Geopolitical Uncertainty is Freezing Private Capital | John Bowman of CAIA
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The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough. Thank you. Just close the f***ing door.

Today's episode is brought to you by Fintool, the AI equity research co-pilot tailored for institutional investors. Go to the Fintool.com link in the description to learn how you can add AI to your research process. Very pleased to be speaking today to John Bowman, CEO of the Chartered Alternative Investment Analyst Association, or CAIA. John, welcome to Monetary Matters.

Jack, it's a pleasure to be here. Thanks for having me. I'm really glad you're here, John. Alternatives matter so much. So it's not just hedge funds and venture capital, but also private equity and private credit, which have seen enormous growth over the past few years. Just tell us quickly, what is Kaya? What role does it serve? And what's its relationship with the alternative investment universe? Yeah, we're about 24 years old. So we're getting close to a quarter century of investment.

of kind of history and runway behind us. The real quick story is that in the late 90s, when investment banks were spitting out these unconstrained tradable equity strategies, which of course we now call hedge funds, we didn't even have a name for them then. We didn't know what to do with them, which is the point of the story because CIOs at Big Asset Owners took this, what I like to call this figurative pilgrimage to Western Mass. University of Massachusetts was one of the first kind of movers in trying to put together indices and research that

There was an endowed center at the University of Massachusetts studying these things that we couldn't kind of put our finger on, didn't have an identity yet. And out of that was born this idea of a body of knowledge, a credential for, quote, alternative strategies to everything outside of public equity and public debt. That has grown up, as we were talking about in the Blue Room a bit over those 25 years. It's been kind of a tale of two halves.

And as we approach GFC and private capital, particularly buyout and growth and venture capital and infrastructure and real estate in the illiquid space has kind of exploded. We now cover that full gamut. So anything outside of traditional is what Kaya is known for. And we really, our mantra to kind of sum this all up

As we're trying to build the most energized community of investment professionals around the world and really equip them to kind of navigate what is, as I'm sure we'll talk about, is an increasingly challenging and complex marketplace. And what is getting increasingly complex and challenging about the marketplace? Well, I think there's a lot of ways we could go with that. I think the one thing we're talking about, maybe I'll say a couple of things that we're talking about most often, it seems like, Jack.

The first one is this great convergence. If you think about the 70s and 80s and where private credit

buyout private equity were nurtured and had their infancy, right? It was high finance in a lot of these investment banks. They came out of kind of high yield and the cowboy mentality that we've seen in Hollywood, right? That diasporas spread out post that blow up in the 80s and really formed many of the private equity and private credit now shops that we know of. And

And so we've had this parallel universe of traditional asset management, which many of us grew up in, that we're running either public equity or public debt. And then all these very complex private partnerships that we're managing illiquid strategies. Okay.

Most recently, to this point of great convergence, there is huge overlap. That blurring of the lines is getting really difficult to discern. You've got M&A activity that is crossing and intersecting and colliding. And it's hard now to make out, well, are you actually a private

strategy organization, GP, or are you actually a traditional asset manager? And we can talk more about those examples, but it has changed the very nature of the ecosystem in which these asset managers operate, where the LPs need to go to find those strategies. And we're spending a lot of time thinking through the implications of that. The other thing, Jack, again, that is no surprise to any of your listeners is this geopolitical uncertainty.

If you've been around a minute, the market doesn't like a lot of things fundamentally, but what it hates the most is uncertainty, unpredictability. And right now we've got a massive spoonful of unpredictability across pretty much the whole world in every theater,

and trade and military avenue. And that is just, that is choking the business of capital markets. And so we're spending a lot of time talking with LPs about what the implications of that are as well.

So there's a report from the Federal Reserve that says that private credits in the early 2000s was single digit billion dollars. And now, of course, it's 1.5, 1.6 trillion. And I think if you include leverage, it's even higher. So this growth of private debt has just absolutely exploded. You're saying that a lot of what is now private credit used to be within the banking system and capital markets. So maybe that wasn't captured in the Federal Reserve's thing. But yeah, the growth has been enormous.

John, just how does geopolitics, I guess we're really talking about tariffs, how does that impact the alternative investment world? If you ask me that question about Nike, the simple answer would be kind of obvious. Like, okay, a lot of the shoes are made in Asia and China, and President Trump is going to raise tariffs on those countries. So that's how it impacts Nike. So either sales will go down or prices will go up, maybe both. Why don't you talk about how that impacts

the private credit and the private equity world, it's not nearly as obvious. What's your answer to that? Yeah. So let me put a bow on your statement around the history. First of all, you're absolutely right. So private credit largely existed as a fundraising or a capital formation portion of the cap stack of private equity until honestly about five to eight years ago.

That's not completely fair. I mean, those that actually operate in the business would take umbrage with that statement. But for most of the marketplace, private credit didn't exist on its own. Again, it was part of financing structuring of buying out of companies, which existed kind of in the private equity category. And that has, as I said, that has been kind of

jumped out of the nest and has been born on its own. And I think you're right. The sheer scale, we've got it actually at 2 trillion US right now on our numbers. That has-

Yeah, that has kind of grown out of several hundred billion only eight years ago. So you're right. There is tremendous, voracious appetite to get access to these loans that are not coming through traditional sources. And as you probably know, as your listeners probably know, something like in the States, 70, 80% of direct lending and increasingly asset lending, meaning there's collateral, there's physical assets that are collateralized against that loan,

are coming through non-bank sources, are coming directly from these type of lending companies instead of banks. That's not quite where we are yet in Asia, but that's moving that direction too. So a lot of what has happened in the GFC and a lot of the regulatory regime that was put in place against the banks on sensitivity ratios and ensuring capitalization, which again was well-intended,

As with all of these regulatory structures, we tend to get a big pendulum swing and unintended consequences. So you're right. There's been a fundamental change in that. Geopolitics, what does that mean?

As I mentioned, I was just I just came back from a conference where we're talking about just this on the stage and a couple of different avenues, private credit and then geopolitics. But it's really the intersection of that is what you're asking about. So I think there's a couple of things. I think first, anytime you get tit for tat tariffs, you know, one eye, one eye, one

we all kind of end up blind in the end is maybe one way to think about it. We don't know where this is going. And I think at least in the short to medium term, even the most

divisive of tariff debates will admit that this is going to be negative for inflation and the economies in the short term. And so, first of all, you've got this cloud hanging over the developed world economies that is really, I think, going to put a headwind against not just trade, obviously, but certainly GDP growth, job creation, and so forth. When you think about the longer-term implications of

I think you also have to bring in the fact that you've now got two parallel worlds of everything from tech stacks to semiconductor development to supply chains is maybe the one that's covered most often in the news. And we hear a lot about this near shoring and friend shoring and debt diplomacy where the Chinese and the Americans are basically building an entire value chain, an entire new apparatus that are completely parallel and independent.

