors can scale up and you know deliver a large check to these
private credit managers and also take advantage of some of the seed economics that they're offering
to help scale their platform. We see more of these opportunities as the alternatives ecosystem
continues to grow and I think that's where wealth managers should take a close look at to make
their to enhance their fee efficiency and net a fee return so they're end investors.
Glass funds has been operating for a while you must have a pretty good look
look through to the industry. I don't know if you disclose how I'm what what is the metric that
you guys use as it assets under advisement or what is like how much money is on the platform?
Yeah we look at a couple metrics. We measure AUM and committed so we're a little over two billion
in AUM and committed capital. The majority of our aggregated capital is in private drawdown funds
compared to open and hedge funds and then we also look at how many advisor firms we work with how
many positions we have on the platform so that's sort of how we gauge our size.
Yeah and you work you work only with with advice with REAs or is that not the case?
We mostly work with fiduciaries so REAs in private banks. Okay. Yeah. All right so so
do you have any any sort of insights as to where the money is going these days? What's what's popular?
So alternatives is a very wide bucket there are as Ben mentioned there's hedge funds there's
private equity whether it's buyouts or venture there's private credit there's private real estate
there's infrastructure I mean there's there's a lot going on there and is any one or two of those
areas seeing particular client interest above the rest? There's different pockets of demand I
would say over the last several years in looking at the broader market trends as well as the
flows across our platform private capital is still dominant over hedge funds hedge funds
garner some strong feelings either on the positive side or negative side certain firms are
large allocators to hedge funds but there's a number of firms that they've decided that hedge is not
the right solution for them there's much less firms that have decided that private capital is not
the right solution for them so the majority of our flows are still being driven by private capital.
Sorry did when you say private capital is that the same thing as private credit?
Yes so under private capital we include buyout venture growth credit and also with under the
real assets category that will include private real estate infrastructure natural resources etc
I'm curious how the current interest rate and development affects alternatives because I can see it
going both ways you know with 5% T bill yields on the one hand I can see that being a much higher
hurdle rate and people would say why would I invest in all it's because those those credit
funds would have to have much higher returns on the other hand you know things like hedge funds I
would imagine higher rates have to be a good thing because if you're if you're shorting you're
doing something like that and you're holding cash you know you're actually earning something
on the cash these days for private equity obviously there's a higher borrow rate but obviously not
all that money is is being invested at once so how do you see the rate landscape impacting alternatives
and you can take it anyway and want with the types of alternatives and how it impacts them.
There are a number of cross currents I would say on a same store sales basis type view
uh allocations from our vantage point are down modestly and I think that's partly
just there's a there was a large decline in the 60-40 portfolio that's probably the major funding
source so you know even despite the rebound in 2023 you know a traditional portfolio is
most likely still under its high water mark and then also cash is a viable asset now you know
now that you can get 5 5 and a half percent on cash you know that becomes a little more attractive
it's more competitive I would say we have still experienced strong growth because there's so much
secular white space within wealth management allocating to alternatives so a large percentage of
our growth this year has been onboarding new advisor firms and helping them scale up their
alternatives across their platform versus you know long-standing clients increasing their pacing
to private capital and hedge. I'm curious what's the range in size of the type of
advisors you're working with? Yeah there's quite a wide range you know we some of our advisors
are more specialists and alternatives so they focus on ultra high net worth families that
typically have you know founded or run a business and they're just managing their alternatives
up portion they can given their specialty you know they could be on the smaller size of a
billion to billion upwards to you know some of our clients larger private banks 50-60 billion of
AUM and everything in between. So you said that advisors have the ability to customize portfolios
as opposed to you know as opposed to say to a client who asks hey do you guys do alternatives
and then they're giving like sort of the laundry I don't know why I said laundry the
oh this is a laundry list the list of things that they can invest in oh we have this we have this
we have this our advisors creating custom portfolios that like this is how we do alternatives and
it's a portfolio of however they they chop it up and then it's just one cohesive message is that
something that you're seeing advisors do? Yes they're building now a program and they need they
lever our technology and platform to deliver that program so they'll start out with some
different iterations of let's say a vintage 2023 private capital series that will include
perhaps some buy-out growth private credit and that will sort of serve as a base to iterate on but
then given certain client suitability or preferences they may tweak that around the edges
and in that way they can greater they have greater efficiency in scaling the allocations across
our client base as opposed to doing doing fully bespoke portfolios on a client by client basis
so just just following up on that does the fact that a lot of these these funds have ventages meaning
that they'll open up a new one once every year once every other year whatever it is does that
further complicate the idea that I just mentioned does it make it harder for for advices to
implement the strategy like that? It can at first but the the more experienced advisors they
learn the cadence of a stable managers that they're familiar with so they they'll know that
manager A they'll raise every three to four years and you know they're going to come on board
in 2024 and that offsets with manager B that's live in 2023 and and so they start out with a
core stable managers but then they may drop one at another one and modify it year by year that's
where we've seen some of the more longer tenure teams do it on our side.
