David B. Armstong, CFA® is Co-founder and CEO at Monument. He is an entrepreneur, portfolio manager, philanthropist, board member, and frequent conference and podcast speaker. He is also a combat veteran and served as an officer in the United States Marines Corps on both active duty and in the reserves, retiring at the rank of Lieutenant Colonel.
I’ve noticed something over the past couple of years.
Every conference, every industry publication, every wholesaler walking through our door wants to talk about the same thing: private equity, private credit, private everything.
If you’ve been in a meeting with a financial advisor lately, any advisor, anywhere, there’s a good chance you’ve been pitched a private market fund. It’s the hottest ticket in town. And look, I’m not here to tell you it’s all garbage. It’s not. Private markets can absolutely have a place in a well-constructed portfolio.
But I want to talk about something most people aren’t discussing… why you’re being pitched on them, and whether there are smarter ways to participate if you believe in the opportunity.
Why Wall Street Fell in Love with Private Markets
Here’s the thing nobody in the financial industry wants to say out loud: the traditional mutual fund business is dying.
Not because the products don’t work, but because investors finally did the math on fees and taxes. Mutual funds charge more, and every year they hand you a tax bill for gains you never even realized, gains generated by other people selling out of the fund.
Oh. And don’t get me going on the “shelf space fee” the major wirehouse firms get from the fund companies as well. Ever wonder why you can’t have access to certain mutual funds or share classes? Well, that’s part of it.
ETFs fixed both problems. Lower costs, better tax efficiency, and you can trade them whenever you want.
Investors noticed.
And so did wealth managers…especially RIAs, who’ve gravitated toward ETFs because mutual funds are a share class compliance NIGHTMARE.
Money has been flowing out of mutual funds and into ETFs for years now, and the asset management companies that built their empires on those old fee structures are watching their revenue evaporate.
So, what do you do if you’re running a fund management company? You can’t keep selling yesterday’s story…you need something new. Something where the fees are higher than ETFs, maybe even as juicy as the mutual funds, and the end investors can’t compare you to a simple index on their phone every morning.
Enter private markets.
The pitch practically writes itself: “You’ve never had access to what the billionaires invest in. Now you do.” It sounds exclusive. It feels sophisticated. And for the industry, it comes with margins that make the old mutual fund business look like a lemonade stand.
Oh and you’ve been hearing about the push to include private investments as an investment option in your 401(k)? Yeah? Well here’s an example of that…Capital Group, the company behind American Funds, announced a major partnership with KKR, one of the largest private equity firms in the world.
Their plan is to start blending private credit into target-date retirement funds. The ones that sit in millions of 401(k) accounts.
Look, I’m not “hating” on it at all…this is capitalism, and people are going to sell what people want to buy.
All I’m doing is setting up some context…I think you deserve to understand the mechanics before you sign up.
But What If There’s a Better Play?
Here’s where it gets interesting to me.
When I see an entire industry racing toward something, money pouring in from everywhere, marketing budgets going through the roof, every competitor scrambling to launch products, and the phone ringing off the hook with firms I’ve never heard of pitching us on their new fund…I start asking a different question.
Instead of asking “Which fund should I invest in?” I ask: “Who’s making money no matter which fund wins?”
The answer is: the companies running these funds.
The Blackstones. The KKRs. The Carlyles. The Apollos. They collect fees whether their funds have a great year or a mediocre one. They’ve built distribution machines that are pulling in capital from retail investors, pension funds, and everything in between.
They’ve turned themselves into toll collectors on one of the biggest highways in finance.
Again, not hating. So I asked myself…why bet on individual traffic when I can own the highway?
The Numbers Tell a Story
I looked at the data, and it’s pretty striking.
Josh Brown over at Ritholtz Wealth recently ran the numbers on this. Over the last three years, the publicly traded stocks of the major private equity firms have absolutely crushed the returns of their own fund products.
The median return for these stocks? Around 30% annualized.
The Bloomberg Private Equity Index, which measures what the funds themselves actually delivered to investors?
Closer to 4%.