And I think that even outside of the recent,

tariff weaponizing that's going on currently is simply going to add inflationary elements to each waypoint or each marker of that supply chain. It's just natural, right? The reason that we globalized to an extreme level was for comparative advantage and cost savings. And we put this stuff in labor areas and efficiency areas and comparative advantage areas that made the most sense to save consumers the most money. And, and, and

and certainly producers the most money. Now we're putting more constraints. Anytime you put more constraints on efficiency, you add cost. You add inconvenience. You add probably more time for development and getting that said widget in the hands of the consumer. So I think there's multiple kind of consumer behavior and cost implications that are going to happen because of these two parallel worlds of a bipolar supply chain.

Okay, so that's the general macro of tariffs. But how does it specifically impact the private capital markets, private equity and private debt? I guess, you know, the stock market changes on a whim. But like I talked about how tariffs easily hurt Nike, like Nike is down about 11%, just what the from Pete to drop over the past, you know,

from last month. And the S&P is about where the S&P is down. It's probably S&P is down about 9% as we record. But as you know, the private equity behemoths and the private debt behemoths, those general partner stocks are down quite a lot. So again, it's a short-term price action. And maybe those stocks were just pricing in a lot of optimism. But it does seem like the market has a view that something about tariffs is not great or maybe not as good for these private companies

private equity companies. So what do you think it is? And like, how do you think if geopolitics or the Trump fiscal administration will impact the private capital markets? Yeah, well, here's what I hear from LPs a lot is that, you know, anytime you're structuring a traditional drawdown fund, either in private equity or private debt,

You basically have to lock up that capital, as I think most of your listeners will know, for anywhere from kind of eight to 12 years minimum. That's the expectation of starting to get distributions back. It's what all of us call kind of the J curve, is that you're putting a whole lot of money in those first five years, and then you finally start to see kind of break even on distributions in year five through eight. And then ultimately, the last few years look pretty golden, and you get your really sweet return back, cash on cash.

If you're staring into uncertainty in a broad sense, and perhaps even these parallel worlds of locked up capital and national security constraints, and if the Biden administration continues

some of the constraints that they put on private capital going into certain industries that they deemed nationally security relevant if the Trump administration continues or even broadens that. That could put some significant strain on the ability and the interest and the appetite for these LPs to be investing into these parts of the world that they may not be able to get their capital out,

They may not be able to render, even if they are able to keep the capital in, the types of returns that they could get maybe five years ago.

And so I think from a private equity and private capital point, you might start to see localization just as in the supply chains, localization to parts of the world that are maybe geopolitically and trade friendly. And that is not good for anybody because that means from a fiduciary diversification standpoint, you're limiting your options. Anytime you walk into the store and certain shelves are unavailable, right? You're limited. And that's the same with diversification. You want diversity.

those CIOs and you want investment professionals to be able to choose the best option out there based on risk return. And this, I think, could have limiting elements on ultimately investment outcomes, which is going to hurt individuals, beneficiaries, families in the long term. And John, so you said in parts of the world. So let's say you're the Harvard endowment allocating to private equity firm A or private credit firm B.

That has an outlook. What's going to happen is going to happen, but tariffs does not really change that at all. It's all within America. But tell us about the globalized nature of private capital markets. How much of American private capital firms raise money in Europe or private in Asia? I mean, I know they do, but just tell us the percentage. For example, I know Canada, in terms of retirement, has trillions of dollars that it is a huge investor in the American markets. And

Do you think that maybe fundraising could slow down, maybe not decline, but just slow down because of the geopolitical uncertainty and the enmity perhaps between two countries towards the United States because of tariffs? The short answer is yes. So let me hit a couple elements of your question. So

I was in Japan in the fall and I was in India about three weeks ago. And one of the things that really struck me is that those are for very different reasons coming from very different points of the cycle. Right. So I don't I don't want to suggest that they're identical situations.

But with India and in Japan, most of the private equity and private credit firms that are setting up shop and putting up a shingle are Western, mostly even US. Some of the big firms we would know, okay? They're setting up new practices to take advantage of

whether it's VC, early stage, new entrepreneurs and founders, particularly in India, that's what I found, or whether in Japan when you have this kind of, as we all know the story back in the 80s, you have this patchwork of lots of national champions that were conglomerates and owned these businesses and they never were really valued. But if you start to extract and pull apart and unwind these jigsaws, there's so much

valuable good businesses there. So the private equity firms, the growth firms see this and they want to take part in it. And the U.S. and Europe has really led that charge. Well, to your question, if we start to see this dichotomy and binary view of the world where

Americans are either required or they are at least the risk reward is so overwhelmingly in the favor of setting up shop in friends jurisdiction versus non-friends or neutralities. I think that could impact the momentum of what you're seeing in these new opportune companies that don't have much of a private capital presence so far.

We've certainly seen it pull out of China for obvious reasons, slow down significantly.

But Japan and India strike me as perfect examples of the future being so bright. But depending on how this tariff war and this reallocation of the world's borders, which seems to be going on for the first time since World War II, what does that mean for what arenas and playgrounds we're allowed or should be playing in as private capital companies? Now, the only other thing I'd add from a layer perspective is we're

Kind of the normal cycle is also playing a role too and exacerbating this. So Jack, as you probably know, we had this huge buildup and overinvestment and froth around fundraising that hit its peak in 21. And so we had all this dry powder. We put all this capital into the ground, promising great returns and obviously exits because of where the economy has gone and where multiples are required has just not played out.

in the last couple of years. So LPs are not getting distributions back, which is not good. So they had all these commitments, they had all these draws, and then they're just not getting those returns back just because the system had to work through all the, it was all clogged up, right? It was all clogged up. So you've got those two, one more cyclical and temporal clogging the system, the traditional cycle cycle.

And then one perhaps more structural. And I think the combination of those two is giving a lot of pause to the big private capital firms about how aggressive they should be on fundraising. I will tell you the psyche of a big, and this is not a judgment, but just the psyche and the pattern of a big private capital firm is that as soon as they raise that fund and they hand it off to the investment team to start putting into the ground in great companies, they're already thinking about the next fundraise.

And that has been stretched out significantly. So it's changing kind of the dynamics and the dialogue between LPs and GPs now. And so, yeah, LPs are the investors in the fund. GP is the management company. So I said the stocks have declined. I'm referring to the GP that are publicly traded.

