“This is the Era of the Retail Trader": Sonali Basak on Democratising Private Markets

0:00Millennials and younger are more likely than their older generations to invest in private markets and actually see them less risky than public markets. And we explored why for a while. And it's because these generations are used to the SpaceX's and open AIs of the world. And they want access. Of course they do. They missed so much of that growth. That's frustrating for people. The short end of the curve, we do think that the market is a little bit optimistic. They think that there's going to be a new dovish Fed chair. And that will change the entire equation, not remembering that there's a voting body at the Fed.

0:35where hawkish people like Beth Hammock are going to be entering that voting committee very soon. So there will still be tension on the Fed that could keep pressure on the short end at a time where Jerome Powell just said it himself. The labor market is stabilizing. In America, you used to be able to buy a house and say, that was how I was going to build wealth over the long term. Forget it. Forget buying a house in America today, let alone making money on that house. You don't know what it's going to be worth in 20 years. And so the calculus of how to build wealth has changed, and it's so weighted to the equity market that it doesn't surprise me for a minute that people are selling off other assets and the equity market's holding up anyways.

1:15Welcome to the Master Investor Podcast with me, Wilfred Frost, where we celebrate and learn from the success of the greatest investors, business leaders and politicians in the world giving you, our listeners, an edge. The Master Investor Podcast is sponsored by BNY Investments, LSEG and Interactive Brokers. Please do remember the views expressed in this podcast are for general information purposes only. Nothing in the podcast constitutes a financial promotion, investment advice or a personal recommendation. More on that in the show notes. My guest today is the Chief Investment Strategist at iCapital, which she joined just last September to much fanfare, not just because of the status of the new role, but the status of the role she walked away from.

2:03as a broadcaster at Bloomberg, where she led the network's coverage on financials, as well as anchoring open interest and presenting and producing her own interview series, Bullish with Sonali Bassic. I am, of course, referring to Sonali, who joins me here in studio. Sonali, welcome to the Master Investor Podcast. Thank you for having me. So good to be in London. So good to catch up. And there's so many areas I want to get to, including your career transition, which I think is sort of kind of the reverse of what I did. Started in finance, went to broadcast. I'm oversimplifying it to say yours was the reverse, but lots to get to on that.

2:38But firstly, what is iCapital for those that don't know? So iCapital really stands in the middle of public and private markets. So what does that mean? A lot of funds across the industry, all of the biggest ones really list on our platform and people can invest in those funds. Now with the retailization or democratization, as people call it, we actually don't love those words, but new investors are entering those markets. We also have funds that we distribute. So we do diligence on funds. We choose them. We have model portfolios where we help pick funds and create our own portfolios. But we also have a huge public markets business.

3:10And it's structured investments tied to NVIDIA and Amazon and Tesla and indexes around the world. So the S &P 500, now more Europe and Japan. So we have a really interesting intersection of what's happening in the investment world. So is it fair to say whether it's private markets, which obviously historically weren't that accessible to everybody, or structured products on the publicly listed securities of the big companies you mentioned, you're giving everyday investors and educated investors access to things that five, 10 years ago they wouldn't have had access to? 1 ,000%. Even a year ago, some of these investors couldn't really access it at this scale because the minimums are starting to come down.

3:51You used to have to have 10 million or at least 1 million to invest in some of these funds. Now you could have 25 ,000 or lower. It's starting to come down. And we want to make sure, I really want to make sure this happens responsibly, that there's the same amount of transparency and education that an institution would get. You and I both covered this for so long where we covered these really large institutions. And so in the first six months, what I really tried to do was travel the country and the world just to meet individual clients, wealth managers, RIAs, just to talk to them every day about the challenges they're having in portfolio allocation so that we can do better by them.

