Transcript

Matt Heine (MH):

Hi, welcome to the show, Lawrence.

Lawrence Calcano (LC):

Thanks, Matt. It's great to be here.

MH:

We seem to have had a run of US podcasts of late, so thank you for joining us at, I think it's about four 30 your time.

LC:

It is, yeah, exactly.

MH:

And you are joining us from which part of America today

LC:

Sitting in our office in Greenwich, Connecticut today, right outside New York City,

MH:

We've recently launched a new partnership with iCapital, so we're out talking to a lot of people, but I thought what better way to explain the story and what you're doing than yourself?

LC:

Yeah, thanks. I'm happy to, and obviously very, very excited about our partnership and together accessing the Australian market. But maybe I'll start if it makes sense with just an overview of what we're building at ICAP and what we've been working on really for the last 11 years, we really looked at this space and this space being sort of the alternative marketplace. And we looked at the number of advisors that had been leaving the wirehouse platforms going back to a decade ago. What was interesting to us is a lot of those advisors really didn't have access to alternatives in a really scaled way when they left their wirehouse platforms. They were really giving up that access and not only the access, but all the operational support that their bank provided. And we thought that we could build an automated solution to give clients, to give advisors and their clients access to the best alternative managers across all the strategies, and at the same time give them an operating system or a technology platform to enable the education transaction processing and all the aftermarket activities in a technical way so that the experience that they would experience and their clients would would be terrific.

And so we've been building that, as I said, for the last decade. And one of the interesting things as we realised as we went through time, that a lot of the wirehouses had built tremendous access and outstanding relationships with leading general partners, but didn't really have a technical platform. And so circa 2016, we started working with a number of the banks. We now work with almost all of the major banks in the US in addition to all the independent broker dealers and independent RIAs to provide, as I said, both product access structuring education, and then the operating system or technology platform to run the business. And one of the things that we've really tried to do is really meet people where they are and recognise that in the case of the wirehouses of the largest banks, they have all the access that they need. And so for them, it's really providing the operating system, the technology to allow them to really scale that business and to create a great advisor experience. Whereas in the case of some of the independent RIAs, our product access and structuring would be very, very helpful to them. We provide the system on a modular basis and let people use the pieces that they need to be successful in their business.

MH:

Lawrence, it's a great story and in many ways quite parallel to what we've done over in Australia with Netwealth as far as the opportunity and the market and the technology. So Lawrence, we've got a lot of business owners and financial advisors that listen to the podcast, and I'd love to hear some of your experiences as you grew the business into what it's today because it's quite a remarkable story.

LC:

Sure. Building businesses like these requires a lot of obviously hard work and a lot of conviction. Anybody who started a business knows that there's many more people who will tell you why your idea is not a good one than will tell you it's a great idea. Getting the right team of people. We had a great founder group who are all committed to the idea. And importantly, as we've gone through time, one of the key things we've always been very focused on is making sure that we work as a team. We're 1,250 people. The focus on working together as a team is no less today at a large group as it was when we were just a handful of people. And as we deal with the complexity of deliver building and delivering great technology building and delivering great products, structured the right way for the marketplace, the businesses as complex as ever, which only underscores the importance of having the right team.

And so as a consequence, we and I personally spent a lot of time on things that you might put in the cultural bucket. We are very transparent with our team. We share with 'em what's happening, the things that are going well, the things that are not going well. We give them, I send out an email every week to the entire company. We spend a lot of time on obviously the important things around promotions and compensations and so forth. And we bring everyone together and keep them focused on the North Star, which is helping our clients be successful with their objectives. And if our clients are successful, we think our success will follow. I really think the success in these businesses is a function of a little bit of keeping it simple. I think a lot of what we need to know as entrepreneurs and as business people, we learned as five-year-olds say, please say thank you, share, recognise that a win is only a win if everybody wins. And a lot of the very basic concepts our parents taught us as kids are highly relevant to us as business professionals and entrepreneurs.