One of my roles early on in my career was tracking the performance of our alternative investment
part of the portfolio and that that's pretty easy, relatively easy for hedge funds but for for
holdings in and private real estate and especially private equity or venture capital
it's can be kind of tricky because you're dealing with IRRs which is not the same thing as the
compound rate of return so how do you handle the performance reporting aspect for advisors?
We take all of the underlying accounting data that we get from our funds and then we provide
that data through an API to a number of front end reporting systems that the wealth management
shops use then they can take that digital raw material and customize client reporting reports
and deliver certain metrics such as multiple invested capital net IRR percent called percent
uncalled so there's some efficiencies with that especially us digitizing it and feeding it to
them electronically and then their ability to customize. Certainly that they're still challenging
aspects private capital reporting is typically lagged by a quarter some strategies are lagged by
two quarters so you know an end client you know obviously they'll have all full up to date public
market performance you know let's say as at the end of second quarter where you know they look
at their private book a portion of it could be marked as a first quarter or another portion could
be marked as a fourth quarter 2022. One of the challenges with alternatives traditionally has been
some of the opacity around the fee structure especially if there's just more than one party involved
and the SEC has some proposals out there that I want to get your take on but before we get there how
does how does glass funds what are the economics of your business. We charge a flat management fee
to the end investor and then that management fee is struck at the advisor firm level and that fee
scales down as the advisor firm scales their usage up with glass funds and what is that what is the
fee for a new user. It can range anywhere from 25 to 50 basis points and it's really dependent on
you know the size of the firm how much they think they're going to initially allocate what the
outlook is for the next 12 24 months and then then we set breaks over time to revisit it.
Got it. So the SEC is taking a closer look at some of the business practices in private markets and
there's a bunch of proposals out there and I'm sure this is going to be litigated and lobbied and
you know who knows where this will eventually land but could you just talk at a very high level
about some of the things that they're going to be going after that you think right you know
rightly or wrongly do you need to be revised. Yeah we've been keeping up to date on it mostly
through media reports and also some sources that we rely on. In general anything that enhances
the transparency to end investors and creates perhaps better negotiating power to the LPs
compared to the GPs were in favor on. I think where it can get a little tricky is if the right
balance isn't struck you know have you know do some of these provisions create owners burdens
on the GPs for them to more efficiently deliver their strategy and you know I'm not quite sure
whether if it will be passed or has been passed but I believe at one point they were debating
a provision of you know if you offered a fee break to one investor you may have to offer to all
investors we think that may be a little too far because allocators that come in size they should
get favorable economics it just is more efficient for the GP to manage a larger ticket than it
is a bunch of smaller tickets. I was talking with Josh about this last night that's how the world
works right if you come with with with better economics you get a better pricing whether it's
finance or construction or whatever the case may be one of the things that they're talking about
that I think the industry is going to be uproarious about is this look through thing can you talk about
about that the look through as in a specific attribute or well well well maybe looking through like
bundled investors and what constitutes a private versus public company.
Yeah so I think again it's it's a fine line between transparency I think better transparency
is better for the end investors almost all the time now the question is do they have are these
requirements just going to create a tremendous amount of burden or complexity to the recipients of
those reports and is it going to get into some arcane debates and that just creates a bunch of
confusion I think that's where it can air on the the side of just it's too much so you know I think
transparency around underlying investments underlying fees audits etc I think that's all favorable
to the end investors you know it's a question of just are they just going to require too much
information where there's just not much use out of that well it's not even just I mean obviously
everybody I think is is in favor of more transparency but if this causes you know cost to rise
whether it's compliance or legal or whatever unfortunately who do you think is going to bear bear
the brunt of that it's probably going to be the investors that trying to protect yeah absolutely so
in going through fund agreements and financial statements all pretty much almost all of the
portion of the cost to operate the fund gets charged to the fund so LPs have to be careful for
how much they ask for because they could just be taking money out of their own pocket so for
advisors that want to work with glass funds are you integrated with all their tech stack whether
it's their CRM their reporting software things like that yeah we have a lot of flexibility to connect
to a number of underlying platforms on the reporting side I think we do have the ability to connect
to their CRM we don't get that request too often but that's something certainly we would explore
are dedicated tech team you know they do a great job keeping up to date on the latest trends as well
as building a tech stack that has great flexibility because we know there's you know just a wide variety
of different systems that either private banks or wealth managers use so we try to focus on our
ability to integrate and connect with those systems. Brad if people want to learn more
about glass ones where do we send them yeah check out our website glassphones.com I'm active on
your team yes one us and then I'm active on LinkedIn don't hesitate to reach out there and
we'll get back to you thanks Brad I appreciate it yeah thank you
okay thank you to Brett again remember go to glassphones.com to learn more about their platform
email us and we'll see you next time at geno.com