Full Transcript
Slava Rubin (00:00)
In this episode of Smart Humans, we talk with Mike Sall who's the co-founder and CEO of Heron Finance. We talk about the world of private credit. Did you know that in private credit over the last 30 years, the median return is about 11 %? In the public markets, you could have got equity returns about 10.7. So should you be in private credit? He talks about the economy. He talks about his predictions as to where it's all headed and how you can navigate this volatile chop that might be ahead. And of course, he gives us his picks for three years out.
Slava Rubin (00:56)
Hello and welcome to the latest episode of Smart Humans. I'm excited for today's guest. We're gonna be talking about the world of private credit. We have co-founder and CEO of Heron Finance, Mike Sall Welcome to the show.
Mike Sall (01:08)
Thanks for having me. Good to be here.
Slava Rubin (01:09)
Absolutely,
we always like to start off with the beginning. How did you even get into this world of alternative investments? Take us back to childhood, school, your first job, whatever it is, how did you even start thinking about this world at all?
Mike Sall (01:26)
Yeah, I think it really started back in high school. taking, had, we had business classes in our high school that I would take a few of those, started thinking about stocks and how you look at them and how you analyze companies. And I remember I even created a project for myself of creating a report of what stocks I would want to invest in at that time to see, even though I had no money, but wanted to see how it would go. And I remember writing it all up and creating a little report for myself just to see how it went.
and so that's how I originally got into the investing side of things. and then in school studied finance, afterwards really focused on tech. So for the past 15 years or so have been originally in data science, doing, technology work at tech startups and companies here in the Bay area, but have just continually being interested in investing since then. So I remember in the early 2010s or so looking at the IPOs of Twitter and Facebook and wanting to analyze those companies.
⁓ that's really what got me interested originally, just always, looking at how to invest in things. then recently started to hear more about things like private credit or other things like that. And, got, got kind of down the rabbit hole from there.
Slava Rubin (02:36)
Awesome. So was your entry into this world really starting your own company with private credit? Or were you getting involved in this stuff while you were, you know, after high school, obviously, but while you were working as a data scientist in any way?
Mike Sall (02:48)
My entry specifically into ALTS, like Private markets was from starting this company, but I've been interested in investing more broadly and how you think about that for a while now.
Slava Rubin (02:59)
Awesome. in terms of we at the show love to get to understand our guests, how they like to invest their own money. So the traditional way of investing is, you know, 60 % into public markets, 40 % into bonds, 0 % into any alternative asset class. Obviously that is not the modern way of thinking and many of our guests have a different perspective. So how would you say is your mix personally for your net worth between public markets, bonds,
in any category of alts.
Mike Sall (03:32)
Right now, I would say it's a decent amount just in stocks, the broader stock market. And then trying to be diversified across a number of other asset classes. So commodities and gold and private markets as well, like private credit. That's pretty much the brunt of it is actually I'm not that I'm not as much into bonds right now, because I think private credit for me personally, is a good alternative for that.
So it's really like stocks, private credit, gold, commodities, and some real estate too.
Slava Rubin (04:04)
Got it. So what percent, if you had to guess, is just the public markets of that 100 %?
Mike Sall (04:10)
I would probably guess about 60, 70 % right now.
Slava Rubin (04:15)
Okay, so let's say 65 % public markets. then so that's like a third is the non-public markets. You're not so much into bonds. So a third of it is in really alternative investments. Is that fair? And if you were gonna zoom in on that 35 % and that was now 100%, how would you say that 100 % is split up between private credit, real estate, commodities, gold? Is it equal 25 % across or are you weighted somewhere in there?
Mike Sall (04:24)
Yeah, that's right.