MH:

So Lawrence, you make it sound very simple, and to build a business your size, it certainly isn't. How have you found managing the cultural aspect across all of the different jurisdictions that you now operate in? Because you are based in, I believe, Zurich, obviously America, Singapore, and now moving into Australia. We

LC:

Have 13 offices throughout Asia, Europe, Canada, the us. And I think the key thing is there are some things that are common to everyone, and those are the things I just spoke about, the mentality of why we're here to support our clients and appreciating the fact that none of us can be successful without the hard work of all of our teammates, but we also recognise that there are differences across geographies. Some of those differences relate to the products or regulatory, et cetera. Market practises are different in each market. And so I think keeping the core theme of teamwork and client success at the front and then recognising that every market's different and letting the team operate in their market, but always benefiting from what iCapital has as a whole. Right. And one of our big priorities is one iCapital operating globally. So if we develop technologies and capabilities in the United States, we want to make sure that all of the relevant parts of those technologies and capabilities are available to all of our clients on a global basis.

And so the required connectivity, communications, education is quite high, but we think it's really the right way to run the business and something we're completely committed to. And by the way, you're right Matt, it sounds simple, but as you know, because built a very successful business, there's a lot of late sleepless nights. I always say there are some days when you're building these businesses that are incredible great days and things are going your way and you feel awesome. And then there are other days and growing and building these businesses where it's like a nightmare. You feel like it's over, it's not going to work. And sometimes it's actually the same day. It's quite hard, but it is incredibly enjoyable and fun to work with great people around a common mission.

MH:

You touched on it before and it's an interesting question that I'm asking a number of people at the moment. Do you consider yourself a wealth management business or a technology business?

LC:

That's a great question. We consider ourselves a FinTech company, and I would say that when I sort of dissect our business into its component pieces, we have a very rich, thin offering. And those components include education around alternatives, structuring of products that make sense for all the different investor groups, the distribution of those products and the management of those products, all of the things you would consider to be sort of financial activities. On the other side of the equation, we are absolutely a tech company with of our 1,255 people, 500 our engineers and product people. And they're developing technology to make the learning about and transacting and owning these assets as easy as possible. And so there are truly the fin and the tech components of the business. And as I said earlier, we really meet people where they are and we let them sort of use and buy the pieces of our service that are most relevant to them.

MH:

Fantastic answer. And interestingly, I was saying to someone with a similar question and their response was different but insightful in that they said, if you don't understand technology, you don't understand business these days. And I think that was a really good lesson because it's very hard to deliver a business these days without having a really solid foundation in technology.

LC:

It's totally true. Yeah. The world is obviously changing. Even the tech, I mean the great and exciting thing about technology, it's never done right? It's never done. We're rewriting and changing and updating things we wrote five years ago, and there are really exciting, significant tectonic changes in technology around AI use of the distributed ledger, et cetera that we've been working on and building into our platform, which we think continues to make the managing and living in this asset class a lot easier for advisors. The commitment to technology is never ending, and I think in many respects it's part of why we can be so helpful to both our wealth management clients as well as our GP clients because all of us are built to do different things, and wealth managers are outstanding at giving people advice and helping them plan and build their portfolios for their future needs and goals and objectives.

And the gps are outstanding at managing money and the respective strategies that they have. And so we can bring to the table this technology platform and structuring capability that allow both of them to meet their goals and objectives without having to do things that are just not in their core DNA. That's really exciting. And the other thing I would say, which I was talking about, I was at a dinner last night with one of our largest managers. We were talking about the dynamic nature of the industries we're serving. I mean, if you think about what's happening in the wealth management side, massive changes. The wirehouses continue to change. The RA space continues now to grow and consolidate at incredibly rapid pace. And at the same time, the asset management side of the equation is very dynamic with a lot of traditional asset managers looking to acquire and or build alternative asset strategies and alternative asset managers looking to add to their offering. There's an incredibly dynamic nature to the firms that we're serving, which makes coming to work every day even more interesting.

