Erin M. Hay [01:03]
Welcome to this episode of Off the Wall. This month’s topic, private equity, and we have a special guest with us today, George Coyle. George is the founder of Triangulated Capital Management, which is an investment advisor that utilizes tactical investment strategies to produce better risk-adjusted returns for investors. And George is also the founder of Triangulated Research, a publisher that focuses on thematic secular investment trends.
David B. Armstrong [01:30]
Yeah, and for fans of market history I’ll also note here George has authored a pretty exhaustive, although remarkably very digestible 75-page. We’ll call it an eBook. It’s a PDF some sorts call it Principles of Great Traders which really documents the core philosophies common amongst history’s great traders and investors, including, among other things, ride winners and cut losers, and listen to price action and follow price trends. So where have we heard that before? Right, Dave?
Erin M. Hay [02:14]
Yeah, exactly, exactly. Anyway, that’s how we originally came to know George and we’ve had a good working relationship and dialogue for going on gosh it seems at least a year and about this, private equity firms are just starting this major push wherein they plan to raise money from smaller retail investors and potentially even lobbying Congress for access to retirement plans. So, we’re going to get into that a little bit. We’re going to get into how that’s defined in regulatory circles and, specifically in this podcast, we’re going to examine the primary sales case for you know we’ll just call it privates, right, as well as possible motivations for the newfound desire to allow the public masses into what’s traditionally been, you know, a high return closed door club for the elite.
[03:03]
Now, important caveat before we introduce George here and this includes George none of us the three of us, we are not private equity experts. We’re just experts in talking about it. So, you know we’ve been around the industry for a long time. We all have our opinions. So just want to caveat everybody that we’re not truly PE experts. We’re not working in the funds; we’re not doing the research of the underlying fund companies. We’re just simply observing what’s happening right and we’re asking what we believe are fair and logical questions as PE outsiders, and we believe, Erin and I, we Monument, believe that George offers some really comparing and I’ll dare even say unfiltered takes on this. And since we’re all truth seekers here, we show you the stars and we will let you draw your own constellations from that. So, with that, George, welcome to the pod.
George Coyle [03:59]
Hey, thanks for having me, guys. It’s a great introduction. I feel more important than I usually do, so I appreciate all that good background.
Erin M. Hay [04:08]
Yeah Well, you know, so let’s just jump right into it. You know why private equity is going after the public masses now.
George Coyle [04:15]
I guess that’s a very good question. And why, as you said in the intro, like it’s an elite club, why can the masses come in now? And one of the things I do for my research is I read transcripts all day most days and it’s fairly boring, but occasionally you pick up on some interesting things and one of the primary executives at a private equity firm. He said that the growth driver of the industry for the past 20 or so years has been very low interest rates, almost zero interest rates, and he admitted that those interest rates are gone. So that driver is gone, but he said the new driver is going to be we’re going to raise assets from retail, and so I guess the why now seems to be because what was facilitating the growth previously is no longer there and they need a new growth engine.
David B. Armstrong [05:08]
Well, yeah, I have a question for you here, just for some vocabulary and setting some definitions. George, can you quickly just explain to listeners, reviewers here, like, what do we mean by like retail? And I know, Dave, in the intro we talked about ultra-high net worth institutional investors. George, what’s your kind of simple definition of those broad buckets of investors there?
George Coyle [05:33]
Well, there’s a lot of different definitions, but I guess what I would say is there’s qualified investors and there are non-qualified investors and, to be honest, I’m not sure quite what the level is at the moment, but the qualified investors are typically worth several million dollars, liquid, and the way the SEC and most of the states do the rulings is you can’t charge incentive fees to the non-qualified people because they’re worried that an advisor will take somebody who doesn’t have a lot of money and swing for the fences and potentially lose all their money. So historically, as I understand it, p&e has focused on the qualified high net worth people, probably because they can charge incentive fees and that gets them paid a lot more money. And now they’re going after people that aren’t qualified. Necessarily, you know, again, it’s very subjective as to what these definitions are. I mean, people use different terms, but that’s how I view things in sort of a broad sense.
David B. Armstrong [06:28]
Yeah, I’d also interject with, and this is just my observation, having been in the industry for going on close to 15 years now. Gosh, where’s the time gone. I remember when I first started off in the high net worth, ultra-high net worth space at a large private bank. I remember the minimums for private equity or just privates in general. So that includes there’s a lot that encompasses privates and we’ll get into that, but I do remember that the minimums, the state of minimums for these things at one point were $250,000. And now I see via the flood of wholesaler emails, people selling funds these days, that these minimums have come down from $250,000 all the way down to I’ve seen some as low as 2,500. So that kind of speaks to the going from the selling to those qualified purchasers or accredited investors Again, those definitions are a bit nebulous all the way down to retail investors who can kind of get into the club, so to speak, for as little as $2,500.
George Coyle [07:28]
I tend to be a skeptic. I’m okay to be proven wrong at times, but it just seems not such a coincidence that, as interest rates rise and the primary growth engine goes away, now anybody can come to the party. It just makes me raise an eyebrow and start asking a lot of questions and reading more about the case for private equity.
Erin M. Hay [07:50]
Yeah well, that’s a great segue into another question I have, which is why don’t we just start by what is private equity’s argument for including private equity in a portfolio to begin with?