Uh, it's probably roughly equal except a larger portion in private credit compared to the other three. but yeah, my, my view on a lot of this, at least when it comes to my personal, like personally investing is wanting to take a really diversified approach. And like for all of those investments, I'm not choosing specific companies or like even specific funds, but trying to be diversified across multiple asset classes. And then with any asset class being
diversified across the number of different managers who are managing deals. So the things I'm like specifically trying to avoid are just putting a lot into any one deal, whether it's like one company or, you know, one alternative opportunity kind of a thing, like getting away kind of from the like stock picking kind of approach to things and more going into diversified portfolios of things. And then also focusing on managers.
across all of these asset classes that have been doing this for multiple decades and like have been proven rather than newer folks who are kind of creating new funds and getting started. So that's how I kind of view all of it across the board, just be as diversified as I possibly can. But yeah, I would say alternatives are about 30 % of my personal portfolio. And then it's across real estate, commodities, gold and private credit. Private credit is like a large chunk, gold is large chunk and then
kind of real estate and commodities are kind of a mixed third, I guess.
Slava Rubin (06:05)
super helpful. And then in terms of your public markets exposure, is that just like ETFs or mutual funds or is that some sort of stock picking there?
Mike Sall (06:13)
Yeah, it's like VTI, the total stock market is like the large part of it. And then also the non like total international stock market and then like a small bit in emerging market stocks as well. So like basically three ETFs there.
Slava Rubin (06:28)
Perfect. So it's VTI is your main one. Awesome. And in terms of your exposure into like commodities and gold, for example, how are you doing that? Is that through a manager? Is that again, through some public listing of some sort or is it literally some, you know, closed and private thing that very few people have access to? So again, how are you getting access to it?
Mike Sall (06:32)
Yep.
Yep.
Yeah,
for commodities and gold, both using ETFs for that really, really simple. mean, it's like amazing now how easy it is. There's an ETF for almost anything it seems. yeah.
Slava Rubin (07:01)
Totally
Great. And then obviously we're going to get into the private credit. Are you doing much private credit outside of what your own company is giving exposure to or are you trying to stick to kind of your own private credit opportunities?
Mike Sall (07:16)
Um, I, so, no, I'm only doing it through the, through the company, but it's, it's less because, I mean, partly because it's my company, but also it's just literally difficult to go to those funds. Uh, there are publicly traded private credit funds out there. The issue with them is that they are pretty volatile because they're publicly traded where even if you're getting a consistent, say 10 % yield from that particular ETF, the, actual price can fluctuate.
20 % in a given year. So it's like very easy for just the volatility of the public markets to wipe out the returns that you get from that. like part of what prompted originally building this product was I was looking at them and I wanted to invest in those public ETFs. And I was trying to understand like, how are they overvalued or undervalued relative to the actual holdings that the ETF has? Because I know the underlying loans aren't, they can't possibly be
sort of as volatile as the actual prices. And I was very confused, like, why is the ETF fluctuating so much when it's just a whole bunch of loans that aren't changing over the span of like multiple years? And then how do I know when is a good time to go into the fund or not to, because I have to make sure the price relative to the actual value of all the underlying assets is a good price. And a lot of this information isn't that transparent. You have to like look at the...
underlying SEC reports and they just like list hundreds of loans and like trying to figure that out. I was like, this is this kind of a crazy thing. And so I was like, thinking about just just buying them and hoping that I got in at a good price. But then I started to realize that there are these private funds which you can't really go into if you're an individual. So it was a whole kind of journey of me learning that even though I wanted to go into these funds, the ones that I could just click into and buy on, you know, a typical brokerage.
weren't gonna be the ones that I would want to do. So yeah, I decided to just kind of hold off on buying, because I just didn't want to mess up and like time the market poorly or like choose a fund that happened to be really kind of overpriced for what all the underlying loans were due to the public markets. And it's interesting how like there could be such a big difference with the very similar portfolio, sometimes identical portfolios for what's in a public ETF versus, you know, a non-traded fund that is separately where the public
the public securities can just be so volatile, even if the underlying assets are. And there's like many reasons why that might be, but yeah, that's sort of, so that's way of describing why I'm not in the public ones. I did look into them.
Slava Rubin (09:50)
Okay, super helpful. Shifting gears, you know, get a lot of kind of market information, you're studying the market. We always love to get our guest point of view on the economy and the market. So I'm just going to ask that in a very generic, open-ended way. What's your point of view as to where we are in the market, the economy, what's happening now over the next few months, quarters? You know, I leave it wholly open-ended as to how you want to take that question.