4:23I mean, by the way, I should have said this at the top. I mean, we basically were rivals for a period of time, both leading CNBC and Bloomberg's… Admiring rivals. Absolutely admiring rivals and often piggybacking off each other's stories as well, which is, I think, how it should be, even if our bosses used to want us to compete more. But, no, it's… We like to call it quiet confidence, right? Exactly. You break a scoop, I break a scoop. It all evens out, maybe. Exactly. We have similar interviews, different interviews at similar conferences. It was such good fun. So I guess in terms of what is the case for iCapital, what drew you away from that incredible job you had at Bloomberg?

5:00I imagine you'll probably say both to this question. But is it more that this asset class of private markets and structured products is just going to continue to be of more interest to people going forward? And or that you guys can be the best at doing it? So there's two things. One, first of all, it's so funny you mentioned that the job I left behind, I think is what you said. Because I feel you must feel this way too. Do you ever really leave it behind? Well, that's why I've launched this podcast. Exactly. Yeah, exactly. I still talk to my former colleagues almost every day. You know, the news person in you never fully goes away.

5:33But on iCapital, what happened by accident over the last 10 years, you know, I came in to cover the big banks at Bloomberg, and I did. But in that process, I also started covering all these companies that were not the banks. And in those now, what, since 2008 now, right? It's been a long time. Those companies are bank-like. They've filled in so much of the economy and are really critical in terms of the role they play in the financial system. They're the new financial system. And it's not just the companies that are listing funds on our platform. It's all these new market makers also that are entering the space.

6:10So I don't think that the public really has a great understanding of how the financial system has changed. And I do think that that's problematic because then how are people going to be involved in the growth of the future? That's so interesting. And I guess my flip side question to it is whether you fear that you kind of mark the top or short term top. I don't mean it specifically you, but for me, it's quite a high profile moment. You've quit to go and do something like this. I think what I'm really getting at is someone like Rachel Reeves, the chancellor here, started to say private investors here who are behind private investors, return investors in the US, should start to get involved in private markets.

6:49And that sort of suddenly puts a shiver down my spine of like, if we're starting to push people in, are we marking the top? Private capital is obviously not as accessible as public markets, but you're not the only person starting to talk about it and making it more accessible now. So there's a couple of things. One is technology is enabling this at a much greater scale. So why a year ago, five years ago, 10 years ago, people couldn't get in? Now, we can have people access these opportunities at scale. And you do need scale to succeed in these businesses for a lot of reasons. But on top of that, let's just even market structure alone.

7:24It's inevitable. Why? 86 % of companies that have revenue above$100 million are private, right? They're going public later and later. To access those growth opportunities, you know, one thing we're looking at now is just an index of 7 ,000 companies within one of the funds that are on our platform and trying to track that against the Russell 2000 to see how they're performing relatively. Are you actually getting better access to investment opportunities outside of the public markets if you're not in the mega cap? It's a good question. The other thing I think is interesting, you mentioned governments, right?

8:01We're at a moment where everyone can see what's happening with Japanese bond yields this year. Everyone can see what's happening with the U.S. fiscal situation, which is, by the way, ballooning. So when I go around talking to investors, and I think this is fair concern, they had a global 60-40 at equity valuations. You know, 10 companies, 10, make up for almost 40 % of the S &P 500's entire weighting. So if you're that concentrated in your retirement portfolio, you're running on this wealth effect. You're looking to diversify. So what are private markets? It's not just private equity. It's not not just private credit, it's things like infrastructure too.

8:36It's investing in roads and bridges and airports and things that people can see every day at a time where the government actually can't step in either and finance those things anymore. And so we're making that more investable. I think that's a really kind of enlightening perspective on it. I think the other theme I've heard you talk about is just the pure growth in wealth in the United States at the moment, I guess in other developed markets, but particularly in the US. And even if there are great challenges that all of these economies face, there's just a growing amount of money to be invested.

