YouSaid · the spoken record

Stephen Nesbitt

lines on the record: 64
first: 2024-10-07
most recent: 2024-10-07
sittings or episodes: 1
sources: podcast

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“Having good manners is related to your previous question. Just having good manners, don't be intimidated by people. Whoever you are, you are who you are. People like you if you like them. And I just think it's not you versus them. Just being nice and good to people and courteous. I wish I knew that because I was a jerk when I was young. And maybe I'm still I am in some ways, but try not to be”
2024-10-07 · Capital Allocators · Stephen Nesbitt – Innovation in Private Markets for RIAs (EP.410) · IDENTIFIED FROM THE TRANSCRIPT · source
“Best advice is just to be nice to people, be courteous, be nice. That's another reason I like golf because people are nice, they're courteous, but it's not a zero-sum game. Maybe it is on the PGA, but I just find that sport that just produces and attracts really good people.”
2024-10-07 · Capital Allocators · Stephen Nesbitt – Innovation in Private Markets for RIAs (EP.410) · IDENTIFIED FROM THE TRANSCRIPT · source
“First of all, Bill Shart, because I got to meet him when I took this job in San Francisco with Wells Fargo. He was an advisor there. And then after I went to Wilshire, I was a consultant at CalPurs for most of the 80s, early 90s. He was a consultant at Calpurs. Not only was incredibly smart, but not was is, but incredibly practical. Not only did he come up with beta and all that stuff, he did measuring the style of managers. He'd spent a lot of time on how people could quantitatively evaluate managers, which was obviously important to our business. Also incredibly nice to people. Just an incredible person. And I think the second person is not a person, but basically that investment staff at Wells Fargo, Bill Janky, Patty Dunn, who basically built the index fund business for BGI, which now is BlackRock, Tom Loeb, all polly shouts, all great people. I was very lucky.”
2024-10-07 · Capital Allocators · Stephen Nesbitt – Innovation in Private Markets for RIAs (EP.410) · IDENTIFIED FROM THE TRANSCRIPT · source
“That sounds stupid, but I can't handle the TV remotely. I've been moving quite a bit here over the last few years. I can't believe how complicated viewing a TV screen is today. It drives me bananas. Why can't someone solve this? I can't understand. Maybe Elon Musk, if you spend a few minutes, you'd probably figure it out.”
2024-10-07 · Capital Allocators · Stephen Nesbitt – Innovation in Private Markets for RIAs (EP.410) · IDENTIFIED FROM THE TRANSCRIPT · source
“A partner gave it to me. So if you travel around a lot, particularly in the wintertime, you get stuck. We were based in LA. She said, Steve, look at the board. Find a flight to Las Vegas. Those flights always go. They're generally southwest. And she told me this ten years ago. And she's absolutely right. Every place goes to Las Vegas, and those with Las Vegas flights, they always go because generally these are packaged deals. And there's a lot of economics writing on those deals. for advice along.”
2024-10-07 · Capital Allocators · Stephen Nesbitt – Innovation in Private Markets for RIAs (EP.410) · IDENTIFIED FROM THE TRANSCRIPT · source
“Was interested in how much time of my life have I spent on a plane? So I've been in this business forty-five years traveling to this client, their clients, some places, not so great places. I travel about six or seven million miles. If I did that all at once, how long would that be? It's like almost a decade. I spent a decade of my life. Did LA, New York equivalent. So it would be like, okay, for the next decade every day, I'm going to get up, go to the airport, fly from LA to New York, sleep there, get on plane next day, go New York to LA. Ten years. So I think if I knew that when I started, I wouldn't have gotten into part of the business I got in.”
2024-10-07 · Capital Allocators · Stephen Nesbitt – Innovation in Private Markets for RIAs (EP.410) · IDENTIFIED FROM THE TRANSCRIPT · source
“You just have to keep an open mind about everything and survey the broad market. If you're successful, it's hard to change. And that may be true for us too now. But if you're struggling, you got to be open to change. And fortunately, I had partners who maybe beat me up a little bit, but were willing to make a big change. It was a huge change for us. I just think it'd be willing to take some business risk along the way.”
