FULL TRANSCRIPT

‍

Eric Cantor (00:00)

Welcome to our event today. It's going to be a very interesting discussion. We've got three great asset managers here talking about diversified portfolios, different aspects of private markets. I think you'll really like it. We're going to start with some introductions, get into a brief review of some data that we've prepared to just orient the discussion, some context, and then we're going to let our panelists go back and forth on which asset classes are best.

what their offerings are, what some of the pitfalls and risks are, and address all of your hard questions. So please do ask the tough questions in the Q &A below. Let us start by welcoming who's here today. we've got, we had a few hundred investors sign up for this. the way to break them down. We're mostly accredited investors in today's audience.

Some of you said you're quite advanced. The bulk are kind of intermediate. So let's say people who've done a few deals in private markets, but not people who do that as a day job. And in terms of asset classes, there's pretty high interest in all the asset classes. We're going be talking about venture knocking out of 80%. Been in the news a lot lately, real estate, always a solid favorite at 67. And more than half of you also are interested in private credit. you know, private credit is something we want to make sure we define.

in addition to telling about some of the products available. So let's start with some introductions. My name's Eric Cantor. I'm your moderator. I'm the CEO of Vincent. We help individual investors navigate private markets. We're hoping to do that today. We've got three great managers who will help us do that. So let's introduce who we have here today. Why don't we start with Khang Khang Nguyen from Heron.

Go ahead.

Khang Nguyen (01:42)

Hi, I'm Khang, Chief Credit Officer at Heron Finance. Before joining Heron, I had a similar position at two other tech companies. Prior to that, I 10 years as a lender and investor, and I started my career in investment banking. Heron Finance is an investment platform for individuals and family offices. Private credit is our flagship product. And yeah, happy to be here with everybody.

Eric Cantor (02:11)

Excellent. All right, let's go to Andy from Alumni.

Andy Ervin (02:14)

Great. Thanks, Eric. Hi, my name is Andy Ervin and I'm the Deputy Chief Investment Officer at Alumni Ventures, which is America's largest VC for individual investors. We have over 10,000 individual investors. We've raised over a billion five purely from individuals. And we have a current portfolio of about 1600 companies. So a big portfolio. We invest across the venture ecosystem from seed stage up through pre-IPO.

really across all sectors. And while about 90 % of our capital is deployed into US-based firms, we are expanding our reach globally, building an office in London and Tokyo currently. I'll quickly go through our investment model. It's pretty simple, just highlighting three main aspects of it. We are purely co-investors, meaning that we don't sit on boards or set round terms, but rather invest on the same terms as the lead.

allowing us to use our time more efficiently. We're not traveling to quarterly board meetings, trying to unwind companies that aren't working out, so on and so forth. Number two, we've done a lot of analysis on identifying who the top lead investors are. There's a big gap in returns between top quartile VCs and everyone else. And so we've put a lot of work into identifying which VCs we should be following into deals.

And then finally, we've got a large team. So we have about 40 investment professionals across our offices in Menlo Park, Chicago, Boston, and New York. And we source deals in a lot of different ways, but one of the key sources is through these alumni networks that we've built across top institutions in the US. People tend to be more willing to pick up the phone for a fellow alum, and we use that to our advantage. So happy to be here. Thanks for having me today.

Eric Cantor (04:02)

Great. Let's go to Jonathan from Lightstone Direct on the real estate side.

Jonathan Spitz (04:08)

Good morning and everyone and thanks for joining us today. My name is Jonathan Spitz and I lead the capital formation team at Lightstone Direct. I've been in the commercial real estate business, I guess for over a decade now at this point. But for some quick background on Lightstone.

We are actually one of the largest privately held real estate companies in the country. We were founded in 1986 and almost 40 years later, we've grown into a diversified real estate company with over 12 billion in assets under management and a portfolio spanning over 25,000 apartment units and 15 million square feet of industrial and commercial space. And at Lightstone Direct, what we do is we provide individuals with an opportunity to invest alongside Lightstone.

in the same institutional multifamily and industrial opportunities that we're pursuing with our own capital. And we invest at least 20 % of the total equity in every deal that we offer. So excited to be here, excited to share bit more about who we are and how we're thinking about the markets and investing today.

Eric Cantor (05:08)

Great. Let's jump in our discussion. Before we do that, just a quick note as always, none of what you're about to hear is financial advice. Everything you do should be in concert with your advisor or your own situation. You know, nothing one size does not fit all. With that, let's go into a little bit of data that I want to walk through for everyone just to kind of set the scene. First point is, you know, there are many more accredited investors than there've ever been.

So you can say what you want about how the SEC should be governing that. can mention that the dollar amounts have not gone up in like 50 years on what is an accredited investor, even though obviously inflation has made dollars much less precious. But the reality is there are many more individuals who are eligible to invest in the kind of opportunities we're talking about today. And there's even investors who are making these available to other credit investors. So a lot more supply of capital and increasing demand.