Mike Sall (10:15)
Sure, yeah, I can share a few thoughts on that. I should also just caveat it. I'm more a technology person. I'm interested in investing as well. But yeah, I think about it from that perspective. when I'm looking at it right now, one of the things I'm thinking about is wanting to be careful about public markets just generally because it's missing so much of the actual economic activity that's happening right now. So am I thinking about how 30 years ago, I think there were over 8,000 public companies and then even now,
with the market getting so much bigger, it's less than 5,000. part of when, so there used to be like this great way to get diversified exposure to the economy, which is, as I described, this is like how I'm always thinking about it is how can I get diversified exposure? But it's just not that easy right now with the public market. So when I'm thinking about the broader market, there's almost this disconnect of how do we think the broader like economy for the US is going to go? And then how would that translate into actually
what we see in the markets because the markets right now, like the S &P 500 is predominantly the Magnificent 7 as I think 30 % or so of the market there. And so I think there's two things, like two trends that I see going at the same time that I'm thinking about. One is that I'm overall very bullish on the stock market. And by that, mean bullish on the Magnificent 7 because that's basically the stock market now because of AI and I see all of the...
kind of economic benefit that we're getting and the growth that that can drive. Like we're using AI in a lot of places. I have lots of friends and other people using AI in their companies all over. And so I think that can drive a lot of growth for the economy. And that's pretty much what the stock market is right now. At the same time, a big concern I personally have is about the amount of debt that the government has right now. I'm worried about what that could mean for inflation. I think that if the Fed can
continues to cut rates that, mean, historically helps a lot with stocks, but it can also have a big impact on inflation. And so I think, okay, what can the government do if inflation really gets out of hand? There is like, we could try to cut government spending. We could try raising taxes for everybody to cover the cost of the debt. We could print a whole lot more money to cover the cost, ⁓ or we could just hope for the economic growth.
driven by AI and like the hope for economic growth might help but it seems to me like the easiest thing for the government to do in those circumstances would be print a lot of money. It's kind of like easier to do than raise everyone's taxes. And so if we're doing that, then I'm thinking over the span of like multiple years, not like, you three months or six months. But if we start printing a lot of money, then I can see that affecting inflation quite a bit. And so that's why actually like what I described before.
being not only in stocks, also commodities and real estate and gold, all of those things being kind of inflation hedges. So that's what I'm thinking about. So when I look at where the markets are, I'm seeing the potential economic growth of AI as being a major thing and that could drive the broader economy, but then also concerns about inflation and what we might do as a government and society to solve that.
how that impacts inflation even further, I mean, with the debt. that's sort of how I'm thinking about the current markets and the two kind of main points I'm preparing myself for.
Slava Rubin (13:28)
⁓ Super interesting overview. Let me put you on the spot with a few distinct questions. I think I know the answers to some of them, but we'll make sure to ask. So 12 months from now, inflation, up, down, flat.
Mike Sall (13:40)
I would guess up.
Slava Rubin (13:43)
Unemployment, up, down, flat.
Mike Sall (13:47)
I might say flat, maybe up, but it's hard to say, I think, with AI as well.
Slava Rubin (13:54)
It is hard to say. That's why we like to hear your opinions. ⁓ then Fed Reserve rate up, down, flat 12 months from now.
Mike Sall (13:57)
You
I would guess down.
Slava Rubin (14:07)
You want to give perspective on how much a year from now?
Mike Sall (14:11)
I, let's see, that's a good question. I guess I would bet a year from now maybe two to three cuts.
Slava Rubin (14:21)
So like 50 to 75 basis points.
Mike Sall (14:23)
Yeah, that would be my guess, yeah.
Slava Rubin (14:25)
So less than 100. All right. And then recession binary 12 months from now. Are we in one or we don't have a recession? 12 months from now.
Mike Sall (14:36)
I think probably we are, but I don't know if it'll be like a massive recession. I guess it depends on how we define it. if recession is defined, I mean, know that there's the technical definition, but I think of it as like, what does recession look like in terms of the value of stocks and what does recession look like in terms of unemployment and felt?
