Alternate Investing: Masters in Business with Kristin Olson

25:30That has to be like a giant lift, especially if you have a few hundred managers on the platform. Yeah. Look, I think most investors need to seek the help of a professional organization that can help them do that diligence. So I think for us, we have a group called our External Investing Group. It's over 400 people globally. It's 250 people doing manager selection and diligence. And so we like to deploy that team to do the fiduciary diligence and all of the outside managers that we're partnered with. And that's a pretty intense process, right? Each manager is going to take a couple months to do the diligence.

26:07It's going to go through an investment committee process, right? And as we know, like you look at a track record from a manager, you really need to dig in and understand kind of what's behind that track record, right? lots of caveats sometimes. And so that's the work that they're doing and going to their investment committees and getting approval. So we work with that team to diligence the managers that we think make sense for our clients. So I'm going to guess there's some analysts, some lawyers, some compliance people, some regulatory specialists. Like this isn't the sort of thing that the average investor can undertake on their own.

26:38You really need a team of professionals to dive in. I think you want to have the advice of professionals. The other part that we've found is we talk about diversification being so important. So when we think about an individual investor, I always think there's a couple of vectors of diversification for them. One is diversification of strategy, which we talked about under the Alt umbrella. Number two, diversification by manager. You want to work with different managers. And then diversification by vintage year. So we think it's very important for clients to be pretty programmatic about making allocations every single year.

27:09Because, again, you don't want to market time. You don't know when the best opportunities are going to be. And actually, it's usually when times feel the worst, it's probably the best time to be allocating, right? Always, right, right. And so, you know, and then when you dial that back, you might be needing to make 10 commitments a year, 15 commitments a year. How can you diligence enough managers to decide that you've picked the best one, right? And so it gets very challenging and very complicated. And that's why you see a lot of individual investors partnering with an advisor or an advisor that has diligence capabilities to help navigate them through who are the best managers in each of those lanes.

27:42So diligence is the first step, and that is all the legal and other paperwork that has to be done. Let's talk about risk assessment. How do you figure out when you're looking at a variety of different investment strategies and managers, hey, how much bang am I getting relative to the risk the client is assuming in this investment? It would seem that's really challenging also. So, yeah, look, I mean, there's things you need to look at. Obviously, you're going to look at the track record over time and you're going to look at the stability of the team. And do they have all the fundamental things that lead to a repeatable investment process?

28:19Right. Which should argue that you could rely on that track record as being hopefully something that you could look at that could be repeatable in the future. Right. I think the other important part is what's the concentration of that strategy? Right. How many investments are they making? Is it highly concentrated? Is it more diversified? So, for example, one thing that our clients have been longtime investors in is secondary private equity. And one of the interesting things about secondaries is underneath one single fund, you may have thousands of companies. So you have a tremendous amount of diversification.

28:52And because secondaries, if you thought about secondary private equity, it's already partially invested. So most traditional private equity funds, it's a blind pool, right? You're committing capital that's going to invest over the next five years. Secondaries allows you to take a look at some of the money that's already in the ground and actually buy that theoretically at a discount to what fair value is, right? So there are two types of secondaries that I'm familiar with, and I want you to comment on this. One of them is, hey, a co-investor in a fund suddenly has a change in their liquidity needs, and hey, we're willing to sell this for 15 % discount from what the last closing date was.

29:30so you get to buy in an earlier vintage at a discount. That's one secondary. Is that something you were talking about? Yeah, so that's an LP secondary, right? It could be a big institution that for whatever reason wants to - We saw that earlier this year. Rebalance their portfolio, big university that has liquidity needs, right? We'll look to go and get liquidity in the secondary market. It could be individuals. So that's sort of a traditional LP secondary. So the other thing I occasionally see is, hey, one of our portfolio companies suddenly is adding this or pivoting in this direction, and we're comfortable with how much us as a fund are putting into this company, and we're going to continue maintaining this investment, but they need additional capital.

30:12Do you want to do a one-off side pocket, or people call it all sorts of different things? How often do you see that sort of thing come up? Yeah. So when you look at the secondary market, you have the LP secondaries, which you just talked about. The other would be GP-led secondaries. So that's not initiated by the LP in the fund. It's actually the manager of the fund, to your point, saying, hey, we have a company that we don't want to sell right now. We want to continue to own, but we need to find new capital to fund it, right? So you might want to take out some of the old investors. The GP might want to roll their capital, roll their incentive fee.

