Eric Mogelof – KKR's Pivot to Private Wealth (Private Wealth 3, EP.446)

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3:12Hello, I'm Ted Seides, and this is Capital Allocators. This show is an open exploration of the people and process behind capital allocation. Through conversations with leaders in the money game, we learn how these holders of the keys to the kingdom allocate their time and their capital. You can join our mailing list and access premium content at CapitalAllocators.com.

4:02investors held most of their assets in stocks and bonds. David Swenson led a movement to an approach to portfolio management that broadened the asset mix to alternative investments, including hedge funds, private equity, venture capital, and real assets. These days, almost every institutional portfolio incorporates significant allocations to alternatives to produce better outcomes with similar risk or similar outcomes with lower risk. However, capital in the hands of individuals has not yet followed suit. Private wealth portfolios, particularly the so-called mass affluent, typically hold only 2 % to 5 % of their assets and alternatives, compared to a range of 20 % to 50 % for institutions.

4:46But that's changing quickly. Innovations in structure have allowed individuals to access alternative strategies at lower minimums, with liquidity options not previously available. According to Arctos Partners, the six largest private banking and wire house platforms committed$110 billion to funds last year, approximately twice the amount invested from the six largest institutional investors in North America. And those flows are just beginning. The potential investment dollars from private wealth to alternatives are staggering. Every 1 % asset allocation shift would equate to approximately$500 billion of new investments.

5:29The impact of these capital flows will have ramifications for GPs and LPs for decades to come. How will the capital get deployed? What will it do to asset prices? What will it mean for returns and for fees? And who will win and who will lose? This miniseries, Private Wealth, explores the important questions raised by the accelerating convergence of institutional-style investing with private wealth. We'll hear from three of the most influential asset owners, one each from the private banking, wire house, and RIA channels, and three of the most significant asset managers playing in the space. Just as this channel is in the early innings of changing the investment landscape, so too will this miniseries be just the beginning of our exploration of what it means for you.

6:23My guest on the third episode of Private Wealth is Eric Moguloff, the head of global client solutions at KKR, one of the world's leading alternative asset firms with roots in private equity dating back to 1976. KKR currently managed$640 billion in assets across approximately$250 billion in credit,$200 billion in private equity, and$160 billion in real assets. The firm's objective in private wealth is to deliver the same strategies, performance, and quality of experience to individuals as it does institutions. Our conversation shares how a longstanding brand in private equity has adapted to serve the Wealth Channel in the last five years.

7:09We trace Eric's path to KKR after a long run leading private wealth at PIMCO, the growing demand for alternatives among individual investors, innovation behind evergreen structures and interval funds, and importance of brand, customized products, and advisor education. Eric shares how KKR is investing in marketing, digital engagement, and on-the-ground sales to reach advisors globally, and the firm's partnership with Capital Group to expand access for non-accredited investors. We also cover the competitive landscape and the opportunities and challenges of making alternatives more accessible to a broader range of investors.

7:50Before we get to the interview, a quick announcement. We've set new dates for our Capital Allocators University for investor relations and business development professionals. Those dates are December 3rd and 4th in New York City. Later in the year is just a better time of year for this gathering. It's post-AGM season, travel starts to wind down, it's right before the holiday crunch time, and it's a great time for capital raisers to reflect on their previous year and plan for the year ahead. December 3rd and 4th in New York City. CAU for IRBD is a closed door gathering for capital raisers to connect with peers, learn from allocators and other experts, and really share in best practices with each other.

8:28You can learn more at capitalallocators.com slash university. Thanks so much for spreading the word about Capital Allocators University for investor relations and business development professionals. Please enjoy my conversation with Eric Moguloff. Eric, thanks so much for joining me. Oh, Ted, thank you very much for having me. I'd love to have you take me through your path to getting into private wealth. Absolutely. It was a little bit of a longer journey for me. Out of college, I went to work on Wall Street. I went to work in investment banking and then private equity. And the things I really liked about both was the engagement with clients.

9:06And so I headed back to business school. And when I tried to figure out, quote, what I was going to do with my life, I decided, hey, I want to work with clients. And I ended up joining PIMCO as a relationship manager. And at first, I started out on the institutional side, covering pension plans, foundations, endowments, and insurance companies. And I got to learn about how institutional investors think and act, asset allocation, portfolio construction. And over time, I migrated from that role to another role, but eventually ended up leading wealth in the U.S. for PIMCO. And that's where I really got to learn about the wealth business.