People want to invest in private markets. Private markets are growing. There's, you know, depends how you count it, but there's the double digit trillions of value and going up. Fundraising for all these asset classes took a little bit of a shot in the last couple of years. There's definitely been some headwinds, but as a secular trend, it's, it's clearly growing and more and more deals are landing on the private side as things like bank regulations and the limits of how many companies want to go and stay public.

influence just more capital going into privates. Why do we, I say we, the audience is all investors who are interested in private markets. Why do we want privates? There's a number of reasons. One is that there's this return potential, right? People see outsized returns. They saw the movie where somebody got rich off of this deal or that deal. They want to be a part of that. And that clearly can happen.

Diversification, we're talking about that today, building diversified portfolios and multiple asset classes, hedging against the inevitable inflation involved that you see elsewhere. The availability via these online platforms, and really just wanting to invest in things that I care about or I want to be connected to or I want to create impact with. All these factors are there. I actually just saw a report this morning that I wanted to read something really interesting from. And it was PitchBook and they wrote,

quote, are private markets worth it? Unsurprisingly, it depends. Private market allocations can add real value to portfolios, but success is not automatic. Performance depends on timing, portfolio construction, and manager selection, which means allocators must treat private markets as a deliberate strategic allocation rather than guaranteed alpha. So a lot of words, but I think you get the point, which is that you want to approach this with an open mind and an educated mind.

And so let's have a discussion here that helps you do that. There are a lot of products available to accrediteds. We're to focus on three of them today from three different managers across the asset classes we're talking about. But, you know, going along with the fact that more people want this than ever, and there's more investors than ever, there's also more products. So you're to want to really understand the products you're using and why you're using and why you're blending those into a, into a portfolio.

Let's get into our panel discussion here now that we've got that context. Let's go through each manager on the call. We're going to start with Andy on this one. Why don't you tell us more about your asset class? know, so in your case, venture, what does it play? What role does it play in my portfolio? Right. As an accredited investor, if I don't have any venture, why should I? And generally speaking, historically, like what kind of return profile does this asset class?

tend to deliver.

Andy Ervin (08:49)

Yeah, good question. One of the things that we have looked at from a data standpoint is how much exposure to venture capital do endowments and institutions have. Latest numbers that I've seen pegged at somewhere around 10 15%. But there are two main reasons why those institutional investors are putting money into this asset class. The first you've touched on, which is overall returns.

If you look over a long time horizon, venture outperforms public markets and many other asset classes. The second is diversification. The venture asset class generally is very little correlation with the public markets. The other piece of it that is really a trend that you touched on, Eric, is more and more companies are staying private longer.

Right. So 20 years ago, companies would go public much earlier in their development life cycle than they do today. So now a lot of value is created before most individual investors can ever access those companies. You've got open AI, SpaceX, valued at close to a half billion dollars. This puts them in the, I think, top 20 or top 25 most valuable companies in the world. So, you know, I know

A lot of these institutional investors have taken the approach of, hey, I want to be able to tap into this value earlier and get access to these companies before they could be tapped out or could hit that slower growth point of development. So we bring that access to this asset class to individuals. And coming back to why.

I think individuals are interested in this asset class other than those first two main points, overall returns and diversification. I think it's comfort with optimizing for returns without any sort of promise of near-term liquidity. And that's, think, the key comfort point here. This is not an asset class for individuals who want to be liquid in five years.

You know, you should expect 10 years plus if you're willing to get into this asset class. the other piece that you got to be comfortable with is risk. you know, this is a high failure rate asset class. So if you're looking to make one or two investments. Back one or two companies in venture it's not the right fit. This is a bit asset class that if you want to do well, you need to be diversified, you know, across many different companies.

as well as over time. So we encourage our investors, if they're putting a million dollars to work or if they have a million dollars available, put 200K to work over the next five years each year. If you look at 2021 vintage, for example, it's not going to be a great vintage. There was a lot of capital flowing around, a lot of exceedingly high valuations that year.

So you gotta play the long game. You gotta be willing to invest over the long run to really take advantage of the benefits of this asset class.

Eric Cantor (11:56)

Right. Yeah. I mean, as we saw yesterday, the leadership of Sequoia, which is probably the prototypical venture manager turned over and somebody was tweeting or commenting like, yeah, they invested in this company that went bust that company. And someone pointed out, yeah, like 90 % of the investments actually don't work out. And you got to be comfortable with that. As you said, let's shift gears to real estate. Same set of questions. Tell us about the asset class. Why? What can we expect? Uh, Jonathan.

Jonathan Spitz (12:26)

Yeah, so private real estate is an interesting asset class because it really sits at the intersection of both equity and debt. on one hand, you've got

the growth potential of an equity investment as properties can appreciate over time. in the case of the projects that we focus on at Lightstone, there are always opportunities to actively enhance a property's value through hands-on asset management, operational improvements, bringing rents to market levels, or just improving the physical characteristics of the building. Now, on the other hand, you've actually got contractual income streams that provide really stable

tax-efficient income, which can make a property look and feel kind of like a fixed income investment, right? But a unique feature of real estate income is that investors are able to take advantage of depreciation benefits, right? So that's something that's pretty unique specifically to our space. And what this allows is investors to offset sometimes often a large portion of their taxable income and defer that tax indefinitely until a property is sold. So you're not only earning

steady distributions, at least in the case of the proper the strategies that we focus on a lightstone. But you're doing so in a way that's typically more tax advantage than interest from bonds or dividends from stocks. So it's really this unique combination of being able to generate durable income or durable tax-efficient income with the potential for capital appreciation that makes private real estate such a powerful complement to a traditional portfolio. And what's what's really interesting, I've been working with investors for

going on six years now. And depending on who you talk to, some people may view their private real estate allocation as augmenting their equity exposure, right? But then others may take that same strategy, whether it's value add or something that's just more stable and income producing, and they will think of it more as like their fixed income, tax-efficient fixed income allocation. And so

Again, that just the variability of the types of returns is I think what has always made real estate such attractive investment and part of a more diversified portfolio.