2024-10-07 · Capital Allocators · Stephen Nesbitt – Innovation in Private Markets for RIAs (EP.410) · IDENTIFIED FROM THE TRANSCRIPT · source
“As you step back after having really made an incredible transformation in the business of Cliffwater, I'm curious what lessons you take away from that experience, particularly over the last five years.”
2024-10-07 · Capital Allocators · Stephen Nesbitt – Innovation in Private Markets for RIAs (EP.410) · IDENTIFIED FROM THE TRANSCRIPT · source
“Return, that's going to ebb and flow. But there's always going to be delta there. I can go back to the 80s and tell you that everybody thought the private equity premium would go away. And it's really been pretty consistent at 3% to 5%. I expect the same on the private debt side.”
2024-10-07 · Capital Allocators · Stephen Nesbitt – Innovation in Private Markets for RIAs (EP.410) · IDENTIFIED FROM THE TRANSCRIPT · source
“Standards haven't changed. The market conditions have changed, so maybe you can't meet your standards, so your deal flow becomes restricted, ebbs and flows. One of my partners says everything cycles. So hedge funds will come back one day. Right now, spreads have come in. There's probably an excess of demand relative to supply of opportunities. So instead of 12% that we've been looking at probably earn with Fed funds coming down, we'll probably be looking at 10%, maybe 9%. Inevitably, the market changes. If all of a sudden we go into a recession, the flip will happen that spreads will widen again. We're like a 2001 again and where things looked a little tight and then 2002 most of 2003 was a very good time to put money to work. Now it's maybe a little bit less so. From our investors' point of view, hey, private markets are going to offer you three to four percent.”
2024-10-07 · Capital Allocators · Stephen Nesbitt – Innovation in Private Markets for RIAs (EP.410) · IDENTIFIED FROM THE TRANSCRIPT · source
“If you look historically 2000, 2002, that was a fairly deep and prolonged recession. The good thing about having data now with the index, we could measure credit losses during those time periods. And then when you do manager due diligence, you ask, hey, how did you do during these periods? You know what the maximum alpha is.”
2024-10-07 · Capital Allocators · Stephen Nesbitt – Innovation in Private Markets for RIAs (EP.410) · IDENTIFIED FROM THE TRANSCRIPT · source
“This is really easy business. This is yield, which I call beta, minus losses, credit losses, defaults, minus fees. Even my granddaughter, I think, understands that. You can control fees to some extent, or at least manage them. So it all comes down to losses. The average loss rate in this market, like the leverage loan market, is 1%. We say yield is beta. That's efficient in the marketplace. For the same loan, no one's getting a better yield than anybody else. It doesn't exist. But there are some better underwriters and less better underwriters. So the question is, how much alpha is there? The average loss rate, if you bought everything is on the average 1% per year, it's kind of lumpy recessions that goes up last few years. It's been below average. So that's your potential alpha. The risk, if you study credit losses, it's all correlated to recession. The downside case and private credit is a prolonged recession.”
2024-10-07 · Capital Allocators · Stephen Nesbitt – Innovation in Private Markets for RIAs (EP.410) · IDENTIFIED FROM THE TRANSCRIPT · source
“No, it's a little bit frustrating, but on the other hand, we partner with lenders, they're all focused on the institutional market. We don't want to compete with our suppliers, if you will. But I just think the other consultants to these funds, interval funds, even BDCs, they're starting to come around to BDCs. But they say, oh, that's a retail product. It's not for us, that kind of thing. So be it. They can have their sevens and we'll take our 10.”
2024-10-07 · Capital Allocators · Stephen Nesbitt – Innovation in Private Markets for RIAs (EP.410) · IDENTIFIED FROM THE TRANSCRIPT · source
“That have kept pace with us. We respect them all. But I think a lot of times they suffer from overdiversification. A lot of people seem to think in the name of diversification all of a sudden they'll do some price niche product. I do think our product, we can deliver institutional plus returns to the RIA channel.”