9:43And it was probably my favorite job I had at the firm. What years was that when you started focusing on wealth? I came back from Asia in 2017 and was there for about three or four years leading wealth for PIMCO. How did you define what that landscape looked like eight years ago? It's interesting. When people say wealth, it means something different to different people. In my book, there are really three components to the wealth market. There is what I would call the ultra, ultra high net worth family office component. Those are typically professional buyers of investment solutions. They tend to have their own infrastructure, their own CIOs, and in a lot of ways make decisions like institutional investors.

10:32The second category that we think about in wealth is the wealth that's financially intermediated. So we think of those individual investors that utilize financial advisors or financial consultants or some type of platform to help with investment management. And then the third category that I would consider is the self-directed individual investor. So those investors don't use any formal financial advice. Obviously, in the asset management business, for the most part, the focus is usually on the first two categories. But over time, you might see different people focusing on different parts of that market.

11:08What did you see about how to address, particularly the second two? Because I think the institutional market looks a lot like the ultra high net worth market. Sure. one of the reasons why I really loved getting into the wealth market was because at the time I moved over to lead wealth, the market was really changing. There was this real important inflection point. We talk sometimes about this idea of wealth going from 1.0 to 2.0, but the intermediaries and financial advisors all started to become much more sophisticated when it comes to portfolio construction and asset allocation. Also at the time, we started to see this real transition of financial advisor business models.

11:49If you think about it, years ago, most financial advisors were really portfolio managers. They would develop portfolios for their individual clients, usually incorporated individual equities, individual bonds, and they were really portfolio builders. If you fast forward, we're really seeing business models change dramatically, financial advisors now have a much broader value proposition that they are holding out to their investors. Sure, they're building portfolios, but they're also providing financial advice and planning, tax perspectives. Sometimes they're a financial concierge, sometimes a financial referee, an educator, an advisor, a therapist.

12:31And so for an advisor to be able to do all of those things, they really need to evolve the way they do the first part of that job, which is to build portfolios. There, they're starting to rely much more on model portfolios, advice, and support. That was one really big change that we started to see five, 10 plus years ago. The second change really relates to how asset managers engage with the financial advisors and financial intermediaries. In the U.S., there's over 300 ,000 financial advisors. It's unlikely that any asset manager is going to build a sales team that could touch every single one of those advisors.

13:12All of a sudden, data analytics and marketing became much more important in figuring out how to engage with advisors and how to support advisors. And so that was some of the reasons why I started to get pretty excited about the wealth market. What happened as you dove into that that led you to move from PIMCO to KKR? Gosh, I had been at PIMCO for 17 years. I never thought I was ever going to leave, but I got a call to meet some of the folks here at KKR. Part of my decision-making process was this idea that within the asset management and specifically within the wealth space, the demand for alternative investment solutions was only going up.

13:53So having an opportunity to work at a pure play asset manager that focused on alternatives was pretty exciting. Also, what was really exciting was if you looked at KKR five years ago, the firm really had built out world-class private equity, infrastructure, real estate, and credit investment capabilities. But the firm really hadn't built out distribution to really take those investment solutions and deliver them to a broad array of investors. The opportunity was to come here and really help build out distribution, which included wealth management. It was pretty exciting to come here. The people here are exceptional.

14:30Just really amazing culture, collaboration, and just some really talented folks here. How do you think about how big this opportunity is, this movement of private wealth assets into alternatives? There are so many numbers that are painted out in the marketplace in terms of what the opportunity set could look at. Here at KKR, we're really focused on just delivering investment solutions to our clients. We don't measure success like in AUM perspectives, but if you were to try and size the market, here's the way I think about it. If you look at the typical institutional investor, you can see that they are allocated to alternatives and private markets anywhere from 20 to 30 to even 50 % of their portfolios.