George Coyle [08:05]
I mean there’s a lot of different ones, but I think there’s three kind of core points. Maybe we can tackle them one by one and talk about them. But one is private equity has traditionally produced better returns than public, and that’s largely because private markets are inefficient, so public companies are subject to gap accounting and different things like that. Private companies oftentimes aren’t run as efficiently as a public company. So, there’s a lot of validity to that in the sense that, yes, there are inefficiencies in private markets. But I guess the question that I have is how much of the private market returns were really a function of declining interest rates over the last 20 or 30 years, and what do you guys think about that?
Erin M. Hay [08:48]
I mean, it makes sense. It’s got to be. I mean anytime that they’re able to borrow money and invest it into projects your return on that post, your borrowing costs are going to be astronomical, relative to say now, where you’re borrowing money at a much higher interest rate and investing in ostensibly are the same kind of growth projections.
George Coyle [09:10]
Yeah, I mean, I guess, like the other thing that I think about is just, obviously all hedge funds advisors typically don’t, but they have to preface everything with you know, past results may not be indicative of future results, and that’s really the real question to me. I mean, there’s been a tremendous macro tailwind in terms of interest rate declines. Past results may not be indicative of future results, and that’s really the real question to me. I mean, there’s been a tremendous macro tailwind in terms of interest rate declines behind PE for so many years. So, if they’re coming out and they’re saying, hey look, we’ve earned 20% or 22% on an annual basis on average over the last 20 years, will that be the case in the future?
George Coyle [09:42]
And another thing that I wonder is, so we had arguably 15 to 20 years of very low interest rates, how much low hanging fruit or fruit at all on the tree of private equity is left? I mean, it seems to me that anything that could be made efficient probably would have been at this point, and I’m sure there’s still some pockets, but I guess it’s like a big picture view, you just got to wonder, like you had 15 years of the heyday, what’s left?
Erin M. Hay [10:24]
Is there a correlation there to geez? Maybe that’s why we’re seeing more of a push to get the public masses into this, because the institutional investors maybe are just too smart to be buying into private equity right now, and they know that. And so the private equity funds are saying, well, geez, let’s go raise money from somebody else. That may not be tuned into. That. It’s certainly a plausible theory.
George Coyle [10:48]
I don’t think they’d ever admit it to us, or anyone for that matter, because it doesn’t sound nice. But yeah, I guess it goes back to why now? Why can we join the party now, you know? Oh, all of a sudden, these 22%-ish returns, which is a number that I see floated out there occasionally.
[11:05]
You know we’ve made all the money that we can or want to, so we’ll let everybody else have a taste. I mean, I’ve never once had somebody in my life come say I’m making more than 20% a year. Would you like me to show you how, so that you can do it or get in? Usually when people are in those kinds of returns, the funds are closed for the most part unless you get in very early. So yeah, look, I mean wearing the skeptic’s hat. It’s a big, raised eyebrow Like why now? I mean I think we’ve sort of explored the idea of will the returns be the same. I’m skeptical that they will, but time will tell.
Erin M. Hay [11:41]
You mentioned, there are a couple of reasons for including private equity in portfolios, and we just talked about the outside returns, and how about some other ones?
George Coyle [11:49]
Yeah, I mean I guess it’s sort of their selling points, as I understand them from reading these transcripts. And another one is that Australia’s retirement system is in way better shape than the retirement system in the United States, and I don’t really have the data to analyze that personally, so I take their word for it. I assume they’ve done their homework. But if you go look at Australia’s interest rates, they’ve followed a very similar path to US interest rates over the past 20 or 30 years. So, it kind of goes back to that same question If there’s no declining interest rate tailwind, do the returns come in the future? And because Australia had more allocation to privates historically, they did better historically, but will that sort of go forward into the future? And ultimately, I think I have the same skepticism on that argument because I think the macro tailwind is gone for the foreseeable future. Now, that said, the stock market keeps going down, so maybe they cut rates and things change, but at the moment hopefully that doesn’t happen. Right, and how about a third? I guess the third one is that, and it’s valid, but it’s that the stock market has really become concentrated in sort of the mag seven or a handful of stocks. And they say, these stocks are incredibly volatile. Nvidia moves 20% a month, 10% certain days. So, we need to start to rethink what’s risky and what isn’t, because historically private markets that’s risky, I can’t get out. But then you have NVIDIA or Tesla’s down almost 50% in two months now. So, I think the argument essentially goes that public is very risky because it’s highly concentrated in highly valued stocks that are moving a lot. Look, the bear case on these high growth stocks has been around for a lot of years and ultimately, who knows, will NVIDIA go to 30 or 400 first. I mean, I don’t know. These things can keep running for long periods of time.
[13:45]
The other big thing is volatility, in my opinion, is not risk. So basically, modern portfolio theory says that you want to look at your return versus your volatility and you want to get the best portfolio, and volatility is measured by something called a standard deviation and that’s essentially just a measure of how volatile something is. And ultimately, I did an analysis once where I said, okay, let’s compare volatilities, aka risk, of different portfolios and see how they add up, and what I found was that a portfolio that’s flat this month, up 10, flat, up 10, flat up 10, continue on has the same volatility as one that’s up five, down, five, up, five, down, five. And so, if you step back and think about that, it’s like wait a minute, you’re telling me a portfolio that never loses any money is just as risky as one that makes and loses the same amount every month and per the math, that’s true. Now to modern portfolio theories, credit the average return will be higher on the portfolio that doesn’t lose money and goes up.