Eric Cantor (14:38)

want to take us through private credit, maybe private equity as well.

Khang Nguyen (14:43)

Sure. And just to clarify, Heron is actually not a fund manager or a lender. We actually work with the most experienced and largest private credit managers in the world to create portfolios for clients. So some of the managers are like, AKR, Apollo, BlackRock. Actually, across the managers in our platform, they collectively manage about $1 trillion in private credit assets. That's about half of the global industry.

⁓ But yeah, probably quite a, basically, I think I answered a question in the chat as well. We're talking about non-traded loans between the borrower and a non-bank lender. And as an asset cloud, it's been around for actually three decades since the 90s, actually. So people might not realize that, but this is, it's lending, right? So it's been around for a long time. The industry has evolved a lot, especially after the global financial crisis.

Today, it's the $2 trillion industry. Most of the loans, more than 80 % of the loans are actually first lien loans. The LTV is pretty low, actually below 50%. That means that you have to destroy more than half of the collateral for the first dollar to be at risk. 90 plus percent of the private credit managers today were formed after GFC. So if you pick the average manager in private credit today, you're more likely than

to pick an inexperienced manager. Inexperienced means that you have not managed a book through a drawdown like a GFC. So the role of private credit is really, in my opinion, high income in the public markets. Historically, you can make around 9 % on private credit, which is twice as much than high yield bonds, which gives you about 5 % a year over time.

So yeah, that's the space we're in and we build these highly diversified portfolios for clients and most of them are high net worth individuals and family offices.

Eric Cantor (16:42)

Right. So now that we've kind of painted the picture of what these asset classes look like, let's get up to date on where we're at in the market cycle. So what's happening now in today's market, in your asset class, or even at a more macro level that affects multiple asset classes. And what are investors doing about it? So what's happening in each asset class and how are investors responding and what are some either risks you think they should be avoiding right now or opportunities that they should jump on?

Why don't we reverse the order and we start with Khang on this.

Andy Ervin (17:14)

Yeah.

Khang Nguyen (17:15)

I think that this higher for longer rate environment in the last couple of years has impacted private credit, especially I would say the younger managers that run more concentrated portfolios. All those equal, if you have a very concentrated portfolio, then one deal goes bad, it impacts the portfolio. The reason is that

if you are a young manager and you have not experienced a downturn, you are more likely to not know what to do when things go south. And so I think we're starting to see some cracks in the more concentrated portfolios that are managed by fund managers that have only a few years of track record. Taking a step back, when we think about ⁓ downside risks in private credit, there are fundamental risk factors that

investors should be thinking about. One is non-accruals. Two is pick interest or pick income. And three is just to what extent is it before they're diversified. And I know I keep mentioning that, but it really matters. At the high level, ⁓ things are actually totally fine in terms of the trend in non-accruals and pick income. But there is a slice of the industry where you're actually seeing

that some of the younger managers with shorter track record actually showing higher non-accruals and higher pick income. So yeah, I think we expect to see more dispersion in performance going forward. And more than ever, fund selection and manager selection is of critical importance for clients trying to get into private credit.

Eric Cantor (18:46)

Seems to be a theme in a lot of these asset classes. Jonathan, you want to tell us where we're at in the real estate cycle?

Jonathan Spitz (18:52)

Yeah.

Yeah. So I mean, over the past few years, I mean, look, it's been a it's been a challenging time to invest in real estate, you commercial real estate property valuations. mean, they are sensitive to interest rates. So that abrupt spike in rates that we really started in twenty twenty two push property values down pretty much across most sectors. And valuations have really taken two to three years to adjust to this new reality. But at the same time, a lot of the new a lot. So like

while this was happening, we saw a lot of new, specifically multifamily and industrial developments that broke ground during COVID all came online over the course of 2023 and 2024 during this abrupt spike in interest rates. So you've seen a lot of supply hit the market while the market is still digesting the dramatic move in borrowing costs. But now after three years,

the market is really starting to finally turn a corner. And we've seen both institutional capital, capital from high net worth investors and family office really start to reenter the space. And for good reason, right? Like it actually makes sense as to why now. And as of today, multifamily and industrial valuations are down roughly 20 to 30 % from their 2022 to 2023 peak. And that's creating really one of the more compelling entry points that we've seen in three plus years.

