Is the panic in private markets a contagion or a kingmaker?

Alisa Wood:
Winning is not asset gathering. Winning is performance. And if we perform, the capital will follow.

Rohan Goswami:
Welcome to Compound Interest from Semafor Business. I’m Rohan Goswami, Semafor’s business reporter, and I’m joined as always by Liz Hoffman, Semafor’s business and finance editor. Hey, Liz, how you doing?

Liz Hoffman:
Hey, Rohan. Great. We’ve got a fun chat today. We’re going to be talking to Alisa Wood, who’s a partner at KKR, the big investment firm, and it and all of its rivals across Wall Street are in the middle of what I think is the biggest shift in their business basically since the leverage buyout was invented 50 years ago, which is this push to manage money, not just for big institutions and really, really, really rich people, but for all of us.

Rohan Goswami:
That sound that you’ve been hearing over the last few years is the velvet rope dropping across the PE world.

Liz Hoffman:
Yeah. KKR started doing this a couple years ago. They’ve got, I think, about $35 billion of what we might call mom and pop money. And it’s not just in private equity, it’s in private credit and real estate and infrastructure. And the goal is to kind of take everything they do that they sell to Harvard University and the government of Saudi Arabia and sell it to my mom.

Rohan Goswami:
Which the obvious question then is, should your mom, who I have no doubt is financially very savvy, be owning that?

Liz Hoffman:
Look, the argument in favor of allowing everyday investors to own this stuff is that this stuff has made people really rich over long periods of time. And so if you only let rich people own it, they’re only going to get richer and the wealth gap explodes. So that’s sort of the policy argument in favor. And also just huge parts of the economy are not publicly traded. And I realize that is in part using a thing that private equity did, which is take all these companies private and then use it to sell their products back to us in a different, kind of more expensive wrapper. But it is true that there’s huge parts of the economy that if you want to invest in, you just have to be able to access private markets.

Rohan Goswami:
Okay. That’s the argument for. What’s the argument against?

Liz Hoffman:
Oh, that it might end terribly.

Rohan Goswami:
Oh, good.

Liz Hoffman:
So this is going to be a fun conversation. I’m looking forward to it.

Rohan Goswami:
Sounds like it.

Liz Hoffman:
Yeah, yeah.

Rohan Goswami:
Well, let’s take a short break and we’ll be right back with Alisa Wood.

Liz Hoffman:
Alisa, welcome to the show.

Alisa Wood:
Thanks for having me. It’s great to see you.

Liz Hoffman:
Good to see you. So listen, if I went back 40 years and told Henry Kravis and George Roberts that they were going to be raising money from my mom, there was a decent chance they would’ve left me out of the room. But here you are, that’s your job at KKR and every firm has someone doing that job. And if they don’t, their headhunter is busy calling you. How did we get here?

Alisa Wood:
I think this has been a long progression and they might’ve laughed, but I think in reality, they probably wouldn’t have because of the fact, if you think back to call it the early ’80s, that was when the first pension plans started investing in private equity. We actually received one of those first, I think it was actually probably the first commitment to do that. The likes of the Oregons, the Washingtons, New York, Michigan. What I think is really interesting is the change in how people save for retirement. And that has been the progression over the last several decades. In the 80s, it was more around a pension plan. That’s what you saved into. Today, that’s less the norm, unless you work in the likes of certain teachers or certain police officers or public officials or things of that nature. 401ks and personal savings is actually taking up a much, much larger part of that long-term retirement savings.
And yes, it might be a little different than we set out for in the ’70s and then the early ‘80s, but I think this is actually a natural progression that’s moved with the times, honestly.

Liz Hoffman:
So as alternative asset managers have quartered retail, and this is really what, five, six years old, I think you guys really in earnest got into this business with your K-Series of funds a couple years ago. That building block of private equity, that closed end 10-year fund where we raise some money, we go out, we buy some companies, we ideally improve them, you take them public or sell them, and then you give them money back. That doesn’t quite work in retail. Talk about the product that you’ve tried to build, the problems that you’re trying to solve, and understanding that at the end of that product is just an emotional toddler that doesn’t really know what this product is and how to get in and how to get out and how to think about private equity, though they may find it cool and interesting to own.

Rohan Goswami:
Not our parents.

Alisa Wood:
Yeah, definitely not our parents, right? There are definitely so many pain points in investing in private equity. So all the benefits of investing in private equity, and the biggest one probably is long-term compounding. That’s the beauty of it. What’s the saying? The eighth wonder of the world is compounding of returns. But what I think is so important to remember is in a closed-end fund structure, and this is why it made sense for large institutional investors for so many decades, is because of these pain points that we’ll walk through, but also because of the infrastructure you had to have to manage those pain points. So think about it. You make a commitment to how much you want to invest. That is called over five to six years. You have to hold that capital ready to be called at any point in time. And by the way, there’s no limit to how much someone can call a year.
So you can get 50% called one year, you could have nothing called one year. And you have to totally manage that. That creates a lot of cash drag. Two, you’ve got to try to diversify. You can diversify within the strategy, and that’s part of the manager’s job, but you also have to think about diversifying beyond that. Thirdly, and I think this is also really, really important, as those investments are made and as capital comes back, what do you do with that capital? I had a CIO say to me once, “It’s great that you just made this great, terrific investment. You sold the company, you got the money back, but now you just made your problem, my problem.” And I said, “What do you mean by that? ” And they said, “Well, now I got to go figure out what to put that in. ” And you gave me no notice.
So then you’ve got to drag on that reinvestment. So when you think about all of those different pain points, all we tried to do, and this has been ... Liz, we’ve talked about this many times before, this is decades in the making, right? How do you try to reduce the cash drag? How do you try to make sure you’re optimizing for diversification? How do you make sure that you have the highest velocity of compounding and the capital is fully put to work on any given day? The only thing that’s shifting is in a closed end fund, the end client, the end investor, the end institutional investor has to manage all those things. In an evergreen vehicle or in a perpetual vehicle, the manager is managing those things, not the end client.