[14:45]
But I think that sort of trying to call volatility risk is problematic because, as I just pointed out, something could just keep going up and it’s going to be. Oh well, that’s really risky. But if it never goes down, is it? So that’s essentially the argument is that the stocks are too volatile and therefore they’re too risky. But I think the idea of volatility is risk is a problematic assumption.
David B. Armstrong [15:08]
So yeah, what do you make of the diversification benefits, George? I know that’s another potential benefit that we’ll hear. A lot of people who are in the sales role for a lot of these private equity funds say oh, you’re way more diversified than you are in publicly traded stocks. In your opinion, is there anything to that or is that sort of a contrived sort of concept there?
George Coyle [15:31]
I mean, I guess the research that I’ve seen says that there are ways to replicate the exposure to private equity via public equities, be it small cap indices or things of that nature. So, I think arguably, if you ran the statistics on it, there’s probably some diversification benefit to having private equity exposure. The question is, do you have to get that exposure via private equity, or could you use a highly liquid correlated vehicle to private equity that gives you the same diversification, and I think it would come down to each individual portfolio. But to me personally I don’t see it as a big diversifier because I guess you’re still subject to the same risks in the stock market, right? I mean, there are these charts that people typically show and it’s here’s the S&P 500 and it goes up, and then they’ll show the private equity index, and it really tracks it. The only difference is it doesn’t get marked up or down as much as the index does. So, in theory it has less volatility, but realistically I’m not sure that’s true.
[16:31]
If there’s no publicly traded market for it, who’s to say what it’s worth? It’s kind of like your house what’s your house worth? What someone will pay you. I could say it’s worth this, but it really comes down to when it trades. So certainly, I think things have gotten better. In terms of marketing to market on private equity deals or private equity funds, it doesn’t have the same liquidity. The correlations are very high between the S&P and private equity funds. So, I would say if the diversification benefits there, it’s very minor.
Erin M. Hay [17:00]
Our perspective on this is Warren Buffett doesn’t have a volatility risk problem because he’s just so rich and has cash and everything else. But the people who are our clients and the people who are probably getting pitched a lot of this private stuff now there’s always a risk needing the money when the volatility to the downside is very high, and we say this all the time and we’re recording this today, on the 4th of March, where there’s been two pretty consecutively large sell-off days in a row. I’m assuming that we’re going to stay down as much as we are right now. And if somebody called up today and said, hey, I need money, I’d say where were you last week? Or where were you two weeks ago when the S&P was essentially at an all-time high?
[17:49]
And in the real-world modern portfolio theory, standard deviation, looking at volatility that’s great classroom, academic stuff, but in reality, most people’s exposure to risk is they need money when the market’s down or, in this case with private equity, they need money, and they’re locked up with it. So, risk is an interesting topic, and I don’t mean to get too far off, but the real risk in the real world outside the classroom is you need access to money and it’s either in a contraction, like we’re in right now, or it’s illiquid.
George Coyle [18:26]
I think that’s a good point. Right, there’s a perception of safety, even though private equity is highly correlated to stocks, but you’re really trading liquidity for that perception of safety. And most of what I’ve heard historically is it’s about an eight-year lockup give or take. So if you invest in it, you better be okay not seeing your money for about eight years, I think that’s. I mean, you guys tell me what you hear, but that’s about the average amount of time that I think money’s locked up in private equity.
David B. Armstrong [18:55]
Yeah, from what I’ve seen, it depends. I know there’s been an evolution of these fund structures. Where it used to be the traditional GP LP structure GP being the general partner who’s responsible for basically doing all the investing and making the strategic decisions of the fund, you’ve got your LPs, your limited partners, who are cutting their $250,000 checks and locked up for anywhere from eight to 10 years. And we’ve even had instances where a client has we’ve seen clients that have been in a vintage 2011 fund, meaning the fund was started in 2011. Contractually, it’s supposed to be done in 10 years and so 2021. But then you’ll have these. There can be up anywhere between one to two-year extensions on these funds as well. Funds as well.
[19:48]
The evolution there, of course, being these fund managers are trying, in an attempt to go after some of these smaller, quote-unquote retail investors, trying to put an inherently illiquid asset private equity into a liquid or semi-liquid wrapper. And these are these interval funds, which basically allow you to lock up money and invest in private equity. But they also attempt to let you basically have your cake and eat it too, like, hey, cut us a check for, in some instances, as little as $2,500. Hey, you can’t touch this money for a year, but after that we’ll let you come withdraw your money on a quarterly basis and of course that works until it doesn’t. When everyone goes for the exits and then these funds end up and I know these funds hate this term, but this is what it is they throw up the gates and say sorry, we can’t allow any more funds to leave the portfolio. You’re just going to have to wait this out. So, it isn’t necessarily an eight-year lockup.
