The Relentless Ask

You don’t hear about the bid-ask spread too much these days. The rise of electronic trading has virtually eliminated the need for such lingo. If it’s liquid, you can pretty much buy and sell whatever you want at the same price.

But back in the day, the bid price, which is the most a buyer was willing to pay, gave you a good window into the demand side of the market. On the opposite side of the coin, the “ask” represented the market's supply side and showed you the lowest price where a seller was willing to transact.

The only time I use either of these terms is when I’m referring to Josh’s now eleven-year-old post, The Relentless Bid, which was the first time, to my knowledge, anybody explained why it felt like there was permanent buying pressure underneath the stock market.

A similar tectonic shift is happening today, except now it’s in the private markets. There is an endless supply of deals. Advisors are getting twenty emails a week from asset managers of all shapes and sizes, and they all want one thing: to sell our clients alternative investments. I’ve been thinking about this for the last year or two, but only today did I think of something to call it. Ladies and gentlemen, I give you, The Relentless Ask.

If you want to learn more but don’t feel like reading, you’re in luck. I’ll be talking about the intersection of alts and wealth tomorrow with Phil Huber on Talking Wealth, live at 11.

Now, let’s get to the story of why wealth management clients became such an attractive target for alternative asset managers. This topic can be a book, but I will try to explain this as quickly as possible for the sake of time. I’m writing this at 9:30, and I’m tired. Generalizations will be made, and whole parts of the story will be missed.

Legendary investor Dave Swenson, who ran Yale’s endowment, revolutionized how large pools of permanent capital chose to allocate their assets. In 1989, more than three-quarters of their portfolio was in U.S. stocks, bonds, and cash. By 2020, those three buckets represented less than 10% of their investments. The Yale Model, as it came to be known, performed incredibly well over the years and inspired a lot of copycats.

Fast forward a couple of decades, and the endowments and foundations of the world are basically tapped out. The average institutional investor has 25% of their portfolio in alts, some way higher. They’ve had their full share. It doesn’t help that distributions have been few and far between these days, but that’s another story for another day.

As a result, the fundraising environment has been nosediving over the past few years.

Given this backdrop, it’s no surprise that wealth managers are being marketed to so aggressively. The endless supply of capital from institutional investors has dried up, and we’re a well in a desert. The average wealth client has 5% of their portfolio in alts, which seems high, but whatever let’s go with it.

In Larry Fink’s annual letter, he spent a lot of time talking about how BlackRock is going all in on private markets. He said, “We see an opportunity to do for the public-private market divide what we did for index vs. active.”

It makes perfect sense why BlackRock is doing this. Alts are a phenomenally lucrative business. BlackRock manages ten times as much money as Blackstone, and is far behind in terms of market cap. I wouldn’t bet against Larry Fink here. You might think we’re late in the game, but I think it’s the second or third inning.

The number one pitch I see these days, by far, is in private credit. I mean, holy moly.

I’m talking with Phil about this tomorrow, so I’ll save most of my thoughts for the show, but here they are at a high level. I don’t think this is a bubble that pops. But I think returns will be lower because too much money is chasing too few deals.

I am skeptical of private investments in general. They’re expensive and complex, and the lack of liquidity should prevent most people from investing in them. But, I’m not cynical. I definitely don’t think it’s all bullshit.

87% of all companies with $100 million in revenue in the United States are private. There’s a lot of opportunity outside of public markets.

I think you can get legitimate diversification benefits from things like infrastructure, farmland, GP staking, and the like. But I’m afraid that a lot of the money being shoveled in there today doesn’t have a real understanding of what they’re investing in. And I’m talking about the advisors more than I’m talking about the products.

This trend isn’t going away. The relentless ask is just getting started. It’s important to make sure you’re asking the right questions and have the right expectations of what you’re investing in.

To learn more, check out my conversation with Phil tomorrow.