And so I want to give a shout out to Other People's Money, my business partner's podcast. This episode will actually go on the Other People's Money feed because it is very much about the other people's money. So, John, that segment you gave of 2021 was froth, a ton of fundraising. I think of that in private equity, venture capital and private credit. But in terms of the investing and the realizations haven't been there, they haven't been able to sell as many and return to investors.

as an issue for private equity and for venture capital. But my sense is that for private credit, those assets have performed very well. I mean, their term loans and that the

the default rate has been very low. And so high yield spreads have been going down. So credit rates have been going down. And then private credit spreads over high yield spreads have been going down as well. So yields are high because the Fed raised rates. They're floating rates. The credit spread has gone down. And that is why in some instances you've had double digit returns. And I guess now the pitch is you can get double digit returns, equity like returns for

for credit-like risk. So talk to us about the remarkable growth of private credit and where you think it goes from here. Today's episode is brought to you by FinTool, the AI equity research co-pilot tailored specifically for institutional investors. Everyone in finance is racing to figure out how AI can best be integrated into their investment process. And

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Yeah. Like I said, I think it's probably 2 trillion plus now that's on a denominator of about 150 trillion assets under management globally. So still a small piece, but again, it's become a legitimate asset class in its own right. That kind of coming of age is probably more important than even the numbers right now. And there has been, as I tried to express earlier, I always look at kind of the conference stage as maybe a leading indicator. What type of topics are getting up there? I mean, in

In 1920, it was crypto. And in 21, 22, it was private credit.

There's some good signals in that and there's some cautionary signals in an overwhelming number of topics on the stage. So we could kind of see this coming. To your point, yes, private lending is usually kind of 10-year. Take kind of a risk-free rate, put quotes around that, and add 3% to 5%, right? And that's the type of return that you're going to get. Now, there's a two-edged sword to this, Jack, that plays out, is that as...

Interest rates rose, to your point, as the Fed rose and as all access to lending started to have higher costs associated with it.

that spread continued to rise too. So direct private lending went up into low single digits, eventually low teens. That is on the one hand for a little while, very attractive for investors, for both those LPs that are managing on behalf of investors like you and I, and for the beneficiaries. You're getting access to yield that we haven't had since the early 80s, arguably, right? Now, eventually though, you have to be careful because you can't run

an economy on 13, 14% borrowing rate for very long. You start to really stress the income statement. And just as if we had a loan for a car or a house that skyrocketed into 13, 14%, that's going to really hit your operating budget month to month, right? And these small and mid-sized companies, as you can imagine, they have a tight...

income statement nonetheless anyway. There's not a lot of degrees of freedom. And so that can only go so far. And so it was good to see kind of those interest rates. And even the best private credit firms would say this too. This is not healthy for us to stay this long. It's very satisfying for us in the short term on the books, but it's not sustainable if we stay this high. Now, the only other thing I'd say more structurally is that part of the reason

you had this explosion in private credit is that, as I've already alluded to, you had no access to yield. An investor really had no access to yield for over 10 years. And there were these narratives out there that we were going to stay lower for longer, that interest rates were never going to go back up. And whenever you hear that type of stuff, either they're never going to go down or they're never going to go up, you know it's wrong. And it's probably time to buy or sell depending on where on the cycle you are. And inevitably, right, the cycle came back.

And WIPP sought us and you saw access to public credit that rose. And so traditional sources of yield were once again available to the individual investor, to the allocator in ways they weren't for a long time. So private credit was getting a little bit more competition.

than they had in a long time. And I think that was probably good. They've got to make sure that they're underwriting their risk profile, the way that they're sourcing that has to be really disciplined, right? Because I think the scrutiny, the microscope is on them a bit more. The only other thing I'd say is I still think that there is probably...

some creative destruction to happen within the private credit space. It has grown up, as we've talked about already a couple times, very quickly. I've heard a stat that 95% of private credit firms did not exist pre-GFC. So you're talking about

10 to 12 years or less of life of most of these GPs. Now, that doesn't mean that these professionals that are running them only have 10 to 12 years experience. I want to be clear. These could be very experienced folks. But nonetheless, most of that firm, besides maybe the partners, have not even gone through a cycle, a credit cycle. So they're experiencing this for the first time. So things like restructurings and bankruptcies and breaches of covenants in these loan books that they have

The fact that we can't see them and the fact that they're all kind of working through these loans for the first time gives me a little bit of pause that we just haven't seen more headlines about workouts and restructurings and struggles and fails. I think there's probably a little bit more of that to come.

It's interesting. So I want to explain when you say, let's say a private credit fund for one year had an 11% yield. I think some of that, so the base rate from the Fed is 5%. On top of that, let's say the credit spread is 4%. That gets to 9%. I think that extra level of performance is because the credit spread has narrowed. So the bond itself is on paper worth more because the perceived risk in the market is higher.

is worth less. And that's such a good point about the double-edged sword. As the Fed raises interest rates, as it did tremendously in 2022, yields go up, and that is good for returns. But also, the borrowers have to pay more, so that may not be unsustainable. All right. Now, let's talk about, you said that there could be some creative destruction in private markets, in private credit. That interests me because...

Like just how good is the underwriting? And you also talked about workouts and recoveries. It's Meyer saying that actually a lot of the recovery rate in private credit is higher than in high yield. Maybe there's a higher delinquency default rate for private credit, but when it defaults, there's a higher recovery rate because of the underwriting. Is that true?

I think that probably is true as a good generalization because I, you know, despite my 95% new folks on the bus point,

The reality is that these are extremely sophisticated investors that have started these private credit firms. And they typically, as I used my word earlier, came out of the 80s diaspora of the high-yield, wheeling, dealing, cowboy, M&A takeover that we saw, at least that we reflect back on. So I do think the underwriting discipline...

is stronger than what you would see in traditional banks. I think they understand how to approach and work with some of their portfolio companies they're lending to in order to protect themselves. And as a result, the hard part about this is that you don't see a traditional default ratio or default metric that is clean like most fixed income banks.

analysts are typically watching in high yield or in other types of fixed income segments. And that's because what I referred to earlier is that often with a private credit firm, they're working very closely with that management. There could even be equity kickers and other avenues by which they get some upside capability if things go well, depending on the kind of the life, meaning where they are in the

the private credit firm might have some access to turn these things into preferred or actual equity going forward. And so as a result, they're working very closely, kind of all standing around the laboratory and thinking through how do they restructure this? How do they work this out? How do they think through extending the debt, repositioning the debt? And so as a result, you don't get that clean delinquency rate. And that's what I'm saying is that because this stuff

occurs, not inappropriately, but a bit more cloak and dagger in the dark of a private book and not from a Fed perspective. When Silicon Valley Bank crashed

We saw the books. It's a publicly traded company. We saw that this thing, the spread squeezed and the old rule of not making sure that you go too far out on the yield curve came back to haunt them if things go the wrong way. We can't see that in a private book. And so we're trusting in

Starting where your question was, the sophistication, the experience and the discipline that those partners used in the underwriting terms. And I think most of them are probably just fine. I've just I have a feeling that we're going to start to see more news flow as we as we as we pursue these next couple of years and these private credit firms stabilize a bit from, you

from this interest rate back and forth. I think you're going to start to see some significant damage around the edges of some of the new folks.

And who are the borrowers? I know that actually a higher percentage than normal of the borrowers are technology companies, which is interesting. You're a technology company, you don't think of them as borrowers. But a lot of the debt is used not necessarily for operations, but to fund those buyouts in the private market. And if a private credit firm lends to a private equity deal, that is called a sponsor deal because private equity company is the sponsor.