30:43So that's the GP-led secondary, also called a continuation vehicle. Many times you're hearing a lot about this. And so that's another part of what we do within our secondary franchise that our clients have exposure to. Really, really interesting. Coming up, we continue our conversation with Kristen Olson, Goldman's Global Head of Alternatives for Wealth, discussing the state of alternative investing today. I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio.

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32:28I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio. My extra special guest is Kristen Olson. Kristen is the global head of alternatives for wealth management clients at Goldman Sachs, a position she's held for 24 of her 27 years at Goldman. So before we get into the state of alternative investing today, I'm fascinated by this big survey you guys do each year, over a thousand clients and other people participate in it. And some of the answers that come along are kind of expected. Some are really kind of surprising. Let's go over a few of these because they're really fascinating.

33:09So first, your survey reveals wealthy individuals adopt alternative investments as their net worth grows. That wasn't a surprise. Not surprising. But some of the specifics, some of the percentages were really like, wow, look at that. Tell us a little bit about the response you get to that survey question. Yeah. So, well, first I would say this is our inaugural survey. This is the first time that we're actually surveying a broad universe. Put me on that list. I want to see that data every year. I'm a junkie for that sort of stuff. And I think part of the impetus for that, too, was just what we've talked about, sort of the incredible interest by individual investors in figuring out, should they invest in alternatives?

33:50How do they invest in alternatives? And so that was sort of the impetus to this opening the door to alternatives survey. that we just did. I think the data that you mentioned is not surprising, obviously, from my seat, starting with ultra high net worth clients. I've been investing in alternatives for 25 plus years. I was surprised by down the wealth spectrum, the fact that there's a fair amount of participation all the way down to the$1 to$5 million clients, right? And I think as it becomes easier for these individuals to invest in alternatives, and as there's more education around it, those numbers are going to continue to go up.

34:27So I'll tell you what surprised me at first blush. And then as I thought about it, made a lot of sense. Millennials are at the forefront of a significant shift in investment behavior towards alts. And as I began to think about it, hey, these are the kids who more or less came of age right into the great financial crisis. They're like, wait, stocks can go down also. So I'm not terribly surprised by that once I thought about it, but still how significant of a shift is this? Look, I think it's one to watch. Obviously, we're just starting to see it and digesting the survey results. But one part I think about as millennials is their interest in accessing innovation, right?

35:08Like this is a digital first generation. No doubt. And so when you think again to earlier comments, how do you access innovation in healthcare, in tech? A lot of that is in the private markets, right? And so I think part of that also might be the reason why you see millennials, you know, being more inclined to alternatives and being sort of kind of this shift in behavior. So let's talk about the percentage of people whose wealth is professionally managed. And obviously the data set that this question goes to is pretty significant, but 59 % of wealth amongst a thousand individuals surveyed were professionally managed.

35:48And I kind of scratched my head about that because my assumption has been amongst the ultra wealthy, it's even higher just as a matter of, hey, I don't have time or interest in this amongst most people. They're running their business. They're continuing to accumulate more wealth. But I'm curious about who is the data set this went to and what do you think of that 59 % number? High, low, somewhere in between? Well, so it went to a thousand investors, million dollars of investable assets plus and 25 years old or older. So not necessarily Goldman Sachs clients. So not necessarily the ultra high net worth.

36:25And frankly, part of the intention was to try to get a better sense for the broader individual market, not just the ultra high net worth market. I think we have a long history in our wealth business. We know the ultra high net worth space very, very well. And I think in that space, if we were to run the survey, I mean, very high percentage. 80, 90 percent. Exactly. Something like that, right. So my guess is that not professionally managed piece are more self-directed at the lower end of the wealth spectrum would be my guess and maybe younger. Right. When you see BlackRock at$12 trillion and Vanguard at$11 trillion, hey, someone's running their own portfolio.

36:58So it would make sense, 41 % or so of people, if not more, are doing it. It's really interesting to think about what is the mass affluent doing? What is the high net worth doing? What is the ultra high net worth and multifamily office doing? I think as you go up that scale, is it safe to say most of them are working with professional advisors? Is that the... That would be my guess, for sure. The other part is, if they're self-directed, and there's some of the other survey data that also shows that, I think, something less than 50 % of advisors have even brought up alternatives with some of the people you surveyed, right?

37:33And so you have the self-directed that probably are not accessing alternatives, because it's very hard to do that without an advisor. And then you only have something less than 50 % of advisors bringing up alternatives. Like, this is where the opportunity is, right, on educating the advisors to feel more comfortable talking to investors about alternatives and obviously then educating the end investors. So one of the questions you ask led to an answer that I adore because I'm constantly saying to not only the people I work with, but other people, your clients aren't telling you the truth. They have money away from you.

