Chris Galeski: So, Meghan, we talk a lot about private investments, and it's sort of part of our DNA. Lately, as alternative investments have become more popular. There's been headlines out there like Moody's, for example, sounds alarm on private investments for individuals.
Meghan Pinchuk: Scary.
Chris Galeski: And it's meant to, you know, scare people. I think fear sells better than that other thing. That's fair. But not all private investments are created equal. And so I wanted to kind of talk to you today about not only this article, but what you think the key difference is are between the stuff that we do, the private investments that we look at versus the really, really large ones.
Not to pick on Blackrock or Blackstone.
Meghan Pinchuk: We can pick on them. I'm fine with that.
The article is talking about specifically individuals. So that is a key trend that's been happening in this alternative investment space is the idea of democratizing investments. So you're taking something that was previously really only accessible for big institutions and pensions. And they're being put into formats that are more accessible for individuals, which I think has some big positives, and then also some things to watch out for as well.
Chris Galeski: And so when you're talking about those really big institutions, it could be endowments, it could be pension funds. And they were looking for alternatives to stocks and bonds for years because they have a lot more money to invest.
Meghan Pinchuk: They do. And they have a lot more they can they can write very large checks. And previously a lot of these private funds could only take money from higher net worth individuals. So the some of the new structures that are out there allow for retail investors to go in for a couple thousand dollars into these big pools of assets that are alternative in nature.
Chris Galeski: Growing up, I was very fortunate to be around golf and a lot of very successful people growing up at a country club. It always amazed me by the number of individuals that directly invested in businesses or real estate, or had very little exposure to traditional stocks and bonds. So this doesn't feel all that new to me because I kind of grew up in that environment.
But what would you say is the biggest difference between investing in the private markets versus the public market?
Meghan Pinchuk: Well, certainly a lot of if you are sophisticated, a lot of a business owner or someone like that or they they know people, country club type deals, people will find things to invest in. So that's a little more on the side. Or again, things that people can kind of touch, feel and control. And I think that's why we like a lot of alternatives, is it does feel like you can wrap your arms around it a little better versus the public markets.
What we're talking about here is more, big pools of capital. Again, it is your big guys out there who are aggregating many billions of dollars and putting them into these big buckets and saying like, great, now retail investors can come buy a couple thousand bucks worth and you have a giant pool.
Chris Galeski: And you have the ability, I mean, you talk to those large groups and so you have the ability to say yes to those, but you often say no.
Meghan Pinchuk: Yeah, we and we've we've done a little bit of it over time. There's times where it's, there's maybe if there's a screaming buy in the market, we're accessing it through, you know, the big guys can make sense. I think our bias is definitely towards smaller, more niche managers, just because we tend to like the segments that they play in a little bit better.
And again, more controls, more risk management, things like that.
Chris Galeski: When I think about public versus private, investments, it's easier to look at it through the lens of like a bond. So a private loan versus, you know, buying a bond, a corporate bond or a municipal bond, what are the key differences there?
Meghan Pinchuk: So I think the one of the big differences, it really is the same. So when you break out assets generally you can really think of like do I own something equity or am I lending on something. So a bond. And so with, a publicly traded bond, one of the big difference is that you buy it and there's usually very little controls that are in place.
So, as someone who enjoys control, I don't love the idea that I'm going to go invest. And let's say it's a five year bond. And as long as they make their payments, that company, there's really not much you can do. Let's say the company is doing poorly and so their numbers are bad and their earnings, whatever it is, you essentially as the bond holder, the can't do anything.
I mean you can sell at the bottom of potentially at what price. But like you can't do anything to say, hey wait a second. The value here is deteriorating. Like stop. You know, stop spending money, stop doing these. Whatever it is. You don't have any control. Private loans today. A lot of these private loans, when they're structured well, they're structured with a lot of what are called covenants or controls where you can say, oh, you have a minimum amount of liquidity you have to keep, or you have to have a minimum amount of earnings things, things that are just sort of like, marks along the way, right?
To see like, okay. Yes. That they're they are performing, they're doing well. And if they're not now you as the lender can step in and say, hold on a second. Let's let's course correct here before things get too far. So that that appeals to me.
Chris Galeski: When you break it down like that, why would anybody want to own a traditional bond versus something that has rules and things in place to help better protect the investors?
Meghan Pinchuk: Liquidity is the biggest example or the biggest reason? I think public bonds, there's a lot more liquidity in the market. And so again, you don't have as much control, but you can sell it. At what price is the question. But you can go sell it out in the market typically. Whereas historically these private loans were not salable in these structures.