That could sound risky, but that actually is typically seen as less risky than a non-sponsored deal where a private credit firm lends to a company that's just a company. It's not owned by a private equity firm. So tell us about what is the distribution of sponsor versus non-sponsor? And is that distribution changing and the various risk rewards between those two asset classes?

Well, I think the non-sponsor lending was largely to the way we started this conversation, Jack, non-existent. Again, at least in the way we're thinking about it, where you've got a dedicated private credit firm that is lending against cash flows of a company. This is what we typically call direct lending, right? That is a new business with a new category that is now being

assessed and allocated to as a separate asset class. And to your point, while sponsored deals are still a significant portion of this, again, what that means is that you're participating effectively in a private equity deal. It's syndicated out. You've got a portion of the capital stack and you're lending towards either the sponsor or the underlying company itself. Direct lending is by far the biggest of the non-sponsored deals. So that is overwhelmingly meaning

Jack, you and I start a company. We need access to capital. And so we borrow from one of these firms and we pay them a coupon, just as you would a traditional bond. And we go from there. Asset backed, I alluded to a little bit earlier, that is a growing and a very high interest because from a lender perspective, you actually have collateral. There's a real asset there you could

You could draw to, you can underwrite against, which is, I think, both comforting and makes for a structure of a loan that's a little bit more understandable and predictable. Again, when you're just lending against cash flow, there's a lot of uncertainty, right?

And then you're starting to see a lot of special situation stuff where you're lending against leases, you're lending against a purchase of a fleet of assets, let's just say airlines or boats. There's interesting stuff that fit within this private credit category, even though it has a slightly different flavor, which is insurance-linked securities, betting against basically acts of God, effectively.

So there's some really interesting stuff on the fringe and on the tails of this, but the large majority of the non-sponsor stuff is direct lending. But I'd say the most interesting part that a lot of firms are starting to build is this asset-backed lending. And these are heavier infrastructure, industrials-type companies that have buildings, that have assets, that have capital. They're capital-intensive, so they need the capital, first of all, to run the business. But they're not going to be able to run the business.

but they also have the capital as part of the collateral of receiving the loan as well. So it's a bit of a win-win. And I know Mark Rowan, CEO of Apollo, I've heard him say, he said a number, I don't remember the number, but a very high percentage of the credit that Apollo has on its balance sheet, I think, is investment grade. And so is it that infrastructure debt, that asset-backed lending, that is investment grade? And how is that perceived to be safer than...

lending without collateral. But lending without collateral sounds dangerous. But I remember I interviewed someone who's a big investor in collateralized loan obligations and all the capital stack. And he made a point that if you lend to Wendy's or Burger King, it's not collateralized, but it's collateralized by the name. And companies generally pay back their loans. And I think people look at the subprime mortgage bubble, and that was a huge bubble, but it was a

property bubble that was clouded by houses, that was a huge bubble. But generally lending to companies, they generally pay off their loans. And in a recession, even, you know,

even a steep recession, generally things end up okay. But then also on this investment grade side, I know there's a lot of lending to AI data centers. Now it's safe. It's not like that unsafe collateralized lending. It's now safe because we're lending against collateralized by property and Nvidia chips. But what if that blows up? Maybe that's not as safe. So just tell us about that growth as well as of investment grade private credit

Which I'm going to take a guess, three years ago, that phrase didn't really exist. I think that's right. I think that's absolutely right. It certainly wasn't uttered as common vernacular more than anything. You know, the technical definition is sometimes different from the phraseology we use and how common we throw these terms around.

I mean, let's go back, first of all, to again, for listeners, if they're not familiar with much of what we're talking about, our corporate finance courses in one on one. Right. The fixed income portion of the stack gets access to the capital in the case of the worst case of bankruptcy first before equity. Right. So let's remember that first, that in some sense, on some definitions, right.

fixed income lending is safer than equity. You don't get nearly the upside that equity has, but you're right. You're first in line as a creditor before an equity owner if things go south. So in many respects, you have to start with that, less risky. I think

To your point, too, is much of the direct lending that I've referred to is not happening with the Wendy's. And I know you're just using that as an example. So,

Direct lending to the Wendy's, they probably wouldn't need to pay to our earlier point, the 10-year plus 3% plus 2%. I mean, that would strain their balance sheet in ways that an organization like Wendy's wouldn't need to. These are typically small to medium-sized companies.

that are looking for capital to grow or to expand. Maybe to make an acquisition, but typically not. So the buyout lending as part of a sponsorship deal is, as we talked about, very different. These small and medium-sized companies, kind of the engine of the U.S. economy, is either getting funded through

what we now call, because we've got our own category here, growth private equity firms or private credit firms. And that is where most of the upside is, is because you're starting to see real cash flows. That's why it's now called growth and not early stage or venture, meaning it's more than an idea. It's more than a founder. It actually has a product. There are cash flows coming in. So to your point, you are lending against real dollars that are coming in the door. There are sales and revenues and profits that probably...

are available that you can study, that you can look at the time series and you can underwrite against. And so, but my point is, is that despite maybe the, the, the comfort of being able to have this, this throughput and see-through into those numbers versus a venture deal,

You've still got a lot of sensitivity when things go south because these are small firms and they're typically competing in a way that's still delicate if the competitive dynamics or the economy turns upside down. So I still think you've got to keep a proper perspective that while, yes, on paper, you

a direct lending loan against cash flows that are proven is probably stable, all else equal. There's a lot of delicacy on the exogenous factors and the external economy state that could turn that very quickly.

Now let's talk about the fundraising that the inflows into private credit as we have sought is just enormous. And that's part of why it is so-called the golden age of private credit. The other is of course the performance prep, perhaps those two are related, but what are the channels by which money has flown into? I talked about Harvard as the stand in for the endowments that there's foundations, uh, high net worth in individuals, but I know also insurance companies, they have a very large demand for yield. And now increasingly, uh,

retail through wealth solutions and the like. Tell us just about how that's going and where you see it headed.

Yeah. So you're right. Let me start with where you kind of ended, which is insurance, right? When you think about managing against the liabilities of insurance, fixed income instruments historically are the most appropriate. They're the best match of asset liability, which is all... When you're in the cockpit of running an insurance company, all you care about is matching of assets and liability. If I get one of these big events where I need to pay the Farleys millions of dollars, right?