38:09Your wallet share is much lower than you realize until you're with the same advisor for five or 10 years and the client is comfortable in shares. But I love this data point. Households with$10 million and up in investable assets typically engage two different advisors compared with one advisor at the mass affluent and high net worth groups. Tell us a little bit about that dual advisor approach. We're not saying two people at the same firm. These could be two completely different firms. I think as people go up the wealth spectrum, They want to have different options, different viewpoints, have some capital at different firms.

38:49A little diversification internally. Exactly. I do think, though, from my experience on the wealth side, ultra high-endware side at Goldman, it does tend to be that over time, though, there is a lead relationship. Right. And I think as you get higher up the wealth spectrum and you have more complexity in your portfolio, a lot of that namely coming from alternatives, it becomes more and more imperative to have somebody that's the quarterback or the driver, you know, in the pole position as opposed to, you know, as opposed to two people both managing parts of the portfolio. You don't want overlap.

39:23You don't want, you know. You don't want overlap. And you also want, you know, we talked about how hard it is to build these alternatives portfolios. Mm-hmm. You know, doing that in two places and how are you managing the liquidity and how are you knowing how you're actually allocated overall? I think you start to see this shift to one advisor really being the lead advisor and the other advisor maybe being a secondary advisor. So as much as I thought that was a fascinating data point, this one kind of terrifies me. Millennials cite social media more often while boomers rely on traditional media outlets for their investing and financial planning information.

40:00Social media? Really? Well, you know, one of the things that I say, and I'm definitely not a millennial, but, you know, if you go on your LinkedIn feed, You see videos on Instagram from major alternative investing firms, right? And so you can see why money is – I don't know what percentage of their time they're spending on social media. But naturally, these ads and these videos are getting served up to them there. So it seems logical to me then that that's where they're going to – Well, LinkedIn is probably the most credible of all the social media outlets. But I think of TikTok and Instagram and Twitter.

40:36a couple of years ago, the IRS put out a list of 40 tax statements that they had culled from various social media that were wrong, some of which would lead to penalties, interest, or jail time if you followed them. And they literally, here are 41 things that we got from social media, do not do any of these things. So that's why I say I get a little nervous when I I see millennials are citing social media. LinkedIn of all the places seem to be the most credible because it's business oriented. Not some wacky guy telling you that if you're on a boat offshore on April 15th, you don't owe any taxes.

41:18That was the one that really stayed out with me. So that's all I have to do is just be out on the water April 15th. Could have saved myself a lot of money. I think it all goes back to the number one thing that I think we're focused on with respect alternatives and individual investors, which is education, right? Absolutely. And so, you know, hopefully they're not getting their education off of TikTok. But, you know, all of us need to think about how do we better educate around the role of alternatives, the risks of alternatives, how you invest in alternatives. And so I think we're spending a lot of time thinking about advisor education and client education.

41:54And by the way, education that we roll out on social media, right? Because if that's where they are. Right. You got to meet them where they are. Absolutely. That's where we're going to have to put the education. So let's bring this back around to alts today. Let's talk about themes. What are you most excited about in private markets? What's new, interesting, and, you know, thrilling? Can I use the word thrilling to talk about alts? Well, look, I think when you say thrilling, I think about all of the innovation that's happening right now in technology. Obviously, how can we have a podcast and not mention AI on any topic?

42:27I'm not familiar with it. Tell me a little bit. I haven't heard enough about that. But look, I think that what we're seeing in terms of the incredible advances in AI is bringing back a lot of risk appetite to invest in venture and in growth and to participate in what they think is going to be, you know, transformational technology advancements, you know, around AI. And that permeates not just the venture tech and growth space, but how AI is going to transform traditional businesses, right? So I think that segment is quite interesting. and then a lot of the other things that we think are interesting are a little more not thrilling which was the word you used.

43:03Maybe that's the wrong word but what's really interesting with great growth potential? Well, look. That's thrilling to me. Yeah, so look, I would say we talked a little about secondaries. We really like secondaries because again, if you think about the primary markets growing, right? More money's going to alternatives. That naturally means the secondary market's going to grow, right? It's a spillover. It's correlated to the growth of the primary markets and alternatives. So there's more opportunity there. And we really like the risk return for clients there in that segment. So I think that's one space that we very much like.