2024-10-07 · Capital Allocators · Stephen Nesbitt – Innovation in Private Markets for RIAs (EP.410) · IDENTIFIED FROM THE TRANSCRIPT · source
“I recently looked at that. We've been doing these funds, for example, the debt funds for five years now. We looked at our clients, what their performance has been, and it's close to 10 in terms of bottom line performance. Our institutional clients have been doing comparable to our own RAA performance. That's good news for the RAAs because they can say getting in the institutional level of return. I think from the institutional side, they should be able to say we're getting Clifforder's discretionary performance, so it's not like they're misallocating deals one way to our discretionary products. More importantly, with a study I found that I looked at roughly 35 big public funds that have disclosed June 30 numbers, their average number is a high seven. There are a couple of funds.”
2024-10-07 · Capital Allocators · Stephen Nesbitt – Innovation in Private Markets for RIAs (EP.410) · IDENTIFIED FROM THE TRANSCRIPT · source
“Two things. So our legacy clients know us generally, they've been with us many years in some cases decades. So I think they look at us. I think they recognize, hey, this is a different firm. Clifford, my level of services that I'm getting from my consultant, is that changing in any way? Is it improving or is it getting worse? I think during this period for us, there's a high level of focus. I like to think that our stability, we're providing them a level of expertise we couldn't before. I believe they've viewed that positively, but I'm not exactly in their shoes. So in terms of new client acquisition, we've been picking up some clients abroad, but I think the knock on us is, oh, they're an asset manager now. They'll put 100% of our portfolio on private debt. We find our relationships with the institutional market very valuable to us. Generally, that's where the highest level thinking is going on, a tremendous source of intelligence.”
2024-10-07 · Capital Allocators · Stephen Nesbitt – Innovation in Private Markets for RIAs (EP.410) · IDENTIFIED FROM THE TRANSCRIPT · source
“If it's private debt, it's crowd right now. So RA channel, you have a few interval funds that matter, only a few. So it's going to be a long slog if you do an interval fund. The private BDC market is now very competitive. So it all comes down to fundraising. If you're sitting there and you're a large asset manager, you think you have good distribution, fine, go ahead. But if you don't have RA distribution already in place, where it's a cross cell, it's going to be challenging. Or if you're a good manager, a good lender, private equity manager, you don't want to do it yourself, go RA channel, give us a call, and negotiate something. We've become a conduit for many managers into the RA channel for SMAs and other stuff.”
2024-10-07 · Capital Allocators · Stephen Nesbitt – Innovation in Private Markets for RIAs (EP.410) · IDENTIFIED FROM THE TRANSCRIPT · source
“Have a good team and usefully good access, you can basically manage your launch date to your opportunity set. So what the optimal launch time is. We're not holding a lot of cash or if we're holding cash, it's going to be for a very short period of time. And we can have a good experience. I will say on the private equity, we didn't launch from zero just cash. We negotiated with a large insurance company that had a private fund and we bought that private fund, flipped it to an interval fund, and on we went. There are a lot of these tricks you can do, but you got to know how to do it. It's complicated. And be prepared to have a lot of lawyers on staff.”
2024-10-07 · Capital Allocators · Stephen Nesbitt – Innovation in Private Markets for RIAs (EP.410) · IDENTIFIED FROM THE TRANSCRIPT · source
“Private equity that we do on private debt. It's semi-annual. It's half of what we do on private debt. You need to be very sensitive to your actual and contingent liability. Because otherwise it's game over if you can't meet those redemption requests.”
2024-10-07 · Capital Allocators · Stephen Nesbitt – Innovation in Private Markets for RIAs (EP.410) · IDENTIFIED FROM THE TRANSCRIPT · source
“Liability management can you do private equity? If you use the typical institutional playbook, you can't. If you're doing primaries, you got these big unfunded commitments, that implementation approach will not work. You're going to get yourself in trouble. First of all, you've changed strategy on the private equity due very seasoned primaries or secondaries or co-investments where you don't have these outstanding unfunded commitments. That's where you start. Fortunately, we were in the market where it's the secondary market and co-investment is very active. So it's a good time to launch private equity from that regard. On the liability management, same thing. You should have a fund level credit facility, preferably a revolver, that gets you access to liquidity should you have any quarter mismatch between inflows and outflows. The third thing is we don't provide the same liquidity.”