[20:43]
From what I’ve seen, there are some funds and fund structures that do allow you some modicum of liquidity. But again, it always raises some red flags, in my view, is hey, you’re putting an inherently illiquid asset into a liquid or semi-liquid wrapper and I just don’t know how that ends up working out in a scenario where everyone’s going for the exits. Probably not well. Yeah Well, george, you talked a lot about interest rates for private equity. I’ve got a couple of questions here, kind of a question A and B If rates had stayed at zero, do you think that private equity would be making this push? And I can’t help but think here is it a coincidence, now that rates are four to 5%, that this wholesaler sales apparatus is pivoted from private equity into another realm of privates, and that being private credit.
Erin M. Hay [21:42]
Really quick, before you jump in there, let’s describe for people who are listening what you mean by the wholesaler apparatus, because that’s some industry lingo and I’m not sure everybody knows exactly what you’re asking there.
David B. Armstrong [21:52]
When I say wholesalers, I’m talking about employees of fund companies, so think of them. There’s wholesalers for the publicly traded asset managers and then all of the privately held asset managers, and they’ve got an army of people that go out to companies like Monument trying to get access to our clients, saying we’ve got a vintage 2025 private equity fund that offers these benefits and look at our track record and you can get in for the low, low price of a $2,500 ticket and here are all the terms of the investment. So, when I say wholesalers, it’s basically people who are pitching Monument for Monument to put our own clients into these funds.
George Coyle [22:33]
Yeah, I get a lot of those emails too. They find your email in the regulatory documents and never stop.
David B. Armstrong [22:39]
Oh, it’s terrible. I get at least a dozen a week. It’s insane. As you said, George, I’ve never signed up for any of these things. These companies, they’re animals when it comes to finding an email and being relentless with cold calling and sending emails on a weekly basis.
George Coyle [22:58]
That’s sales. I guess It’d be interesting if you could take the volume of emails that you receive and see if it’s an indication of negative returns for the coming window. But anyway, so back to your question, which I think was your first question. Essentially, if rates were zero, would private equity be making this push? You can’t really know right, the world is such that you can’t control group and non and see how they compare. But it’s a good question. I guess that I can’t answer, but I could say it’s a good question.
[23:30]
If rates were still zero and returns were still benefiting and that growth driver was still there, would they have pivoted to going after retail? I guess the skeptic in me says no way they’d have kept the 20 plus percent returns for themselves. But you can’t know. I mean in some sense it makes sense to raise money from retail. But yeah, I guess if I’m wearing my skeptic’s hat I’ll say no way they never would have. This is only a function of interest rates, but I can’t say for sure. So, I don’t know if you guys have a strong opinion either way on that.
Erin M. Hay [24:03]
But I just look at it and I say anytime my phone is ringing off the hook with a common theme coming from multiple different people and multiple different companies, it’s never a good sign, it’s like for listeners. It’s like the more you start hearing all about SPACs on the news, that’s sort of an analogy to like when we start hearing things in volume in voicemail messages and emails, because it’s a rare day that we ever take any of those calls. But you just kind of know, if this is what everyone’s calling me about right now, are we at the absolute top of this thing and it’s the last few fools that get in that are going to be the be the very top of this thing. But I just I look at the volume and I just say it’s usually a sign.
David B. Armstrong [24:55]
Yeah, for every 10 emails I get from these wholesalers, I’d say these days, when I first started at Monument over five years ago, I got 10 emails from a wholesaler or from wholesalers. I’d say a good 60 to 70% of those would probably be from something in private equity land and I’d say nowadays that’s down to probably two and 10 is private equity and going over to shifting over to private credit. And, dave, to your point on we just it’s just a constant torn of this. It seems like these types of funds and products, these things are sold, not necessarily bought. I know that’s a kind of a nuanced distinction there, but in my opinion these things are sold, not bought.
George Coyle [25:35]
Sold versus bought might be an interesting topic for another podcast. I have thoughts on that, but I’ll leave it for potentially another podcast. So the private credit you talked about, could you just repeat the question since we went off?
Erin M. Hay [25:49]
Actually, if I can, massage the question a little bit, because I think Aaron was making a statement, but it prompts a question for me. I think Aaron was making a statement, but it prompts a question for me. So you know, speaking of this private credit, like how does that actually fall into this conversation?
George Coyle [26:04]
Well, I mean reading the transcripts. I don’t claim to be an expert on private equity or private credit, as we talked about at the beginning or you guys mentioned, but it’s sort of becoming this just big. We’re going to sell private investments to different people and whether it’s equity or credit, I mean I think it goes back to credit as you’re giving money for some kind of fixed payment, and equity as you take a stake. But I guess I would step back and say it’s more of just a larger private push. Now what I’m reading from executives is that they have certain expertise that enables them to provide credit in a better way than the banks do. And I step back and think about that. I think, well, banks are pretty competitive, so maybe they have some specific knowledge that enables the private creditors we’ll call them to basically get a slightly better rate. But it’s not like it’s a super inefficient market as I understand it. So how much better could it really be? The margins probably are not massive.
[27:04]
The other point, I guess, is I read an IMF paper, or let’s say I skimmed it. I didn’t read the whole thing. The IMF papers are a little dry, if you guys have ever read one but it basically pointed out that there’s a lot of risks when the lending goes into the hands of basically private lenders because they’re not subject to the same essentially regulatory criteria as the private lenders. So the question there becomes is that a good thing or a bad thing? The paper pointed it could be a bad thing long-term because it enables more freewheeling lending and if things go bad that could go really bad people’s sort of more freewheeling lending and if things go bad, that could go really bad.