I want to make sure I've got liquidity and I've got cash flow so I can pay out against those events. What you've seen in kind of the glory days that we've been talking about a bit over the last five to eight years is

traditional LPs, so university endowments, foundations, non-insurance LPs is what I'm speaking of, public pension plans, sovereign wealth funds that are starting to build, as I talked about the evolution and coming of age of this, their own private debt book. So they had access technically in their private equity book for years to these types of instruments in the capital stack of their private equity partners, right? But as I've said, you've now got dedicated individuals

yield exposure and return exposure now to private credit. And I would say overwhelmingly the last five years up to kind of 2022, 2023 was coming through some of those other forms of LPs catching up with insurance. And then you alluded to, I think the most interesting

which is you're starting to see interval funds, even ETFs being pitched. Currently in registered funds, the SEC limits in an ETF, 15% of those assets can be illiquid. So that's whether you're running a mutual fund of equities or a quote private credit fund of both publicly traded

private loans and privately traded loans. You can only go up to 15%. So State Street and Apollo, just to go back to your Mark Rowan reference, they've just announced a fund that would be a private credit portfolio of loans through the Apollo, but traded through the ETF structure sold through State Street distribution, which is really interesting because these are not

loans that are liquid daily. And the whole point of an ETF is that you've got always on liquidity, again, up to 15%. So I just want to make clear on that disclaimer. Oh, you know that ETF will only have 15% private credit loans? Yeah, an ETF. Yeah, that's still the regulation. Oh, okay. Yeah. Now on the interval fund, it's probably a better regulation.

liability match. Because in an interval fund, you have gates and you've got maximization of typically it's about 5% per month or quarter that is available for liquidity. So you can manage around having a much higher percentage of illiquid assets or loans on your book and not be caught

with this huge run of the bank effectively if a lot of people wanted liquidity at once, which is kind of the problem on paper with the ETF. ETF having any illiquid exposure starts to have a schizophrenia problem.

And that's why it'll be interesting to see how this plays out with some of these newer instruments that are publicly traded with daily minute-by-minute liquidity. The interval fund is probably a more optimal fit to have a significant portion of e-liquid assets. Can you explain what an interval fund is?

Yeah. So an interval fund is, it could be registered, could be not, by the way. It also could be available to what's called accredited investors only, which means you have to have a certain level of income. You could put gates on it so that you have to have high minimums, or it could be registered in retail for anyone that wants to take shape. So first of all, there's a lot of flexibility in how you kind of position an interval fund. But an interval fund has...

hence the name, only offers liquidity in certain periods, episodically. As I mentioned, the most common structure is quarterly access to liquidity. So if you and I are both co-investors in an interval fund, and both of us, for whatever reason, want to get some of that money back, we effectively apply for an amount of our investment

And then there's this clearinghouse of the provider that looks at all the applications. It kind of accumulates them all and then makes a decision up to typically 5%. They're not always written that way, but that seems to be the standard we're kind of anchoring to. Up to 5% of the total NAV is available for liquidity. And then you and I would hear back in my little illustration about whether we got all of what we asked for, a little bit of what we asked for.

or in some cases, none. So there's management of the liquidity. So you don't force a mass sale of these underlying illiquid assets, which of course would defeat the whole purpose of having illiquid assets in the book.

Thank you for explaining that. So I know there are ETFs that have quite illiquid asset in them. For example, municipal bonds and during the March 2020 COVID sell-off, I think the discount to NAV got as wide as 6%, which for municipal bonds is quite wide. And then of course, there's an ETF I'm thinking of that literally has a

seven-year option on a put option on a 20-year bond. So of course, you have to go to a bank and do that. So that's very liquid. But they are kind of commodity products, whereas the 20-year bond is a 20-year bond. Whereas if you have loan A, loan B, loan C, they're extremely idiosyncratic. So I could imagine that ETF being a little bit more difficult. So the State Street Apollo, yeah, I've been hearing about that. Is that live or what's the status of that?

Yeah, it's a good question. My understanding is that they're still in dialogue with the SEC on the approval because it is such an idiosyncratic, rare form of an ETF. An ETF offers a lot of great things at low cost. But I think both the regulators and the public and the media are still trying to kind of understand how this would work. So not surprisingly, this seems to be caught up

In a dialogue, my guess, Jack, too, is obviously because we're going through a transition of the SEC that they are distracted with some other things in getting the new the new SEC commissioner sat and the new group sat. So my guess is this is going to drag a bit more than usual. But as I understand it, it is not public yet.

Got it. Thanks for explaining that. There actually is, I think, a so-called private credit ECF. I'll be interviewing the CEO of the asset management company later this month. But they are private credit CLOs, which is a different asset class than the direct private credit loans. John, what is the vibe like in private credit and private equity now? I'd say two years ago, a year ago in private credit, I would describe the vibe based on watching Bloomberg as a bulliont.

just because I guess the inflows were so high, the performance was so good. What is the vibe like now? I think it's more measured. I think if there were pockets of hubris, that's been kind of flooded out in many ways. As I said, however, I don't know what the right adjective would be, but I'm still a little bit skeptical that the full flush of,

of some of the underwriting loans that occurred in the heydays of 2021-22 is completely gone. It just, it feels like we've stretched this out. And that is a benefit of private credit, as I tried to articulate earlier, is that you do have more levers

to restructure without just simply giving up because they breached a covenant with one payment, right? That you have in kind of a traditional fixed income instrument. I mean, your car company is not going to restructure your whole loan just because you missed one or you call them and say, actually, could we completely restructure this? And in private credit, you've got all this instrumentation in which they are aligned with you much longer term than

a car financing company or your mortgage company, for example. So I think that's part of it. It's apples and oranges with the way we're used to kind of assessing the state and the health of the fixed income business. And that's because the first cycle we've ever been through. So I think there's a lot of wait and see. You've got a lot of really brilliant

uh finance years that are as i as i've mentioned that are working through this but a lot of the new entrants i still think there's some rationalization that needs to occur in their books and we just haven't seen the headlines i expected

And so the rationalization, you haven't seen the marks go down. In other words, the credit spread is still being priced at 300 or 400 basis points above the Fed funds rate when maybe it should be a little bit higher. Or in terms of price, cents on the dollar, it should be lower. Again, as a public market investor, all I see is the general partners, those stocks going down a fair amount. But yeah, I mean, how much have we seen? I've read

the Bloomberg articles, the Financial Times articles about how private credit firm A and private credit firm B made the same loan to a different company, excuse me, loan to the same company, but they have them marked at different things on their books. Just how prevalent is that? And also, what gives you confidence when you say that we haven't seen the full flush? What is your thinking? What is the information behind that argument you're making?

Well, I don't think, by the way, and we have this debate a lot in both private equity circles and private credit circles. I don't think two companies that happen to be invested in the same instrument or organization that we should necessarily place an expectation on them that they're going to have exactly the same mark. I mean, think of the whole role of the public market ecosystem. You and I might look at, let's just use an earlier example you mentioned of Nike, which

and value it with a different price target. That's okay. That's what makes a market. And by the way, leaving aside some of the shenanigans of rating agencies through the GFC and some of that timeframe, the purpose of rating agencies is not to be uniform. It's actually to give a different kind of cacophony abuse of looking at the same underlying asset or in that case, organization. So I don't see that as a problem. I think it's a little bit

I hear that a lot, by the way, so I'm not responding to you. But I think that view that, well, they should all be the same if we want to trust them, I think is a little bit naive to how the public markets work. But that aside, the problem is we don't have systematic data to look at, I think is exactly my issue and my concern. I could end up, and maybe we'd all be celebrating if I am,

wrong on this, but the reason that we can't assess whether there is danger around the edges or restructuring or potential failings that need to occur in certain books is that we don't get access to the books. These private credit firms, the engine of small and medium-sized companies is now sitting within

dark pools is what we used to call them, right? Private credit firms that have no reason, have no obligation and don't share them with the public. They're not sitting on banks' balance sheets. Do they share them with LPs though?