2024-10-07 · Capital Allocators · Stephen Nesbitt – Innovation in Private Markets for RIAs (EP.410) · IDENTIFIED FROM THE TRANSCRIPT · source
“We started with private debt, the easiest asset class really to implement. And then we did a higher octane credit product that's going well. We just launched private equity. So we started the company thinking alternatives could add three plus percent net risk adjusted. So across efficient frontier. So we started with the lowest risk alternative. And now we have the highest risk alternative in private equity. There are some between asset classes. That's infrastructure or real estate. Those are becoming. I don't think our investors are missing out on anything, not doing those right now, but particularly infrastructure as an asset class that needs to develop further before it's really useful to us. And of course, real estate's out there, but can't seem to sell anything with real estate today. So we're focused on private equity right now.”
2024-10-07 · Capital Allocators · Stephen Nesbitt – Innovation in Private Markets for RIAs (EP.410) · IDENTIFIED FROM THE TRANSCRIPT · source
“But like most of the private asset classes, you drive it down through co-investments, secondaries, depending upon the price discount you can get. We do other things, we warehouse for season and sell or other lenders. So basically we get a lot of zero fee or low fee type loan collateral. But on the flip side, we try to help our lenders, those who provide us loans with things they really want. It may be an SMA where we negotiate fees based on scale so they have some sense of permanent capital. They can rely on. And we also do some primary, but primaries we do is we'll be first up if a manager wants to launch a new product, getting that first dollar in seems to be very valuable to managers, we'll step up and scale and give them an allocation. So, hey, what's important to you? What's important?”
2024-10-07 · Capital Allocators · Stephen Nesbitt – Innovation in Private Markets for RIAs (EP.410) · IDENTIFIED FROM THE TRANSCRIPT · source
“Largest 10, how concentrated they are, and it seems every quarter some manager goes into the penalty box because one of the largest credits has a problem. But for us, our largest credit is well below 1%, so MNAVs. I call this a quasi-index fund. So basically our fund, we access loans from many managers, diversification. We're capturing beta. I know things will go wrong, but I know it won't wake me up at night.”
2024-10-07 · Capital Allocators · Stephen Nesbitt – Innovation in Private Markets for RIAs (EP.410) · IDENTIFIED FROM THE TRANSCRIPT · source
“So, first is our philosophy diversify. You only have downside optionality. So diversification is a free lunch. The problem with single manager funds is in portfolio construction, therefore diversification, they're captive to their deal flow. Your portfolio construction is incredibly constrained. Individuals can get around that by hiring a whole lot of managers. And if you look at the institutional markets, people are hiring 10, 20. With our interval fund, our philosophy is maximum diversification. We've got over 3,000 credits in our fund. And importantly, at the largest credits, everybody talks about, hey, my average position as a percent of the total portfolio. First of all, you shouldn't look at total portfolio. You should look at net assets just for leverage. But you'd be surprised if you look at the largest credit of a typical fund, the largest five.”
2024-10-07 · Capital Allocators · Stephen Nesbitt – Innovation in Private Markets for RIAs (EP.410) · IDENTIFIED FROM THE TRANSCRIPT · source
“We have 30, maybe 35. We're North America centric. We have a very young group of sundivized hungry salespeople. I will say early on, we're not on the investment banks. Our shortcut is to go find another distributor, go to an investment bank or another wire channel. We're going to compete with Blackstones, et cetera, and those channels. No one knew who Cliffwater was. So we decided to build it, build a sales staff. That was a very important decision. If we're going to fail, I didn't want to add no excuses. I didn't want to blame investment banks.”
2024-10-07 · Capital Allocators · Stephen Nesbitt – Innovation in Private Markets for RIAs (EP.410) · IDENTIFIED FROM THE TRANSCRIPT · source
“I don't know, Ted. Sometimes you're lucky, but it just seemed to be a right product at the right time, in the right market. Sometimes you get everything right. I've had a lot of strikeouts in my career. This was one where I think it all worked. I will say the RIA market was a huge decision for us and a big payout. Some years ago when I started talking to lenders and managers saying, hey, I want to do this fund and I want to go to RA channel. I think they said, oh, that's great, Steve. Good luck. We're in, but I don't think they thought we'd be successful at all. And it just happens that that is the market that everybody wants to get into these days. I will say we work with close to 800 RIAs. And before we launch this product, before we went to RA channel, maybe I get 10 to 15 outsiders on my quarterly asset allegation call and our institutional clients. And now I get 500. They want objectives.”