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MH:

Absolutely, and that's probably a fantastic segue into my next question just around the private market space. So one of the reasons that we're really excited about working with iCapital and bringing what you do to the Australian market is that access to private market assets, that's just to be honest, not available in Australia in its current state and working with your team then to educate the market and give them the skills and the capability to actually start bringing private market assets into their client portfolios. When you think about private markets, I think America has been really very much at the forefront of it, but the experience in Australia is very different. So I'd love to just understand I guess the evolution of the private market space in America, particularly as it relates to the RIAs and the family offices.

LC:

So I think of, it's interesting, there was a tremendous book that I remember when I was running tech at Goldman serving all of the exciting startups and larger technology companies. It was a book by Jeffrey Moore called Crossing the Chasm, where he talked about the way markets develop and you have early adopters in markets and you have followers and then fast followers and followers and laggards, and the characteristics of each of those groups is actually quite different. And so when I think about the family offices, many of the family offices are really like institutions and they were very aggressively adopters of alternative assets. They saw the benefits both from a return standpoint as well as a diversification standpoint in terms of how these types of assets can help positively affect their portfolios and allow them to meet their goals and objectives. And there was really somewhat of an issue in terms of getting from that first group of family offices to the next wave of investors because of some of the impediments that we've built I capitals to solve.

So the minimums in these investments tend to be quite high, $5 million. So even if you're a family with 25 or $30 million, you're not going to make a $5 million investment in one vehicle. So the minimums were quite high and challenging access to products was quite difficult unlike some of the other asset classes in the private markets space, if you're not in the top quartile managers, there's quite a difference in your experience. So if you look at what we call interquartile spreads, the difference between the top quartile manager and the fourth quartile manager, private equity for example, that might be a thousand basis points. So if you're in the wrong managers, you are in a different asset class. And so helping this next wave of folks get access to products that are top performing in the sizes that make sense for their portfolio, not 5 million but maybe a hundred thousand, and then to allow them to have access through a technology platform that makes it operationally much easier for them.

I think really that was a big unlock for a lot of the market. And then we see a lot of financial advisors now really flocking to the asset class thoughtfully in an educated fashion. And as that's grown in the United States, we see a lot of growing interest everywhere and that we are building businesses on all the continents aggressively. And I think one of the really exciting unifying things that I think really accelerates the global adoption is the fact that many of the leading gps are themselves global. They're out. If you think about the largest firms, Blackstone, Apollo, KKR, et cetera, they are marketing their products globally. They have teams on every continent. They're actively educating advisors and bringing their products to market in the structures that make sense as we talked about earlier for the different geographies. And I think that is a unifying and an accelerating dynamic.

The fact that these gps are working globally and even the non-US based gp, gps like any QT similarly driving their business globally, CVC, et cetera. And I think that really helps the world create balance in terms of how people adopt and will give advisors and investors in all the different geographies a chance to really build these portfolios in the right way. So I'm super excited for the global nature of this business. I will tell you that being an international company was never an option. It was always what we knew we needed to be from the start because of that global nature of the GPS that we serve and of our 1250 plus, we have 350 people who live in offices outside the us. So we continue to grow that number and I would expect that over the course of time, our business outside the United States will be every bit as large as our business in the United States.

MH:

One of the statistics that I saw recently when I was over in the US was that at the higher net worth family office part of the market, circa 15 to 17% of the portfolio might be in private market assets. And the intention for those offices is to increase to say 25%. Whereas in Australia, it's probably sitting sub 1%. Why the sudden interest in private markets and why do you believe so wholeheartedly? It's the right thing to do moving forward.

LC:

I would just tell you I'm a little surprised by your 17%. I would have guessed that the actual allocation across all the advisors is kind of 5% or less. To your point, if you look at the allocation suggestions to alternatives by the CIOs of all of the major private banks, they are talking about 20 to 25%. And I think the reason they're doing that, if you look at the institution institutions, and I think we're all very familiar with David Swenson and what he built at Yale and their view and the very significant allocation they had to alternatives, private equity, et cetera. I think the reason why institutions invest in alternatives, which is to compound returns over a long period of time to create diversification and protection in their portfolios, I really think at some level is exactly the same reason why advisors are so interested in adding the allocation of alternatives to their client portfolios, right?

