Talk Your Book: Streamlining Alternative Investments

Today's animal spirits talk your book is brought to you by glass funds go to glass funds.com That's glas to learn more about how they work with advisors to bring alternative investments to their clients Welcome to animal spirits a show about markets life and investing join Michael Bannick 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 Red Holts wealth management this podcast is for informational purposes only and should not be relied upon for any investment decisions clients of Red Holts wealth management may maintain positions in the securities discussed in this podcast Welcome to animal spirits with Michael and Ben Michael one of the initial jobs I had early in my career was working for an investment office for a billion dollar fund not the brag and One of the we were a small investment child. There's only three of us, right? And one of my roles was as sort of operational manager of hedge funds and private equity and I had to track Capital calls and distributions from private equity accounts and paperwork and all it was just a mess for such a small team and it was a lot of like heavy lifting For these funds and I came away from that experience Thinking the operational inefficiencies of running alternative Platform are just not worth it if you have to do all of that heavy lifting because there's so much that goes into running it That you just don't have to deal with for more liquid public How many how many funds were we talking to you member give or take hedge funds probably a dozen private equity funds probably 30 to 40 So it was I mean it was a lot of you know new funds coming on and old funds maturing and money being moved around and and I learned a lot about how hard it is to To get that to a like a warm to very much and we were coming from it was brand new money at the time So we were like building it up and so wasn't like a mature book yet of of Investments it was what years is like a five or like oh seven oh seven You know is when we kind of when I started so we were building it up And so it was a lot and and I realized like you need to be you need to have expert level knowledge not just investing wise in terms of like you know putting your money in the right funds or diversifying the right way and alternatives, but Operational you have to be a ninja to to make that kind of stuff work and so I thought it was interesting in this talk We ever talk your book with with Brett at glass funds that that's the that seems to be the main focus for them is the operational stuff and making it easier because You and I have looked at at plenty of different alternative strategies over the years And that is always the big pain point right is okay the strategy sounds great But how are we gonna implement this operation? How can our advisors understand it and how can our operation people actually make it work with cash flows moving in and out and Working with the rest of the portfolio and performance printing all this stuff. That's the difficult stuff for this especially when it comes to advisors Yep, so we get into all that how glass funds works with advisors to streamline the investment process So without any further ado here is our talk with Brett Hiller Today's show we're joined by Brett Hillard Brett is the chief investment officer at glass funds Brett. Welcome to the show. All right. Thank you Pleasure to meet you Michael and then Alright, let's start with the company. What is the origin story? What is the infinity stone deal with man? I tried way too hard that I'm sorry audience What is the origin story for our glass funds? Yeah? It's actually interesting origin story back in 2008 the founder Michael Maroon who's currently our CEO He realized after working as a wholesaler for a traditional fund hedge fund of funds He kept getting questions from his clients Hey, can I just Allocate to this underlying manager that underlying manager instead of the complete portfolio so he realized that there was a growing demand for more bespoke customized alternative portfolios and he worked with a lawyer friend of his to draft up a novel legal concept that would allow certain attributes for investors to more easily access blue chip hedge funds as Well as create fully bespoke customized portfolios based on the needs and risk tolerances of their underlying clients so Glass funds started out as a customized hedge fund platform for about the first four or five years and Then with growing demand from wealth management for private capital funds started onboarding private funds like buyout venture growth private credit starting at about 2012 2013 and we've made a number of iterations to make the process as seamless and frictionless as possible for advisors to allocate to alternatives across their client base and Today we cover the full spectrum of hedge and private capital. It's a fully digital process online and Your advisors can come on the glass platforms and create fully customized alternative portfolios across hedge and private capital across their client base Brad but I should mention that is I am Joe. That is a baritone voice right there credit to you sir Yes, I've heard many of times that I should be on the radio my dream job is to do voiceover work for like movie previews and commercials Well, yeah, I mean you've got it man. You've got it. All right So before we we're gonna we're gonna dive deep into glass funds and how it works, but what problem are you solving for? So we were an RA we we want to do some private investing What what sort of pain in the butt things do we have what sort of hoops do we have to jump through to get our clients's access to these funds? Sure, so first and foremost there are qualifications thresholds our platform. We only work with qualified purchasers or QPs So that's what does that mean so a qualified purchaser based on definitions by the SEC They have to have a certain amount of assets as in a certain amount of net worth to be qualified as a QP And then once they're qualified they can access QP eligible strategies which most Institutional hedge funds and private capital funds are do