2024-10-07 · Capital Allocators · Stephen Nesbitt – Innovation in Private Markets for RIAs (EP.410) · IDENTIFIED FROM THE TRANSCRIPT · source
“The drawbacks are asset liability management. So you have to manage the liquidity. That's not an easy task. So every quarter, we will redeem or repurchase up to 5% of shares outstanding. Our flagship fund is over $20 billion, so a billion dollars will offer repurchase. We have to have liquidity to meet that potential of a billion dollars. And so we don't want to hold cash because cash is a drag. People are paying us to hold private assets, not cash or liquid credit. Having credit facilities in place where we can draw a billion on a few days notice, that's not an easy task. And if you have an asset team, you've got to have a liability team that's first class.”
2024-10-07 · Capital Allocators · Stephen Nesbitt – Innovation in Private Markets for RIAs (EP.410) · IDENTIFIED FROM THE TRANSCRIPT · source
“Like a regular mutual fund. So for REAs, individual investors who are familiar with mutual funds, it's SEC oversight. So people feel safe allocating to a SEC registered fund. It's not a private fund. The interval fund specifically, you can invest on any day. It's easy. I just execute a ticker on Schwab, Fidelity, TD, whatever. I'm invested tomorrow. You don't have all these subscription agreements, all this accounting stuff that goes on. It's $10.99. It's incredibly convenient. The only thing that's restrictive is getting out. So you can only get out once a quarter. Generally a fun level gate of 5%. But for us, except for one quarter during COVID, anybody wanted to get out on any quarter could get out.”
2024-10-07 · Capital Allocators · Stephen Nesbitt – Innovation in Private Markets for RIAs (EP.410) · IDENTIFIED FROM THE TRANSCRIPT · source
“I leveraged off the Rolodex of this person. I had hired him like a year before to do all the prep work and everything. But he onboarded somebody else. So I had an East Coast person and West Coast person. And we raised, I think it was like $120 million out of the box. That got us going. I will say launching a 40-year fund, a tremendous vehicle, but getting one launched is extremely difficult. You've got to go through the entire regulatory process, which is a bear. You need to raise capital to launch all at once. And with interval fund, there's not drawdown capital, that kind of stuff. But there are huge advantages, but getting it launched is a challenge. And you just have to be committed. And we were committed.”
2024-10-07 · Capital Allocators · Stephen Nesbitt – Innovation in Private Markets for RIAs (EP.410) · IDENTIFIED FROM THE TRANSCRIPT · source
“Have an RIA gets a new client, they've got some venture fund that's being onboarded, they have no idea if this fund is any good or not. And while they may be invested in our private debt product, they may call us and say, hey, Steve, is this fund any good? And we can give a quick answer. That value add or that advice beyond just a single product, I think is really for us the difference between success and not.”
2024-10-07 · Capital Allocators · Stephen Nesbitt – Innovation in Private Markets for RIAs (EP.410) · IDENTIFIED FROM THE TRANSCRIPT · source
“Size and sophistication sails into that channel or product pitches and substandard product with high fees. Phil Hasbrok was working in that channel. I think he was somewhat successful on that channel, but I had the idea of cold calling me. And part of this is just listening to people and even young people and being willing to take business risk. That's how it all got started. And I quickly determined that these RIAs, generally they managed between one and maybe 20 billion. There are very small business people. They have some investment skill, but they don't have the resources, particularly the resources to do alternative investments. They really needed advice as well as good product. I think we've been successful because we have great product, but we also can give them institutional advice that single product salesmen can't give them. So, for example, maybe you.”
2024-10-07 · Capital Allocators · Stephen Nesbitt – Innovation in Private Markets for RIAs (EP.410) · IDENTIFIED FROM THE TRANSCRIPT · source
“Of, like, the if you build it, they will come with investment visits, they don't come. I was just lucky enough young professional, maybe it was 30 years old who had been following my research, who came to me and said, hey, you ought to meet with a bunch of people I sell to. He was selling BDCs to individual investors and to RAAs and said, you ought to spend some time with this RA channel because I think you could be very successful in it. And so I spent a year meeting with the RAs who recommended, I said, hey, let's switch the RA channel. And that was it. We figured out, hey, what's the best fun structure to make it easy for these RIAs so we selected this interval fund structure? Others use BDC. And offering yields closer to ten than to zero. That got us started. We took advantage of a market that was severely underserved this RAA channels that was gaining.”