Read that again. The companies themselves have generated roughly six times the returns of the strategies they sell to investors.
Now, past performance isn’t destiny. We’ve been through this a thousand times. But the logic makes sense to me.
These companies are growing their assets under management at a furious pace. Every new dollar that comes in means more fees. More fees mean higher earnings. Higher earnings eventually mean higher stock prices.
If you believe, as I do, that private markets are going to continue growing as an asset class, then the question becomes: Where do you want to sit at this table?
My Approach
As an example, we’ve owned shares of Carlyle Group ($CG) before in our managed portfolios. Full disclosure, we owned it because we’d rather own the business than be a customer of the business.
But here’s what gets me:
Liquidity – We can sell our shares tomorrow if we need to.
Transparency – We can see exactly what the company is doing through public filings.
Lower fees – We’re buying the common shares and not additional layers of management and performance fees.
The Full Monte – We get exposure to the entire enterprise…every fund they launch, every strategy they deploy, every innovation they pursue.
In investing, we like to think of it the same way. One of our investment philosophies is not trying to pick which private equity fund is going to be a winner, but understanding more people are going to keep trying, and that the firms facilitating those bets will continue to profit handsomely.
The Caveat
Look, again, I’m not saying private equity funds are bad. Some of them will do great. Some will disappoint. Most will probably land somewhere in the middle, just like everything else.
If you’ve got the right situation, the right time horizon, and you genuinely understand what you’re buying, they can absolutely be part of a thoughtful strategy. For reference, this is the case for roughly 5% or less of our client base.
But if someone’s pitching you on private markets, just know what’s driving that pitch. Ask yourself who benefits the most. And consider whether there’s a simpler, more liquid, more transparent way to participate in the same theme.
At Monument, we’re always looking for investments where the returns aren’t driven by complexity or exclusivity. Sometimes that means investing differently than the crowd.
Sometimes it means owning the casino instead of the chips.
Keep looking forward.
Dave
P.S. Catch more commentary and investing insights from me and my co-host Nate Tonsager, CIPM on the OFF THE WALL podcast.
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Market Commentary
A Different Way to Think About Private Markets: Why I Own the Casino, Not the Chips
David B. Armstrong, CFA
David B. Armstrong, CFA®
David B. Armstong, CFA® is Co-founder and CEO at Monument. He is an entrepreneur, portfolio manager, philanthropist, board member, and frequent conference and podcast speaker. He is also a combat veteran and served as an officer in the United States Marines Corps on both active duty and in the reserves, retiring at the rank of Lieutenant Colonel.
I’ve noticed something over the past couple of years.
Every conference, every industry publication, every wholesaler walking through our door wants to talk about the same thing: private equity, private credit, private everything.
If you’ve been in a meeting with a financial advisor lately, any advisor, anywhere, there’s a good chance you’ve been pitched a private market fund. It’s the hottest ticket in town. And look, I’m not here to tell you it’s all garbage. It’s not. Private markets can absolutely have a place in a well-constructed portfolio.
But I want to talk about something most people aren’t discussing… why you’re being pitched on them, and whether there are smarter ways to participate if you believe in the opportunity.
Why Wall Street Fell in Love with Private Markets
Here’s the thing nobody in the financial industry wants to say out loud: the traditional mutual fund business is dying.
Not because the products don’t work, but because investors finally did the math on fees and taxes. Mutual funds charge more, and every year they hand you a tax bill for gains you never even realized, gains generated by other people selling out of the fund.
Oh. And don’t get me going on the “shelf space fee” the major wirehouse firms get from the fund companies as well. Ever wonder why you can’t have access to certain mutual funds or share classes? Well, that’s part of it.
ETFs fixed both problems. Lower costs, better tax efficiency, and you can trade them whenever you want.
Investors noticed.
And so did wealth managers…especially RIAs, who’ve gravitated toward ETFs because mutual funds are a share class compliance NIGHTMARE.
Money has been flowing out of mutual funds and into ETFs for years now, and the asset management companies that built their empires on those old fee structures are watching their revenue evaporate.
