Why is private credit blowing up right now? Why is it constantly in the news?

I think part of what you’re hitting on is how private credit as a topic has jumped from a niche subject in trade publications to an area of general interest covered by all sorts of media outlets. It’s in the news a lot these days. Or more precisely, it’s getting criticized in the news a lot these days.

Private credit can be a pretty dry topic, so to spice things up ever so marginally, I’ll frame my answer below as Private Credit, A Play in Four Acts (the Cliff Notes version). Why not?

Act I – Private Credit Takes the Spotlight

Private credit as an asset class is broad and varied, but it tends to be most often associated with corporate direct lending, the largest and most prevalent strategy. That’s the strategy where lenders provide senior secured loans to privately held companies. More specifically, these loans are generally provided to private equity backed companies (direct lending puts the leverage in leveraged buyouts, literally). Much of the media coverage has centered on direct lending, so that’s where we’ll focus too.

Pre-2022, private equity strategies, from buyouts to venture, were major beneficiaries of the low interest rate environment.1 Direct lending has been the largest and fastest growing part of the private credit market in no small part because their major customers – private equity firms – grew so rapidly.

2022 was an inflection point. When the Fed raised rates, private equity’s appeal dimmed, as higher borrowing costs weighed on prospective returns. But private credit strategies, which frequently lend at floating rates, were positioned to benefit from the new higher rate environment. Before you could say SOFR+550, private credit became the new private market darling.

The appeal was simple. Private credit offered an income-oriented strategy with a historical track record of consistent returns and low correlation to equities. Post-2022, higher base rates meant potentially higher returns. And private credit delivered on these expectations, at least initially. Eventually, too much capital flowed in, compressing spreads, lowering total returns, and loosening credit standards.

So to sum up, private equity fundraising stalled post-2022, and private credit stepped into the limelight. Private credit managers capitalized on the moment, capturing a lot of new investment dollars. Of course, private credit didn’t just take in new funds from institutional investors (though it did plenty of that too), it was also enormously successful in raising capital from retail investors.

Act II – Retail Funds Look Different

Raising capital from retail investors looks different in all sorts of ways compared to raising capital from institutional investors. But in this context, the difference that matters is one of fund structures.

Retail fund structures look different from institutional fund structures. Institutional fund structures are typically private drawdown funds with defined terms – say, 7 to 10 years – and no intermittent liquidity. Private credit funds for retail investors tend to fall under one of two categories: business development companies (“BDCs”) and interval funds, also known as evergreen funds. Both types typically offer investors a limited amount of intermittent liquidity, offered quarterly and capped at 5% of total fund assets.2

Compared to being fully locked up in a drawdown fund with no option for partial liquidity, the quarterly liquidity feature of interval funds and BDCs is generous. Compared to the daily liquidity mutual funds and ETFs used to invest in publicly traded credit, the quarterly liquidity feature for private credit evergreen funds is onerous. Especially since it isn’t a quarterly option to redeem all assets, but instead a quarterly option to redeem up to 5% of a fund’s total assets.

Ultimately, these tradeoffs are reasonable. Private credit loans are, as the name suggests, private. They don’t trade freely on secondary exchanges. But they do have known maturities and are usually structured with consistent cash flow yield profiles. Across a portfolio of these loans, a private credit fund could responsibly offer limited liquidity at known intervals – say up to 5% of the fund on a quarterly basis. Of all the private market strategies, private credit arguably fits most neatly into evergreen structures, and these structures offer an access point for strategies that would otherwise be inaccessible.

The caveat, however, is that investors have to truly understand the limited liquidity profiles. In hindsight, it seems that investors in BDCs and interval funds may have anchored more on the “quarterly” part and less on the “up to 5% of fund assets” part.

Act III – Investors Question Private Credit Valuations

What is a loan worth? You might say, a loan is worth the balance to be repaid, or par value, plus remaining interest.

Unfortunately, sometimes lenders can’t collect all of what they’re owed. If a borrower’s financial position weakens, they may not be able to repay their loan. You might say: a loan that is at risk of not being fully paid back is no longer worth that par value. It should probably be marked down to whatever amount is likely to be paid back.