David B. Armstrong [27:44]
Yeah, I don’t think it’s any, or I think it’s rather some interesting timing here, as we’re sitting here March 4th talking about private equity, now private credit, and I recently mentioned putting these inherently illiquid funds or assets into these liquid wrappers. Funds or assets into these liquid wrappers Last week I think it was on February 27th actually there was a major ETF issuer who’s come to market basically putting private credit so these inherently illiquid assets into not just a semi-liquid wrapper but into an exchange traded fund or an ETF wrapper. So TBD on how all that works out, especially if we go into some sort of a major macro credit event or a recession. So TBD on that. So, moving along here, we’ve talked a lot earlier about some of the potential benefits of private equity. George, in your mind, what would you say are the major downsides or concerns of not just private equity? We’ll say again you know privates in general. What are some of the downsides that you see?
George Coyle [28:45]
I mean I guess historically they’ve had higher fees, but if the net returns are there, who cares? Right? I mean that goes back to the whole issue of like will the returns be high enough, net of fees? If they’re not, and the fees stay high, which could get into, like someone qualified or not, it may not be worth it versus alternatives, right? Another one we mentioned is just illiquidity. You’re really and I guess there’s different, Erin, to your point a few minutes ago like there’s it’s not all eight years, like maybe it never was, but you’re definitely locked up for some period of time, and so you’re really trading the ability to get out and have access to your money for perception of better returns, which may not materialize.
[29:29]
Another big one, I think, is that I’ve had this happen to some friends. But if you buy a private asset with your advisor, you buy a private asset with your advisor. The question becomes can you get out somewhere else? And the friends that I’ve talked to have done it. The answer is no. So they might have their liquid stuff with their advisor and then they have their illiquid stuff and if they decide, hey, I don’t like this guy, I want to leave for whatever reason, they can leave with the liquid, but they’re really stuck in that relationship with the private stuff because the advisor is typically the only guy who can get them out. So it essentially forces them to have a very long-term relationship with that advisor.
[30:11]
And I guess that also can be problematic because, as we know, we’re all fiduciaries, right. That means we have to put the client’s best interest first. It’s a little gray, but I mean the extremes are sort of where you can understand it. If I have a nice older person who says, hey, I want to be in dividend stocks and I go buy Tesla calls, I’m in big trouble, right. But from there, the broker-dealer world, they don’t actually have to have the best client’s interest in mind. If there’s a 50 basis point S&P fund and there’s a 4% fee S&P fund, they could put them in the 4%. So if you get advisors who are not in the fiduciary camp, there could be a strong incentive for them to put their clients into private markets using these sales points, because then they’re going to get a locked up relationship for a number of years and I mean that’s really like every advisor would like their clients to all stay forever. But if you use privates you’re sort of forcing them to do that. So I guess at a high level, those are really a lot of the biggest things.
[31:13]
I guess the only thing I’d add on to the advisor comment is this Sometimes the brokerage firms will incentivize financially the advisors to sell certain products and I don’t know that this will happen. But you could see a scenario where, hey, the private equity guys say, listen, we’re going to make it worth your while, you’re going to have sales fees, whatever different ways of compensating them, and that further incentivizes them to push private markets or whether it’s credit or equity, onto their clients. So I guess to me, if somebody came to me, I’d be like I want to ask a whole lot of questions. If somebody came to me trying to sell me this stuff, I’d say I want to ask a whole lot of questions to find out their motivations, find out, could I get out? Will the returns be the same?
David B. Armstrong [32:03]
And make sure it all smells right, Because I think there’s a lot of potential perverse incentives. A quick little roadmap definitional time out here. We’ve talked about fiduciary and you talked about broker-dealers. Can you just kind of quickly explain the distinction between those two camps of advisors and how that potentially affects the incentives for the stuff being either marketed or sold?
George Coyle [32:27]
In layman’s terms. I mean, easiest way to determine is you figure out what licenses someone holds, but that’s very technical so we won’t go into that. Fiduciaries have a responsibility to put their clients’ interests ahead of their own, and they tend to be charging a flat fee, which means a fixed percentage every year of the assets. I guess then there’s everyone else who is a non-fiduciary and they get paid a lot of different ways and sometimes you’ll have people that live in both camps.
[32:59]
But the sort of extremes would be you’ve got the fiduciary who’s putting you in the lowest cost vehicle as a client. You’re getting put in the lowest cost vehicle. That is the best for what you need. And the other camp it’s hey, I can sell this person this really expensive private equity deal that has a huge sales fee to me and it may not be the best for the client, but hey, I make a lot of money doing that. So I guess again, that’s the extremes, and who knows if that exactly exists. It’s almost like heaven and hell there, right, but I think that’s a good way for the layman to understand the sort of dichotomy that exists.
David B. Armstrong [33:36]
Dave, you’ve worked in both worlds. Do you want to lay out your perspective on that as well?