Liz Hoffman:
Can you kind of take me back whatever the right year is where you say, “We’re actually going to do this. We are going to make ourselves, we’re going to have a channel that is for wealth, for retail. Let’s get in a room and design these funds.” What does that process look like?

Alisa Wood:
So this started honestly, probably two decades ago. So I walked in the door at KKR in early 2003. World looked a little different to say the least, both the KKR and the world at large. The concept of creating an evergreen perpetual, always on product that took these pain points out of the system was something we were talking about back then. Everybody thinks this is new because it’s making headlines today and it feels like in the last five years we’ve woken up and this is the topic du jour, but it’s actually something that’s two decades old. And we started spending a lot of time thinking about ... By the way, we talk about this as a wealth experience and a wealth type of opportunity, but this is actually an opportunity for all clients. This is an opportunity for institutional investors. If you are not a large pension plan, if you’re not a large sovereign wealth fund, a perpetual product may actually make more sense for you.
It’s not just my mother. And I think that’s the piece that sometimes gets lost. But to specifically answer the question, Liz, I think if you rewind back to two decades ago, a lot of the conversations we were having was less around how do you crack the code on wealth? Because what is there? $190 trillion of wealth in the world today in individual hands, with the vast majority of that being in folks who can’t access the structures that we had before. But it was more around how do you solve for the pain points? How do you actually optimize for a smoother return stream if you could always be invested as an example? How do you invest into a fully invested nav so you don’t have that J-curve issue in your return performance, right? How do you optimize for the recycling and the compounding so you can always stay invested?
Those were the things we were solving for and the access that this then allowed for a whole different group of clients that maybe either didn’t want to deal with those pain points or couldn’t access institutional type structures, that was almost the outgrowth of it, but that wasn’t necessarily where we were starting 20 years ago.

Liz Hoffman:
Was there ever a point before, and you launched, you have now what, $35 billion in a bunch of different funds that are available to retail investors of different kind of wealth levels. Was there ever a point before you pushed the button, you file it with the SEC where everyone looks around and says, “Do we really want to do this?” Like, this is a new client set, these are different kind of people, these are different parts. Was there ever a moment where you’re like, “I don’t know about this?”

Alisa Wood:
Of course. I think there was a moment where, and it wasn’t, do we want to do this, but it was a moment of, can we do this well? That’s a different question. And for us, the integrity of the return experience is paramount. If you think about the return experience of the individual investor, the whole point was to create an institutional-like experience. And now what do I mean by that? It’s not just an experience in terms of return performance. Obviously it is, by the way, but it was also an experience in terms of what were you investing in. Okay. Were you investing in the same thing at the same time and did you have a sharing right and a mechanism to be able to do that or were you getting the leftovers or were you getting something that was other? Okay. That was probably the most important point of the whole thing of what we were doing.
If we were going to create an institutional-like experience, that meant that we also had to make sure we were sharing in that institutional deal flow. So that was part one. Part two was, could we actually get the education right? If there are people that are buying these products, do they actually understand what they’re investing in? We throw in the industry around the word semi-liquid a lot.
I always joke that if I could strip one word from the English language, it would be it. Granted, it’s probably a hyphenated word, so maybe it counts as two. But the reality of it is it’s a bit of an oxymoron the statement because investing in private markets is all about being a long-term investor. It’s about long-term compounding. That is the beauty of it. It’s not only could you do it, right? And I think the answer was yes, you could. But the question was also, was the way you were structuring it the right structure to get that right experience, but could you also make sure people understood what it was that they were buying? And I think that was the bigger question for us was if we were going to embark upon this, the 35 billion you just mentioned, which is really exciting that we’ve been able to do that.
And we obviously have tens of thousands of investors. Now, how does that compare to the tens of millions of pensionees that we represent? We’re on a journey. We’ll get you up there at some point, but it was also making sure that we were going to spend the time and really put in the commitment to making sure the world understood what this was and by the way, what this wasn’t so that there wasn’t a mismatch of expectations.

Rohan Goswami:
I mean, all the education in the world can’t solve a simple fact, which is that retail can generally be counted on to panic at the worst possible moment. We’ve been seeing it play out a little bit at Blue Owl. We saw it play out at Blackstone a few years ago. And I’m sort of curious if you think this is a solvable problem or it’s just a kind of feature of human nature where the whole retail push becomes a game where the manager ends up trying to catch the next hot potato and ends up with egg on their face for a little bit here.