Slava Rubin (14:59)
I'm actually gonna
ask you your view on the stock market right after this. So recession as it relates to GDP down for two quarters in a row.
Mike Sall (15:03)
Okay.
Yeah, I would guess, think so, but maybe not like a huge one.
Slava Rubin (15:12)
We're in a shallow one. All right, and then how about on the stock market? Obviously you do use whatever index you wanna use, are we, what's the amount of up, down, flat on the stock market? 12 months from now?
Mike Sall (15:27)
I think flat probably, but highly volatile over the lifespan. So I could see some big dips there, but also kind of recover.
Slava Rubin (15:36)
Nice. So we stay in kind of the same place, but we have a choppy way to get there.
Mike Sall (15:41)
I think so.
Slava Rubin (15:42)
Interesting. Cool. So with all of that background, you decided to create Heron Finance and get into the private world. Can you give us some perspective as to what got you interested to create that specifically and tell us a little bit more about Heron Finance?
Mike Sall (16:00)
Yeah, so I guess as I'm describing here, I'm concerned about the choppiness of the markets. I'm concerned about potentially heading into recession or shallow recession. I'm concerned about inflation and things like that. But I also believe that it makes sense to invest in great companies that have solid kind of cash flowing operations and that they can pay
you know, the loans that they take out and I want to kind of invest in private credit and get diversified exposure to all of these companies that represent the actual kind of backbone of the US economy. And then looking into it and seeing that there are some publicly traded ones, but they're, so volatile. And the whole goal is to go to companies that have great businesses, good cashflow, they can pay their loans at a steady rate and offer strong returns and get a really diversified exposure. And
the publicly traded versions of these kinds of loan portfolios are very volatile and wanting to get more diversified exposure to them. And so that's why we built Heron is to make it super easy to get diversified exposure to not only many of these kind of underlying companies, but also to the managers who manage the funds so that if you have different fund managers who...
who handle private credit in different ways, you aren't putting all your eggs in one basket with one manager. You can get a portfolio across many different managers. So that's what we built it around. And historically, like what drew me to private credit is just seeing how strong the returns are. So when you look at the median private credit manager over, for over three decades, it's been, they've delivered around 11 % annualized return when
the S &P 500 delivered just shy of 11%, I think it's 10.7 % over the same time period. that's like, normally private credit is a fixed income asset class. And you think of it as being in there, but it's actually the returns have been comparable to stocks and equities when you look at it in S &P 500. And the lowest year over that timeframe was positive 7.3 % for the median private credit manager. It's just a way less volatile asset class compared to
things like stocks or even other kind of fixed income asset classes. So the returns are really compelling. But then what the key statement I said there was like the median private credit manager, because not all private managers, mean, not all private credit managers are the same. And some have way more experience than others. Like the vast majority of managers out there today were created after the 2008 financial crisis. So they haven't been through
a lot of the major market cycles like the dot com boom, the 2008 financial crisis and things like that. So it's really important to pick the right ones. when you look at private credit, if you want to get broad diversified class exposure to these kinds of loans that companies make, you gotta kind of do two things. You have to analyze all the funds and make sure you pick good ones and then the actual process of
subscribing to the like being like, owning a piece of the funds is this whole thing because while there are the public ETFs that are basically very volatile for these, you can go directly to the funds. But as an individual, you can't do that. You have to go through an investment advisor and there's a whole process to get set up and each one can take a few months. And so if you want to go into like a dozen funds, it's like each one is taking a very long time. And so that's why.
we built Heron is to make this all much easier. So what Heron is doing is solving the whole process first. We do a lot of vetting of all of these funds. We vet over 70 of the largest private credit funds out there. We regularly update our analysis and metrics of them with the reporting that they provide every quarter. And we create scores for them. And we have so far chosen 12 out of like 70 plus to be on the platform. So we do the vetting to make sure the funds are doing well. And then the second piece,
is we handle that process of actually subscribing. So when you go to Heron and you create an account, basically, you sign one document, you make one deposit, and then you just, that's it. You have a full portfolio across 12 plus credit funds out there. And then we are automatically rebalancing it and updating your portfolio over time according to your investment preferences. So we really simplify that process a lot and just make it as easy as basically going and buying an ETF except what you're getting.
is a personalized, custom managed portfolio that's totally diversified across the asset class.