Erin M. Hay [33:40]
The broker dealers the brokers versus registered investment advisors or RIAs, and I don’t want to frame my comment here in what’s better, who’s better. That’s not the position that I’m coming from on this. I’m coming from it on the standpoint of making sure that anyone who’s listening to this understands who they’re talking to. If they’re talking to an advisor and I’ll just pick on the big firms, because we all know them right, the big firms that sponsor golf events and all that kind of stuff I don’t want to say their names If you’re talking to an advisor who works at one of those big firms and they’re talking to you about investing in a private investment, I think the most important thing to look out there for is, to George’s point, they don’t have to, from a regulatory perspective, do what’s in your best interest. Now, I believe personally this is just my sample set of knowing advisors out there in the world 95% of them are trying to do what is in someone’s best interest. I just truly believe that, regardless of the mechanism that they are registered or operating in. However, because you are being sold a product and you are buying one in the private space by getting into one of these private, I’m just going to call it a private equity fund, but it could be private credit too. You end up in what George was talking about the possibility of because you bought it through XYZ firm, through ABC advisor, and at some point, in the future you decide you don’t want to work with that advisor anymore. Maybe you move to California, and you just want to have an advisor that’s more local to you or something like that. You will not be able to move that investment. It’s very likely you will not be able to move that investment off the platform. You may be able to have it reassigned to another advisor, but that’s a whole different ball of can of worms there. That’s a whole different ball of can of worms there.
[35:42]
So, make sure that you’re asking advisors to the extent that you’re working with an advisor in one of those big firms, if you’re going to be entertaining an investment in one of these privates that you ask the questions about what is my liquidity? What are my fees? Because if you get into an eight-year locked up investment through one of these firms and you decide that you don’t like the performance, you can’t get out and you’re stuck paying those fees, which could be like 2% a year and 20% of your upsides is a very common fee structure there you could be locked into that for eight years, maybe even longer, and you can’t move it. So just make sure you understand what you’re getting into there with the fee structure, the liquidity and your ability to change or move.
[36:28]
And that’s generally happening in the broker-dealer world. The reason it doesn’t happen in the fiduciary world is because we I’ll just use Monument as an example, we do not maintain securities licenses that allow us to buy and sell securities for a commission, so we can’t do it, even if we wanted to. And so generally in the independent space or in the RIA space, if you’re getting into an investment, it’s portable to another advisor. I’m not saying you can get out of it in eight years, I’m not saying that the fee structure is different, but you should know as an investor what the portability of your investment is when you buy it. That’s just kind of my riff on it.
David B. Armstrong [37:05]
Yeah, I think a specific question you could even ask someone who’s trying to sell you or get you into one of these vehicles is hey, john Smith, do you have your broker hat on right now, or do you have your investment advisor hat on right now? And if they, if they’re, you know, worth their salt, like they should know exactly what you’re, what you’re talking about right there, so that might even be a good specific question to ask.
George Coyle [37:27]
So, um, could you, uh, just curious. I don’t know the answer to this, but can you ask you know what do you get paid for selling me this and they have to tell you? Or absolutely? Oh, that’d be a good question. How much money are you making on this? And they’ll have to tell you like, well, I get this percentage for this sale, and it trails for this amount. Yeah, that’d be a great question to ask, because if they don’t answer the question.
Erin M. Hay [37:50]
I think you’re dealing with somebody in that 5% of people who aren’t acting in your best interest.
George Coyle [37:54]
No, no answer is an answer, I suppose, right. Because for the three of us you know, or your firm and my firm, like I, tell people all day specifically what I charge, it’s full transparent. It’s interesting too not to go too far afield. But you have to disclose your fees in some of the regulatory documents. But when you go to the larger firms there’s so many different moving parts that they don’t have to do it because they sort of file as an umbrella company. So, I guess the bigger the firm, the smaller firms, it’s very transparent as to what their fees are. The larger firms, because there’s so many different moving parts, it’s not that transparent. So, people should probably ask the specific question of what am I getting charged? And all different ways.
David B. Armstrong [38:32]
That’s a good point, George, because, as you said, a lot of these large firms they will. Sometimes this is a term I said they will be duly registered. So, the advisor you’re speaking to likely holds both a brokerage license and also holds an investment advisory license, and, depending on how they’re interacting with you, it could be one or the other. So, these are just really good questions to ask someone about their motives for potentially selling these products.
George Coyle [39:01]
Here’s one more fun question, potentially, if I can ask one. Yeah, I know my answer, but I’ll ask you guys first If you guys went out and hired an advisor not that you would, because you’re already advisors but would you hire a fiduciary or anything else? Would you hire a dedicated fiduciary or a hybrid or a non-fiduciary?
Erin M. Hay [39:22]
Okay, I’ll take a stab at this and I’m going to try to be really objective and fair here, because I know so much about the industry, I’ve been in it for 25 years now. I personally wouldn’t have a problem hiring a hybrid advisor who is affiliated with a broker-dealer, because I know the right questions to ask. It’s sort of like you’re a custom home builder no, here’s a better one. Why do lawyers always hire other lawyers to defend themselves in court? You never represent yourself in court right as a lawyer. It’s the same thing. I would just. I know so much about the industry that I would have a really easy time figuring out where the fees are, what’s going on, where the backend stuff is all of this in the commission business that there’s no way somebody would ever be able to pull one over on me.