Well, you're going to see some of it. You'll probably see who they're lending to. You're not going to see the terms and the covenants on every loan and instrument. I would be highly skeptical that in these LP agreements and quarterly reporting that you're going to see that level of transparency because that's their secret sauce, right? So again, I'm not judging them. I'm just suggesting that because we now do not have...

transparency and kind of spectacles into the books that used to drive our views on the stability of these books that I think we shouldn't be surprised if we continue to see workouts and structures that

that maybe are different from the headlines and the rose-colored glasses we sometimes hear in interviews. And what are you hearing and seeing in terms of the workouts? I know you said that you don't have the data into it, but also I look at JP Morgan, their annual report. They just report commercial and industrial loans.

And they report a default rate, they report a default assumption, non-accrual, non-performing, all this data. But it's not like, oh, I made this loan to this company in Pittsburgh, I made this loan to this steel company, the documentation either. So what is public about a bank, JP Morgan, that's not public for a private credit firm? And then also, again, I understand the lack of documentation you're saying, but what is

The lack of public documentation. There's documentation that just is with the firms. But what, again, this cautiousness, I say, you said about private credit, what is fueling that claim that you're making? Yeah, well, what you just described with JPMorgan, it's a publicly traded company. So even that summarized data and an estimate of potential write-offs, non-performing loans, whatever you want to call it, is not required of private credit firms. Now, you mentioned that there are a few companies

what you might call diversified private GPs that trade publicly, that have a private credit book, that the SEC would subject them to some level of summarized financial statement transparency. But the large majority, as I've already described, of private credit firms, at least these newer evolutions, these newer forms, are small boutique players, right?

and they are not publicly traded. So even that summarized data you just described with JP Morgan, which is far from satisfying to your point, wouldn't even be available. Again, I could be wrong on this. It's just when you look at where we've gone with interest rates and spreads, the bullish nature, the competitive nature of how quickly capital was being passed out in both equity and debt back in 21,

The reality that distributions aren't coming back, that's more than an anecdote. We know that exits because of valuations of these companies just aren't where they were

they hoped that we would be. We've still got a lot of dry powder that we have to work through. All of these kind of elements and observations together suggest to me that we've got some books in there that probably have a little bit more work that they need to kind of take out of their loan portfolio. And so that's all I'm saying is that I think this is going to be stretched out a bit more because you don't have this pressure

or metric of delinquency or default that you can easily point to and say, okay, it popped to 5%. We saw everybody kind of

clean up what they had, right? Covenants were broken, default. In this case, there is no measure we can look at. And even if we had delinquencies, as I said earlier, because there's so many avenues by which you can restructure things, not even that as a single metric is gonna be particularly helpful in this. - Thank you, John. Okay, so you said in private credit, a lot of the new credit is coming from startup firms that are not publicly traded. That's interesting to me because while I know that there's been a lot of growth in that area,

I thought that private credit was similar to private equity, where there's been a huge amount of consolidation of the biggest or second biggest firm buying out the 50th biggest player. And actually, most of the capital being raised is raised from the biggest players, the Blackstones and the Apollos of the world. Is that less true in private credit, where a lot of the dollars is flowing to the companies that are four years old or six years old?

I think yes. I mean, Apollo is one of the big four, right? But also had its, as with Carlisle, had its kind of infancy and childhood in private credit. So there are some major, major players. But back to my point on 95%, you had all these boutique single strategy private credit firms that just exploded from the ether.

back in the post the GFC, so 10, 15 years ago. And so the long tail of private credit is much longer than private equity. You have seen acquisitions, so BlackRock most prominently bought HPS, T-Row, and this was my point on convergence. You have old T-Row, right? Bought Oak Hill. You've had Jenny Johnson at Franklin Templeton buying up private credit capabilities.

But there's not been as much energy around the private credit. This is still a very fragmented operating industry or sub-industry. And so it's harder to get your arms around this one. Yeah, that makes sense. Thank you. All right, now let's turn to private equity, not private credit. I read an interesting article in the Financial Times that actually for the first time ever, private equity assets under management actually declined. I believe it was 2%.

And that is something that didn't even happen during the great financial crisis of 2008, probably because the capital had already been raised because I know there's a delay there. But what's going on in private equity? And talk about this phenomenon of a ton of money had been raised. It has been deployed.

The on-paper returns are quite high, MOIC, multiple invested capital. But in terms of DPI, distribution to paid-in capital, that is what the limited partners, the investors want. They say, how much money have you given me back of what I have invested? And there, that is where private equity firms are struggling. And the way that they have a distribution is they sell an asset. And there are three buyers of an asset that you could sell it to. You could sell it to another private equity company.

You could sell it to a strategic buyer, i.e. a company, or you could sell it in the public markets via an IPO. So yeah, take that journey, add what I've said to it. And then also, where do you think this is going in terms of distributions and what's going to happen for fundraising returns and DPI? Yeah, well, DPI has really dried up as we talked about a little bit earlier. When you've got that much...

new fundraising, dry powder, and even committed capital in the ground, it clogs up the system. This is the oldest story in the cyclical book, right? And so this is not

Completely abnormal, but we are still in this two to three year kind of stabilization where we're absorbing this massive inflow. And so LPs are complaining a lot about lack of access to liquidity. We talked about insurance companies. A more traditional LP usually still has liabilities, not as important.

as an insurance company, but a pension is paying pensioners, right? A university endowment is paying the school. They typically cover or subsidize a large portion of the budget. So that spending rate is carved off of the returns every year. And so without distributions on what now is, could be 30, 40, 50% of your book, meaning private equity, these are significant allocations from the last cycle. These typical CIOs and CIOs

and corpuses of capital did not have anywhere that big of an allocation to private assets back in the last cycle of the GFC. And so it's a completely different liquidity profile. And so they have had to do a couple things. They've either had to not re-up with their private equity firms, meaning not participate in the next round of fundraising, or not parlay the

their existing assets into a continuation fund. So when you have those decision trees, which only come once in a while when you're in a traditional drawdown fund, as I said, this is kind of an eight to 12 year life. When you get that decision tree for liquidity and you're really hungry for liquidity, you tend to call it back. And so what you've seen to your first point is a, and not massive, you've seen starting to see kind of a drift down

in total AUM and total allocations. Not because people have gone bearish structurally on private equity, but because they've had to kind of shore up their liquidity profile. And what you don't want to do is sell a lot of your public equity, right? Which only makes your allocations worse. Then you're going to have this arbitrary bump in the percentage that you have allocated to private equity. Your public equity is going to be too low because you're trying to pay your liabilities. So they're trying to solve for a number of different issues