Slava Rubin (20:38)
Awesome. So on behalf of the listeners, let's assume me as the potential customer and I need to add some private credit. So, I guess the option is I could try to get into these individual deals, for these private credit companies, ⁓ offerings themselves, but that's quite difficult, right? So then there's these managers who are then aggregating these opportunities into one fund. And now you're bringing up 12 potential fund managers that I can invest into.
Mike Sall (20:43)
Mm-hmm.
Mm-hmm.
Slava Rubin (21:05)
through you guys, is that right?
Mike Sall (21:08)
Yeah, maybe, maybe just work for, yeah, probably a quick overview of how private credit kind of exists today. What private credit refers to is just making loans to companies when those loans aren't done by banks, they're done by, you know, private, private capital. And what that means is then there's folks out there who go and source various companies and, structure loans to the companies. And there's a range of options out there for investing in specific deals. And usually when platforms are offering that these
The specific deals are usually for smaller companies that might have a few million dollars in revenue and they're structuring like a smaller loan, like a multimillion dollar loan. But then there's these large funds like Ares and Golub and Apollo that have been around for decades. And what they do is they structure loans that are tens of millions of dollars for companies that are making a billion plus in revenue kind of a thing or a hundred million dollars on average in EBITDA. And so these are large, well-established companies that are getting
very large loans and then these funds, what they have is on the low end, say billions of dollars under management, often tens of billions of dollars that they are managing that they've been doing for multiple decades. And what they do is they go out and they make these large loans to these companies and they're building these relationships with these companies. And so each of these funds will have a few hundred loans in the fund. And so when you go in that fund, you have exposure to several hundred loans that is managed by this team of
hundreds of people that all they do all day is work with these borrowers and structure these loans and make sure that the borrowers are paying. And so you can, when I look at the spectrum, there are areas where you can pick and choose individual loans for smaller companies, managed by smaller, scrappier teams and the returns there are higher to reflect the nature of that risk. And then on the other side of the spectrum are these.
Massive funds with like tens of billions of dollars that they're managing going to companies making you know hundreds of millions of dollars in revenue with large loans and they're doing hundreds of loans and it's just this more kind of like You know total stock market kind of sort of diversification but within these loans to private to private companies and so they are for those kinds of Loans to get exposure to that. What you would do is you go into those individual funds and each fund
might have a few hundred loans in it. And then what we're enabling with Heron is you not just going into one fund with hundreds of loans, but going into a dozen of those funds that each have many loans that the total portfolio right now is a little over 4,000 actually underlying loans in the portfolio. And so it's a lot more like, you know, a broad asset class exposure to that. But yeah, there's other options out there where you can pick and choose individual deals, but a lot of the companies
that are in these larger portfolios, like Chobani yogurt, example, they borrow from one of these. You can't really go to Chobani yogurt yourself and get an individual piece of that particular.
Slava Rubin (24:03)
There's no real let's call it like Robin Hood simplicity of getting a piece of Chobani yogurt loan, right? Is that the point? So what year did Heron Finance start?
Mike Sall (24:11)
Right. Yeah.
We started this product about two years ago, so early 2024.
Slava Rubin (24:21)
Okay, great. And can you give any metrics in terms of your scale? How many customers, how many investments, how large of a investment base is it that's gone into these managers? Any numbers you could share?
Mike Sall (24:32)
Sure, yeah, well we recently crossed the 20 million mark. I think right now we're at 23, 24 million. We've been actually growing 30 % a month consistently for pretty much the past year, just like consistent. And we have a couple hundred clients as well.
Slava Rubin (24:46)
Amazing.
Great, and again, let's say I'm the customer here. So do I need to be accredited or can I be unaccredited?
Mike Sall (24:57)
Yeah, you need to be an accredited investor. Yes.
Slava Rubin (25:00)
Okay, accredited, and is there a minimum?