[40:11]
Now, I don’t think that my experience is applicable to people who are listening that haven’t spent 25 years in the business.
[40:21]
Therefore, I think it complicates the situation when you are using an advisor who is on the hybrid thing, because you’ve got to be really good at asking questions to figure out what hat they’re wearing at the time they’re wearing at the time. You could do it, and I’m not saying those people are bad people. I’ll even go so far as to say this Most of the reason advisors stay in the hybrid model is because they came out of a big wire house and so much of their business was already generated on that wire house model under the commission business that they want to retain that business when they start their own independent shop and they don’t want to give up that room, and that’s a completely legitimate and reasonable way to do it. We operated under the hybrid for a while because of the exact same situation. So, it doesn’t mean that if somebody is a hybrid, it just means you as the client need to understand exactly what’s going on when you are being advised to buy something.
George Coyle [41:25]
It’s a good answer. I learned something here. I appreciate that, Dave.
Erin M. Hay [41:29]
Full of knowledge here, George, full of knowledge. I’d probably go the same route.
David B. Armstrong [41:34]
To be honest, the same route.
[41:52]
To be honest, I wouldn’t have any issue using an advisor who is duly registered, or even a broker for that matter, and for the same reasons you outlined, Dave, I feel like that I’m astute enough to know the right questions to ask and it would be kind of hard to pull one over on me.
[41:58]
I’d tend to think of this, you know, when you ask me, like you know, hiring advisors, I think kind of a caveat to that is and I’ve had this discussion with other advisors in the past it’s like hey, if my parents are going to need to find an advisor like I personally would have a very hard time, even as a fiduciary, probably managing money for my, my parents, just because of all of the, the emotional, you know, behavioral things that go along with that. And so, if I were to steer someone like a close family member or my parents in this instance, where would I likely direct them? I’m probably going the fiduciary route there, absent them, bringing me into all these discussions with all their advisors to kind of hold their hand through everything. If I just want to steer them in the right direction, or someone in the right direction, I probably would be going the fiduciary route or, in this instance, again laying out vocabulary RIAs, otherwise known as registered investment advisors.
George Coyle [42:48]
My answer was initially fiduciary, but they made me think that, yeah, maybe I would consider a hybrid, if the circumstance is right.
David B. Armstrong [42:56]
George, do you see there as being any and I’m pun intended here any alternatives to private equity here?
George Coyle [43:03]
Yeah, but I guess I briefly mentioned it earlier. But One is there’s a company called Verdad and a guy did a study and maybe you guys can link to the paper, but he essentially found that you could really, with small cap value, you could essentially replicate the exposure of private equity with publicly traded stocks. Now you’re going to have the volatility, but his study was pretty compelling. The other thing that I’ve been thinking a lot of is this so why not just buy the stocks of the private equity firms, the publicly traded stocks of a basket of private equity firms there?
Erin M. Hay [43:42]
you go.
George Coyle [43:43]
Well then you get. Not only do you get exposure to the private equity deals because that’s their business, you also get exposure to their ability to raise money, which is their new growth driver, and you have liquidity. So in my mind it’s like why would you go for just one private equity deal, or two or funds, when you could really own a diversified approach across a couple of different companies and get the benefits of not only private equity deals but their fundraising ability? And if it doesn’t go well, you could still get out tomorrow as soon as the markets trade. So those are kind of to me the two big I think big alternatives to traditional private equity.
David B. Armstrong [44:23]
Interesting. I’ll admit I’ve done some cursory research. I think there is potentially something there. Of course, dave, our compliance disclosures here. We’re not suggesting anyone go out and buy specific tickers or stocks here. But, George, that’s an interesting thought and I actually have looked to see how that would have played out. And again, this is looking backward.
[44:43]
But Cambridge, which is a big institutional consultant and they try and track the performance of private equity writ large just in general, because public stocks, if you want to get index-like exposure, what do you do? Well, most people are going to go out and buy something that tracks the S&P 500 or the Russell 3000, some index. They say you can’t invest directly in an index, but these exchange-traded funds or ETFs, it’s basically the same thing. Well, cambridge actually tries to track an index. It’s impossible to fully capture everything, but they do publish stats on that and I did look at some stats over the last 10 years.
[45:22]
And you look at the annualized returns of the Cambridge index I’ll just take that at face value because I think Cambridge is the gold standard for tracking these types of stats in this data. And then you look at the over the same timeframe. You look at the returns of some of these large publicly traded asset managers and it’s eye opening the outperformance of the publicly traded guys, you know, in the face of these private equity funds in this entire universe having the benefit of again 10 plus years of low to near zero interest rates. So, it’s an interesting take, George. I kind of like that.
George Coyle [45:57]
To understand this. You compared a private equity fund index to a basket of private equity publicly traded stocks, and the stocks outperform the index Demonstrably. Ah, interesting, yeah, demonstrably. I have one other point, if you guys don’t mind if I make I write research and maybe we can link to this.