9:13That is very true. And also on top of that, Goldman Sachs had come out with a survey at the end of last year that I thought was really interesting, that millennials and younger are more likely than their older generations to invest in private markets and actually see them less risky than public markets. And we explored why for a while. And it's because these generations are used to the SpaceX's and open AIs of the world. And they want access. Of course they do. They missed so much of that growth. That's frustrating for people. And on top of that, you know, a lot of these people were paid in equity.

9:47They fundamentally understand what it's like to hold a private asset. Now, will there be mistakes made? Back to the Rachel Reeves comment. Of course there will. This is a bigger industry now. And when we look at it, when you're picking a public fund manager, for example, there are going to be losers and winners. There's divergence. That's also true for private markets. So what we're trying to do is make that research and diligence much more rigorous so people can get much more information on what's happening in their portfolios. Final quick question on the sort of offering before we get into the markets.

10:23tokenization and the sort of technology that's available to tokenize pretty much everything now. Is that a threat to a business that's been the leader in this space that is an expertise in giving access to previously inaccessible investments or is it an opportunity? I would say the conversation comes up once a week. And so to me that says it's an important strategic thing to be involved in. It will make a difference and it will fundamentally change certain parts of the market, like venture capital. And so if you're not thinking about it, you're at real risk of being behind. But the flows that you're seeing in tokenization are actually really small relative to the dollars being raised.

11:02And the tokenization benefits we're seeing near term are in places like Stablecoin, where really I wonder all day long what that's going to mean for the treasury market down the road, especially because we have a lot of big hedge fund clients on our platform, those hedge funds are a little worried about the – a little is an understatement. They're worried about the treasury market. And so if the hedge funds that have always bought treasuries, or at least in recent years they've been the biggest buyers in the short end, if they step back, that leaves you with the treasury market being vulnerable to the stablecoin market.

11:37So let's fast forward five, ten years. That's a new financial system. That's a new set of risks that we really need to think about.

11:49The Master Investor Podcast is sponsored by Interactive Brokers. Building wealth starts with the right broker, and Interactive Brokers helps you reach your goals with powerful tools, global market access, low costs, and unmatched financial strength. That's why the best informed investors choose IBKR. Learn more at ibkr.com forward slash masterinvestor.

12:19Let's talk a little bit about the rate structure, then move on to the macro and your views on the market as chief strategist. What is your view on short rates versus longer rates at the moment? I mean, there was obviously a big scare last year, Q2 around April, kind of went away for a bit. Suddenly, it's back to the fore. 4.8 % 10 year. I think, you know, as Max Kettner at HSBC calls it, the danger zone. We still think that that's the danger zone. We're not near that at the moment, but could we get back there? I don't think a treasury market event is necessarily a 2026 event. Once you start getting it, but it could be, by the way, based on what's happening in the world.

12:59When I say event, I mean a much more serious event, something that really makes the Fed step in more than it has been. Remember, the U.S. is already running on a little bit of life support with the Fed buying bills. So when we're thinking about that, we think, let's just do this in two ways. The short end of the curve, we do think that the market is a little bit optimistic. They think that there's going to be a new dovish Fed chair, and that will change the entire equation, not remembering that there's a voting body at the Fed where hawkish people like Beth Hammock are going to be entering that voting committee very soon.

13:34So there will still be tension on the Fed that could keep pressure on the short end at a time where Jerome Powell just said it himself. The labor market is stabilizing. And if I think about what we are kind of most proud of so far is there's been so much noise in the air. We're just looking at the data, the government data and the high frequency data, and it does show you the stabilization. Now, it doesn't feel good to society, but it's also not feeling good because the labor market dynamics are changing. The college graduates, for example, not feeling the ability of a robust job market. That's really hard.

14:07And you can understand that, but it doesn't mean we're falling into a recession. And in fact, on an aggregate basis, we're more at risk of reaccelerating than falling off the cliff right now. What then is happening in the very short term, start of this year to the dollar? I mean, obviously, long rates have moved a bit in the US, but they haven't moved that much, whereas the dollar move has been pretty pronounced. You know, people remember, right? Higher yields, lower bond prices. The sell America story, I think, is kind of an interesting one because there are ripple effects all over the place on a trade perspective, certainly.