And while higher interest rates have created plenty of headwinds for the industry more broadly, they've also brought new construction and development activity to a screeching halt. And that's critical, right? Because it means that future supply is drying up just as tenant demand remains incredibly healthy. So as an example, despite the wave of new developments coming online, like just to give you an example, in multifamily specifically, we just experienced a 40 year high.

in new apartment supply, right, since the 70s. Yet vacancy rates across multifamily and specifically shallow bay real estate, shallow bay industrial real estate, which we'll talk about a little bit later, is only five to six percent, right? And you would have thought that a massive wave of new supply that you would see this falling occupancy, falling rents, and that's not really what we've seen. So demand has been incredibly robust. And so

Now you have with higher interest rates and higher construction costs, there will be little to no new supply coming online for the next few years. You can't just solve the supply problem overnight, right? And we believe that this limited pipeline will further improve occupancy, support rent growth, and really create a stronger foundation for long-term capital appreciation, especially for investors that are entering the market at today's adjusted pricing. I mean, just to give you an example, I talked about the drawdown of 20 to 30%.

The last time we saw that was 2007 and 2008, right? And what we've seen as indicated by the NACREF Odyssey Core Index, just a proxy for measuring private real estate valuations, it's been up for seven, eight consecutive quarters, right? So I think we are past the worst of it. And now I think is a really good time as we kind of start this new cycle.

Eric Cantor (21:59)

All right, Andy, tell us where we're at on the venture.

Andy Ervin (22:03)

Yeah. So I would say, from my perspective, in a pretty exciting time in venture, there's a lot of capital flowing into this space. And it was driven by the evolution of technology that we've seen. AI is the buzzword that I'll throw out there. But that has triggered a lot of capital flowing into this space. If you believe we're at the beginning of a huge disruption,

in technology, then venture is the right place to be. What we have seen is a little bit of an overlap between where venture ends and where private equity begins. Because at least from Alumni Ventures standpoint, we invest in early stage companies generally. But then we put more capital to work as we see them perform, and they're doing well, and raising more capital. And as I alluded to earlier,

A lot of these companies are staying private longer. So you've got companies that are super late stage that venture firms are still chasing. Private equity firms are backing and private equity firms see the opportunity of potentially getting in earlier. So they're starting to invest earlier. So it just results in a lot of capital flowing to these private startups.

And because there's more capital, you see a lot more activity in the space. New companies being formed, which is great. But the danger is that you've got too much capital chasing too few attractive ideas. There's going to be a lot of winners in this space, especially in technology infrastructure. But as more capital is backing early stage companies,

We're going to have a lot that fall off the cliff that are being propped up with high valuations right now. And their underlying technology does not support what they're doing or does not support them ultimately winning. So I think we're going to see certainly some failures, but I think more so we're going to see a lot of winners out there. But these winners, whether they ever go public and create liquidity is the big question.

You know, and so the final thing I'll mention is with companies staying private longer because they can, and because the capital is there to support them. What does that mean for liquidity for venture investors and private equity investors? And I see, you know, the emergence of a lot of these secondary markets popping up. I do think that there's something that is going to happen there and I don't know what, but more efficient public markets that allow.

venture investors, private equity investors to take more capital off the table and create liquidity when a lot of these companies are just choosing not to go public. In terms of risks, I'll just touch on that finally. I'll come back to diversification. And the point I mentioned about there's going to be a lot of players in this space that raise capital and go to zero. It just highlights the importance of backing

You're choosing the right manager, say, but also backing a high number of portfolio companies. So, you you spread out that risk.

Eric Cantor (25:16)

Got it. All right. So everybody got to talk about what's happening in their asset class. Why don't we turn the heat up a little because we're getting in the middle of the hour here. I'll put you guys in the hot seat. Let's say that I'm, you you meet me in elevator. We have 60 seconds. I just got this bonus. I got 50 K that I want to invest in private markets. I'm getting started. Like why is your product? Why should I buy your offering? And we'll do

that with each of you. Why don't we start with Jonathan on this one? Why should I buy your product?

Jonathan Spitz (25:47)

Well, yeah, if I think about this from an investor standpoint, let's just assume I want to make a private real estate allocation. where do I go from there and what should I be looking for? ideally, it starts with I want to invest with a manager that's been around a really long time, one that's invested through both bull markets, one that's invested through bear markets. And that's really critical in my due diligence because real estate is inherently cyclical. And experience through multiple market cycles tells me

how a sponsor performs when things don't go according to plan and they don't always go according to plan. And again, we've been around since 1986. We've invested through the great financial crisis where a lot of other firms or a lot of our competitors in this space, were born post 2011 or or navigating a more challenging environment for the first time. Second part is I want to know that I have a manager that is genuinely aligned with me, meaning...

Are they putting meaningful capital into the deals themselves? And at Lightstone, we invest a significant amount of our own capital in every deal we offer. Again, we're typically investing a minimum of 20 % or more of the total equity required. That's four to five times average of the typical real estate manager. And what that tells you is you have true alignment with the manager and with the true decision makers. Now, then I also just want access. I want to be able

to have a direct line to the manager who is making the investment decision. So I'm able to ask questions, understand the strategy and know who's accountable for the results. And that's one of the biggest advantages of investing directly with Lightstone is that you are, you're talking directly to the firm, right? There are no middlemen. And lastly, I'd want to make sure that the investment strategy actually fits with where we are in the cycle and what I'm looking for as an investor. So,

Look, interest rates are still high and not every sector within commercial real estate is positioned the same way. So at Lightstone, we're being very selective on where we deploy capital. So at the moment, we're leaning heavily into smaller multi-tenant industrial buildings that are designed for regional distribution, light manufacturing and more service oriented tenants. And the reason for that is because most of the development activity I spoke about before

has been largely focused on the class A segment of the market. And what that means is just brand new, larger, single tenant industrial facilities that are leased to firms like Amazon, Walmart, et cetera. And that's where you've seen the higher vacancy rates across industrial is, you you're seeing 10, 11 % vacancy, but smaller class B industrial facilities with suite sizes that maybe have anywhere from 10,000 to 100,000 square foot suites.