43:36What else would I say? You mentioned real assets. And very often when you talk about real assets, I think that has morphed over the past decade and evolved. I used to think of real assets as timber or coal or whatever. but now it's things like infrastructure and data centers, laboratories and healthcare. Tell us a little bit about what the real assets look like. Yeah, that's where I was going to go. I would say for our clients, I think for a long time, real assets was real estate. Right. I think today, if you wanted to talk about some of the more interesting parts, it's the things you alluded to, which is what's happening in infrastructure.

44:15Infrastructure is one we're spending a lot of time with our clients on because institutions have invested for a long time in infrastructure assets, individuals less so. And so trying to understand the role of infrastructure in a portfolio, which has a lot of unique benefits, right? A lot of times it's not correlated to GDP growth, right? This is a lot of times critical infrastructure, things that we need to do. It has inflation protection benefits, right? Something we didn't need to talk about inflation 10 years ago. But now, how do we think about things that are inflation protected with long-term contracts, with built-in escalators?

44:45And then the other part is educating around it's not your grandfather's infrastructure, right? People tend to think about bridges and toll roads and ports. Exactly. Today, it's the things you talked about. It's digital infrastructure. It's data centers to support AI. It's energy transition. It's a lot of the very, I guess, maybe the more thrilling parts of investing are actually in the infrastructure asset class. And so that is part of the real assets that's grown a lot and where there's a lot of interest. I wish I could remember where I read this somewhat technical piece because we always talk about AI, but you alluded to AI plus another sector.

45:22Of all the different parts of the economy that AI is going to have a big impact, this author had made the claim, I read it like two weeks ago, so it's gone, that AI and genomics, oncology, and healthcare are going to be amazing because what you can do with AI in terms of testing new molecules and new treatment regimes is just a whole nother level. Are you looking at AI plus another sector or is it just all AI all the time? No, definitely plus other sectors. And you're completely on point that life sciences, how's that going to be impacted by AI, healthcare, right? And by the way, every sector in the economy is likely going to be impacted.

46:08So, you know, how do, when you look at, this goes to your diligence question, you look at private equity firms that you're diligencing today, what kind of value creation playbook do they have for their portfolio companies? And how are they thinking about the AI opportunity or threat for their portfolio companies, right? So it's going to infuse really all the different sectors of investing within alternatives. So what other alternative strategies are you seeing the most demand for clients? like I'm enthusiastic about AI and life sciences. Are people asking for real assets or for infrastructure or for, like what are you hearing from the bottom up?

46:46Well, that would be private credit. Really? Yeah. But in response to a relatively low rate environment. What I would say, what we're hearing from clients for the last few years has been a search for yield, a desire for yield. And that's led to a lot of interest from the bottom up in private credit, right? A place where you can be top of the capital structure, so a lot of protection below you, and get yields that are high single digits with quarterly cash flow. That's been an area of pretty broad interest across the wealth spectrum in alternatives. Really, really interesting. So last question before I get to my favorite questions that I ask all my guests.

47:25When it comes to alternatives, what are investors not talking about or thinking about but perhaps should be? What sort of – it could be asset, data point policy. What's important that they might be overlooking? I guess the thing that comes to mind for me right now, and we think about the advent of all these evergreen, open-ended alternatives. Perpetual funds. Perpetual funds. And there's been a lot of enthusiasm, a lot of growth. In some of the sectors, are investors spending a lot – enough time thinking about how big some of these vehicles are getting? And then what does that actually mean in terms of how much origination that they need to have to be able to deploy the capital?

48:07Because in these evergreens, if you have more capital coming in than you can actually invest, you're going to start diluting your returns. You're going to have cash drag. And so are investors spending time and thinking about who they're investing with and do they have enough origination capabilities to be fully invested in high-quality investments? So I think that would be one thing that I would think about. The other thing that I'm interested to see how it evolves is, you know, we're new in this perpetual evergreen alts space, you know, last five years. You know, how do we start to see performance divergence over the next five years, right?

48:41I don't think we've seen a lot yet because we're still in the early innings. And so I'll be curious to see how investors react to performance divergence or negative performance on some of these. And what happens? Do we see redemptions? Or are investors long-term minded? and do they stay the course? Really, really interesting. Let me jump to my favorite questions that I ask all of my guests, starting with something that you hinted at but didn't expand on. Tell us about your mentors who helped shape your career. So I have to mention Eric Lane. So he was the one who won me in the analyst draft. I then worked with him for decades.