2024-10-07 · Capital Allocators · Stephen Nesbitt – Innovation in Private Markets for RIAs (EP.410) · IDENTIFIED FROM THE TRANSCRIPT · source
“Once you got conviction in the area, you look today and you've had this incredible growth on the asset management side of your business through this dead asset class in a completely different market. You often find people with a good idea that you had that are along the concept and short distribution. Really curious how you made that pivot from serving mostly public pension funds in consulting to creating a product and then figuring out how to bring that into a completely different channel”
2024-10-07 · Capital Allocators · Stephen Nesbitt – Innovation in Private Markets for RIAs (EP.410) · IDENTIFIED FROM THE TRANSCRIPT · source
“I've been familiar with indexes my whole career. I've learned about them, actually implementing them at Wells Fargo, investment advisors, so created a couple indices, two or three at Wilshire Associates. When it came to private debt, once I had the data, I knew how to create the index. Unfortunately, the BDC market, not many people knew about it, these are 40-act vehicles, so they're SEC registered. And the SEC requires disclosure on a quarterly basis, including holdings. If you can manipulate SEC data, you can create an index. People can replicate our index if they're now willing to spend an incredible amount of time and resources doing it. We scrubbed, sliced, and diced SEC data to create this index. It's an asset weighted index of the underlying collateral. I analogize it to Nate Creef, the real estate index where it's saying.”
2024-10-07 · Capital Allocators · Stephen Nesbitt – Innovation in Private Markets for RIAs (EP.410) · IDENTIFIED FROM THE TRANSCRIPT · source
“So I'd love to dive through different aspects of that process. The index creation, what are some of the complexities that you walked into as you started thinking about creating what became the direct lending index?”
2024-10-07 · Capital Allocators · Stephen Nesbitt – Innovation in Private Markets for RIAs (EP.410) · IDENTIFIED FROM THE TRANSCRIPT · source
“We had proposition was huge. We ran into the problem that we couldn't sell this to our existing client base because you have a fiduciary problem. No, can't recommend ourselves. So started to talk to other funds. And the problem was we couldn't get through their consultants. The other consultant didn't want to recommend us, quickly discovered raising capital was going to be a problem. Here I have, I thought, really great idea, but I can't sell it into the market.”
2024-10-07 · Capital Allocators · Stephen Nesbitt – Innovation in Private Markets for RIAs (EP.410) · IDENTIFIED FROM THE TRANSCRIPT · source
“No data. There's no index. So I felt that it's like any asset class. It's not going to take off until it has an index. I often say it's in the Wizard of Oz, the scarecrow. He wants to be recognized as smart. He is smart, but wizard says, all you need is a diploma. And then everybody will think you're smart. I've discovered in the consulting and the institutional business, you need an index before you fit into asset allocation. So we spend an incredible amount of time, like five years building a database and creating an index, Clifford Druck Linning Index, engineering that back to 2004. So people could have a good idea of what this could do. They're not going to hire a specialty private debt consultant. Too many consultants. I said, hey, this is new. Why don't we do kind of a fund of funds? I thought that was a simple solution, charge low fees. Fund of funds weren't particularly popular, but I thought we could.”
2024-10-07 · Capital Allocators · Stephen Nesbitt – Innovation in Private Markets for RIAs (EP.410) · IDENTIFIED FROM THE TRANSCRIPT · source
“Private debt we were interested in wasn't distressed. You didn't need to be a rocket scientist. All you needed was access to senior secured loans backed by viable companies. The yields were extremely attractive and the question became, hey, can you hire managers that can underwrite those loans to close to a 0% default rate? I felt that was the answer. We'd still do hedge funds, but I saw this as a more simple and more elegant answer to that northwest quadrant. And it just so happened for a few, not many, that had done this through the 90s into the 2000s that I knew they performed very well during the financial crisis. Hedge funds, for the most part, and I felt, hey, let's do our due diligence on this asset class on these managers and start recommending them. So that's what we did. When we got interested in private debt, I was amazed.”