Alisa Wood:
It’s a great question, right? And it’s something we think about a lot, which is this a market where if someone sneezes, everybody catches a cold, right? And how does that actually play out a little bit? I think, and this is really the defining part of private markets for me. It all is about the who. It’s always been about the who. And it’s not about the what. The reason why private markets looks as attractive and private equity looks as attractive as it does is because you’re typically looking at the managers who do it best. It’s not the asset class in itself that’s the answer. It’s the manager who operates in that asset class that gets you the returns. If you look at the thousands of private markets investors in the world or private markets managers and funds in the world, and you look at the return dispersion, the return dispersion is greatest in private equity than any other asset class. And by the way, it’s widening. And this is all public data. You can recreate all of this data. If you look at the data, the return dispersion in private equity is about 1,400 basis points. And if you look at the return dispersion between best and worst performers in public equities as an example, it’s 2 to 300 basis points. Right.

Liz Hoffman:
So the best private equity manager is a lot better than the worst compared to the best public stock manager is to the worst. That’s what you’re saying.

Alisa Wood:
Exactly.

Rohan Goswami:
And therefore immune, in a certain sense, to a panicky investor trying to pull out because they implicitly have trust that you can navigate the chop.

Alisa Wood:
You took me to where I was going.

Rohan Goswami:
Sorry about that.

Alisa Wood:
That’s exactly the hope in this, right? Could there be panic in the market? Of course. And by the way, our job is to hopefully be seen and show the world that we are that safe pair of hands. Listen, I think we’ve said this many times before, we like volatility. We like complexity. That’s where we can show our stripes even more so than in a world where everything is up and to the right. Bring it on a little bit. We got this. In periods of dislocation, the best private equity managers do better. That’s what the data says. If you look at Cambridge or Preqin or whatever folks you want to look at. So that’s the piece of this where this goes back to the education. It’s like a continuous loop where part of what we have to explain to the market is this is okay. Okay.
This is not a carrot that you pull out of the ground every day to see how it grows. This is something where you’ve got to do your work and understand who you’re investing with, understand how they’re going to drive value, understand how they differentiate themselves in these periods of dislocation and let them do their thing. That’s really hard to do, if I’m being honest. And that is in education. We’re only a couple years in this cycle of teaching the market that that’s what good looks like. And I think that’s where we’ve got to wait to see how some of this plays out.

Liz Hoffman:
Plenty of people probably wake up and say, “I’d like to own a slice of KKR buyouts. That’s cool and seems like a fun thing to talk about at parties.” I don’t know how many people wake up and say, “I really like a global diversified portfolio of ports and water treatment plants,” which is what you do in your infrastructure business. And there’s kind of a saying in finance that some products are sold, not bought. I’m curious, as you think about that last mile, you’re going through wealth advisors, through registered investment advisors, through private bankers, financial advisors that are trusted by the end client, but there is someone between you and the person buying your product who is sometimes financially incentivized to sell different things on different days. How do you think about the further you get away from a product that everyone kind of understands? It seems like there is an inherent tension there that a lot of these products are in the sold, not bought category.

Alisa Wood:
I don’t disagree. I think private markets as a whole is it’s sold, it’s not bought. But I also think that’s because of the phase or the chapter maybe we are in and the evolution and the growth of it. Folks have been investing in public equities or fixed income for decades. They’ve gone through that education of understanding what they’re buying, how it works. You really haven’t done that yet in private markets. Back to your point, the industry as a whole has only been doing this on the individual investing side, not for decades. You can count it on your hands. And I think that is a bit different. But I really think that part of the education comes down to investing in boring, and I say that in like air quotes, is actually good. You want to invest in things that are the unsexy or less sexy mission-critical parts of the economy, whether that’s some of the infrastructure type assets that you just said, some of it’s the companies that we buy.
The vast majority of the things that we own in private equity, you would not know the name of. You would have to go Google it. If you look at our portfolio, I feel like we are very long, mission-critical, boring, repeatable businesses that at the end of the day, the way I always describe this to an end client is if you look at the hundreds of companies we own, they are companies that you cannot live without that you probably use every single day in your life or some part of your life uses that you don’t even know exist. That is what we do and there’s nothing sexy about that if I’m going to be really blunt when you’re talking about some of the things that we own good through our portfolio, whether it’s on the infrastructure side, whether it’s on the private equity side, there are lots of those examples.
But I think at the end of the day though, that’s the educational piece of this, right? This isn’t about investing in the big brand name that everybody is talking about at a cocktail party. That’s maybe where something is bought, not sold. But if you really want to invest behind the managers who know how to do this and have done this for decades, they’re the ones who are probably ... We’re a big hockey family. I have a bunch of kids and my boys are big hockey players. There was a quote that Wayne Gretzky always used to use.

Rohan Goswami:
Don’t do this one.

Alisa Wood:
Yeah. You got to skate to where the puck is going and not where the puck is. I know it’s so overused, but it’s true though, right? Where if you are filling the void in the market, you actually are able to achieve differentiated results because of that if you’re not trying to go with the consensus trends. If you think about infrastructure, a lot of that’s the same, right? You want to find the mission-critical, long-dated, contracted cash flows, but you also want to be in the parts of the business where you could also either strategically reposition or do something with the asset too. All of those things at the end of the day go back to that manager dispersion. So I think that’s something that no matter how much we’re hearing noise in the market, whether it’s on the private credit side or whatever piece of it may be, you got to remember that all managers aren’t created equal.