In public credit, markets enforce this pricing discipline. If leveraged loan investors expect a borrower to default, that publicly listed loan will trade down. But in private credit, where a single lender, or perhaps a handful of lenders, own entire loans, lenders have far more discretion in pricing their loans.

In an ideal world, private lenders would meticulously adjust the values of any potentially impaired loans. We do not live in an ideal world. But even so, there is an expectation that private lenders will reflect some measure of reality when loans are clearly impaired. If only to maintain credibility with their investors.

Lately though, everybody seems to be questioning whether private lenders are reflecting any measure of reality at all. Private credit’s reputation is being dragged in real time due to a combination of headline grabbing credit events, sudden write-downs, and macro concerns around software companies.

Let’s start with the concerns about software companies.

For over a decade, private equity loved software companies, touting their “mission critical” products and sticky recurring revenue. As private equity investors increasingly allocated to software companies, private credit lenders also allocated correspondingly larger portions of their portfolios to software companies.

The narrative flip from software companies being asset-light, high-margin businesses to software companies facing an AI-driven SaaSpocalypse has been abrupt. As with many rapid shifts in sentiment, assessments are being made in broad strokes, with limited nuance. The current consensus is more or less: software exposure = bad. And as noted above, direct lending funds have software exposure, because for years their private equity customers were investing in software.

Then there are the sudden write-downs. There haven’t actually been that many to date, but in a market that is already spooked, any instance is one too many.3

And finally, there have been headline grabbing credit events. First Brands, Tricolor, Market Financial Solutions, to name the biggest ones. It matters that these were idiosyncratic frauds, and it matters that these happened primarily in the asset based lending side of private credit. But it also doesn’t matter in the sense that again, investors are nervous about private credit, and direct lending is a stand-in for all things private credit.

Act IV – Everything Comes to a Head

What do investors do when they’re nervous about an investment? They probably sell. It’s a perfectly reasonable thing to do. In fact, from a game theory perspective, if you’re worried that others are also going to sell, it’s the rational thing to do.

Which leads us to today.

Investors, most notably private credit’s newest retail clientele, are selling their investments. Several of the largest retail-oriented BDCs and interval funds are seeing investor redemptions in excess of their quarterly liquidity provisions. For the first time, these quarterly 5% thresholds are being tested almost across the board in a big way.

And private credit fund managers are choosing very different responses.

Some managers are maneuvering to honor all redemptions, regardless of stated caps.4 Those in favor of this approach would say it signals confidence in a fund’s underlying strength and maintains goodwill among investors.

Other managers have drawn a bright line in the sand.5 They’re making it clear that 5% is the ceiling and reiterating that redemption limits serve to protect all investors in the long run. Those in favor of this approach would say that it is the most responsible way to manage portfolios and safeguard remaining investors. Certainty of capital is what enables private credit funds to execute their strategies.

When the dust settles, which approach will be regarded as the right one? Which evergreen structures will survive this period? How does private credit regain its footing with retail investors, assuming it can be done?

It’s anyone’s guess how this story goes, and so we have private credit blowing up all over the news.

Epilogue

I think the unforgiving nature of credit payoff profiles is, to some extent, contributing to the negativity. Performing credit investments have capped upside. Invest in credit long enough, and some amount of credit defaults are inevitable. But if there is a risk that default rates are higher than expected and/or recoveries are lower than expected, there’s not really a way to make up for those excess losses. It’s not like an equity portfolio, where the upside in any given investment is theoretically unlimited, and outperforming investments could potentially offset underperforming investments.

I’m also seeing some folks raise concerns that private credit troubles potentially pose a systemic risk to financial markets. I’m open minded in a worst case scenario, but I’m not convinced. The restricted liquidity feature of private credit funds limits the possibility of bank run scenarios. There isn’t a massive asset-liability mismatch, because private credit BDCs and interval funds don’t actually take in short term assets (as some investors are learning the hard way).6 I don’t think we’ll see a fire sale of private credit assets, much less a disorderly unwinding of private credit portfolios.

If I had to wager, I’d say that private credit, from direct lending to specialty finance, will ultimately be just fine. These non-bank lenders fill a need in capital markets, and if anything, that need is more likely to grow over time. If stress in this market resets spreads and risk premiums, well, that might be a good outcome in the long run, even if it causes short term pain.

