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PJT Partners (PJT): Company Profile, Stock Price, News, Rankings

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Andrew Shapiro, Managing Director, PJT Partners, Tripp Shriner, Managing Partner, Point72 Private Investments Moderator: Diane Brady, FORTUNE

Future of Finance 2024: The Allure of Alternative Investments

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The allure of alternative investments. I feel like I should say Van Gogh up, down, let's do I want to start with a lightning round first? Nice to see you, Andy Tripp. I feel like this is such a vast space. Let's start with, you know, what do you think is over hyped? You know, where is the dumb money going? I'm just going to start with you. Kick us off, right. Very provocative sneakers. I'm not a fan of any of the D to C so direct to consumer retail alternatives. So that's sneakers, art royalties, collectibles, even real estate that it's just rife with fraud and it makes me nervous. Ok. So that's the dumb category. How about for you? Trip? I mean, I have a slightly different view that a lot of these things are sort of point time as to whether or not they're overvalued or undervalued. But I think the challenging thing about alt is they're not liquid. And so I think for a lot of people out there, you need to be very aware of where you are in the cycle and when you're entering because unlike a stock or a bond that trades down, you can't get out once you're in, at least for not, not for the foreseeable future. So you're recusing yourself from making a direct answer that one. So that's, that's fair. I think that's very fair. So let's talk the other under appreciate maybe rising on your radar. How about that instead? Um So, so I think your, your question implies like rising is a good thing. I see like rising is a bad thing. Um So I'm gonna answer it that way. Um I get nervous. There's a lot of money right now flowing into private credit and that's these are kind of asset managers that are taking the place of, of banks, right? We talked about that this morning, actually huge category. And so I'm worried about all the assets flowing into that market and kind of a lot of money chasing maybe less and less quality, right? And loosening of of credit terms that maybe a bank wouldn't do. And then if I wanna drill down into that specific asset class, there's an emerging asset class out there that called NAV lending or net asset value lending. And that's effectively a loan that institutional investors make to other private equity firms on top of their portfolio. So basically the portfolio of several investments takes out a loan on top of it. So you're basically putting leverage on top of a portfolio of levered companies and so you're double leverage. Is it the leverage that makes you nervous or is it the fact that it's kind of an unregulated space relative to the formal system? It's both but it's really a, it's a, it's a coy way to put more leverage into a system and really a product that feeds off of leverage. And so, you know, it just takes one bad asset or one kind of bankruptcy and it could have a real kind of domino effect. Ok, because I met before, I love the way you're answering each question and that's, that's rising on the radar, but not a good thing. How about, is there anything rising on the radar that you like or don't like? Well, and keep in mind, I'm primarily a technology engineer. And so that's the lens through which I view uh view ALTs. And one of the things that I think is, is interesting, albeit in the early stages is whether you wanna call it tokenization um or securitization, just the fractionalization of ALTs. I mean, it's always been an area that as I alluded to earlier has been relatively a liquid. It's also been one that's hard to access for a lot of people. And so I think if you can take an office building and offer fractional uh opportunities around that or, or private equity fund or private credit, although you, you may think that's not a good idea at this point. Um I think that could really open up the space and, and democratize it to a certain degree, I think right now, we're kind of in the pilot phase of that. But to, to your question, I think that's an area that I'm particularly interested in, in tracking. And, and really one of the reasons we're having this conversation is that we're in this pilot phase, we're talking about the democratization, basically opening up this asset class to retail investors. Let me go back to you a second. You don't like this phenomena. Is it that, is it an education problem or is it a consequence problem regulation? What is it that I don't like some of the fluffy stuff I'd say, I agree with trip that the democratization of alternatives for retail investors is a very exciting uh place to be. And if you think about the typical financial advisor pushing the 6040 portfolio, 60% equity, 40% fixed income. And now a a piece of that pie is gonna be taken up by alternatives. If you wanna look at the data, the average retail investor has between kind of five and 8% of their portfolio. And alternative, the average institutional investor is closer to 20%. And so if you just do the back of the envelope