Rohan Goswami:
Would you guys ever buy a retail brokerage, control that last mile, control the customers?

Alisa Wood:
On the private equity side, it’s something that we’ve obviously have looked into, but more as an investment, not as a distribution angle to this. I think what we do really, really well is invest. Well, I mean, in private equity, as an example, we own Janney. We own Söderberg in the Nordics and in Europe. These are different parts of that value chain and that ecosystem. But on our side of the world, I think we are very good at creating investment opportunities, creating product. We like partnering at the end of the day with advisors who could help educate that end client. And I think they’re parts of the ecosystem where you may want to own some of them, but you also may want to rent some of them.

Rohan Goswami:
We’re going to take a quick break and we’ll be back with more from Alisa.

Liz Hoffman:
Most industries benefit from vertical integration. That’s why they try to buy their customers and their suppliers all the time. What is different about investing where you’re obviously interested in that last mile? It sounds like you’ve thought seriously about it, but what gives you pause about going all the way down and owning that financial advisor relationship to the client?

Alisa Wood:
I’ll say it this way, and it’s not even pause. I think it’s defining what good looks like. What good looks like in building a book of private equity or private markets investments is not just having single manager exposure. You don’t want hundreds of managers, but you definitely want more than one. And I think that’s part of this equation. This is an industry, for better or worse, I think for better, where you want to have some like-minded folks around the table with you, where you can build ... You want a couple competitors to also do well alongside you, because that gives a better end result to the client. And if so much of what we’re all focused on is that end client experience, having single manager exposure and owning that last mile back to, I think both of your points on that, you’ve got to do it in a little bit of a differentiated way.
So that’s the piece that I don’t think it gives us pause, but it’s almost redefining what good looks like.

Liz Hoffman:
You were saying, is this an industry where one person sneezes and everyone catches a cold? I’m always reminded that airlines don’t compete on safety, right? A crash is bad for everyone. I don’t know. Is that true in your business or is there, as you’re thinking about where to competitively position yourself, is saying we are actually better at this than other people without reminding retail investors that this can go badly. How do you think about that competitive balance?

Alisa Wood:
You raise a really great point. I think about it from two perspectives. I think part of it is, do I honestly think we do it better? Yes, I do. But here’s the but, and there’s a big but in this, is that if we as an industry, if we have players in the industry who don’t do well, if we have players in the industry who do catch the bad cold and do create a truly negative experience for end clients, that is bad for all of us. I love your example. I’m going to borrow it. I will give you full credit for the airlines don’t compete on safety. And I agree with you on that, but there are airlines who do create a better customer experience. And that’s the world I think we’re in.

Liz Hoffman:
And I always joke on Wall Street, you don’t worry about bad ideas because they never go anywhere. You worry about good ideas because someone will come along and do them badly and someone is going to come along and do this badly. I actually think in some ways the industry was a little lucky that kind of the first hiccup happened a couple years ago at Blackstone in their real estate business. Blackstone is a great firm. They’re really good at real estate. They were able to kind of sell an asset for a good price and calm everyone down. We’ll see what happens right now with Blue Owl, but like Blue Owl is a good firm. They’re good at credit. That it is actually kind of lucky that it’s happening to strong players because they’re not getting taken out by it. Do you all think like, I don’t know, there, but for the grace of God, my retail investors weren’t as twitchy today as theirs. How do you think about that?

Alisa Wood:
You’ve got to reassure investors. By the way, whether they’re an individual retail investor or they’re a large client.

Liz Hoffman:
Do big clients get twitchy too?

Alisa Wood:
Of course they do. Of course, they just don’t do it in the public as much. They call you up behind closed doors and say, “Hey, I’m really worried about X. What do you think? ” But they’re doing this. It’s the same concern, right? It’s human nature. It’s totally human nature. And I think at the end of the day, it is our job to be explaining what good looks like, making sure you are fully transparent in what you’re doing and why. There was something that I learned very, very early in my career of somebody that I worked with, actually the person who hired me here at KKR said to me, “If you could live life when dealing with clients under one premise, and the premise is never create surprises.” Surprises are bad. Okay, good or bad surprises are bad. So always make sure someone is never going to pick up the newspaper in the morning when they ... Now, granted, this was 25 years ago.

Liz Hoffman:
But yeah, open your Semafor email.