Mike Sall (25:04)
The minimum is $5,000, so very low. A lot of these funds will sometimes have higher minimums, but we're able to make it so that a $5,000 minimum and you just get the exposure across all of these funds.
Slava Rubin (25:17)
So if I invest for the sake of using a round number, let's call it $100,000. So I invest $100,000, do I have to get all 12? Or do I pick just one of the 12 or four of the 12? What's the answer to that?
Mike Sall (25:32)
Yeah, so the process is we automatically create a portfolio for you across all of the funds. when you go in, we act as your investment advisor. So when you sign up, you answer a few questions about what your preferences are and like what your risk tolerance is. And we give you a recommendation of your strategy for the portfolio. And so then you can look at our recommendation, but choose, we have a few different strategies from the conservative side to the aggressive side.
Our perspective is that you wanna be as diversified as possible, so you wanna be in all the funds and that the different strategies, they really impact is how concentrated are you in some of the higher yielding funds and loans across the entire portfolio? So you kind of will be more concentrated but can get higher returns if you're going more aggressive or if you wanna be maximally diversified in being more of the conservative loans, you can choose that path.
all of those strategies, they do give you diversified exposure across all of the funds, but you can also write in to let us know if you don't want to be in certain funds and we can exclude that as well. So what we'll be doing is over time adding even more customization there, including choosing which funds you like or don't like, but we're trying to make it as easy as possible to get a piece of everything, because that's part of our philosophy. We do all this work of vetting all of these ⁓ private credit funds and choosing the ones that we think are really solid.
But yeah, we can provide additional customization there.
Slava Rubin (27:01)
And so for these 12 funds over the course of last two years, what's been the return for the last couple of years in aggregate?
Mike Sall (27:09)
They, yeah, they generally spend around nine to 11 % returns, net of their fees.
Slava Rubin (27:16)
Net-of-fees, so if I put a hundred K in two years ago, I would have made 10 K on my first year and then another 10, 11 K on top of that. Is that right?
Mike Sall (27:26)
Yeah, roughly speaking. It of course depends on what any given person's personal portfolio is. And part of what we do is help people choose different ones. like generally speaking, around 10 % per year is what these funds have been delivering. Yeah.
Slava Rubin (27:33)
Right.
And how should I think about fees? What are the expenses fees and how does that show up as part of my process of investing or getting my distributions? How does that work?
Mike Sall (27:50)
Yeah, so when you, so what I should say is when you, when someone signs up for Heron, the kind of different options have net returns in the range of like 8 % on the lower side, around 12 % on the higher side, and those are all net of our fees, and so, all fees, all combined. So what the underlying funds do is they charge typical fund fees that tend to be in the range of all in two and a half to three and a half percent, and that includes,
about half of it is a performance fee and about half of it is a management fee. And then on Heron, what our fees are is a flat 1 % of AUM fee. So altogether, those are the fees. What's interesting though is these funds, have what's called an iShare class where usually when you invest at least a million dollars, you can get in the range of like 25 to 85 bips in fee savings. And so because of our relationship with all the funds, we are in the iShare class.
⁓ And so if an individual, if you wanted to get in the iShare class across 10 plus funds, you would need to invest a million dollars in each one. So the fact that we're able to do that by kind of aggregating the capital across our client base means that we can get those fee savings which help to offset our fees. And then that is what sort of nets out to the total returns I described.
Slava Rubin (29:11)
Awesome.
How did you pick those 12 or set a different way? How are you gonna pick the 13th one to add? What is part of that process and criteria?
Mike Sall (29:25)
Yeah, so what we do is every quarter, all of these funds, like 70 plus of them, they provide very detailed financial reporting on everything that's in the fund. So they provide the high level kind of financial stats, but they also provide the full list of every single asset that is in the fund, including like, you know, the maturity, the interest rate, all of these things. So we ingest all of that data and we build a quality score, like a
proprietary score that takes into account a number of factors about the fund, about its portfolio, things like how much of the portfolio is first lien, how much of it is PIK, payment in kind, how much of the portfolio is not accruing, factors like that. And we calculate a score and we're updating it every quarter to see how the fund is then we're at obviously what the returns are and how does the performance compare to what we would expect for the risk level of that fund.