I don’t know what happens next, except that it’ll probably continue to be bumpy. And we should probably expect many more news articles on private credit ahead.

Thanks for the question! As always, reach out to: askacio@ivyinvest.co.

See you in two weeks,
Wendy

For individual investors, whose portfolios are often highly liquid, there may be a temptation to react to all the headlines. Should you reduce equity exposure? Increase energy holdings? Move to cash and wait until clear skies ahead? (Spoiler alert: it could be a long wait.)

For institutional investors, any temptation to react would be likely irrelevant. As I’ve noted before, the typical institutional investor’s size, complexity, and liquidity constraints make it highly difficult to quickly shift portfolio exposures in any big way. And perhaps counterintuitively, that’s very much a positive, structural advantage. It forces long-term decision making.

Compared to individual investors, institutional investors in aggregate also came into this week with more broadly diversified portfolios, which means more variation in the sources of potential returns, and ultimately, more resilient portfolios. So while I would never encourage individual investors to make reactive portfolio changes, I do think this is as good a time as any for investors to be extra thoughtful around diversification and their long-term asset allocation targets.

On to this week’s question:

What do you think about portfolio hedging, with equities at all time highs?

Obviously, this question came in during an earlier week. But even though markets are no longer at all-time highs, I still think it raises relevant concerns. For investors worried about downside risk in markets, that instinct to protect the portfolio is probably as strong as ever.

That said, in my experience, portfolio hedging rarely makes sense. I’ll caveat my answer here by noting that while I have seen a lot of different hedging approaches across various fund managers, I am admittedly not an expert in portfolio hedging. In fact, most institutional investors I know (and I’m willing to bet it also applies to a lot of those I don’t know) do not run tail risk hedging programs.1

Let me also clarify that for this conversation, I’m defining portfolio hedges as financial instruments used specifically to reduce some risk or other. In this context, hedges would include things like put options on equity indices or interest rate swaps. On the other hand, I generally wouldn’t consider an investment in gold to be a hedging instrument.

For most investors, maintaining a disciplined, diversified portfolio is the most effective risk management strategy. Large institutional investors think a lot about asset allocation and the equity risk within their portfolios. As I’ve discussed before, these investors build multi-asset class portfolios with deliberate allocations to equity investments and non-equity investments. The non-equity parts of the portfolio are 1) expected to generate returns that don’t correlate to the equity parts of the portfolio, and 2) help protect the portfolio when equity markets experience drawdowns.

Assuming an investor is maintaining their equity exposure within their targeted range, that investor is already mitigating the potential impact from a significant equity market decline. Diversification inherently serves to protect portfolios.

Next, let’s consider the cost of hedging. As an individual investor, you won’t have access to all the hedging tools that institutional investors might use, so you’re already starting from a more limited position. Like, nobody is going execute a credit default swap with you.

What might you use instead? Put options are probably among the more easily accessible hedging instruments. But there’s a cost to buying options, and those premiums can really add up. Let’s consider two of the key components to pricing option premiums: time value and volatility. Unless you’re making a market timing call and certain you know when markets will decline, you’re probably not looking at put options with near term expirations. You’re probably considering put options that expire further out in time, which means you’ll have to pay up a bit more for that time value.

Let’s say you get the timing right, and your put options are in the money before expiration. Now what? Do you continue protecting the portfolio? If your equity put options are in the money, it’s because stocks declined, and the likelihood is that volatility has increased. So now the option premium on new puts is higher. How much additional cost do you want to take on? After all, these premiums are real dollar costs that will eat into the value of your overall portfolio.

And I recognize not everyone will agree with me on this, but there can be a huge mental cost to managing portfolio hedges. There’s a lot of complexity associated with structuring and maintaining portfolio hedges. Unless you’re highly experienced, even if you have access to all the same choices as an institutional investor, those hedges are still likely to lead to some real brain damage.2 I think hedging often sounds smarter in theory than it actually is in practice.

When I think about all the hedging programs I’ve seen across fund managers over the years, the most successful ones, at a minimum, had:

1. A clear understanding of the specific risks they were looking to hedge;

2. Dedicated traders thinking deeply and often creatively about the lowest cost way to construct those hedges;

3. The ability to look for hedging instruments across asset classes and geographies; and

4. The ability to dynamically shift hedges in the portfolio.

Hedging can absolutely make sense for investors looking to isolate out a specific risk that they want to take from broader risks that they don’t want to take. Think, for instance, a U.S. investor that wants to invest in a Japanese stock but doesn’t want to take on currency risk. These are often discrete hedges, for a discrete purpose, over a discrete period of time.