Alisa Wood:
Exactly, exactly. But if you woke up in the morning and read something on the front page that we didn’t tell you, we failed, we failed, especially in the individual investing piece of the market. Performance is only one part of this. To be really good at having individuals as investors in your products and in this evergreen space, you need to be really good at three things. In the regular way closed-end fund market, you need to be good at one. Okay. The only overlap is that one and that is performance. So delivering performance, and by the way, please don’t take this the wrong way, it’s almost table stakes. If you can’t deliver performance ... By the way, it’s really hard. I’m not saying that it’s not. Right. But if you can’t deliver performance, you shouldn’t have an evergreen. You shouldn’t even be in existence, but you definitely shouldn’t have an evergreen.
But if you want to have an evergreen product, you also need to be really good at two other things. And by the way, these two things I think are going to be what trips up people. One is, do you have enough deal flow to actually support this always on model? If you do two, three, four deals a year, whether you’re an infrastructure or private equity or real estate or private ... You know what? Evergreens don’t work for you. Right. And what happens is you start using Filler to try to make up the gap of the capital coming in and what you have interesting opportunities to put the capital out to go invest in. So you’ve got to make sure that as you’re selecting your manager, are you picking a manager who has breadth and depth of deal flow? And by the way, is that breadth and depth of deal flow the same deal flow that the institutional investors are getting?
If you’re buying something that’s other, do you actually know that it’s other? That is the biggest piece of this. When you think about marketing and communication in these products, it is all about making sure your message is getting out there in a very different way. It’s not talking to just the CIO of a single institutional investor, it’s getting reached to thousands of people and tens of thousands and hundreds of thousands at different points in time. And by the way, that’s been the opportunity. Private markets has been an asset class where if I think back to 25 years ago when I started in the industry, it was all behind the smoke and mirrors.
Back then, most private equity firms didn’t even have a website. You couldn’t understand what they invested in. It was all behind that shroud of secrecy. And now that’s not it. We’re very transparent about who we are, what we do, how we do it, what we think is good, what we think is not. When I think about how many insight pieces that we’re constantly publishing on any given day, that’s part of our responsibility in the market. It’s actually the managing of liquidity, and it’s the managing of operational risk. And I think that regardless of if you’re managing it for a 401k type of vehicle or you’re managing it for one of these other evergreen types of vehicles, the operational risk of the evergreen world is harder than anything I’ve ever seen. You’ve got to manage cash, you’ve got to manage liquidity, you’re managing hedging, you’re managing valuations.
You used to live in an asset class where you used to get values once a quarter. Now you’re talking about monthly values. If you go to a 401k world, maybe that even looks like something else, maybe it’s daily. How do you navigate all of that? If I had one prediction in the next 10 years, that’s going to be the part that trips people up. It’s those who don’t invest behind that.

Liz Hoffman:
If there’s a really good investor out there who’s really good at finding good deals, but is bad at all that other stuff, is there ever a world where KKR white labels and handles ... Is there a secret business inside your business that is turning people who are good investors, but bad at everything else and distributing their product?

Alisa Wood:
I think it’s less for us. I would like to believe that we’re very good investors and I do believe that. And I think we have enough of our own deal flow that so much of creating these evergreens is finding capital to support what we’re already doing. We’re long investment ideas. We’re short capital, which I know is a crazy statement to make as we’re sitting here at the size and scale of who KKR is. But I think for us, it’s less around needing to come up with interesting product ideas and it’s more around how do we bring more investors into the fold that can access already what we’re doing? Think about it this way. In the last 25 years, the average company has grown about fivefold. The amount of equity needed to do a private equity deal has grown anywhere between two and threefold. Our institutional pools of capital, the institutional pools of capital all over the world haven’t grown at those rates.
And that is why at the end of the day, if you could have smart individual investors all of a sudden getting access to this, that’s the win-win. You’re providing them an opportunity to get returns that they didn’t have access to before. And we’re having the capital that we could keep doing what we’re doing.

Liz Hoffman:
That’s surprising to me. I mean, we write all the time about these huge pools of capital, particularly in the Middle East and Asia, big sovereigns. Where did the money go?

Alisa Wood:
By the way, some of those are new, some of those aren’t. But I would say in a few ways, think about back to pre GFC. One of the largest investors in private equity used to actually be bank balance sheets. They can’t invest in it anymore. That’s a huge part of the market. So if you look at, and by the way, pension plans and endowments and foundations and insurance companies who have been investing in private equity since the ‘70s and the ’80s, their allocations have flat lined out. So they went from 5% to 10% to 25% to maybe even a third, but they shouldn’t be 50% allocated to privates. So if you look at a lot of what institutional investors are doing right now is culling the investors who haven’t performed and those who have are getting a disproportionate amount of the flows. So you’ve got all of these things happening.
Yes, there are new pools of capital emerging, but some of the historical pools aren’t growing at the same rate. And there are huge parts of the market that have gone away because of regulatory and structural reasons. So when you put all of that together, there’s always the headline of there’s so much capital chasing too few deals. It’s actually the opposite, to be honest with you.

Rohan Goswami:
To your point, KKR, Blackstone, none of you guys had to worry about street cred of certain kind, but regular old street cred for most of your existence. The velvet rope stayed up. Your sophisticated investors talking to other sophisticated investors. Now you’re dropping that rope. That’s most of your job, a lot of your job. What are your conversations like with KKR’s marketing team? What’s your consumer brand?

Alisa Wood:
So the way I would describe it is not we’re dropping the velvet rope. We’re just inviting more people behind it. But the conversation with our marketing team is actually, if I’m being honest, it’s a fascinating one. If you think about how investors ... And by the way, I’m saying traditional investors, this isn’t just institutional clients. This is also, this was maybe the high net worth investor of 20, 25 years ago too. If you think back to how you used to communicate, it all used to be in written form. It all used to be in these long-form, I would argue, dissertations on, let me just throw so much data at you that at the end of it, you’re going to have to think we know what we’re doing. You got to think we’re smart. If you need a PhD to understand any of that, we lost you.
We’ve got to figure out ways that we can communicate in different formats. We just consume information differently today, regardless of what type of investor you are.