have the QP threshold So you're I assume you're doing all the due diligence upfront picking the managers and then the advisors come to you and Say we're looking for this certain type or we're looking for you guys to help us and and you can get us placed And that's how the the investment process works. Yes There's some additional capabilities so going back to you know What are the issues that wealth managers have when trying to allocate to alternatives? There are a lot of pain points One is there's high minimums So some minimums go up to 20 million plus and when individuals are looking to build a diversified alternatives portfolio That becomes very owners very quickly. So we're able to aggregate positions to allow individual investors to essentially allocate to funds for as little as $25,000 Secondly, there's a lot of paperwork in terms of subscription documents and for a larger institution making one subscription That's not that big of a deal But when you're trying to scale an alternative program across dozens if not hundreds of individuals It's very challenging for advisor firms to consistently fill out a hundred 200 page subscription documents So we've digitized the full process take six to eight minutes to fully onboard a new client and submit the necessary Information for AML KYC and then also the subscription is fully electronic fully electronic signature So, you know, we're gonna have to send out paper docs to the end client or the advisor firm and then I I I I I I'm sorry I My previous life I worked for a small investment Office and there's three of us in endowment fund and like you said we we worked with dozens of private equity and hedge funds and alternatives in your right the 200 page Documentary edit sign and they're all legales and lawyer speech speak and it's it's very operationally inefficient and difficult to just allocate to these funds or get your money in or get your money out so so operationally you guys have have Figured out that pain point. I guess is your is your point. Yes first and foremost by using technology To make the processes much more efficient in time efficient and when scaling across a large client base So what is it about the blockchain that makes this so much it normally kidding? so I'm looking at your site and You list like our partners just in terms of the complexity and all the moving parts that are involved here So you've got PwC which is a third-party auditor that you work with there's Northern Trust a custodial bank There's a compliance consultant There's a registered office and independent director. There's an independent legal counsel There's a secondary administrator a third-party administrator There are a lot of moving parts when you're investing in just one of these funds let alone Sometimes up to half a dozen or even beyond that correct so operational sound though soundness is very important an alternative investing and We need to have robust third-party controls across the complete process So that includes Arcastodial Bank Northern Trust our third-party administrator NAV consulting so cash does not move from investor to Glass funds to the underlying alternative manager without the dual sign off between Northern Trust and NAV consultant Glass funds itself does not touch cash Secondly we also need to have strong audit controls and tax reporting and that's where PwC Provides high-level services for us and our clients So glass funds has been in the business. I don't know you said a decade or something. It's been in the business for a while Correct starting in 2008 for the first four to five years. We primarily Made hedge funds accessible blue chip hedge funds and then starting in 2012 2013 We incorporated private capital including buyout credit real estate today private capital is the majority of the assets and The marginal flows to the platform are dominated by private capital strategies as well When you say private capital is that is that private credit or is that something different under private capital? We include a whole host of strategies including leverage buyout growth venture capital real estate natural resources Yes, the overall equity how do you? operationally how do you handle the capital call thing if you said that you could do it for a minimum as low as maybe 25,000 and if you have an advisor who has hundreds or maybe thousands of clients and Obviously all of them are not going to be qualified purchasers But let's say an advisor has a hundred clients who want to invest in privates How do you handle something like capital calls? How does that work because I mean you going off for every dealer? Is it just a one-time thing sure so we can open up a position with the manager for as little as a million dollars? So in the aggregate we require one million But that one million and above can be chopped up in any number of ways across the end glass funds investor So advisors who have identified a strategy and a manager that they want to allocate to if they want to allocate across 100 or 200 of their clients They can unload their clients to our platform They we offer bulk upload so you know they can download certain census data per client We can upload that to our platform to get them started and then for each client They'll have to go and submit the final information It takes about for the first time six to eight minutes per client, but once they're registered on the platform They don't have to register again. It's an evergreen subscription and then when they allocate they select the allocations they want per client and Then when it comes to capital calls a manager. Let's say we'll make a capital call for 50% of the commitments We will send the advisor firm the aggregate capital call in terms of the total amount plus we will break down the total capital calls per client and They will then in turn wire the money to our northern trust account for those capital calls where there's a number of efficiencies is when a Portfolio is built up. So now the underlying investors may hold four to six positions Let's say they're holding a private credit fund that kicks out quarterly income distributions they can Anticipate