And we're doing that, we're also frequently getting on the phone with the funds and just learning more, trying to understand how they're seeing their portfolio, how they're seeing the markets. And we combine that to come up with our estimate of, you know, this quality score. And then what we do is we evaluate what do we want to include in the portfolio? It's a combination of are the returns compelling, plus is it compelling for what we view the quality score of it? Plus we look at what is currently on Heron and
to what extent can additional funds add more diversification? For example, are certain funds focused more up market or down market? Are some of them more internationally focused versus others? How can we continue to flesh out the portfolio? And then the other piece of it is how long has the fund been operating? So something that's kind of interesting here, which I didn't mention before, is a lot of these asset managers are seeing this trend of folks outside of institutions. So like not pension plans or...
⁓ endowments or insurance plans, but like other folks wanting to get into private markets more generally. And they're setting up a new type of fund for that, which is better structured for a more audience. We use the word retail, but like individuals versus large institutions. And they're setting up these new funds, semi-liquid funds. And some of them haven't been around for very long. So we also want to like, there's some funds that maybe we like, but we wanted to see them be operating for a little bit longer before we go into them.
So those are all the kind of things that we look at before deciding when to add another one to
Slava Rubin (31:54)
Awesome. So as a final question related to this, know, some of our listeners are already in private credit. They're super interested on the flip side. Some of them have never touched private credit, think it's not for them. They're into crypto. They're into pre IPO. They're into some more high alpha type investments. What would you say to them as to why they should get involved with a portion of their investments into this diversified product?
Mike Sall (32:18)
Sure. It's, I mean, it's important before I say anything, everything is dependent on what someone's personal investment goals and preferences are, what the risk tolerances are. So, you know, I should be careful to provide some kind of like blanket recommendation to folks because it really depends on what each person is looking for. But the reason why I personally like private credit and why a lot of our clients like private credit is, I view it as an interesting asset class where it's been around.
for so long, it has been proven for so long, but it just hasn't been available to folks outside of big institutions that a lot of people don't know about it. And it's lumped into this bucket of quote unquote alternatives, similar to things like collecting collectibles and art and crypto. But I don't personally think of private credit as really like an alternative in that sense, because these are just like,
massive companies that existed forever, they take loans and there's not a big difference between these companies and publicly traded companies that get public debt. It's just that the trend is for more of these companies to be private. So my perspective is if you have traditionally, you have thought of wanting to be in bonds across many companies that think the backbone of the economy, the trend is that a lot of these companies are not going to public markets anymore.
they're going to private markets and there's a wide range of types of opportunities within private credit. And there's some where it's like individual companies that are maybe a little bit more speculative that are higher risk, but higher returning that might be more similar to other types of sort of the speculative or like, you know, higher risk area of alternatives. But the other side of the spectrum, it's like these companies that used to be public now more and more of them are just private. And it's almost like traditional bonds except now
you get them through private funds rather than through the public markets. I would think like that's how maybe I would describe it to folks is like if you are going a lot into bonds across many public companies, maybe look at what the actual diversification is of those public bonds versus what you get across these thousands of companies in these private markets. And I would view it as kind of like, I would view it as a good kind of like compliment to public bonds going into these private company.
sort of runs through that side of private credit.
Slava Rubin (34:42)
Super interesting. So obviously you know a lot about many things, especially private credit. What do you like to listen to, read, or watch to make you, you?
Mike Sall (34:50)
Yeah,
I see. I read a lot of the like the Financial Times, Wall Street Journal, Bloomberg. I'm a big fan of Matt Levine's newsletter. So all of those kinds of things are things I'm reading. then also, you know, our team, what they do every day all day is looking at the markets, especially as it applies to private private credit and private markets more generally. So our team, our chief credit officer, they're sharing a lot of things internally. So I also get a lot of my
sources and insights from our team here.
Slava Rubin (35:22)
Are they like outside of just the regular stuff? Is there anything specific that they're using that you can share that is helpful for others to want to try to read or watch or listen to as well?