Now in theory there more is more liquidity built into them. But that's a bit of a misnomer too. So I actually when I think about these, I like that more people can access the private loan market. There's some issues with that. So one of the big issues is, is there actually liquidity to these things. And they're promising a lot of liquidity.
The answer is no. And that's actually the right answer. That's that's the funny part about this too right. Is that you you shouldn't be expecting to invest in something of like semi liquid pool and be able to get out whenever you want to. Typically there's quarterly windows. It's the right structure to say, hey, we're going to limit the amount of people who can get out every quarter.
Do people investing in this understand that that is highly questionable.
Chris Galeski: And so that's the loan side of things. But I know you like to say no to private investments for a number of different reasons. Structure being one of them. Do you own the right assets in the right structure? Maybe you don't like the shirt that they're wearing. You don't typically really enjoy sales people.
Meghan Pinchuk: Petty. That's petty.
Chris Galeski: Yeah, but you don't enjoy sales people. What are some of the other reasons why you would say no to to a private.
Meghan Pinchuk: Investment sales people? That's that's fair. Actually, that one, I think I think look, the the structure is really important and I'm going to try to hopefully keep this interesting for people because I could geek out on structure for, for a long time. But but again, that match between like are the loans appropriate for the structure is really important.
So when I get out my soapbox and I really, really share my true feelings about how much I hate equity. So again, the idea of you own the assets now in these open more semi liquid funds drives me insane. And it drives me insane because for a company again the liquidity is right. It's limited. So it's not like they're going to have to go fire sale a bunch of their assets to let people out.
So that's the good news. But the flip side is you literally have people buying these things daily in a lot of cases. So you're getting a price that someone is transacting at on a daily basis. What what is said price like what what price are we talking about? Bring in equity assets that are not liquid. It just blows my mind that this is sort of acceptable in the market.
And maybe it's close enough that I'm I'm being too rigid. That wouldn't be the first time I was accused of that. But, it just it it bothers me that there's that kind of level of mismatch.
Chris Galeski: You brought up the story about, knowing somebody that was invested in the Blackstone, real estate investment trust.
Meghan Pinchuk: And we're going to pick on them again. That's fine.
Chris Galeski: We're gonna pick on them again.
Meghan Pinchuk: And they were they're big enough they can handle.
Chris Galeski: And they were invested in that real estate equity. And the fund was doing okay. But we know that real estate prices had come down a lot. And the salesperson called me and said, hey, you know, prices are down. You should invest more.
Meghan Pinchuk: Yeah. They were like, oh, real estate's down. It's down like 20%. Like, this is a great time to add money. And so he said, what do you think? Should I, should I add money? And I said, well what what's the price like how much is the price gone down. And the thing you're buying into is like, I know that's up like 2% on the year, but what.
Something does not compute, right? Those two things don't go together. So that that is one of the issues too again with those valuations is like is it being market at a fair price? Because let's be honest, if the pricing really dips materially and they sort of they truly market to market, are people going to freak out and then hit the sell button.
They can't get out immediately. But that doesn't mean they're not going to have a fun run on the bank situation.
Chris Galeski: It just feels like Wall Street lies to investors often about, you know, are you an actual investor or you're a speculator? Because most of this stuff driven around liquidity is meant for speculation. And they tell people you want real estate exposure on this real estate investment trust. You can buy or sell it daily, but you think that's a little bit different.
Meghan Pinchuk: Well, and usually there's not a sale daily. Again that's where it's... Well it's the right thing on these on the semi liquid formats, the REIT structures that you're talking about. So real estate investment trusts, those are just like stocks. It's like a company that owns a bunch of real estate assets. Now what you're doing is there's less of a promise that you're buying at fair value.
It's more like supply demand. Like what are people willing to pay? And so just like, you know, if Apple goes up 5% to the fundamentals of Apple and Apple, just assets go up by 5% that day. No, it did not. It's just what people were willing to pay that day. And so Reed's fall more in that category. And there's times where rates historically are really attractive because let's say that they're out of favor.
So you can go buy this pool of real estate assets at a discount. Sounds good to me. There's times where it's trading at a premium, and it just might not be as attractive to buy something like that.
Chris Galeski: So your best tips for how investors can best protect themselves as it relates to investing in the private markets.
Meghan Pinchuk: I think it's really hard to do this yourself. And so this sounds a bit self-serving, but having an advisor who's a professional who understands the alternatives is really important because it's not there's a lot of layers here. Right? So is it a good investment? It's a good investment at a reasonable price that you're buying and selling at. Is the structure in place actually there to protect you?