Liz Hoffman:
Do you advertise? Do you have KKR jingles out on the internet that are trying to sort of introduce you to the retail investor?

Alisa Wood:
Let’s not go that far. I don’t think you’re going to get the KKR jingle.

Liz Hoffman:
But this is always the tension. I covered Goldman Sachs for a long time when they went into consumer banking and they just have a really hard ... There was a lot of heartburn about we were this brand, but we have to sort of go after this kind of customer. And I don’t know, maybe you have a big advertising budget, but it hasn’t yet found me on my Hulu.

Alisa Wood:
I think it’s something that we’re all working through. And by the way, I don’t think we’re alone. I think all of our competitors are trying to figure this out, which is how do you create the relevant content for the investor that you actually care about, but do it in a consumable way, and in a digestible way. If it’s the three-minute video on LinkedIn, or is it maybe the one-page insight piece that you can take away and read it in a minute and understand what it says? All of these things, I think we’re trying to figure out, do they actually work? Do they get the eyeballs that you want on them? And by the way, is it actually helpful to the end client? It’s hard, by the way. It’s really hard.

Rohan Goswami:
But let’s talk about a yet untapped target for you guys, which is 401ks. Obviously, the Trump administration is working on bringing private equity, bringing private credit strategies to those accounts. What does that process look like and what does the race to win those assets, those investible dollars look like from your seat?

Alisa Wood:
I think it’s a fewfold. I think this is something that so many of us in the industry are investing behind. We’re hiring people that focus on this. We’re trying to figure out, and I think we have in a lot of ways, figured out the structures that will work best for these types of pools of capital. There obviously has to be a regulatory element and component of some of this, which we’re clearly seeing that play out and that’s important. But there’s a huge, huge educational element to this. And I actually feel very good about the fact that we are walking as an industry, we are not running. So if I’m going to use the analogy of we’ve been trying for 20 years to create evergreen product to ... And I think Liz, this goes back to your original question of what is it that we’re solving for.
We started that journey a couple decades ago. That was the crawling phase. And we’ve gotten to a place now where we’re taking individual clients into these evergreen products. They used to be very focused on the higher net worth, the higher qualified purchaser. Now we’ve actually been able to figure out structures that we can go down to the accredited investor, which is helpful. And through some of these public private partnerships, you obviously have seen some of what we’ve done with Capital Group. We can actually access even below that accredited investor, the mass affluent, and that’s really helpful. So when you look at all of that, this has been a progression, right? And every step of the way, every layer that we’re peeling back, we’re moving from that crawling phase to the walking phase. We’ll see obviously where this administration comes out on some of the regulatory things that need to evolve and change for us to get to that last mile before we’re actually running.
I think that will take care of itself. But the piece of it that we are personally spending our time investing behind is really the educational piece of the market. You need to make sure that people will understand what it is they’re buying.

Liz Hoffman:
I wonder though how true that is in 401ks, and they’re not exactly paternalistic corporate pensions, but to your point, the industry has created all of these, we keep using these words, semi-liquid, evergreen, permanent capital, semi-permanent capital, but they’re all trying to do a really hard thing, which is take an underlying illiquid asset and package it in something that feels a little more like a stock or a bond. But 401ks are the ultimate, put it in the ground and pull it out in 50 years. And I actually wonder if that takes off, does all of this seem like a little bit of a sideshow? If you can get back truly in the retirement game and not have to do all of this education about don’t mark to market, don’t look at your thing every day, don’t try to take it out, that actually that might just make your life simpler.

Alisa Wood:
It very well could. I don’t think you’re wrong, but it’s got to work. We’ve got to get there. The one thing we haven’t talked about, by the way, which I think directly goes into, Liz, some of what you’re saying here, is think about how many companies today, if you’re thinking about investing in private equity in a 401k or investing in some form of private investing as an individual investor, why are you doing it? Take a big step back and say, “Well, what’s the point of it? What’s the so what? ” The so what is because you believe you’re either accessing something you can’t access in all of the other investment solutions in your portfolio or, and maybe it’s an and too, by the way, or you’re getting something that will give you a differentiated return. And so we’ve talked about the differentiated return piece of it, but the piece of it I think we haven’t necessarily talked about is what is it that these vehicles are investing in and how does that compare to all the other things you invest in?
And this I think is the piece that is the most misunderstood. I don’t think people think about it. Think about private companies for a minute. There are 50% fewer public companies today than there were the day I started in private equity 25 years ago. Now, why is that? And by the way, does it matter? The reason is being public isn’t what it used to be cracked up to be. In a lot of cases, you’re managing to quarterly reporting. And what a public company CEO wakes up every day and thinks about is how’s the next quarter going to look? Not, how am I compounding long-term 10, 20, 30-year type performance in my assets? Those two things are totally in contrast to each other in a lot of cases. So what we’ve seen is companies are staying private for much, much, much longer.
I actually view being public, and I don’t think this is just us. I think many people view this. It’s a phase in a company’s lifecycle. There are moments to be public. There may be moments not to be public. Certain companies, if you’re a certain size or you’re in a certain industry, maybe it doesn’t actually make sense for you to be public. Those are okay things, but what does that mean for the end investor? It means that if you’re talking about that individual retiree, you actually are not able to access 50% of the companies in the world, half of your investment landscape has gone away. And I would argue that is an important piece of this equation as we start to think about the opportunity set as well.