Running a proper hedging program demands a fair amount of attention, dedication, and expertise. If you’re feeling uncomfortable with equity valuations, maybe don’t jump to layering on expensive portfolio hedges. Instead, consider revisiting your asset allocation. Institutions build multi-asset class, diversified portfolios to withstand periods of equity volatility. And I would say that broadly, this approach is more sustainable (and involves a lot less brain damage) than trying to time the market or run a tactical hedging program.

Thanks for joining, and as always, reach out with questions: askacio@ivyinvest.co!

See you in two weeks,
Wendy

My husband, Seattle-born and raised, graciously (some might say, wisely) avoided mentioning football for a bit. And while it took me longer than it probably should have, I eventually came around in time to root for the Seahawks this past Sunday.

Huge congratulations to Seattle and Seahawks fans on a well-deserved Super Bowl win!

What happens next, though, is up in the air. The Seahawks are up for sale, and whenever the team trades hands, it’s expected to do so at a record setting price. I’ll be curious to see if the buyer that emerges includes one of the NFL approved private equity firms as a minority owner in the transaction.

Of course, above all else, here’s hoping the team stays in Seattle. I don’t think the city could stomach a repeat of the SuperSonics debacle. In our house, we still refer to OKC as the Team That Shall Not Be Named.

This week’s question is about the allure of investing in private markets through individual companies or assets, particularly if it’s an extra shiny object (like, perhaps a sports team). The question arose during a recent conversation with family office friends over dinner. The group was a mix of family offices of different sizes and investment approaches, with remarkably few investing in private markets primarily through funds.

When does it make sense to invest in individual private market companies or assets, and when does it make sense to invest through a fund manager?

It should be a surprise to no one reading this that, when it comes to private markets, I am heavily in favor of investing through fund managers in all but the most limited of circumstances. For the purposes of this discussion, let’s set aside co-investments alongside fund managers. We’re talking here only about making one-off, individual private investments.

For the majority of individual investors, the short answer here is: never; and always.

A longer answer might be, it could make sense to invest in individual private market companies or assets if all of the below apply:

1. You are yourself an expert on this private market industry or investment type;

2. You have the network and deal flow to see most, if not all, of the investments that are related to your area of expertise; and

3. You understand the risks and can confidently underwrite the investment.

It makes sense to invest through a fund manager in pretty much all other scenarios.1

I’ve found over the years, and it was no different at the aforementioned dinner, that very few people want to hear this answer.

I mean, I get it. Telling folks at cocktail parties about investing into a promising private company just sounds so much cooler. It’s surely more interesting than talking about a fund manager. But at the end of the day, wouldn’t you rather just give yourself the best chance of investment success?

At one point over dinner, someone unintentionally made my point for me, saying: you’re telling me to invest alongside experts. But it feels like any time I invest alongside a buddy that is an expert in [insert industry/vertical], it underperforms!

I’m paraphrasing, and the comment was made half-jokingly, but it captured a lot of the challenging dynamics inherent to cherry picking private investments. Remember the conditions I laid out above? Including how an investor should have the network and deal flow to see most, if not all, of the private opportunities in a segment before selecting one? In this example, the investor was relying on a friend’s deal flow. It’s possible that the friend in fact has the network and deal flow. But the investor still doesn’t. And if an investor is relying on a friend, an investment club, or an online marketplace, there’s always the risk of negative selection bias.

A good heuristic, another way to frame the decision process might be asking: why are you being shown this opportunity? Are you the natural buyer of or natural investor in this company/loan/property/etc.?

Let’s assume the friend referring the investment is indeed a subject matter expert. Let’s also assume the friend is indeed a good investor in their area of expertise. But that doesn’t mean any given investment will be successful. And to go back to the central question – why are you being shown this particular investment? Why is this one getting shared?

In case it’s not obvious by now, investing in one deal shown to you by a friend, industry expert or not, is not the same as investing in a fund manager with industry expertise. Only the latter provides a thoughtfully constructed portfolio of investments where your dollars are deployed alongside that expert in every single investment that expert makes.