And they just can't, they don't have the levers that are particularly nimble with private equity. So yes, we've got private equity at $9 trillion. I mentioned that private debt was about $2 trillion now. $9 trillion, that's about

40 to 45% of all of alternatives as we kind of define the space. And so that's a big number. It's nine of kind of 22, 23 trillion total in alternatives. It's by far the largest. It's double hedge funds now, which is shockingly given where we started this conversation where hedge funds was alternatives. That's at four to five trillion. It kind of has stayed there for the last five to eight years and private equity has exploded. So

A little bit of a breather is not a bad thing. A little bit of shoring up some of these allocations by the CIOs is not a bad thing. I don't expect that this is...

portending some negativity or less excitement about the role of private equity in a portfolio. It is just a response to the reality that DPI has dried up. They need access to liquidity to pay their liabilities. And maybe they're reassessing to the geopolitical point we talked about a little bit earlier, the types of managers they want to be involved with, maybe tightening up, concentrating their partnerships,

These are the types of conversations and anecdotes I'm hearing a lot from the big CIOs as far as their private equity book. If you're a fund manager or managing an endowment,

your bets are correlated. And if one bet goes down tremendously, then the other bet is a greater percentage of that portfolio and maybe exceeding the target weight. So not my base case, but if the stock market is cut in half, then what private equity was 40% of your portfolio, but now it's 60 or 70%. I'm not going to do the math. So

that could happen if the stock markets sell off. I should say, people have been calling for the end of private equity or doomsday for private equity for five or maybe even more years, and it hasn't happened yet. I think it will be with us for a long time. John, I'm so glad you brought up hedge funds because that is, to be honest, more related to what I talk about as well as with my consulting business. But what is going on with hedge funds? So they haven't grown in terms of assets. What

where is the money going? It had gone to the multi-strategy firms, the so-called pod shops. What are kind of the hottest trends right now? And yeah, what are you seeing with hedge funds?

Yeah, well, about five, eight years ago, maybe not eight, five to six years ago, you had this trend, particularly on the university endowment side, which, Jack, you probably know is typically kind of considered the smart money. They usually lead. They usually lead kind of counter. And this is personified in kind of the David Swenson and Yale model, right, is that the endowments have traditionally been able to take counter cyclical, countercultural options.

odd timing type bets in ways that other corpuses of capital have not had the luxury to do. And so you typically do see them leading the charge in these types of trends. And that trend five to six years ago was actually lowering or even completely getting rid of their hedge fund book. And I think that was a realization that hedge funds hadn't performed that well. And to be fair,

because the media often gets the purposes of hedge funds completely wrong. And I think the hedge fund PR machine didn't do themselves any favors for a long time either, is that often they just saw this glorified high-octane alpha opportunity. Now, some hedge funds strategies are positioned that way. Maybe global macro is one example where you're just trying to find that

bets with very unconstrained avenues for any type of assets and timing and instruments, right? Those would fit more and more in that category. But the majority of hedge funds are just what they say they're to do on the tin. I think we forget. Hedge is a modifier for funds. And the best hedge funds, at least the way that a CIO thinks about them, is when you've got

One that is long short, where perhaps it's trying to provide alpha or return in economic environments or market situations when the other books are going the other way. So when public markets are down, perhaps this is more stable, right? Absolute return capabilities are sometimes what you hear about this, right? They are meant to perform in all market environments. That doesn't mean they're going to perform

the same in every market environment, but better than what the market does in a down market and probably not as well as what a bull market would look like for the long only broader S&P 500, for example. And so I've started to see, as you think about this five, six year history where you had this huge pendulum swing of negativity and getting out of hedge funds, maybe in the late teens, because

The S&P has just skyrocketed and people were saying, why do I need this stuff, right? Why should I dilute my 60-40, particularly my S&P 500, with this stuff that hedges and slows down and provides a headwind against my alpha opportunity? You're starting to see, at least I think, the more sophisticated asset owners come back or increase assets.

very selectively those that truly are diversifiers. Again, the original reason for hedge funds is to truly provide absolute performance in all market environments in a way that allows for stability of returns so that going back to where we started, you can pay your liabilities, you can deliver on your investment incomes, whatever the purpose of that particular fund is. And at

as correlations have risen in risky assets, so when equity and debt are kind of behaving together, when private equity, although with a lag, is behaving largely together, it's all equity risk premia. It's just manifested differently. It's really nice to have some stuff, and fixed income used to do this decades ago, but it's really nice to have some stuff that is kind of performing in a much more stable manner and not subjecting itself to the volatility and the significant ups and downs. So

I actually would say that the sentiment is a bit more sanguine than it was even two, three years ago. That is very interesting to me. I'm glad to hear that because a lot of the people I speak to are in the hedge fund community. And what do you think it is? Because I totally get, okay, if the S&P is up 30% in a year and the average hedge fund is up

11% or a hedge fund is up 11% with being long, short and hedging all those risks. People say, why do I need a hedge fund? I'll just go in the S&P. So that is why people got less interested in hedge funds, let's say 10 years ago. But what is it about the past few years that have made people more interested in hedge funds? Because last year, I think the S&P did pretty much exactly 30%. Well, I think you have to realize that the last at least

12 years up until maybe a year or two ago have been a beta market. It's just risk on beta. Like why pay for high fee alpha generating strategies? And that could be the case for private equity, for active public equity, and for hedge funds. These are not cheap. These fees are expensive compared to a passive 60-40. And I think you were looking at that kind of

kind of cost benefit analysis, the average investor, and even the large LPs, institutional LPs and going,

What am I paying for? Right now, again, as the oldest kind of warning in the book, you know, things don't continue forever. And so I think we've entered with this volatility, with this uncertainty on geopolitics and trade and geographic blocks and where alpha is going to come from. We are entering into what I would say, Jack, is probably a more normal, even though it's been a long time,

a more normal capital markets environment where you are going to get paid for alpha again and finding these kind of dark places of opportunity that are either not covered well, not understood well, um, that, that, that, um, provide, uh,

outsize returns in a way that maybe the public markets won't. I think you'll probably start to see public markets a bit more muted than we've seen over the past 10 to 12 years. That was the exception. I think people that haven't been around the business very long don't realize that, but that the types of behavior and performance we've seen in the public equity markets are not normal. And so diversification, I think, is back. Alpha strategies are back. And so I think that's why hedge funds as a

piece of this total puzzle, not as the holy grail, but as a piece of this puzzle fit really nicely into a market that probably is going to be more volatile and uncertain. And a huge percentage of the growth and performance, quite frankly, for hedge funds was the multi-strategy

the pod shops, they have a series of low correlation bets and they, they lever them up a lot and they are very good risk managers with tight stops. None other than Ken Griffin, founder of Citadel, a giant hedge fund that has many funds and it has pod shops as well said that I'm going to paraphrase.

But a few months ago, he says that he thinks that the growth of the huge growth of the multi strategies is over. And that's kind of like peak pod shop or peak pod shop growth. Do you agree with him? And if so, where do you think the biggest growth and performance is going to be in the hedge fund world? If it's not in multi strategy? Is it going to be in global macro? Is it going to be in relative value? Long, short? What are your thoughts?