Liz Hoffman:
When you were saying a few minutes ago about the importance of having enough deal flow, every institutional fund you raise has a hard cap because you know that there’s a limit to your ability to invest, but retail, as you said, is a spigot that is a little harder to turn off once you turn it on. And I remember I think a year ago, one of your competitors in the credit space, HPS has gone to some of its distribution partners and private banks and said, “Turn it off right now. We don’t have the deals for it.” Have you found yourself in a position where you had more money coming in than you knew what to do with? And how would you deal with that if you did?

Alisa Wood:
And I’m smiling because most people would think that’s-

Liz Hoffman:
A great problem to have, totally.

Alisa Wood:
It’s a great problem to have.

Liz Hoffman:
Until you start having to find places to put it and ultimately you’re either going to go in cash, which is not as high yielding or you’re just going to do stupid deals and then the returns are going to be bad.

Alisa Wood:
Totally. So you almost have to protect yourself against yourself sometimes. But what I think is really important about, at least how we’ve thought about this is we set out with picking our partners early on very carefully. We don’t want to be with every distributor on the street. What we want are very thoughtful, consistent relationships that in a lot of cases see the world the way we do. And what do I mean by that? I mean by that in terms of like being long-term investors, view the world in terms of five, 10, 15, 20 years, don’t view the world in terms of that many months. What we have done is we have diligenced our partners as much as they’ve diligenced us because this is a marriage. It’s not a quick date. And if you think about it that way, you actually are partnering with people who view education the same way that you do, have the same alignment that you have in making sure that clients understand how to stay the course, understand even when the market is starting to catch the cold, how they can navigate that differently.
So what we have done is start slow, build that. And Liz, I think you started out by saying 35 billion across all of our evergreen strategies. It is all about the slow and steady wins and because winning is not asset gathering. Winning is performance. And if we perform, the capital will follow. That has always been the case. We are one of the largest investors in everything we do. And we say that all the time. I often joke that we’re like the ultimate family business with Henry and George being first cousins. And you put that in the context of the ultimate alignment, which is we’ve got $28 billion of our own money invested in everything we’re doing. It’s one of those where we put our money where our mouth is. Then I think at the end of the day, the capital will follow, the right pools of capital will follow. We don’t need the last marginal dollar. That’s not the dollar we want. And I think if you-

Liz Hoffman:
So you’ve not found yourself in a position where you have money coming in that you genuinely don’t know what to do with?

Alisa Wood:
Well, not historically because of the fact that we’re very prescriptive about how we’re taking that money in. And I think this is a market where you can have visibility into that. And we are also, when you think about the opportunity set, at least today, right, this may look different 15 years from today, but if you look at today, we are still filling enough of a hole in terms of needing more assets than back to the long investment ideas, short capital. That balance still is somewhat out of whack. Maybe that looks different over time, but we’re not there today and I don’t see us being there, at least in the medium to near future.

Liz Hoffman:
We talked at the top about how the 10-year traditional, that building block of private equity, that closed end fund doesn’t really work in retail, but it’s also showing its age in other ways. We’ve seen a bunch of these continuation vehicles where there’s some assets left at the end of the life of the fund and everyone has to kind of move them somewhere else and recapitalize them. We’ve seen this big boom in secondary sales of private equity funds. And I guess I wonder whether you think that model has kind of outlived its usefulness.

Alisa Wood:
I don’t think the model’s broken. I think it’s just ripe for evolution. And when you think about you buy a good company, you make it great, you have a timeframe that you’re trying to do it in. Sometimes it just takes longer. Or by the way, sometimes, and I think we often don’t talk about this enough in the industry, sometimes you’ve got a great asset that you actually don’t want to give up. And by the way, as an investor, you kind of have the hard parameters of like, well, it’s an end of fund life. What do you do with it then? But wait a minute, what you want us to do is find good companies we can make great. That’s the theory in private equity. What about if I have a good company and we are making it great and I’m just running out of time and I need more time to make it even better and with that comes in an even higher return?
All of these are the things that I do think that evergreens could be helpful with, but that’s not the goal of it. So much of it, at least in how we’ve thought about the world is, I actually think there’s definitely a market for continuation funds for the right asset. The right asset that can give certain investors liquidity, but other investors who want to stay in it and help ride that wave of what it could be from here, you want to be able to facilitate that. But in an evergreen strategy for us, it’s all about creating the alignment, right? You want to make sure that you’re having that institutional like experience. So if the institutional pools of capital are selling, well then you know what? Maybe you should be selling. If the institutional capital pools are buying, well, then maybe you should be buying.
You want to get in, but you also want to get out and it’s balancing those two things at velocity. The one thing that I think is very interesting right now is that we’re living in a period where the paradigm is fundamentally shifting. And what got you here as an investor in terms of what drove your performance over the last five to 10 years is just not going to be what gets you to where you want to be over the next five to 10. And I hate saying like, now is the time because I’m a big believer that in private equity, it’s always the time. And I think this is a moment where not having private equity in your portfolio or not having private investing, infrastructure, private credit, whatever it may be, the downside is going to be very real. And you’re going to see the difference between portfolios that have it and don’t.
Because when you think about the compression of public equity returns, right? After periods where you see 20 plus percent compounding, the next five years usually look to be about 5% compounding, right? So whatever asset allocation sins you may have committed, they’re not going to get made up for in the public equity space. In fixed income, the fact that fixed income used to act as a hedge against public equities in a portfolio because of the lack of correlation, that has fundamentally reversed. So all of the tools that have been used historically that allowed you almost to get away with not investing in private equity and private investing, that’s fundamentally gone away now. So think about this, like you’re now in a world where you need the asset class more than you’ve ever done before, because it acts as a return gap closer in these periods of dislocation and in this new paradigm.
And too, by the way, this is also happening at the exact same time. We’re creating these new structures to take all the frictional pain points out of the equation. It’s those two things combined that I think are really shifting the steady state of where we are today. And by the way, that’s what in the morning when I wake up every day, that’s what makes me excited.