The supply of these types of buildings has actually been shrinking as a percentage of the total industrial supply. And that's why we have continued to see strong occupancy in rent growth across our own 12 million square foot portfolio that consists mostly of Class B industrial real estate. So what this translates to is better cash flow yields for investors, better returns over time. And again, these are assets that are producing cash flow the moment we acquire them.

Right. These are not speculative ground up developments where you have to wait two, three, four years to get a check. So for us, alignment isn't just about putting your own capital in the deal. It's about investing in the right parts of the market for the right parts of the market for today's environment. So putting it all together, it's really just investing with a manager that has experience and is aligned with you or you have access, direct access to that manager.

and a strategy that fits your needs. So, and again, I'm just not aware of another private real estate firm that works directly with investors that really checks all those boxes. And that's really the advantage we bring to individual investors.

Eric Cantor (29:38)

All right, Andy, you want to give us your hard sell?

Andy Ervin (29:42)

Sure. I will echo one of Jonathan's points, access. the telltale put on it from an Alumni Ventures standpoint is that we are giving our individual investors access to a world-class deal flow engine. I mentioned some of the aspects of our investment model. We are following name brand VCs that we

Believe in and trust names like Andreessen, Khosla Bessemer, so on and so forth. We're getting access to those deals that they are leading and investing on the same terms. So our investors are investing on the same terms as those VCs. With the team that we have built and the alumni networks that we've built, we are doing about 300 to 400 individual deals every year. So giving our investors access to that engine,

at least in my mind is super compelling. Now, the additional layer I'll add on that is in the past, if you wanted to invest with alumni ventures, we would have a conversation and tell you about, give you the standard pitch on why investing in one of our diversified funds is a great fit. And that whole argument. What we have done in the last six months,

months, which I feel is very compelling and has certainly resulted in a lot of growth for us, is that when we find individual deals, many of them we are able to negotiate incremental allocation into. So these are deals that our funds are already investing, but we've been able to negotiate an extra million dollars, for example. We can take that and put that in front of our individual investors.

share our diligence material, share our thinking, have a call and discuss our view on the deal with our investors. In the past, we only made that available to people who invested in one of our diversified funds. Six months ago, we switched to kind of reversing that. So instead, we encourage folks who we're chatting with about investing in our funds to sign up for free to get access to look at these deals.

And so, you you got to sign an NDA and answer a quick five minute questionnaire about being accredited. But once you do that, we start sending you individual deals, which you're under no obligation to invest in, but you get to see our diligence. You get to see how we think about the deals and the types of deals that we bring to the table and that our funds are investing in. So there are really two outcomes of that. You take a look at, you see our deals and you say, Hey, this is really cool. I like what I'm seeing.

I'm going to invest in one of alumni venture's funds or invest in these deals directly. Or you say, hey, this isn't the right fit for me. I can get deal flow elsewhere. So I think that approach that we've taken, especially recently, is just a new way to think about deal flow in the venture ecosystem.

Eric Cantor (32:36)

Awesome. Khang, gimme your Why should I use?

Khang Nguyen (32:41)

Heron Yeah, so this is private credit. So people primarily come to Heron for income. Historically, the asset class has returned about 9 % per year for the last 20 years. With Heron, you get exposure to 3,000 underlying loans. All industry sectors, 12 of the best private credit fund managers.

and very broad diversification in terms of not just industry sector but a number of loan counts but also different segments of the market, low middle market, core middle market, upper middle market, direct lending, asset-based finance. So I think that the idea that you can get that kind of return which historically has been twice as much as public credit markets with broad diversification, I think that is pretty compelling. Another thing is that

the loss rate for private credit has been very low, 0.9 % per year based on the last two decades of data. That's about half of what you see in a public credit market, such as high-yield bonds and broadly-significant loans. So the idea that you can make nearly twice as much an income with half of the historical loss rate, I think is very compelling. But again, I think broad diversification to me is really great because

If unless you have a view about a sector or a manager or a company, if you don't have a strong view, the probably the better solution is to go very broad. The other thing I would say is that because Hanoi is not a lender, we basically build this investment platform for clients to invest with the best of the best. You get the benefit of having everything in one place. So instead of getting

I don't know, 12 tax forms, 12 reports, 12 contacts at different funds and dealing with multiple funding deadlines and potential cash draft from capital calls with Heron, one single tax form, one report, one contact, one funding deadline, no capital calls.