14:40But just even from and, you know, anybody who watches the currency market from, you know, the bank CEOs will say, what is the dollar saying about the attractiveness of U.S. assets? Let's also put it into perspective. U.S. assets have been acquired and acquired on leverage for many, many years. So that's starting to unwind a little bit as it pertains to the dollar doesn't surprise me because everything we're seeing in terms of policy is meant to support the equity market. If everyone's retirement funds are levered to the equity market, if that's the way right now that most people can access any form of wealth.

15:13In America, you used to be able to buy a house and say, that was how I was going to build wealth over the long term. Forget it. Forget buying a house in America today, let alone making money on that house. You don't know what it's going to be worth in 20 years. And so the calculus of how to build wealth has changed. And it's so weighted to the equity market that it doesn't surprise me for a minute that people are selling off other assets and the equity market's holding up anyways. What about, I guess, the potential triggers from abroad for sort of long end of the bond market sell-off? Clearly, to start the year, the focus has been on Japan.

15:49There was a lot of discussion whether Greenland was triggering some bond market moves in the US, whereas I think it was perhaps more Japan. But you could talk about France, you could talk about the UK, I guess it just increases the risk of global bond market selling off when there's a number of countries that might be the trigger for that. The global bond market is a good way to put it because to your point, actually, me and my head of macro have been talking about this. We have a little bit of disagreement on this, which I think is good. Disagreement makes a spread. I'm all for it. That's how I run my team.

16:18And so in Japan, I agree with you. It was Japan. It was less about Greenland and more about Japan in the bond market, 1 ,000%. Japan's debt to GDP ratio, if you look at it on a chart, it far outpaces by a landslide any other developed nation. And so when you look at Europe, this is the debate. How much are Europe's bond market troubles going to spill over into the US? And certainly in the last two years, we've seen fits and starts of that, particularly because if you are any large investor, for most of your history, you've been weighted in bonds. And so I do worry about the spillover effect. The long way to say where it's going to come from, I think, is the big question mark.

17:00What is going to cause the pain at the end of the day? Again, we are running on life support today. So it's a little bit unreasonable not to look at the risks down the road. So bring back all of those views on the bond market and yields to your asset class. I know it's lots of asset classes, but particularly private markets and private credit. Is there a lot of leverage which is exposed to this? And I guess you're sort of saying that your base case for rates this year is not that many more cuts at the short end and fingers crossed for the long end? No more cuts in the first half of the year. So we don't think the Fed will cut in the first half.

17:35In the second half, once, maybe twice, we actually kind of worry about if you see too many cuts, because does it imply that the economy is weakening more than you expect. When the Fed chair is saying that we're kind of closer to neutral, what is neutral? Now we're talking about what is neutral again and where inflation will be in the longer term, right? So yes, a little higher than the market expects, I think, on the short end. On the long end, we could be stable, but we are worried about an uptick because we do believe that the fiscal situation in the U.S. is probably headed in a trajectory that most people are not accounting for?

18:12Higher defense spend, right? This is three weeks worth of everything signaling, we are going to be spending more on defense. And also what a lot of people did not talk about was the fact that in a midterm year, the fiscal impulse is so high to support the K-shaped economy. They have to step in. Otherwise, how is it going to get fixed? So that's to me the big problem. The long end has structural issues. So what does that mean for private credit? So for private credit, remember, it's floating rate. So actually higher rates for private credit can be good. Now, that's only so far as the underlying companies also perform well.