math getting from that 5 to 7-Up to 20 is trillions of dollars of assets that could go into alternatives. And should it be 20? I mean, again, it depends. But if we're talking to retail investors, should our portfolio be about 20% in alternatives. Iiiii, I think it should, I think it, it provides an uncorrelated, um, market exposure and, you know, despite the kind of low interest rate environment we're not in anymore, it still provides a lot of yield. And so as the nation ages and you have baby boomers retiring and transferring assets, the assets that you do hold on to you, you could argue should be more of an alternative, uh, form factor. Yeah. Well, I think there's, there's a difference between what should be done and what's what's practical right now. I mean, the fact of the matter is it's still relatively hard to access alt for a lot of the alternatives platforms. They view the R A Ria channels as sort of the next level of growth right now. Um But there, there's a lot of work to be done there. Uh First and foremost, and you alluded to this earlier is, is education not only for the end customer, but for the advisers, a lot of them have never been familiar with this space. So that's hurdle one to overcome and then hurdle two. again, I go back to sort of technology and, and infrastructure um being involved with A T whether it's doing due diligence, subscribing, managing your portfolio. Those are really challenging things and, and by and large, we don't have a lot of that infrastructure built up right now. And so while I agree with Andy, um that the ideal state is for there to be more exposure for individuals. Um I just think it's going to take a little bit of time for us to get there. What would you prioritize for us to get where we need to go? Um The, the technology piece first, I mean, that really is, is the the friction here in terms of accessibility. And then I think once you have that and people understand how you can do it, it then goes to education and being informed of why you should be doing it. I mean, remember this is an ethics class that was designed for institutional investors. So when we talk about the state of New York, that's used to putting $100 million in a Blackstone fund. Now you're talking about an individual that wants to put 10,000 in all the infrastructure needs to be designed around that investor, being able to, you know, access their portfolio, monitor it, um have redemptions, capital calls and none of the infrastructure is designed for checks that size. Let me ask about how is the geopolitical landscape or even the macroeconomic landscape? How do you think that is um influencing this category? You're nodding. I'm gonna go to you first. Yeah. Well, Andy, you mentioned it earlier but um interest rates is, is the obvious one. I I agree with Andy that all provide a lot of benefits in the way of diversification and lower volatility. But the fact of the matter is, you can't ignore interest rates right now. If, if I'm looking at treasuries that trade at 5% it's great that I'm getting those additional benefits. But at a certain point, they need to make the returns for me to say, ok, the opportunity cost of me being in treasuries is offset by being an al, you know, and we haven't talked about gold, of course, but that's uh maybe that's such a big category. We don't even need to go there. But let's talk about some of the other. I mean, I want to ask you, we, we've talked a little bit about private credit. Um There is infrastructure, there are, you know, real estate, for example, can you look at some of the categories? What are you seeing out there in the landscape? I'm going to go to you, Andy because I know again your technology. Um So in real estate specifically, um a lot of the assets are flowing towards the distressed and opportunistic investors, um managers right now and these are the managers that are kind of experts at cleaning up, you know, buildings where they have to hand over the keys, right? And there's a ton of capital flowing into that right now. Um where it's distressed are these kind of plain vanilla real estate investors that just own office buildings that are have, you know, tenants that are fleeing, that's not a very popular asset class right now. Um I'd say infrastructure is also very uh exciting. I mean, again, like any kind of institutional manager, a lot of the flows are going to like a very a small handful of really mega managers. Um But again, there's a ton of money to be made and a ton of assets flowing towards what I generally call the energy transition trade. So that's basically uh you know, adding solar panels, things like that, the grid enhancements around the country, a ton of capital going there and a ton of institutional capital wanted to be put to work there. I want to step back a second more to the 30,000 ft level, which is you mentioned, this was these, these were, you know, asset class is designed primarily for institutional investors or accredited investors, which implies that you need a certain level of sophistication to invest in these products as we democratize, you know, obviously people talk about protections, they talk about education. How do you, is it antiquated to still think about this need for a