Eric Cantor (34:50)

I just want to double click on something each of you mentioned in passing, but it's come up with investors. And also we have a question that sort of blends with it. So I'll give you a free range to answer how you want. So we talk about deals, right? I want to invest in SpaceX. I want to invest in this real estate project. We talk about funds or portfolios, let's say. So Khang's saying, yeah, I'll get you into like 400 credits.

with one check. So how should we think about that, both in your asset class, but also combining these, right? Because I want to build a diversified portfolio. So is there a world where I want to, I mean, let me just read the actual questions. I'm interested in how one conceptualizes risk, meaning time level of risk sector, et cetera, among private investments in order to create portfolio, given no limited no slash limited historical data. So

Just opening that up, are we stock picking or are deal picking? we building portfolio? How broad do we have to go with that to get diversified? And then is there room for these other asset classes as well? Why don't we start with Jonathan on this one.

Jonathan Spitz (36:01)

So as far as conceptualizing risk, the way that we've built our portfolio at Lightstone is very much on a deal by deal basis. We don't have a mandate to, we launched some REITs a very long time ago, but for the most part, we've always focused on buying individual assets where we have a very high conviction. So as an example,

And the big difference there between, let's say, a fund and investing in individual deals is there's really no clock shot that's against or shot clock that's against us. So as an example, like as I mentioned earlier, it's been a really real estate's been a challenging place to invest the past couple of years. So, you know, most of the deals that we've done until recently have been using our own capital. Last year we did two or three deals, you know, and so we've always taken the view of we want to be patient.

especially in today's market, we want to be selective in investing in individual deals. And you can build a portfolio doing that. I think the trade off as an investor that you make is, OK, when you're investing in deals, you can evaluate that deal. You can evaluate that market and really sink your teeth into the underwriting assumptions of that specific asset and knowing exactly what you're investing in. But.

you are taking some idiosyncratic risk, especially in the early days when you buy that first deal, because you won't necessarily have that diversification right away unless you deploy maybe across multiple deals with multiple managers, which you can absolutely do. And maybe that's part of it as well, is you want manager diversification as opposed to just deal diversification. The flip side of that is then if you are investing in an individual or a fund structure, as an example,

You do get that immediate diversification, but sometimes the problem with that can be, it's not a problem. It's really just a preference at the end of the day is you inevitably will likely be investing in assets that have not been identified yet. Right. So you're really betting on the manager's asset allocation, their ability to allocate assets over a specific period of time. That's the last element to it, depending on the fund structure. It's a broader term.

But if you're investing in a typical closed-ended fund, you have a shot clock. You have to deploy, whether it is $100 million within a certain amount of period. And that can put strain on an asset manager to make sure, are they deploying that capital judiciously over that given time frame? So at the end of the day, when you're evaluating risk, I really think it's ultimately a personal decision. And having worked with investors for a long time,

Sometimes it's very binary. Some people only want to look at individual deals. Some people only want to look at funds. And both reasons are valid. think it's ultimately, especially if you're new to private markets, it's what are you the most comfortable with ultimately? Do you want to maybe find a deal that's in the city that you live in? And you have comfortable. You live in Charlotte, North Carolina. And OK, you can take comfort in investing in a deal there in a market that you know. So hopefully that answers the question. But that's how we just think about some of those different things

Eric Cantor (39:03)

Makes sense. Khang, your thought on deal versus portfolio versus diversifying?

Khang Nguyen (39:09)

and also public versus private, right? Was that also part of the question?

Eric Cantor (39:13)

No, but that's another question that's on our list. So if you want to know that one, we get to.

Khang Nguyen (39:16)

Maybe

I'll go there first. So I have some fun stats to share. First of all, in the last 30 years, the number of public companies has shrunk from about 9,000 in the 90s to less than 5,000 public companies today. So despite all the growth we had in last three decades, the number of public companies has shrunk by a lot and we expect it to shrink even further. The worst part is that if you buy the S &P 500, nearly 40 % of that is in 10 stocks.

So to me, that extreme concentration, so people who buy the S&P 500 think that they get very diversified exposure, it's the opposite, right? Because you are literally getting about 40 % of your market cap in just 10 companies. And at this rate of growth, it might get even worse in terms of concentration. It has got a lot higher in terms of concentration by the top 10 stocks. It used to be in the 20s percent, so it has got a lot more concentrated.

To put things in context, 99 % of the US companies are private. There are 8 million private companies in the US. If you just want to focus on the, say, ones, companies that have more than 100 employees, there are 2 million of those companies. And you're going to zoom in even closer, the core group of the private companies in the US, 200,000 mid-market companies, that's like the third largest GDP in the world, I think. But in any case, that's a third of US GDP. So third of US employment, approximately

approximately speaking. so 200,000 middle market companies, that's private, right? But just 4,000 public companies. So if you really want diversification, I think it's a private market, not public markets. Now, if you want to invest in both, that's your choice. But if you really think, if you care about diversification, I think that the private markets matter. Probably it's where you want to be. Private markets meaning private equity, venture.

private infrastructure, credit, private real estate. Well, many choices when it comes to determining how much you should have in each portfolios. I think the question is really the question is more specific to each individual. So you should be asking questions like how much do you need in terms of income? Because if you don't need income, maybe go bigger on the lower yield or no yield assets like private equity, ⁓ maybe venture, right?