We all as individuals have things that we want to save for over time, whether it's retirement or various of the many life events that we need to make sure that we can fund and afford. We all want to insulate and protect our portfolio. And the diversification that these assets offer, I think helps us do that. So I think a lot of the underlying reasons why institutions invest is the same reason why there's such a strong interest on the part of these CIOs to see their clients allocated in a similar fashion. I think one of the important differences is people's relative education on one hand and the other, I think really important dynamic is people's comfort with illiquidity because many of these assets are very illiquid. And I think as part of the educational journey into understanding how these assets work, you have to really understand the liquidity characteristics of these investments and make sure that you're comfortable with that and you're comfortable with what it suggests for your portfolio and the cash flows that might come off your portfolio.

And I think in many respects that understanding the liquidity characteristics is one of the most important things for people to understand as they plan. By the way, it's one of the reasons why we are so focused on working with advisors and why we're not believers in sort of the B2C alts model, so to speak, because we think as a platform, it's much harder for us to get an understanding of the underlying client's, real understanding of and comfort with the illiquid nature of many of these investments. And we think working hand in hand with advisors, giving advisors all the tools they need to work with their client, we think will raise the probability of clients understanding these assets and having the outcomes that they expect to have by investing in these assets. So we're hugely committed to the B2B nature of both working with advisors on the one hand and GPS directly on the

MH:

Education front. We're seeing some fantastic tools coming from the AI capital team, and we had Mike Kel out in Australia the other day running through some of the new offering. What is it that you are doing that's so different to some of the other platforms in the space?

LC:

I think education is a threshold issue, and in the context of that normal distribution I talked about, we're still very much in the early days, and I think the next wave of advisors who are more followers, if you will, as they enter the asset class, they need more education. And importantly, they need the kinds of tools that they're used to working with in the liquid markets and making it easy for them to allocate, making it easy for them to plan portfolios, to build portfolios, et cetera, and to manage portfolios is really critical without requiring them to do a whole lot of different things than what they do today. Education is key to that, and Mike's been doing an incredible job both educating advisors and also as we think about and strategize about what these tools need to look like, there's several different flavours to these tools.

I'll talk about a couple of them. The first is just the general education that we do on the asset classes and people need to have the context, if you will, of how private equity works versus private credit versus private infrastructure versus hedge funds, et cetera. Then there's this specific information and educational material on funds. How do the specific funds work? And by the way, all of the education that we deliver is delivered on a learning management system, which allows advisors to read the material and requires them, if you will, to take a test at the end. And an important piece of that is the compliance element of that, which allows a broker dealer or an RIA to understand which of their advisors truly understand their products and from a compliance perspective are permitted to sell those products. And it gives them both the record of that, the knowledge of it, and the record of that.

So if a local regulator comes and asks them the question, how do you permit educate your advisors and how do you permit them to sell? They have the backup for that, which we think is quite important. The other element of education that I'm sure Mike talked about was architect. An architect is absolutely a first of its kind in that it allows advisors to understand the actual portfolio implications of adding either an alternative product or many alternative products or a structure noted or an annuity to an existing real, not hypothetical portfolio. And so advisors can really look at, if I add these products, what will happen to my client's portfolio relative to the portfolio goals and objectives? Do these products help bring me closer? Do they improve my alignment to my goals and objectives or not? Do they improve If I'm trying to track a certain set of factors, am I getting closer to tracking those factors or not? And we think that's really critical to the next wave of adoption. And as I talked about, giving advisors the kinds of tools that they're used to working with in liquid markets to help them help their clients make really good decisions, we think is critical and we're committed to that. And we have engineers, quants product, people all working collaboratively to bring these types of products to market.

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MH:

Fantastic. I know we're definitely looking to bring the asset class and fund education to Australia, so we look forward to also getting access to architects. Sounds fantastic. Now just before we go, maybe a bit semantic, but as we start to educate ourselves and the market over here and raise awareness of private markets, different terms get bandied around. So whether it's alternates, private markets, and alts used to be the bucket where you put things if it couldn't be allocated anywhere else, how should people be thinking about private markets or potentially the terminology, and also where are you seeing the money flow at the moment?