2024-10-07 · Capital Allocators · Stephen Nesbitt – Innovation in Private Markets for RIAs (EP.410) · IDENTIFIED FROM THE TRANSCRIPT · source
“It's very tough. We had some options. We could merge with another bigger firm. We looked at that, a firm that might have global offices, whether that mattered or not. Their head count was in the hundreds and not the tens. That would have been a logical option for us. And there were a number that didn't have alternative capabilities. So that was interesting. And we did look at that honestly to solve our growth problem. But it just so happened that the emergence of private debt caught my eye early on and going back to this idea of the Northwest Quadrant. The yield curve had basically gone to zero. And it was like, is this an asset class that has growth itself? Can we manage it? How do we manage it? Could it be big? Could it be the new thing? I thought it was the new thing. And basically, arguably, we bet the company on that asset class.”
2024-10-07 · Capital Allocators · Stephen Nesbitt – Innovation in Private Markets for RIAs (EP.410) · IDENTIFIED FROM THE TRANSCRIPT · source
“So, you have your business, your undersized, and you see this consolidation. There's no growth, low margins. You got a bunch of people, you got a bunch of clients. That's a tough position to be in. What did you do?”
2024-10-07 · Capital Allocators · Stephen Nesbitt – Innovation in Private Markets for RIAs (EP.410) · IDENTIFIED FROM THE TRANSCRIPT · source
“themselves so they could charge higher fees, attract better people, and add value. For us, I think we had the right idea in consulting, we were just undersized. And we focus on alternatives, but then after the financial crisis, the general consultants decided to do alternatives as well at a much lower price. So we're getting squeezed.”
2024-10-07 · Capital Allocators · Stephen Nesbitt – Innovation in Private Markets for RIAs (EP.410) · IDENTIFIED FROM THE TRANSCRIPT · source
“The consulting business, in a sense, from a business perspective has gotten very concentrated and virtually zero growth, where you probably have five, maybe ten, but not much more than that, really sharing the pie amongst themselves. Sometimes it seems to be a zero-sum game there. And it competes on fees. All these top firms, very qualified, very good, have very good people. But the problem is they're not very differentiated. And it's questionable whether they're really adding a lot of value other than education and check the box on fiduciary oversight. It's a very tough business. Margins are very low, single digit, zero growth. It's hard to attract really good people in that type of business environment. I think all of them, like us, have been interested in finding a clientele that values execution, can't execute themselves so they can differentiate.”
2024-10-07 · Capital Allocators · Stephen Nesbitt – Innovation in Private Markets for RIAs (EP.410) · IDENTIFIED FROM THE TRANSCRIPT · source
“Down 20%, and they were supposed to protect capital and didn't meet that standard. And we've gone through the last 15 years since the financial crisis where people have ratcheted down their hedge fund allocations. And I don't know. At least in my opinion, maybe a dozen hedge funds that really matter today.”
2024-10-07 · Capital Allocators · Stephen Nesbitt – Innovation in Private Markets for RIAs (EP.410) · IDENTIFIED FROM THE TRANSCRIPT · source
“Holy Grail in our industry is that northwest Quadrum. High return, low risk. When we launched twenty years ago traditional low risk asset classes, publicly traded fixed income, yields had come way down. No new math was going to get you to the actuarial interest rate. There's been this look for strategies that could get you in the Northwest Quadrant. Coming out of the 90s and early part of 2000s, hedge funds looked pretty good. And some of the strategies, mostly arbitrage strategies, look to be sustainable, so on and so forth. So you could earn an equity-like return at a bond-like level of risk. That looked attractive. Unfortunately, that industry got very crowded, very fast, the reliable arbitrage opportunities just didn't seem to be there, or at least not at the level to get you an equity-like return. I think the watershed year was 2008 financial crisis where hedge funds.”