If you want more income, then maybe get into more private credit, maybe real estate, or maybe infrastructure where you get some view out of it of infrastructure. So the question is like, maybe come up with how much you want in terms of like a paycheck back solve for how much of the dollar should be in that asset class or those asset classes. So you can get the amount of income in a monthly basis. And in terms of like, what else should you think about in terms of asset allocation? Well,

time horizon. Is it one year? Is it five years? Because there are different asset classes that would match those duration or investment horizons. But if you really have no view, no conviction whatsoever, then one strategy is at least determining how much of your portfolio should be public versus private. And then for each bucket, how much that should be in income versus no income. And then think about what's your risk tolerance?

more risk averse or more risk seeking. If you're more risk averse, maybe go more diversified, pick many things. If you want to be more risk seeking, maybe like be more concentrated, maybe take some bets on certain asset classes or certain fund managers or certain segments of the market. But I think that, I don't think there's one universal model. I think it should be, it should depend on those factors, right? Liquidity needs or lack there are.

income needs or lack thereof and your risk tolerance.

Eric Cantor (43:03)

Andy, I think you guys are working with both funds and deals, so how do you see this?

Andy Ervin (43:09)

Yeah. And I guess the theme that I will echo here is personal preference, personal situation, know, different people kind of need different ⁓ offerings. And what we do at alumni ventures is we offer both. So for the folks who either don't have a whole lot of expertise in venture or just don't have the time to pay attention to it, you know, we have diversified funds that you invest into.

you know, essentially set it and forget it. And our portfolio managers build those funds and manage those funds over time. That's for the folks who want access to the venture asset class, but don't want to spend the time worrying about it. The other, you know, bigger group of individuals that we have as customers are those who are very interested

in the venture asset class itself and want to know more about technology that's coming to the forefront, new stuff being built. And that's individuals who we, I mentioned earlier, who we show individual deals to and give them the opportunity to invest in an individual deal. They're reviewing our diligence and making an informed decision whether or not they want to invest in that individual deal. We still encourage

all those folks to build diversified portfolios of their own. Right. So they're constructing their own personalized portfolio. It should still be a 20 to 30 portfolio, 20 to 30 company portfolio at the end of the day. I think the, the risk is, you know, individuals who see some of these flashy deals that are super cool.

And it seems too good to be true. And man, I got to invest big in this one because it seems like it's going to be a home run. You got to avoid that mindset, right? Because as I mentioned earlier, the failure rate in venture is high. Stuff that looks awesome today, things change and some of them are going to go to zero. So no matter which of the two groups you are in alumni ventures, customer segmentation,

You know, you can go with the fund route, set it and forget it. But if you are really active in venture and want to know about each deal that's going into your portfolio, you have that option too. So it's really, it comes down to personal preference.

Eric Cantor (45:26)

Let's turn around the question we asked before about sell me hard on your product. What if I came to you and said, Hey, I want to get involved in one these other products. And you're my, I don't know, my cousin. Hey, what do think? I want to get some exposure to private credit, Andy. How should I diligence this? Like, what are the questions I should be asking? How do I know? mean, I'm not a professional private credit real estate investor. Like, and we'll ask this to everybody of the other asset classes without naming names, but

How do I know I'm ready? How do I know I know enough to make a decision to create my private credit portfolio, my real estate portfolio, or even, you know, venture? Like how would you advise me as your friend on knowing what questions to ask and if I'm ready or not?

Andy Ervin (46:13)

Yeah. Is that for me?

Eric Cantor (46:15)

Yeah, we can start with you. can go in reverse order.

Andy Ervin (46:19)

Yeah. So that's a good question. Yeah. I would start with basic overall portfolio allocation, right? So based on your personal wealth profile, you know, how much should you have ⁓ exposed to venture capital, private equity, real estate, you know, and I don't have the answers on that, but doing diligence on at different, different wealth profiles and different liquidity needs.

What are the different, you know, percentage of my portfolio should be put into each of those different asset classes? So it start there and then double click on that each one of the individual asset classes. You know, that's where we're doing our typical diligence on, hey, show me historical returns. What has this asset class done in the last 10, 15, 20 years? And what are some of the trends that are going on in the world today to make me more bullish or less bullish about that?

about that asset class. For an individual, I would typically say, look to what the larger institutions are doing. Look to what the big money managers, the endowments, where are they putting capital today, as at least a starting point to give you an indication of how much should I be putting into each of those different asset classes.

Eric Cantor (47:35)

Let's throw the same question at Khang. mean, if I'm take private credit out of the mix, I'm looking at some other asset like infrastructure, venture. I'm talking to these guys. They seem really smart. I want to put some money in like what questions do I need to ask? How do I deal with

Khang Nguyen (47:52)

Sure, so we work with individuals and family offices as clients. And I would say this, you would never know enough, but there are questions you can ask at this for private credit. So there are some fundamental factors that ⁓ say a lot about a fund or a deal. First of all, at the fund manager level, you wanna talk about the track record. How long had you been doing this? How did you perform in 2008?

maybe COVID and then you have long enough of a track record, the dot com bubble, right? What is the portfolio looking today in terms of is there fund level leverage? Are most of the assets fortunately in the second lien on secured debt? What is the average LTV loan to value ratio of your average borrower, of the average loan asset in the portfolio? Looking at non-accruals.