LC:

I love this question and I'm going to try to give you an answer that works for the context of this podcast as opposed to sitting here talking for an hour on this, because there's a lot to talk about with your question, so thank you for it. I'm going to jump to the future state, right? I think people over time will stop thinking about the word alternatives, right? If your portfolio allocation is one or 3%, it's an alternative asset class. You could do it, you cannot do it, it doesn't matter. But if your target allocation, as we talked about earlier, is 20 to 25% in a future state, that's not an alternative. That's a core part of your portfolio. And I think in many respects, people will start thinking about these assets really as part of the asset classes they know and understand. So maybe in the future, I have an equity portfolio and in my equity portfolio are publicly traded stocks, some ETFs, some private company shares, a venture capital fund, a buyout fund, and maybe in my credit asset class, I have treasuries of whatever country, municipals, corporate bonds, maybe have some private credit, some direct lending, some real estate lending.

I've got hedge funds that are part of that portfolio. I've got public and private real estate. And I think people will start to think about these asset classes in a more unified way. And this is, by the way, a lot of what we're trying to do with architect is put together a portfolio in its whole so that people can look at their existing investments alongside of these alternative investments in a way that makes sense for 'em. So I think the lexicon, to your question, Matt, will really evolve in a way that makes sense to advisors and makes sense to their clients. As far as the flows are concerned, I'd say 23 was really dominated by private credit. We saw a lot of that, and I think that was a function of a few things. One, there was obviously a lot of economic uncertainty, and these products provide yield.

And importantly, in a rising rate environment, which is what we saw last year, most of these products are floating rate, which means you effectively are hedged against rising rates. And in some cases, given the absolute rate of the benchmarks plus the spread, people were making high single digits, low double digits, their credit investments, which was very, very attractive. And I think as we now see perhaps a little bit more confidence in the system that maybe we're not going to go into the global recession people were expecting, we're seeing now more interest and flows back into the private equity oriented strategies, be those strategies, be growth equity or buyout equity. And so we think we're going to see more of a balance this year in terms of how people allocate.

MH:

Lawrence, sadly, we're about to run out of time. We've covered a huge amount of content in the course of this podcast. We'll be talking a lot more about this. Obviously. Before we go though, for people that are looking to learn more about private markets, have a Netwealth portal, iCapital portal, but where are some other areas that they should go and have a look? Well,

LC:

I would say obviously I think that portal is going to be rich with information because include in all of the educational material, we have, as I said earlier, both on asset classes as well as products and so forth, as well as sort of global economic information in terms of what we see happening in the markets and how they fit in a given environment, how the alternatives fit into that climate. I would also say that really a lot of the gps are doing a lot on the education front, and I think they recognise clearly the importance of education. And so a lot of the firms have educational, have university programmes and other kinds of things that help educate. And we will both try to bring some of that information to the portal that you're describing. But I think that you're going to see a lot more about this broadly in the news when you put on Bloomberg or CNBC.

There's a lot of discussion on alts. Just if you think about the context of the equity markets, there are in the US 4,000 public companies at this point, it's kind of almost half of what it was a decade ago, and there are probably hundreds of thousands of investible private companies that you can get access to. So I think increasingly the general news is going to talk a lot about alternatives and how alternatives can fit into portfolio. I think there's going to be a growing amount of information coming from the general media, coming from the GPS themselves, and obviously what you and we do together in partnership will provide a very substantial amount of information for people to use and learn about the asset class.

MH:

That's great. Lawrence really enjoyed chatting to you and look forward to working with you and the team and also look forward to hopefully having you out in Australia at some point soon.

LC:

I look forward to that. And I have my a Cooper hat that I bought probably 15 years ago when I was there last, so looking forward to getting back out there and spending time with you, Matt, and your team.

MH:

Wonderful. Thanks, Lawrence.