Are the managers the right kind of people who are really thinking things through in terms of downside? Everybody, I've never seen a marketing deck on a deal that didn't look amazing. That wasn't like, this is going to be so great. You're going to love this. What does it look like when things don't go as well? And so are you with people investment manager wise who are actually thinking that through?
Not always. So.
Chris Galeski: And when are you talking about are you with the right people that cannot see that through? Do they have experience in some of the workouts or dealing with problems as opposed to just nice salespeople?
Meghan Pinchuk: So in, in this market, to this private credit market that's really exploded of late, like trillions of dollars now in this space, like big, big numbers. The one of the that is one of the concerns because for so long, I think the thing that's been highly valued by a lot of these teams has been origination. So can you get deals done?
Can you get because so much money flowed into this that they need to put it to work, they need to put it to work. And it's been a really good, easy market in a lot of ways where not a lot has gone wrong. Right. The economy's been reasonably strong. And so now the question is going to be if you hit any kind of a bump in the road, even if it's not crazy, but you just had a normal run of the mill recession.
Do these teams have any workout experience? Do they know how to go in and take a company through bankruptcy to get the highest collection cover themselves? And so I think that's where there's going to be some interesting situations where you get groups who are going to be testing the water somewhat. Again, with large dollars behind them. But how how do you work through it?
Can you get the best results for investors?
Chris Galeski: You know, somebody that works alongside you in this company but also runs into a lot of investment professionals that are always trying to pitch their latest and greatest thing. I maybe get sold on the marketing. That sounds.
Meghan Pinchuk: Great.
Chris Galeski: I get, because I'm an optimism, but you don't look at it that way. It's sort of, how am I going to get screwed? Or how could this go wrong? Which is one reason why.
Meghan Pinchuk: Are you saying, are you saying I'm not a positive, cheerful person?
Chris Galeski: You're a very positive, cheerful person, but you tend to kind of go into things looking at it, saying, hey, what's the worst that can happen?
Meghan Pinchuk: And you have to just ask that question upfront, right? You have to say, okay, like what? It's scenario analysis. It's like, okay, what what can go it's great. I'm glad you told me what can go. Right. That's exciting. Now tell me what can go wrong. And if you are with managers who think that way too, who are thinking to themselves like what if, what if, what am I going to do in this scenario, you're just stuff happens.
You're just increasing your odds that if something bad happens, you're going to be with people who actually know how to deal with it and who are prepared.
Chris Galeski: I see I really enjoyed this conversation, but I see that me too, because we're talking about structures.
Right? I see the rise in alternative investments, something that's likely to continue. And there's probably going to be more headlines out here saying, hey, be careful of the private investment space.
Meghan Pinchuk: Yeah, I think too, it's important. Like even when our clients read that, like the way we do alternative investments is very different than these broad public markets. I'm not saying I wouldn't ever do any of these things again. There's there's a time and place for everything. But as an example, the private credit that's really getting a bit beaten up in the headlines because there's so much of it.
And because what you have seen is I think you've seen the controls, those private loan covenants, or I was saying, oh, I like this better than a bond because, you know, they've got all these controls in place. If there's so much dollars coming into the space that goes down right. If you're going to give on something, do you give on your price where maybe you get a little less on your yield?
Do you give on your controls and you say, it's okay, I don't actually need that minimum liquidity covenant. It's going to be fine. I think we're starting to see that as like the deterioration of covenants. That's what you'll hear in the news now is like, oh, the controls are going down. So these are less secure than they used to be.
And when we look at it again, we are not with groups that are okay with that. They actually in some way they'd rather drop the yield a little if they had to and keep the controls in place. We also really heavily favor groups that if they're doing lending, have some kind of a plan B. So asset protection is is the most common one where look, if if the company does great and pays you back, awesome I love it.
If they don't what's the backup plan. And so again you can have these covenants to adjust or course correct along the way. And then if it just ultimately doesn't go well, can you liquidate the company and take their stuff so their stuff pay yourself back. So that's that's a good backup plan.
Chris Galeski: And obviously the size of the portfolio and how quickly they have to put money to work can cause them to make different decisions, which you care about a lot.
Meghan Pinchuk: Absolutely. And so that's a big deal to where, again, if you've got groups, billions of dollars trying to put out, they can't be they can't be as picky. Right. They have they have to take what they can get so that they can deploy. And then groups that have less, they can be a little more patient in their deployment.
Chris Galeski: Meghan, thank you so much for the conversation today.