Here, I’ll make a concession. I fully recognize that it’s not necessarily easy to find great private markets fund managers either. And perhaps I’ve buried the lede, but investing in private markets is hard all around.

There is no presumption of fairness in private markets. There is no level playing field. Market inefficiency, information asymmetry, and the perfectly legal possession of material non-public information – these are, as the saying goes, features not bugs.

All the above said, an investor might still want to invest in individual private investments. And if the investor sizes them appropriately, recognizing the risks they’re taking, then who’s to object? Don’t we all think about buying a lottery ticket when the jackpot gets above a billion dollars?

Thanks for joining this week! As always, reach out with questions: askacio@ivyinvest.co.

See you in two weeks,
Wendy

If you’ve never lived in New York, you probably haven’t experienced the city in a snowstorm. And you probably also haven’t experienced the state of New York sidewalks following these snowstorms.

For however long it takes for the snow to melt away, New Yorkers are stuck awkwardly dancing around each other on narrow sidewalk paths and crosswalks. There’s maybe enough room to allow a single file line of pedestrians walking in each direction, if that.

And then at the end of each block, there are just these comically large snow mountains. Snow has been plowed off the streets and sidewalks (sorta), but there’s no place to move the snow. So into random, giant piles they go!

This week’s question has nothing to do with snow, or winter. I’m just ready for this cold spell to end!

How do you think about LPAC member responsibility before you decide to not re-up? Are you supposed to raise issues? Why or why not? Is there a different standard of feedback that applies to LPAC members versus just LPs?

I love this question. My mind immediately goes to a bunch of different places, so I’ll try to organize my thoughts in a useful order. In a fortuitous bit of timing, I also recently had the benefit of joining a closed door discussion on LPAC best practices. I’ll incorporate some of the more universally shared perspectives here too.

But before we start, let me first describe LPACs for those readers that may be less familiar with the concept. LPAC stands for Limited Partner Advisory Committee. These committees are formed from a subset of LPs as part of the governance structure for (most typically) closed-end private equity funds. LPACs don’t get involved in investment decision making, that’s the purview of a fund’s General Partners (GPs). LPACs are called upon to weigh in on things like industry wide best practices, valuation policies, legal or compliance matters, etc.

Buried somewhere in the hundred plus pages of a Limited Partnership Agreement, the legal document that governs every buyout, growth equity, and venture capital fund, there is a section describing the LPAC and its role. And while there is some variation in the influence of LPACs across funds and firms, LPACs are tasked with representing the interests of all the LPs of those funds in those moments when LP interests need to be represented (more on this later).

The natural next question might be – well, who gets to be on these LPACs? As is so often the case, the answer is – it depends. Some GPs have a dollar threshold. If an investor commits a minimum dollar amount or above, that investor automatically has a seat on the LPAC.1 For many more GPs, it’s a blend of the GP courting specific LPs and/or LPs negotiating for that LPAC spot, if they’re so inclined.

In fact, the question of whether to sit on an LPAC at all can be a topic of debate in some investment offices. I’ve always felt strongly that having an LPAC seat is preferable, whenever possible. Some in the LP community hold less favorable views of serving on LPACs, most frequently citing the time commitment required from LPs versus the potential benefit of participation. Fair enough. I’ve also heard LPs mention the greater difficulty of not re-upping in a manager’s follow-on fund while serving on an existing fund’s LPAC. This concern touches directly on your question, and I am admittedly far more skeptical of this argument (more on this later too).

Ok, we’ve covered what an LPAC is and who sits on an LPAC. So why do LPACs exist and how do they work? Or perhaps more accurately, how might they ideally work?

Going back to my earlier comment, LPACs exist to represent the interests of all the LPs in those funds in those moments when LP interests need to be represented. These are moments when GPs take, or are about to take, actions that pose potential conflicts of interest. To be clear, in these moments, it doesn’t mean GPs are behaving badly, just that GP and LP interests may not be fully aligned. Common examples might include: fund to fund transactions, changes in key person provisions, fund amendments, or fund extensions. When these events pop up, the GP generally needs some threshold of LPAC member votes in favor of the proposal to take that action.2

Aside from these one-off situations, an LPAC typically meets once per year during a GP’s annual meeting. The LPAC basics described above are approximately similar across firms and funds.