So, what do you do if you’re running a fund management company? You can’t keep selling yesterday’s story…you need something new. Something where the fees are higher than ETFs, maybe even as juicy as the mutual funds, and the end investors can’t compare you to a simple index on their phone every morning.
Enter private markets.
The pitch practically writes itself: “You’ve never had access to what the billionaires invest in. Now you do.” It sounds exclusive. It feels sophisticated. And for the industry, it comes with margins that make the old mutual fund business look like a lemonade stand.
Oh and you’ve been hearing about the push to include private investments as an investment option in your 401(k)? Yeah? Well here’s an example of that…Capital Group, the company behind American Funds, announced a major partnership with KKR, one of the largest private equity firms in the world.
Their plan is to start blending private credit into target-date retirement funds. The ones that sit in millions of 401(k) accounts.
Look, I’m not “hating” on it at all…this is capitalism, and people are going to sell what people want to buy.
All I’m doing is setting up some context…I think you deserve to understand the mechanics before you sign up.
But What If There’s a Better Play?
Here’s where it gets interesting to me.
When I see an entire industry racing toward something, money pouring in from everywhere, marketing budgets going through the roof, every competitor scrambling to launch products, and the phone ringing off the hook with firms I’ve never heard of pitching us on their new fund…I start asking a different question.
Instead of asking “Which fund should I invest in?” I ask: “Who’s making money no matter which fund wins?”
The answer is: the companies running these funds.
The Blackstones. The KKRs. The Carlyles. The Apollos. They collect fees whether their funds have a great year or a mediocre one. They’ve built distribution machines that are pulling in capital from retail investors, pension funds, and everything in between.
They’ve turned themselves into toll collectors on one of the biggest highways in finance.
Again, not hating. So I asked myself…why bet on individual traffic when I can own the highway?
The Numbers Tell a Story
I looked at the data, and it’s pretty striking.
Josh Brown over at Ritholtz Wealth recently ran the numbers on this. Over the last three years, the publicly traded stocks of the major private equity firms have absolutely crushed the returns of their own fund products.
The median return for these stocks? Around 30% annualized.
The Bloomberg Private Equity Index, which measures what the funds themselves actually delivered to investors?
Closer to 4%.
Read that again. The companies themselves have generated roughly six times the returns of the strategies they sell to investors.
Now, past performance isn’t destiny. We’ve been through this a thousand times. But the logic makes sense to me.
These companies are growing their assets under management at a furious pace. Every new dollar that comes in means more fees. More fees mean higher earnings. Higher earnings eventually mean higher stock prices.
If you believe, as I do, that private markets are going to continue growing as an asset class, then the question becomes: Where do you want to sit at this table?
My Approach
As an example, we’ve owned shares of Carlyle Group ($CG) before in our managed portfolios. Full disclosure, we owned it because we’d rather own the business than be a customer of the business.
But here’s what gets me:
There’s a concept in Vegas: Don’t bet on the players, be the house. Don’t believe me? This scene from Casino with Robert DeNiro explains it all perfectly.
In investing, we like to think of it the same way. One of our investment philosophies is not trying to pick which private equity fund is going to be a winner, but understanding more people are going to keep trying, and that the firms facilitating those bets will continue to profit handsomely.
The Caveat
Look, again, I’m not saying private equity funds are bad. Some of them will do great. Some will disappoint. Most will probably land somewhere in the middle, just like everything else.
If you’ve got the right situation, the right time horizon, and you genuinely understand what you’re buying, they can absolutely be part of a thoughtful strategy. For reference, this is the case for roughly 5% or less of our client base.
But if someone’s pitching you on private markets, just know what’s driving that pitch. Ask yourself who benefits the most. And consider whether there’s a simpler, more liquid, more transparent way to participate in the same theme.
At Monument, we’re always looking for investments where the returns aren’t driven by complexity or exclusivity. Sometimes that means investing differently than the crowd.
Sometimes it means owning the casino instead of the chips.
Keep looking forward.
Dave
P.S. Catch more commentary and investing insights from me and my co-host Nate Tonsager, CIPM on the OFF THE WALL podcast.
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