certain level of wealth, a certain level of sophistication to get into these asset classes because they are basically becoming accessible to retail investors, you know, much more quickly than that. I'm gonna go to you first, you you're flicking back and forth. Um But what do we need to do? I think the other thing you, you you didn't mention is uh the time horizon, right? So, so typically one of the main barriers too is and why financial advisor also didn't like pitching to you. They don't wanna tie up their client's assets for 7 to 10 years. Right. They're not like a pension fund and so up to 100 why not? Exactly. But as the technology improves like the, the, the companies, the trip monitors and the form factors change and we have things like interval funds or, or tokenization, then it becomes more like a stock, right? And then it becomes a lot more liquid and then it becomes a lot more, you know, investable and understandable by the mainstream investor. But, but it's still perceived as risky assets, right? And is that fair, is that fair to say? Do you think that's a fair? Um I, I think, I think it can be, I think that comes down to a certain degree uh uh to curation and what type of vaults you're exposing people to, I mean, even within a given alternative asset class, there's a very big difference between the best manager and, and the worst manager. I think actually going back to what Andy was saying earlier, a lot of the early access for retail investors to this space um was more at the the lower end of that spectrum. And so in that case, I think there was an issue with and sophistication, but I think if you can curate the right way and bring the right type of assets to bear, you know, as an advisor, I believe you would be as comfortable as you would. Anything else? One of the benefits of sitting on stage, you know, with, with other people not here put on a regulator hat, if you are a regulator um in, in this sector, what do you, what are some of the steps that you think need to be taken? Um You mentioned developing infrastructure. Any advice you would have? Yeah, I'm gonna take my technology hammer again and apply it to this question which is um you need to make sure that people have robust infrastructure around everything from data collection to reporting to valuations. Those are things that depending upon the asset class are various degrees of maturity. If I I were looking at that, I'd say what, what is the infrastructure there? How close does this feel to other asset classes in terms of the quality of reporting and of information that I'm getting around these? Does it feel to you? Well, we're seeing a lot of companies now emerging that are going directly after those specific types of pain points, in particular, the data side, which I think is sort of underlying a lot of the other potential issues that you could have. And so if you look at a lot of the larger alternative managers, they're working with early stage start ups to address this problem. And a number of those are both gaining traction in the market. But as importantly starting to solve some of those issues. I um I get nervous about the self kind of policing aspect of the industry. And specifically, you know, if you're a, if you're a portfolio manager at a publicly like a public mutual fund, you know, at the end of the day, what the price of your portfolio is and it gets reported out in the NAV and it's, it's not disputed. The problem I have with a lot of alternative assets are the managers are the ones determining the price every quarter and reporting it to their LP S. And there's a robust layer of kind of checks and balances that they will tell you they use to ensure that they're not trying to game the system, but it's, it, it, it can be gained and um I won't mention names but there's definitely managers that have been in the news recently. Yeah, exactly. Um that, that, you know, don't understand why an entire asset class can be down but their fund is up because you know, their own mark, say that no, no, no, our assets are better. And so that needs to be, there needs to be uh a development of the technology there in terms of helping retail investors better understanding a little more transparency into how that is is doing his own thing, her own thing. Potentially, I want to give each of you a chance to give some final thoughts. What do you want the takeaway to be? I'll start with you I mean, from my perspective, it's despite the fact that this is a NASA class in the trillions of dollars, when you think about both the expansion of sub sectors within the space, as well as the sort of results of the capital flowing in and the need for technology. We're still in the relatively early innings, I would say, yeah, I completely agree. Early innings. I think there's a huge opportunity for retail investors to access this market. And as they access this market, the technology around the form factors of how they get into the market, how they get out of the market, the different types of asset classes are all going to evolve and it's going to be really exciting. Excellent. Please join me in. Thanking Andy and trip more to come on this space. Thank you.

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