okay, well, I'm getting quarterly distributions from this strategy or that strategy and now I know a capital call for Strategy B is coming so instead of taking cash out of the northern trust account and wiring it back to the clients Let's just keep it there and then we'll satisfy the cash in the account for the future capital calls And then with the capital calls and distributions all going to the same northern trust account as the portfolio builds there can be greater There could be greater efficiencies by crossing calls and distributions in less administrative work What have you learned working with RA's and what are some of the unique challenges that are different from say like a family office or something like that? So from my experience in working at previously a private bank and now with glass funds Reporting is very important and being able to provide detailed reporting on scale is Something that probably many family offices don't have to deal with because either family offices are You know managing a single pool of money or they're managing it for a smaller group of end clients Where are a's and private banks and other fiduciaries? They have to implement these strategies not just across one client But maybe hundreds if not thousands and they have to administer it and report it So they need technology platforms like glass funds and other providers to help them do that in scale Do you integrate with with the likes of Orion and Adapar and those performance reporting software? Yes, we do so an advisor over time on average their clients will own about 10 to 12 things on the glass funds platform and We can take all of the underlying position data and pipe it to their front end reporting systems through an API And in that way the advisor firm can take the raw digital data and format it That suits their business and their clients however they want So how does this onboarding process working advisor comes to you and says listen our we've tried this on our own It's it's cumbersome. It's operationally inefficient. We want someone to help us They come to you and say, you know, we want to get on your platform. Where do you begin with new advisors? Sure So an advisor, you know, they're looking for a tool to help them access alternatives You know, we're one of several in the marketplace you know, obviously we think we offer some unique next level benefits and there's typically a due diligence process that the advisor firm conducts on glass funds and If it resonates with some of the problems that they're trying to solve Then we will sign a side letter with that advisor firm that will lay out You know fees at the advisor level in terms and conditions and then as soon as that side letter is executed And signed off by each party they can start loading clients onto the glass platform through our online portal and Once they load in the clients they can start selecting allocations to managers that either glass funds has sourced into diligence or the advisor form has sourced into diligence and is utilizing glass funds Architecture to more efficiently implement it across our client base So an advisor can bring their own manager if it's not on your platform. Correct So we have two classifications of strategies one is an advisor source fund Which many of our advisors have built up robust sourcing and due diligence capabilities and alternatives, but they need our capabilities to scale it and So they can bring the strategy to us will do an operational review on the strategy to make sure that there's institutional plumbing and institutional controls To protect the platform and if it passes that process will open up the position on our Platform for that advisor firms clients only and we can do that for as little as a million dollars And there's no startup costs and there's no fees to do that because we're not spinning up new dedicated legal structures for that specific allocation How many managers are on the platform and what does the process look like for getting on? Do you just and do you let anybody on what does the diligence look like? Is there some sort of revenue share like what what is talked us about what that looks like sure? so we have About over 200 positions on the platform the vast majority of those have been sourced by our advisor clients We're about 25 to 30 are currently or either were sourced by glass funds research team or being currently monitored by our team and So when you said we source, what does that mean exactly? I'm sorry cart you off. No, no problem great question So we have a dedicated research team where we're out in the marketplace sourcing best ideas across hedge fund strategies and private capital We do not take any economics from underlying managers So we do not take any fee sharing agreements or distribution agreements So we really that model really resonates well with five do series mainly RAs and private banks and we are looking for true best-in-class strategies across the spectrum and hedge and private capital and It's a it's a traditional due diligence process takes three to four months there's a number of Either zoom meetings or on-site meetings with the underlying manager. We get access to their data rooms We do quantitative analysis qualitative analysis we summarize our findings in a 15 20 page report and It has to get approved internally by glass funds including compliance and then we also use a third-party alternatives consultant to conduct operational due diligence if a strategy passes all of those steps Then we onboard it onto our platform and then it's available to all of our advisor clients What is what is the your selling point to? These funds maybe that not the ones that the advisors bring to you but other funds that you've partnered with What is the selling point for working with a firm like you this can work with with advisors as opposed to working with large institutions like pensions or endowments or that sort of thing? Yeah, we resonate very well with managers the a source of growth for them has been wealth management but the economics are not the same for them as in the institutional space for example a Relationship manager