[46:17]
But one of the things I’ve found over time is the best returns tend to come when there’s a lot of general money flowing to a space. You could find evidence of this historically. But, like AI, except for the last few days, there’s a lot of money going into AI, so those stocks go up a ton. But, regardless of the skepticism that I might have about private equity, when you read these transcripts and you see what people are saying and you see the sales push, a lot of money is going to go into the space and so, even if it’s for potentially different growth reasons fundraising as opposed to zero interest rates I mean I do think that so much money is probably going to head into the space because of the larger wealth management sales apparatus that it’ll likely continue to go up and personally I think, based on what you just said and what I’ve researched, I would buy a basket of the stocks if I wanted exposure to that. But I guess you always have to kind of temper skepticism with where the money’s going to go.
Erin M. Hay [47:16]
Well, I’ll kind of wrap it up here with our parting thoughts here. But, as we like to say, the monument wealth management. So what take? Honestly, I don’t want the tone of this to come off as like saying that privates are bad, right. I just think that what the three of us are saying here is that you really need to consider all of the things that go along with being in privates before locking yourself up in that. I mean, we always keep an open mind here. But look, I, we Monument Erin and I, george, maybe you too.
[47:53]
I don’t know if privates are necessarily this big prerequisite for investing success, unless one of their disadvantages is a serious risk for the individual investor, which is the fees, the lack of portability, the lack of liquidity. All of those things have to be considered first before they can ever be considered if they’re a good addition to a portfolio and its success. And what’s interesting is that towards the end of this conversation we actually started to surface some of the Aaron alternatives to the alternatives that are compelling to take a look at too. But thanks a lot for your time and your thought on this, george. I don’t know if you’ve gotten any last saved comments there or not, but if you do great, let’s hear them and then incorporate into that.
[48:57]
Where can people find you online? I know you’re on Twitter because I follow you on there or X, whatever, but I think you’ve you know. I shouldn’t say I think. I know. You’ve got a sub stack I’m not sure exactly what the address is and we’ll put all this in the show notes. Why don’t you go ahead and throw those out too Sure?
George Coyle [49:12] GFC4 is my Twitter handle, and then I have a couple of sub stacks. Rather than try to read them and make everybody fall asleep, we’ll just post a link to it. Those are probably the best places to start. I also have a series of publications that I have a link to on one of my websites, so I’ll share that too. But one final thought on private equity is this, and I welcome you guys to chime in, but let’s exclude owner-operators of small businesses.
[49:42]
Every time I’ve ever heard of someone who invests in a one-off private equity deal, like my brother’s starting this, or a friend of a friend is starting a chicken business, whatever, it always goes the same way and it’s zero. And there’s examples in reality of somebody who invests in Facebook early and it takes off. But in my day-to-day actual life I’ve never met anyone who had real success investing in a single one-off private equity deal. It’s usually because of some relationship that they have, it’s not sort of well thought out potentially, and it always ends poorly. So, I guess one of the things that I think about with private equity is, if I were to ever do it which I doubt I would I’d do the stocks, but I would want to be diversified within private equity, because I’ve just never seen it go well and maybe you guys have some experience with that too.
Erin M. Hay [50:31]
But okay, I have a private equity investment failure which ended up with people in jail, okay, and I also have another very successful investment in private equity. It’s called Mind and Wealth Management and a lot of people who are listening to this right now there’s a really good chance that people listening to this are small business owners themselves. A lot of our clientele are people who are small businesses and a huge part of my investment portfolio, which is ownership in this company, I mean. So, a lot of people are private equity owners already and don’t really think about it. But just remember, like if somebody came to me and said, like you should diversify by adding some private equity to your portfolio, I’d be like I want to diversify by removing private equity from my portfolio more so than add it, because I’m the classic example of a guy who has a massive private equity portfolio. Hopefully it doesn’t go to zero.
George Coyle [51:48]
The one that you own and operate is going well, and the one that you invested in separately did not go well.
Erin M. Hay [51:54]
Did not go well. Right and yeah, it turned, it ended. It started out as a viable business and turned into an ethical quagmire of people within the company stealing money and ultimately going to jail, federal jail or prison. Well, I guess there is a huge difference, I guess yeah, right yes, uh, federal, a federal penitentiary prison, prison, a felon, a felony conviction, and in prison for 12 years. The CEO of that firm.
George Coyle [52:25]
That’s an extreme example, but I guess, yeah, for most of what I’ve seen in my day-to-day life people I actually know they’re you know the deals are not actually managing. They just don’t go well. So, diversify, if you’re going to do it, of what I say.
David B. Armstrong [52:38]
These niche focus private equity investments where, let’s say, instead of targeting hey, our fund is going to be looking at you know industrials, tech, pharmaceuticals like we were running the gamut here, I would more likely lean into those types of potential investments versus hey, we’re going to be looking at early-stage startups for chicken farms. You know early state you know some sort of you know company that’s in a really narrow industry, because you know those can go incredibly well but those also can turn into zeros very fast.
Erin M. Hay [53:22]
Yeah, restaurants are the classic example of restaurant investment.
[53:26]
Yeah Well, George, thanks so much for your time today. I always love talking to you and catching up with you for listeners. We’ve talked many times with George. If we could have recorded every single one of those conversations that we have with you, they probably would have been just as interesting as this. But thanks for taking some more time to talk to our audience about your experience and really appreciate that. Remember, check out the links in the description below for the sub stacks and the Twitter feeds and everything else like that. But, George, thanks again.
George Coyle [53:56]
Thanks for having me, guys.