15:15If you look at the wealth market today, that number is 2 % to 3%. Maybe there are some good reasons why, on average, it's not going to reach 50%, but most individual investors can give up some liquidity. And for those investors that have longer horizons, they should be able to benefit from exposure to private markets. Based upon our conversations with wealth platforms and advisors, we think that 2 % to 3 % should ultimately be 10%, 15 plus percent. And if you were to do the numbers, that just means that there's literally trillions of dollars of money that's in motion. And that doesn't even incorporate some of the other pockets of wealth that you might see, for example, in defined contribution and 401k space.

16:02Hard to put a number on it, but I would tell you that it's an enormous opportunity over the next five to 10 years. As you look at trying to service that client base, you mentioned the intermediaries and then self-directed, two can be very different decision-making units. How do you think about putting that together and trying to figure out what they want and need? Today, our focus is on the intermediary part of the market. So we don't engage directly with investors. There are a lot of really great companies that have built out direct-to-investor models. We want to participate in that by simply having our investment solutions available on those platforms.

16:40But in terms of us at KKR engaging directly with individual investors, it's just not our value proposition that we can deliver. Our focus really is on that intermediary part of the market. To be successful in that part of the market, you really need five things. You need to have a brand. Make no mistake, brand's important no matter where you are, but within the wealth space, brand is really important. At the end of the day, that financial advisor is going to be sitting across the table with an individual investor, and he or she needs to understand all the different things that are in his or her portfolio, and so brand matters.

17:13The second thing is it's really important to have real quality investment solutions that are customized for wealth. Historically, this industry had taken some of the institutional investment strategies and just plugged them into the wealth channels, and that's okay. And for some individual investors, those drawdown or institutional vehicles might make sense. But for the large majority of individual investors and the financial advisors with whom they work, you really need a customized wealth product. The third thing that I think you need are real relationships with home office platforms. At the end of the day, you need to have relationships with some of the intermediaries that are curating what is going to be available on a platform.

17:59But then once you have that, you also need to have boots on the ground sales professionals that are engaging individually with advisors to help them understand the investment solutions and how they fit into portfolios. And then the last thing is you actually need real thought leadership and education. One of the biggest challenges that the industry will have over time is ensuring that advisors and investors understand how alternatives can be incorporated into portfolios and importantly, the risks and benefits that those investment strategies offer. We've been investing in all five of those areas.

18:34Let's walk through each one and walk through what you saw when you got here and how it's changed since. So just start with brand. One of the things that attracted me to KKR was the incredible brand that we have here at the firm. We've been operating for close to 50 years as an investment manager that's focused on multi-asset alternative investment solutions. And we have a time-tested investment process that we've been delivering out to the market. While I would argue that perhaps we weren't as well-known among wealth investors, we have the background, the experience, and the high-quality investment solutions that it takes to be really credible as a wealth provider.

19:17So what we've been doing at KKR is really investing in taking that brand and making sure that the wealth market fully understands what we can deliver to them. That was one area where I would say it had a big green checkmark at KKR in terms of the brand that we can have and offer to the marketplace. How do you go about doing that, making sure you're not a tree falling in the forest? When I first got here about five years ago, we actually didn't have a marketing department. I remember I got here and was really excited to be on the ground and meeting lots of my new colleagues. And I remember asking someone, hey, can you introduce me to someone in our marketing department.

19:52And they turned to me, they said, isn't that you? And I said, well, yes, we are sales and product strategy, but no, we need to build out a skillset around digital marketing, channel marketing, product marketing, brand. So the firm said, hey, if we need it, let's go build it. And so we ended up building out a fully staffed marketing effort. And through that effort, we are engaging in so many different ways to connect and reach out to advisors and ultimately make sure that the KKR value proposition is well known in the marketplace. We've got about 25 people here at KKR that are dedicated to focusing on engaging and delivering that broader client experience.

20:30What are some of the ways you've done that differently, clearly hadn't been done in the past? There are lots of different ways. One of the ways is we've built out a real robust digital marketing effort. There are 300 ,000 financial advisors. The sales team can never touch every single one of them. But if we can take some of the content that we have and we could package it and leverage digital marketing to reach at scale a number of different individual financial advisors, that's one great way. The second thing that we've done is we've really elevated the client events and client experience that we offer.