49:23and I owe a lot of my success to Eric. And part of it is we sat in like a trading desk type of format when I started. And the benefit of that was just getting to hear him on the phone every day with clients and see how he managed difficult situations, how he explained things. There was an ability to sort of really apprenticeship right next to him. And the other thing that I just really loved about working with Eric, maybe I hated at the time, was he would throw you into situations that you felt ill-prepared for, but he knew you could handle. Deep end of the pool? Exactly. And sort of just forced you to go into those situations that you may have not thought you were ready for.

50:06And that really allowed you to sort of step function, I think, improve in your job and really learn. And then he was always there to support you if it didn't go as well as you would have liked. Really, really super interesting. Let's talk about books. What are some of your favorites? What are you reading right now? So I've really been enjoying the Walter Isaacson biographies. And we talked a little about life sciences and one that I. I was going to say, which one of you. So I have Leonardo sitting on a night table out east waiting for me to attack. I haven't gotten to that one. But it's like it's giant.

50:39So so I actually just finished the one on Elon Musk. But the one that I really liked was Codebreaker about Jennifer Doudna, who discovered CRISPR. This is Caroline Hyde. And I'm Ed Ludlow, inviting you to join us for Bloomberg Tech, a daily podcast focusing exclusively on technology, innovation and the future of business. Every weekday, we bring you the top headlines from the world's biggest tech companies. From finance to defence, AI to entertainment and from startups to the magnificent seven. We highlight the latest stories of the people and companies pushing the tech sector to new frontiers and the politics that shape global tech markets.

51:17We do this all every weekday, then bring you the most important conversations and analysis in our podcast. Search for Bloomberg Tech on YouTube, Apple, Spotify, or anywhere else you listen. Join us every afternoon on your commute home and stay ahead of the tech news cycle. That's the Bloomberg Tech Podcast. I'm Caroline Hyde in New York. And I'm Ed Ludlow in San Francisco. Subscribe today, wherever you get your podcasts. All right, next question. what are you streaming these days give us your favorite podcast netflix amazon prime what's keeping you entertained uh i just started watching an old series i'm only two episodes in which is scandal so that's what i'm watching right now little washington dc intrigue um in terms of podcasts of course all the bloomberg podcasts and you don't have to you don't have to do that that that's we but actually if i were to say one that um i listen to from time to time just for some comedy smartless i love that i'm a big fan of just justin baitman uh jason baitman yeah sister justine he always says they always have great guests and they're so funny so i've interviewed michael lewis a million times and after his daughter was killed in a car accident they had him on and it was a few months later and he describes the grief process he's just such an extraordinary human being to listen to someone share that.

52:38It was both amazing and terrible at the same time. But they're always fun and they all seem to torment each other. They're very amusing. Final two questions. What sort of advice would you give to a recent college grad interested in a career in either alternatives or wealth management? Well, I think that the benefit that a recent college grad has is there's so much information at their fingertips to get smart and to get be interested and to learn about the industry before they come into it and to be really well educated. You know, it was a lot harder 27 years ago, right? Now everything's at their fingertips.

53:16So I think be prepared and then don't be scared to network, right? Use your relationships, meet people, reach out. I think that would be the best advice. Really, really good. Final question. What do you know about the world of alternative investing today would have been helpful back in 2000 when you were moving into this space? Well, I think about it a little bit personally, which is, you know, we have evolved a lot in how we advise clients to invest in alts. We've talked about the process, how do you think about sizing and building it out year in, year out. And if I look back to when I started, I definitely didn't have that rigor in my own personal investing in alts and definitely undersized, was not diversified enough.

53:53And so I think I wish all of the rigor we've put into it, I had known back then in terms of how we were building portfolios personally and for our clients. Really super interesting. Kristen, thank you for being so generous with your time. We have been speaking with Kristen Olson. She's Goldman Sachs Global Head of Alternatives for Wealth. If you enjoy this conversation, well, be sure and check out any of the 568 we've done before over the past 11 years. You can find those at Bloomberg, iTunes, Spotify, or here on YouTube or wherever you find your favorite podcasts. And be sure and check out my new book, How Not to Invest, The Ideas, Numbers, and Behaviors That Destroy Wealth and How to Avoid Them, How Not to Invest, at your favorite bookseller.

54:42I would be remiss if I did not thank the crack team that helps with these conversations together each week. Alexis Noriega is my video producer. Anna Luke is my audio producer. Sean Russo is my head of research. Sage Bauman is the head of podcasts here at Bloomberg. I'm Barry Ritholtz. You've been listening to Masters in Business on Bloomberg Radio.

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