Mike Sall (35:32)
Oh, I think, yeah, that's a good question. I think, I mean, it's boring. It's like literally a lot of the actual SEC filings that all these companies are making and all these funds are making. But then also I like the, there's like I described Financial Times, Wall Street Journal and Bloomberg. And then I would also mention that like some of the larger asset managers like Apollo and Aries and BlackRock, like they provide really interesting reports and research that they do.
So we're also looking at a lot of what they publish.
Slava Rubin (36:04)
Awesome. And final question, we always ask for three years out the predictions, one public markets prediction and one non-public markets prediction for what would be a pick that three years out from now you think will do really well. So if you could first give us your public markets pick and why.
Mike Sall (36:19)
Sure, my public markets pick would be gold, gold ETFs. Like I specifically have been using the iShares, IAU ETF. And that goes just to what I described before about, know, to be safeguarded to inflation a bit. And so that would be my public markets pick.
Slava Rubin (36:43)
Yeah, all time highs. So a lot of people are on that bandwagon. Makes a lot of sense. You've kind of been consistent about inflation and concerning about money printing and all that. And what would be your non-public markets pick and why?
Mike Sall (36:55)
Yeah, and I'll be honest, it is broadly to private credit, like that is, as I described before, that's a pretty large portion of my personal portfolio. And as I've described, like, I just have a personal, what's the word, a philosophy of not wanting to be like a stock picker and wanting to go into an asset class broadly. And so my personal, like private markets pick is private credit as an asset class, which means
going to the funds across the largest folks being Aries, Apollo, KKR, places like that. And so my personal pick for three years out is just a diversified private credit portfolio that's across multiple managers. so I view it as more like an asset class pick, it's because, mean, gold is a single thing, but with other things, just, don't personally believe in like doing individual stock picking and just putting all the eggs in this.
particular basket there.
Slava Rubin (37:54)
Related to the private credit as a portfolio, is there an index that we'd be able to track to see how well your pick is going over the course of next three years?
Mike Sall (38:03)
There really isn't a great index out there to use for that. I think it would be these broader reports on private credit performance and things like that. I mean, that's part of the data that we're trying to compile. It's interesting for asset class that, yeah, maybe. mean, it's actually really surprising to me that for a asset class that is so big and has been around for so much, lot of the basic things you are used to seeing just aren't quite fully developed there yet.
Slava Rubin (38:14)
Maybe you need to create it. Maybe you need to create it.
Amazing. Well, Mike, we covered a lot of ground here from starting in high school. You already were already picking stocks. You got into finance and then data science. And here you are, you know, you are in the public markets pick, but you like sorry in the public markets, but you like to be diversified mostly into VTI. And then about a third of it is in the alternatives with, you know, gold, commodities, real estate, and obviously private credit.
It's you gave us a really interesting point that, you know, the public markets becoming more difficult than ever because they had 8,000 stocks out there 30 years ago and now there's only 5,000. So everything is becoming a little bit more consolidated. You still are bullish on the stock market, but somewhat concerned as to where we're headed. Concerned about debt specifically, you were great at the lightning round, inflation going up, unemployment flat or up rates coming down 50 to 75 basis points recession shallow. But you did say there'd be a recession, which is a hot take here on the show.
And then on the stock market, you thought it'd be flat, but quite choppy. The choppy part is what you don't like. So you created Heron Finance, which is quite awesome. The private credit opportunities. People can get private credit in the public markets, but they're a lot more volatile, which is what you get to avoid. What was really interesting, also a great fact, is in the last 30 years, the median return for private credit has been about 11%, which is a little higher actually than you'd be get annualized from the public markets, which is high tens, which is quite amazing.
So you created Heron Finance and now you've aggregated 12 of the best funds all in one place. I love the fact that you actually are bringing us the bulk pricing as the millionaire pricing, which is awesome. So you don't have to have a million dollars to enter. You can have a $5,000 minimum, but you do need to be accredited. I've been doing this for a couple of years and you're off to the races. So very, very, very exciting. You gave us some interesting content picks. And of course we all love the actual stock picks, which is you gave us gold.
and then an entire asset class private credit. Thank you very much, Mike.
Mike Sall (40:20)
Thank you so much.