a sales professional at an asset manager Could spend the same amount of time on a pension fund, you know one to three months multiple meetings You know multiple hours spent, you know educating that pension client or pension prospect on a strategy Let's say it gets approved by committee then the pension may turn around and write them a 200 million dollar check Now the same manager could spend the same amount of time for an RIA and depending on the demand and size of the RIA the RIA could say well great. I love your strategy. I just approved it I expect total demand to be six million dollars and I want to give you Checks at two hundred fifty thousand dollars apiece and for the manager. That's just not the same Those aren't the same economics. So by working with a platform like us they can tap into the wealth management channel Go through a single point of contact on due diligence We aggregate the small tickets into a bigger ticket And it's much easier for that manager to administer an account for a report on and in terms of portfolio updates There's also a single point of contact to the glass funds research team Which we in turn issue quarterly updates on all of the glass fund platform managers So the fees for the asset management on the platform is what it is How do what are the economics of glass funds? Does do the advisors pay you per household per account? Is it an annual fee? What does that look like? Sure? so our fee is struck at the advisor firm level and It scales down the more that the advisor firm uses us as an enterprise solution And that fee is applied to all of their clients and it's a flat management fee That's charged quarterly. We do not take any economics from underlying managers and we do not charge any performance fees So we say it's a flat fee. You mean for example, I'm making up a number It's ten thousand dollars per household and you charge twenty five hundred dollars a quarter or is it an AUM fee? It's an AUM fee that's quoted on an annualized rate. So our fees range from 25 basis points maybe up to 45 basis points Got it. Okay Obviously, there's a range of results in the advisors that you work with but what are you looking at the general? allocation that these advisors are giving that are cutting out for their their clients Are we talking five percent ten percent? What is the the allocation of privates or hedge funds or else look like for for certain advisors? It really depends on where the advisor firm is in their lifecycle of alternative investing Typically what we see for an advisor firms that are earlier on in their process it starts out around five to ten percent and We've seen it skew more towards private capital than hedge There's more firms that do private capital only then there are that do hedge fund only and then It so it starts there and then as they get through their process They may bump up the total allocation to 15 to 25 percent as they get comfortable with the space and really that makes sense because The way that it takes to build a private capital portfolio You can't deploy 10% of your portfolio Within six or twelve months anyway based on the timing of capital calls and the lifecycle of a private equity fund So most advisors Are not experts in alternatives? What does the educational process look like between glass funds and the advisors? Sure So we've issued several white papers on alternatives to help, you know get advisors up to speed and then also We work on a one-on-one basis with advisor firms to discuss various aspects of alternative investing and we've also worked with advisor firms to help them create a customized education program for their financial advisors and other client-facing professionals So it's really bespoke Customize platform for our clients because our goal is to have them adopt us as an enterprise solution across our client base Are you are you willing to go out and make recommendations to advisors or is it strictly? You know, here's the information. Here's the due diligence You're kind of on your own. How does that relationship work? Yes, we can offer guidance on Portfolio construction and how to place it in a portfolio and the risk return profile and Given those parameters which types of clients this may or may not be suitable for but at the end of the day the advisor firm Retains 100% discretion over the allocations and portfolio construction So what if for example there is obviously with like Things like venture. There's a vintage year and there's the life cycle of the fund is what it is There's not there's no liquidity But what about if an advisor or a client wants to fire a hedge fund? What does that process look like? Sure, so an advisor firm that has sourced their own strategy and brought it to the platform. They make that call So we're just facilitating redemptions. They tell us we're redeeming from XYZ fund Please process the redemption and then we facilitate that forum We remind them of the redemption terms of the fund and the underlying liquidity For funds that the glass funds research team covers we are Rewinder writing our evergreen or hedge fund strategies on a daily basis There are hundreds of hedge funds to choose from We want to make sure that we have very high confidence and conviction in the hedge funds that are currently on the platform Unfortunately, there have been times where we had to Downgrade a hedge fund strategy and then we send out communications to The advisor firms that are currently invested in that position and recommend that they redeem from that fund now at the end of the day they have a hundred percent discretion they can take our recommendation or not now we will cover a downgraded fund for 12 months after we downgraded it and then after 12 months for that fund to remain on our Platform the underlying advisors that are still invested in it will have to source that idea themselves As an investor and alternatives, what are your feelings about people piling into private investments because my sense of coming up in this industry is That after the 2008 crisis everyone everyone in quotes You know all the institutionalism family offices piled into hedge funds