But, and it’s a big but, how well LPACs operate as advisory committees for GPs and how effectively LPACs can advocate for LP interests vary enormously. And here, I’m going to share some thoughts that you didn’t ask for, but that I want to put out there.

Pulling from that recent LPAC discussion, some basic suggestions:

• LPACs are most effective when GPs provide consistent and transparent fund and firm information. Information and LPAC meeting material should be shared well ahead of the annual meeting to give the LPAC ample time to prepare.

• In camera sessions where LPAC members are given the opportunity to talk amongst themselves and coordinate feedback are highly valuable.

• Smaller LPACs may be preferable. Experienced LPAC members are necessary.

• In keeping with transparency, LPAC members should be provided with a full list of members along with their organizations and contact information.

All of the above assumes that a GP wants an effective LPAC. If we’re being totally blunt, that isn’t always the case. And whether intentionally or not, some LPACs can feel not particularly impactful. Hence the viewpoint from some corners that LPACs aren’t worth the time or effort.

Having already shared my broader perspective on LPACs, you might have a sense of where I’m going with this when it comes to your specific questions.

First, an LPAC member’s responsibility doesn’t change based on a decision to re-up or not in a GP’s follow-on fund. The LPAC member continues to have a duty to represent LP interests for the duration of that fund’s term. And since these are closed-end funds we’re talking about, that LPAC member’s own exposure to the existing fund doesn’t change, so the LPAC member is certainly incentivized to do a good job.3

Second, I’m of the belief that an LPAC member’s decision to re-up or not in a GP’s follow on fund should be made independent of that LPAC role. Compared to other LPs, LPAC members, to some extent or other, have more visibility into the operational and strategic decisions made GPs. They may also have closer lines of communications with the GP. To the extent that an LPAC member doesn’t re-up, it’s important to convey that decision while maintaining an ongoing constructive partnership.

Lastly, to your questions about LPAC members raising issues and standards of feedback. If an LPAC is operating effectively, there should be multiple opportunities, both formal and informal, for LPAC members to raise issues and concerns throughout the life of the fund. From the LP perspective, of course LPAC members have a greater duty for feedback. They serve as representatives and are the collective voice on behalf of the entire LP base.

That said, I think you may be asking from a GP perspective, so let me conclude by turning the question back to you. As the GP, how do you want to engage your LPAC members? Ideally, you’re building a partnership where LPAC members can share views and disagreements without turning adversarial. And if that’s the case, then I would expect that you’re putting yourself in a good position to receive useful feedback on a consistent basis, not just when LPs are deciding whether or not to re-up.

Thanks for the great question! As always, reach out at askacio@ivyinvest.co.

See you in two weeks,
Wendy

On a more serious note, even if we could predict the headlines to come, it wouldn’t necessarily make us more accurate investors. Consider this my periodic reminder of the virtues of discipline and diversification.

I’m often asked about how endowments and foundations position their portfolios, how they select strategies or managers. And I’ve written before about how institutional investors evaluate people and processes and consider macro opportunities. This week’s question is a bit more blunt.

What is the return target for endowments and foundations, and how do they set their return goals?

My initial reflex was to deflect, recognizing that every endowment or foundation has its own goals and risk tolerances. But you know what? It’s a totally fair question. There are plenty of commonalities across these institutions, and their return goals often share similar starting points.

Investment performance is a means to an end, and functionally, there are two primary goals for any endowment or foundation’s long-term pool of capital: 1) meet the spending needs of the institution, and 2) maintain purchasing power. The return target is basically the number that allows an institution to meet those two goals.

On the first point, institutional spending needs vary, budgets vary, etc. Still, putting all the variables aside, the spend rate that most institutions use hovers around 5%. Some are slightly above, some are slightly below, but on average, endowments and foundations operate on an approximately 5% annual spend from their long-term portfolios.1

On the second point, maintaining purchasing power just means accounting for inflation. Most institutions assume 2% to 3% for long-term inflation rates. We can quibble on whether that’s right, but I would say those are reasonable assumptions.