interest, pick his payment in kind. That's when the borrower doesn't have enough cash and to pay some of the interest in addition of that. Look at the valuation, the marks on the portfolios. Look at historical realized loss rate. Compare that with other funds. If you get to also review the underlying deals, then obviously look at ratios like leverage ratio, is debt to EBITDA, which is how relative to cash flow, how much

of debt you have for a particular borrower. Look at interest coverage ratio. Look at fixed charges-coverage ratio. So there a lot of things you can look at. And you can ask them these questions, right? Obviously, it's always the case where you ask this question, they give great answer, and you ask them, like, how did you perform in 2008? And they just don't tell you or they didn't exist at that time, which is kind of a red flag, right? Because to me, if you are a battle

tested manager, I think it says a lot because you kind of navigated that stress period and maybe you're better positioned to deal with the next crisis, if you will. So we like fun managers that have some scars on them. We like longer track record and we focus very hard on stress periods because when things are great, everybody performs the same and suddenly things happen and then you realize that there's a group discussion.

But yeah, would say those three ⁓ areas, right? The people, the performance and the portfolio construction.

Eric Cantor (50:10)

Great. Jonathan, you want to have a last word on this and keep it tight? Cause we do want to do one last question before we get out of here.

Jonathan Spitz (50:17)

Yeah, not to not to beat a dead horse, but obviously it starts with just understanding the experience and track record of a sponsor or a firm you're working with, right? Have they done this before? If so, for how long? Right? What is there? What are their unique advantages? So I understanding what is the business plan? Understanding underwriting assumptions and look that that can be that can be pretty daunting if you've never looked at a

In the case of real estate, right? If you've never looked at a real estate offering memorandum before, that can certainly be a lot to look at. But I think it just starts with understanding, you know, asking the question, like, what are the risks in this deal? And how long have you been investing in this market for a specific time? I don't know if we were talking about specific asset class, whether it's venture or credit, but I think at the end of the day, I mean, a lot of the diligence questions really boil down to the same, just understanding, you know, how long someone has been in this market or is this a new venture for them?

Eric Cantor (51:09)

Got it. All right, let's jump. got one. We got three minutes left here, so let's do a back and forth. I just want to know what do you see coming down the pipe? Something in your market or in the macro that you expect to happen in the next 24 months that could impact one or more of these asset classes. Keep it short and tight. We'll start with Andy.

Andy Ervin (51:27)

Sure. So I mentioned this, but the, and Khang mentioned this as well, the continued trend toward companies staying private longer and maybe never going public. That the number of public companies has reduced over time. That trend I am confident is going to continue. The question is what that means for the rest of the private market ecosystem.

My prediction is that the secondary markets are going to become more and more efficient. There are currently some bottlenecks and friction and trying to sell privately held pieces of ownership in a given company across different individuals. But I think there is going to be an unlock there in the next two, five, seven years.

which I think is going to create a lot of liquidity in the private market space.

Jonathan Spitz (52:22)

yeah, look, as I mentioned earlier, I think over the next 24 and that's really especially for real estate because it does tend to move slow. But as I mentioned, we are in the first inning of a real estate market recovery. And so if you think about all of the headwinds that created the recessionary environment, the real estate.

experience over the last three years. Those are now all in the rear view mirror. Right. Property pricing has adjusted to higher interest rates. That wave of supply I talked about earlier has been delivered and is being leased. So as we look over the next 12 to 24 months, there's no new supply and we're actually seeing the federal reserve start to cut rates, not raise interest rates. So that is a pretty favorable backdrop for rent growth, property valuations moving forward and now specifically to the industrial real estate sector. So we

reshoring and supply chain reconfigurations have become one of the most powerful long-term catalysts for industrial. And really the first wave of these manufacturing facilities will start to come online over the next several years. And what's interesting, and I didn't even know this until I got into the industrial space, this creates a multiplier effect across the industrial sector. So as an example, JLL estimates that for every new manufacturing operation, that generates three to five times more demand for industrial space as

local suppliers, logistics firms and service providers cluster nearby. And so that clustering effect forms these resilient ecosystems. And again, we think that's going to be really positive for industrial real estate moving forward. And so we'll see some signs of that in the coming months.

Eric Cantor (53:51)

All right, Khang, you don't have lot of time, but you got the last word,

Khang Nguyen (53:54)

Two things, one for private credit. think you will see cracks in fund managers with no track record. By no I mean you have not managed a, know, the portfolio through a downturn period. So focus on managers with long track record. The second thing is to echo Andy, I think the second is markets will grow, you know, a lot faster than the primary market going forward. Right now, primaries is not even $200 billion. That's, not even 2 % of the private equity market.

So to me, that is going to be a great way for investors to participate in, which is the secondary's market. We're actually launching this week a PE strategy with a focus on PE secondaries. And right now, you can actually buy secondary's funds at a 15 % discount because so many LPs want to get out. So to me, the growth opportunity is in the secondary's market. Most of that is in private equity than private credit. So that to me is a growth opportunity.

Eric Cantor (54:50)

Amazing. You heard it here first. Thank you all for all this info. You obviously have a lot of knowledge and continue to share it with us. Thanks everybody who showed up and stuck out through this hour. We really learned a ton and we will follow up with recordings and contact info and all that other fun stuff. Have a great day.

‍