21:03For example, we do a KKR Academy where we bring advisors to KKR and we talk to them about our capabilities and our investment solutions. The marketing component of that is really important. It's the brand, it's elevating the experience that advisors have. And then there is all kinds of other marketing techniques, paid search, and all these other ways that we can really elevate KKR. One last thing that we're super proud of is that we've created a digital education experience. It's called Alternatives Unlocked. And that's a fully multimedia digital experience that advisors could come on, get continuing education credit.

21:41It's accessible also to individual investors as well. And we think that's a really great way for us not only to help educate the market, but also elevate the brand. Have you thought about the top of the funnel pure advertising? We don't do a whole lot of pure advertising. We do a little bit of it. And the reality is that we will do things on LinkedIn and other social media and we will try and target. But the reality is we don't do a whole lot of it today. But that might change over time. Let's turn to this concept of customization. What's changed from the traditional structure that private equity had been delivered to institutions to make it more accessible for private wealth?

22:25I think it's a combination of two things that have happened. It's a combination of innovation on the vehicle front and then also technology. But if you think about it, these historical drawdown vehicles, number one, they're only eligible to qualified buyers. So there's a limited universe of investors that would even be eligible to invest. The second part is it's a very challenging administrative burden to actually allocate capital to a drawdown vehicle. The subscription documentation process is pretty extensive, and there's a lot of hoops that individual investors would need to go through. If you're a large sovereign wealth fund or public pension plan that is used to doing these things and obviously an eligible investor, no problem.

23:10But if all of a sudden you're a financial advisor and you work with 300 clients and maybe only a couple of them are eligible and they've got lots of accounts and it's complicated, all of a sudden that's a pretty huge barrier to allocate to an alternative investment solution. Over the last several years, however, innovation in vehicles has really made a huge difference. Through whether it's an interval fund, a tender offer fund, a non-traded BDC, an operating company, there are now a number of new vehicles that asset managers can utilize, which really widen the aperture for investors to invest.

23:46And that includes not just qualified buyers, but also accredited investors. And then for some vehicles, all the way down to the non-accredited investor. The other thing is technology has also played a part of this. Even these evergreen investment solutions, some of them do require subscription docs. But through simplified docs, as well as a technology solution, onboarding these into an advisor's client base is a whole lot easier. Both of those things have lowered the barriers for advisors to allocate client portfolios to alternatives. If you look across the different strategies that you offer, private equity, credit, infrastructure, what's changed that goes into these vehicles compared to what you delivered in the past?

24:32That's a really important question. Every asset manager has approached their wealth effort differently. I can speak to what we do at KKR. All of our evergreen investment solutions have the same investments that you would find in our drawdown vehicles. And that's a really important differentiator. When we decided five plus years ago to really build a wealth effort, we had two options. Option one was to go and create investment solutions that invest in things other than what we have already been doing or go through the really complicated challenge of structuring these vehicles, both the drawdown vehicles and the wealth vehicles, so that they can invest peri-passu.

25:20And we said, look, we've had this time-tested investment process for five decades. We would love to be able to offer the investment capabilities that we built and honed to our wealth investors. So we went ahead on all of the investment solutions we offer. They all essentially share deals and share transactions with the institutional vehicles. I'd love you to walk me through an example of how to make it work. Sure. If you were to look in many alternative firms, especially private equity and infrastructure, they typically follow a waterfall approach where you may have a flagship strategy that is first in the waterfall.

26:00And then second in the waterfall, maybe there are other strategies that could participate in a deal. And then maybe third in the waterfall, you could offer co-investment. Most alternative firms, their first in the waterfall is always just their institutional vehicle. We have created in our documentation that first in the waterfall to have an allocation to our wealth vehicles as well. And that takes a lot of forethought because if you think about it, when you launch your drawdown vehicles in the documentation, it will stipulate that waterfall and that priority. So years and years ago, we said, hey, we want to make sure that we can carve out some allocation for our wealth investment solutions.

26:42That's one example of what we've done to make sure that we can share that priority. How do you think about the potential for dilution of the quality of return when, if in fact, all of this money does come in, you have that much more money you have to put to work across these different pools? First and foremost, we're focused on delivering investment performance to our clients. The minute you start to dilute that is the minute that you no longer are consistent with your brand. And you're no longer consistent with your value proposition. I think first and foremost, asset managers always need to make sure they're delivering what they promise they're delivering.