Yeah, I think he's probably right. I think this was more of an asset gathering story, the pod shop narrative, than it was a return benefiter. I think when you've got a lot of this stuff mashed together and then the general partners become effectively allocators across all of their strategies, that is hard to parse through when you're an allocator thinking through trying to fit

a very specific allocation, as I said earlier, to a strategy that's really going to provide something specific. And I think that specific opportunity, as I described earlier, is going to be much more in the absolute return area than relative return. I think most people are looking for their beta in a large portion of their public equity book and even a portion of their private equity book.

And so when they're assessing a set of hedge funds, what they're looking for is something to truly diversify against that beta, that risk on capability. And so long, short, absolute return, something that's going to be neutralized is a word you'll hear a lot with hedge funds, neutralized based upon market environment, market behavior. And I think

I would say, though, that hedge fund shops are probably getting much more scrutinized with harder questions than they were back in the heyday. I think LPs are asking, show me your track record in all market environments. Show me how you behave in this market versus that market. Are you truly this is, you know, for us traditional folks back in the 90s, we had these things called style graphs, right? Growth versus value.

And if you were assessing a publicly traded active mutual fund, right? Were they growth? Were they value? And it was easy for them to claim, self-proclaim whatever they wanted. But if you saw the portfolios behaving and the portfolio holdings drifting in a way that suggested they were actually more momentum and FOMO driven, they slip into value if things got particularly more disciplined. They slip up into growth if things got really

high flying, you see the same thing with hedge funds. And so I think as a result, if you're not showcasing a hedge fund, that is, that you truly are absolute return, that you truly are long short, that you're not expressing or allowing leakage into beta or momentum, then I think that's the new type of discussion that's happening with LPs. So I think there's more pressure

on hedge funds to showcase and prove their specific outcome that they're trying to deliver. John, final question for you is we haven't talked about venture capital. What's going on there? I do very, very few interviews in venture capital. It's private. It's hard to track. What is going on there in fundraising performance? Where's the money going?

So all the DPI discussion we had on private equity generally, multiply that by five, and that's what's going on in venture capital. Really? Wow. The level of froth and fundraising and bullish sentiment and allocations coming in to particularly the top venture capital firms, this is a very concentrated space, just like you were talking about the pod shops and the big private equity firms.

People want access to the big names. More than any other asset classes, the academic research has suggested that there is persistence with certain general partners. Now, if those general partners move from one shop to another, it follows the partner, not the firm. So there's a lot of personality-driven venture capital movements

magneticism that the best LPs want access to. And so you see the big firms that in 21 raised just enormous funds. Andresen Horowitz, we just did a podcast on crypto, raised a $4.5 billion crypto fund, Web3 crypto fund in 2022. So that gives you kind of a sense as to how big these venture capital firms have gone. The

The returns are fantastic, though, if you stretch it back a little bit more, despite the slowdown in recent years. So LPs are still very much hungry to get access to these top firms. I expect that this workout process, using a word I keep muttering here, has to play out in venture capital a little bit. There's not a lot of fundraising in the market right now. You haven't seen a lot of exits. The IPO market has largely dried up.

which of your three avenues that you articulated earlier, was probably the most common traditionally. And now you're either sticking with them through the growth stage or selling them to a growth private equity firm. And that's just harder when you paid a significant multiple in 21 and you're expecting a similar return, right? So all this to say is there's a lot of

inhibitors right now to make exits. And there's not a lot of fundraising happening. But venture capital, I think, is going to continue to be a very hot and sought after asset class for the time being. And do you think when the money goes into venture capital firms, who are they investing in? Are they investing in a lot of AI companies? 10 years ago, it's, okay, we're investing in Uber. I guess now you defense tech. So on the real and the types of...

defense tech companies, but what else is the new money going to towards the new deals?

Yeah, well, the SaaS software model is kind of what made true venture capital over the last 10 years, right? Recurring revenue, very high gross margins. That has grown into things like Web3 and crypto are very hot, particularly with some of the regulatory movement about this perhaps being finally, and this is not a meritorious judgment, just a fact, is it finally the golden age of institutional crypto adoption. So you're starting to see a lot of money being put to work and

in those types of categories, blockchain companies, picks and shovels around building kind of this new computing platform that could be blockchain. You are seeing defense kind of making America great again type of investment infrastructure. Semiconductors, this has been out of favor for a long time, largely because the semiconductor business, the infrastructure has not existed in the U.S., but now you're starting to see regulatory incentive, tax incentive,

And a lot of investment incentive coming through the Trump administration to bring some of this back to nearshore it for a lot of the reasons on the geopolitical side we talked about. And so you're starting to see hardware investment, which is a little bit outside of the traditional trend.

archetype of a VC. And then AI is an obvious one. They are spreading themselves across a lot of startups. The beauty of a VC, when you expect kind of one or two home runs out of 10, you're not ever batting or looking for singles and doubles like you are in growth equity or private equity. You're looking for a slugging percentage, right? You're going to swing 10 times. If you hit one out of the park, it's pretty darn good fund.

You hit two, it's career-making fund. And so they're spreading themselves. They don't have to bet on whether

open AI or one of its contemporaries or the Chinese or a European, they can place their bets everywhere. And so VC firms are spreading themselves across this environment and ecosystem of AI, and that's becoming very, very popular too. That makes sense. John, as we close, tell us what are you most excited about this year with Kaya? Is it the podcast? Is it the events?

Well, I think, you know, I'm a 10 weeks in Jack, grizzly veteran, as I said, to the CEO seat. So got big shoes to fill. And we're working with our board as, you know, most new CEOs do on a new 10 year strategy. I'm actually in the board meeting in L.A. next week talking with them about how we're really going to scale this business and create more credibility and impact.

So what I'm most excited about is kind of aligning and solidifying what our future looks like. And we've got a lot of support from the board. We've got great relationships with LPs and GPs. And I think our future is bright to be a really important place.

lever and conduit for this business to continue to serve investors, which is really why we're here. So I'm really excited about this year and we'll continue hopefully to be making more noise and getting more notice and providing education and professionalism as we always have. And people can find you on Twitter at Bowman John L. And you are also the host of the Capital Decanted podcast, which we'll link in the description. And of course, the website is kaya.org.

John, thank you so much. Thank you, everyone, for listening. A reminder to check out my podcast, Monetary Matters, on YouTube, Apple Podcasts, and Spotify, but also my business partner, Max Wheatley's podcast, Other People's Money, where this will be airing as well. Max interviews some of the best performing hedge fund managers in the space and in particular about

how to grow and scale their business, not just about finding the next big trades, but actually how about connecting with an investor base, growing your organization and the like. Thank you. Until next time. Thanks for listening. Hope you enjoyed today's episode. Remember to check out FinTool to take your investment research process to the next level. Until next time. Thank you. Just close this door.