because they were fighting the last war Do you think that there's something similar going on in private markets? Or do you think private markets have just expanded enough where there's a bigger pool now and it's more institutionalized and more people can and will invest in that space I think it's more of the latter, but I do think with the changing monetary and economic conditions People need to incorporate that when they're looking to allocate to private capital You know there are differences in what returns are going to be when interest rates are at Close to zero percent and there's QE going on in the market versus when interest rates are five plus and there's quantitative tightening Now one of the more obvious examples are buyouts They're leverage buyouts. So when that cost of leverage goes up 500 to 600 basis points after incorporating spread widening Investors going into the buyout strategy needs need to calibrate that in their decision-making They need to make sure that their allocations are geared towards managers that aren't holistically dependent on cheap leverage and can drive Attractive operational improvement and growth in the underlying companies Now on the flip side higher interest rates can be attractive for private credit investors Now the risk-free base rate is five percent plus before it was less than one percent for high quality underwriters that have shown an ability to Underwrite attractive loans in many different market conditions and cycles those returns on private credit strategies probably have gone up and Then another example is venture capital Did the venture manager? Did they ride the wave of cheap money and high venture flows or did yes? I would say yes, there are a decent amount of managers where that's the case There are other managers that will continue to gain access to the attractive deal flow and Constructively work with entrepreneurs to create value at the company level So I think with anything it say it depends but certainly allocators need to incorporate the the monetary and economic backdrop today versus what it was four or five years ago But last question from me you mentioned that that There is competition in the space. You're not the only platform that works with advisors or brokers What is it about last ones that's different like I assume that that Advisors aren't coming to you because they can get you know a blackstone For example like what is that a correct assumption or how do you differentiate yourself in the competition? Yeah, several ways on the operational front Our differences really stand out as the underlying investor holds more and more positions So what has become table stakes in the alternatives access platform ecosystem has has been? fully digitized experience being aggregate smaller tickets to larger tickets Those are all table stakes now Where we think we differentiate is we're offering next level efficiencies as individuals move from just give me access to more efficiently manage my alternatives and private's portfolio going forward so some of those next level features are in aggregated K1 so as Investors hold more and more private funds. They get a K1 for every fund. They hold Some private funds will also kick out 40 to 45 state K1s We work with our tax partner PwC to allow Underline individuals to file on composite which could collapse the administrative burden of For state tax filing materially Secondly given our legal construct advisors can more efficiently source their own ideas as well as Select off the glass funds platform and then lastly the secondary market for institutional private capital Has grown tremendously over the last 10 years. It is becoming more and more mature the secondary market for wealth management private capital positions is still in its infancy and we think our construct is Provides a lot of benefits for the potential for secondary liquidity For underlying investors that need it but can't get it from the underlying manager to be clear I didn't want to I did it in time for blacks no attack to catch any shrapnel there my point was My point was that you could you can get blacks on anywhere. So Brad. I'm sorry finish your thought. Yeah, so in terms of sourcing. Yes, we believe we can Find the smaller more focused niche strategies that can serve more of a satellite position to More of the core positions that could include a black zone or from the larger GPs So that advisors can build a more holistic portfolio of alternatives for their clients But to be clear we do both we think there are some well-known middle of the fairway large strategies that have a competitive advantage and we recommend a portion of those and We also think investors need to explore smaller more focused strategies that could either provide exposure to either an asset class or underlying assets that are truly differentiated and They beat to a different drum compared to other asset classes or have higher Return potential so we take a barbell approach and how we source managers and the types of managers that we put on our platform Brad where can we send advisors for one more? Sure if they can go to our website at glass funds calm and They can also ping me on LinkedIn and that's one s where do they where do the name come from? Great question. It stands for great lakes alternative strategies But you must like that Yes, fly over states. I'm a big proponent of you just wait Michael when climate change is Taking the coasts down and the oceans are rising everyone's gonna want to come to the Great Lakes You just watch it. They're gonna right I bet we I was gonna say Ben. I told managers that Cleveland is strategically undervalued because of our fresh water access exactly right Well now all right. Thanks for calling on Brett. Thank you Thanks again to Brett. Thanks to glass phone. Remember go to glass funds.com to learn more. It's GLAS What's a great lakes asset? What did he say? Solutions? Okay. Maybe that's it. I like it. I know you're a coastal elitist, but let's fly over state guys got to stick together And send us an email animals beer as pot of gmo.com Thank you for watching. See you next time. Bye bye. .