18:49And remember, so we in our 2026 outlook, while we think that private credit can stay kind of high single digits as it has been in terms of return with a decent spread to public fixed income, we also think that there's vintage risk. So deals done in 2020 and 2021. Also, by the way, let's not forget that a lot of people have entered this market without a track record through many cycles. So what we recommend is scale in the managers and also that track record because when you were underwriting at interest rates near zero, everyone looks smart. Now it's becoming a market that would imply you're going to see more divergence.

19:31and you're going to see managers fare very differently in this environment. And realistically speaking, this is the way private credit works that most people don't understand, that there are hundreds and hundreds of loans within those portfolios. So what I ask my managers is, okay, well, what's on the watch list? What are the loans that might go bad and why? What are the ones that you're worried about? The private credit managers, more than fixed income managers in public spaces, have control over those companies. So they can look at that watch list, come in and try to change the trajectory of the company they're lending to before things go wrong.

20:04Because the game is to not lose money. That's the whole point. Do not lose money and you are promised that return, right? So the losses matter and we've seen some high profile ones. We did the math. Most of the portfolios in the private credit world that were exposed to a lot of those losses were not massive. I mean, it was like less than 0.1 % most of the time because you're supposed to be underwriting to a broad portfolio of companies. I mean, some of the cockroaches that were referred to by Jamie Dimon, I guess, were more exposed to the traditional banks. Correct. You don't worry that there's going to be high profile examples of that in private credit space in the year ahead?

20:44No, I do. I think there will be. To be sure, there will be headlines. But let's look at the aggregate. One thing that's kind of interesting is if you look at last year, the Cliffwater BDC index. Everyone saw how the BDCs traded. They're publicly traded. It was down like 5%. But if you looked at the direct lending index in the private markets, it was up almost 10%. And so you can say, well, maybe it trailed S &P 500. You don't compare it that way. It's not supposed to be an equity-like return. So you have to ask yourself two things. Are we worried about the credit underwriting? That is a real question.

21:20Credit health, broadly speaking, has held up, not to say there won't be individual managers within certain losses, maybe more weighted. We've seen high profiles of that recently. There will be some losses, but in aggregate, it's holding up. There's a second question, though, that I think is actually a more relevant question for this asset class. People are equally as confused, I think is a fair word, about the liquidity profile. When you put your money in, it's not easy to get out. And there's a lot of vehicles coming to market that are being branded as semi-liquid. We don't like that word because, realistically speaking, when you want to all rush to the door, you are not going to get your money out.

21:59So make sure that if you're going to put your money in these funds, we say measure twice, cut once. Make sure it's a manager you love with underlying assets that you love and also can withstand cycles. Something interesting, if you looked at 2020 and 2023, some of the biggest kind of hiccups in markets in recent years, private credit stepped right in because that's when the banking industry stepped out. So actually, when trouble hits, the biggest managers have the biggest opportunities and they're the biggest vintages. They're the best performers. So it's not really the time to step out of private credit when kind of things are more broadly wrong in the economy.

22:36Provided you've got the right managers. Let's touch just quickly on some of the broader macro market themes, public market themes. I've seen some of the research pieces you've put out since starting. And I get one theme is that the market's broadening out. Is that largely a good thing? Or do we worry about the MAG7 and its ability, as you said at the top, with its concentration, to drag everything down in due course? You know, we have been cautioning since October, since the hyperscalers started taking on more leverage, that the calculus was going to change. And the reason the calculus was going to change is because now the free cash flow story is going to change for those hyperscalers.

23:13I think it's really healthy that the market is broadening. I think that it's kind of crazy that everyone is so overweight to such a small amount of names. That's not the idea of investing. The idea is to buy low, sell high, and experience the growth of companies that will be the companies of tomorrow. And that's not exactly what's happening now. And it does create a lot of complication and confusion. I do, we spend a lot of time on this, and I'm sure you do too, learning the language of this new AI generation, playing with the tools, understanding how they work, and wondering at the end of the day is, okay, all of these generational technologies kind of just going to be as simple as looking at Gemini on Google or using meta AI to shop on your Instagram.