2024-10-07 · Capital Allocators · Stephen Nesbitt – Innovation in Private Markets for RIAs (EP.410) · IDENTIFIED FROM THE TRANSCRIPT · source
“So we met a long time ago in and around the hedge fund space and probably more so than venture and private equity. It's changed quite a lot in that period of time last two decades. We'd love to get your thoughts on how you've participated and how that's evolved.”
2024-10-07 · Capital Allocators · Stephen Nesbitt – Innovation in Private Markets for RIAs (EP.410) · IDENTIFIED FROM THE TRANSCRIPT · source
“Basically, the same thing. You don't really have the capacity problem in a few instances. Over the last 10, 15 years, it's been middle market buyouts that seem to have produced the greatest value add. And again, it's relationship building, being a good partner, them knowing you can count on capital when they're ready to launch a new fund. So just that consistency. We've been doing private equity since the beginning. I remember my eyes opened. I was at an Oregon Investment Council meeting back in 81 or 82 George Roberts was there talking about what he does. And I was just, as someone who was efficient markets, quant, blah, blah, blah, this guy making a lot of money for the state of Oregon, it was completely different. So being a witness to success and failure, lessons learned over a long period.”
2024-10-07 · Capital Allocators · Stephen Nesbitt – Innovation in Private Markets for RIAs (EP.410) · IDENTIFIED FROM THE TRANSCRIPT · source
“Be tough, particularly in the venture capital space where there's a shortage of supply with who you identify the best managers to be. It comes down to relationships and longevity of relationships. You could also be lucky if you're an institution like University of Michigan, Stanford in the industry that they can get access. We've dealt mostly with public funds on the advisory side. That's a little more difficult. They have special requirements that a lot of venture firms do not like. We've had some success leveraging off our own relationships, helping our clients and to them. You can also establish a relationship sometimes to the secondary market. You buy a secondary, all of a sudden you're in the club, and that helps. So there are some tricks, but no, it's basically having the GP recognize you as a good and reliable partner. Sometimes there are significant drawdowns in the market, and having a willingness to step in, that counts for a lot.”
2024-10-07 · Capital Allocators · Stephen Nesbitt – Innovation in Private Markets for RIAs (EP.410) · IDENTIFIED FROM THE TRANSCRIPT · source
“Track record counts for a lot. The venture industry started in the 70s, and there was a lot of persistence in performance, a lot of well-established platforms. Things change, obviously. There are liftouts and splits and so on and so forth, but we have identified others sustainability in terms of returns on the part of some venture capital firms. You start with that. You say, looking ahead, do we have the same partners? Do they have the same opportunity set? So on and so forth. We produce these 30, 40-page due diligence reports with a lot in it, but it comes down to a few things. Performance people, philosophy. That's been a good blueprint for evaluating managers generally.”
2024-10-07 · Capital Allocators · Stephen Nesbitt – Innovation in Private Markets for RIAs (EP.410) · IDENTIFIED FROM THE TRANSCRIPT · source
“It varies by alternative asset class, but there are some alternatives where manager selection is almost everything. In venture, you can make the right asset allocation decision, but if you can't get the best managers, or at least the top quartel managers, it's not going to matter. It's not going to deliver. That's most true in venture, maybe a little less so in buyout and hedge funds. But unlike the public asset classes, you get 99% of your return from beta. you get the majority of your return from manager selection or alpha in the case of those asset classes. I think the difference was private debt is different. Most asset classes, there's upside optionality, fixed income and private debt as well. It's downside optionality. So there it's diversification and there are a lot of good managers. And so we focus a lot more on beta than we do on alpha, which is limited in the private debt class.”
2024-10-07 · Capital Allocators · Stephen Nesbitt – Innovation in Private Markets for RIAs (EP.410) · IDENTIFIED FROM THE TRANSCRIPT · source
“Use the same playbook. I used it at Wilshire, and that playbook was establish your credentials with the highest level people. So we became advisors to some of the largest pension plans here in the US, some abroad. And then we knew there were clients that were interested in discretion. And so the idea was, hey, however long it took, establish your reputation and then move into a more discretionary role, have a blend of the two. Been successful doing that before. So let's do it again.”
2024-10-07 · Capital Allocators · Stephen Nesbitt – Innovation in Private Markets for RIAs (EP.410) · IDENTIFIED FROM THE TRANSCRIPT · source