Liz Hoffman:
I don’t know Alisa all my money’s in like a 2X levered single stock Nvidia fund, so-

Rohan Goswami:
That’s exactly what you’re supposed to do.

Liz Hoffman:
Is that not where supposed to be? My bad. We’ll take this [inaudible 00:49:50].

Rohan Goswami:
No, no, that’s great. Tesla’s even better.

Alisa Wood:
Well, all my money is either in KKR or cash, so there you go.

Liz Hoffman:
That is a real Barbara strategy. Thanks for coming. This is a really fun chat.

Rohan Goswami:
Yeah, really appreciate it.

Alisa Wood:
This has been great. Thanks for having me.

Rohan Goswami:
That was really interesting. I feel like Alisa did a pretty solid job of laying out the full case and was a good sport about the pushback. What do you think? Has your mind been changed at all? Where is your mind on this?

Liz Hoffman:
This is going to be an unsatisfying answer, but this is really about product design, how you design the product. And it’s clear that she and KKR think a lot about this because they know that there is sort of a there but for the grace of God, go all of us problem. And I thought she was most thoughtful around ... What did she say? If one of us sneezes, does everyone catch a cold? I was sort of saying that airlines don’t compete on our planes crash less than other people’s planes because if there’s a crash, no one flies and it’s bad for the whole industry. It feels like we’re going to see that in some KKR marketing documents. But I think these products, it is not a satisfying answer, but they are working as they are designed to work, which is that you can line up every quarter and you can get some of your money out, but not all of it. And it’s paternalistic and it’s patronizing, but that is how it is designed to work. And it’s the only way to take really illiquid things and package them up in something that feels a little more liquid.

Rohan Goswami:
I mean, on the panic point, we’ve been seeing that play out over the last few weeks unabatedly at a competitive KKRs that’s Blue Owl, where a bunch of their investors, largely retail investors, all want their money back and are just not structurally going to get it. And so that kind of begs the question, which you and I got you a little bit, I think, which is why do the KKRs, the Blackstones of the world even want to deal with these people who are literally just emotional moms and dads?

Liz Hoffman:
It’s very hard to resist giant pots of money. There’s something like $75 trillion of investible money in the US, and it’s roughly split between institutions that have been KKR’s clients from the beginning and individuals. So it’s just a lot of money. And it’s also important to remember, Alisa talked about this, that individuals have owned private equity almost from its earliest days. They just owned it through their corporate pension funds and corporate pensions are going away. And so it’s kind of rewiring of the supply chain of private equity. And so these firms are saying, “Well, I still want that money, but I got to go straight to the end user to get it.” And the things to keep an eye on here, I covered Goldman Sachs for a longtime when they were in the middle of building a consumer bank. And there was a lot of heartburn over there about how do you keep this prestige, the mythology of this big brand, which obviously KKR has spent 50 years building, but also market yourself to the every man and the everywoman.
And I think Alisa’s choice of words is interesting. They’re not dropping the velvet rope, they’re just letting more people behind it. But obviously the less exclusive a club is, the less exclusive the club is. And I think it’ll be interesting to kind of watch. There’s a cultural pivot that has to happen alongside these products. You’ve seen it a little more actually at Blackstone, which was slightly earlier to this retail push and is bigger there. There’s a very consumer facing piece of Blackstone. There’s CEOs out there doing TikTok videos on these morning jogs and they have always had that hilarious Christmas video, but there is a little bit more of a ... I don’t know, they’re going to have to figure out what these brands are when they are no longer only for the elite of the elite. And so that’ll just be an interesting story to watch.

Rohan Goswami:
Well, that’s it for us this week. Thanks for listening to Compound Interest from Semafor Business. Our show is produced by Josh Billinson with special thanks to Anna Pizzino, Katherine Bilgore, Matthew Alexander, Claire Einstein, Rachel Oppenheim, Tori Kuhr, Villana Wang, Garrett Wiley, and Daniel Hoeft. Our engineer is Bob Mallory. Our theme music is by Steve Bone.

Liz Hoffman:
If you like Compound Interest, find us wherever you get your podcasts and leave a review. And if you want more from Semafor Business, you can sign up for our newsletter at Semafor.com.