Put it all together, and endowments and foundations require, at minimum, an approximately 8% annual return to meet the basic needs of their institutions. Of course, institutions don’t want to just tread water, they want to expand their programs and grow. Which means the actual return target for most institutions is going to be higher than 8%, allowing the institution to grow the corpus.

That’s basically the answer to this week’s question. We could stop here, but I’m going to take us on a quick digression.

Some might see that over 8% number and think – ‘hey, that’s a pretty high target for returns. And aren’t those endowments and foundations the ultimate long-term investors? It sounds like they should put their money in equities and call it a day.’ And there would be merit in that line of thinking! In fact, it’s why endowment and foundation portfolios are philosophically equity-oriented.

But (there’s always a but), the spending needs of an institution reflect a dollar amount, not a percentage. Each year, 5% of an institution’s investment portfolio balance is withdrawn and contributed to the budget.2 Therefore, each year, the actual dollar amount spent from the investment portfolio is dependent on the portfolio’s balance.

Quick tangent. I’ve mentioned it here before, but endowments and foundations have some key differences. First and foremost, endowments are open pools of capital that accept new donations and inflows. Endowments, typically tied to educational or cultural institutions, rarely need to support the entire operating budgets of their institutions. These institutions typically have other sources of income, e.g., tuition or ticket sales. Generally speaking, private foundations are closed pools of capital, with no expectations for future inflows.3 Foundations also typically do not have additional sources of income.4 In other words, the corpus of a foundation’s long-term pool of capital needs to sustain that institution’s budget in perpetuity.

As you might imagine, endowments and foundations require a degree of stability and predictability in terms of the dollar amounts that their investment portfolios contribute to budgets. It would be highly disruptive for that 5% spend to equal $100 million of spend in one year, but only $75 million the next. The sequence of returns matters. Any major drawdown could impact an institution for years. A 100% equities portfolio, with all its downside volatility risk, would most likely not be sustainable for an institution. Certainly not if the institution intends to be around for a long time.

Consequently, endowments and foundations have ambitious return goals, but they also seek to achieve them without exposing their portfolios to excessive drawdowns. These challenging dual mandates ultimately inform investment decisions from portfolio construction to manager selection. It’s why endowment and foundation investors invest heavily in equity-oriented strategies, both public and private. And it’s why these institutions also allocate meaningfully to non-equity correlated opportunities across hedge funds, credit, real assets, etc. Over time, these multi-asset class, diversified portfolios have delivered the returns these organizations need alongside acceptable risk profiles.

Drilling down a layer deeper, these endowment and foundation portfolio expectations also lead to some not-always-obvious implications for fund managers. I won’t go into all of them here, but the most common misconception that I tend to see is one in which managers underestimate how high the return hurdles are to make it into an endowment or foundation portfolio.

Let’s say an endowment’s overall portfolio has to meet at least an 8% return (but ideally higher). Some portion of the portfolio is cash and fixed income. That segment is guaranteed not to meet the portfolio’s required rate of return. Some portion of the portfolio is designated for non-equity correlated investments. That segment will realistically probably just meet or maybe slightly exceed the portfolio’s 8% total return target. And the largest portion of the portfolio is equities, both public and private. Given all the above, this segment of the portfolio has to significantly outperform 8% in order to bring the portfolio’s total performance to its target.

Thanks for joining this week, and hopefully, I gave you a useful glimpse into how the sausage is made. As always, reach out with questions: askacio@ivyinvest.co!

See you in two weeks,
Wendy

Instead of an investment related topic this week, I’d like to take this moment to reflect on our buildout of Ivy Invest, the company. Thank you for indulging me.

We started Ivy Invest in 2023. For those of you who’ve known us since the beginning, you know that we started this business with a simple premise. Endowments and foundations tend to invest very differently compared to individual investors. Individual investors, should they want to, should be able to invest like those large, sophisticated endowments and foundations.

That’s it. Oh, and it should feel easy for those individual investors. Easy on the tech side, easy on the investment side. No complicated hoops, no wealth minimums, no tyranny of choice.

In 2024, our endowment style fund1 was declared effective by the SEC, and we launched our tech platform (iOS app and web). We spent the rest of the year building out the Fund’s portfolio and testing out our tech platform.

We’re incredibly grateful to our friends and family who were our first investors and platform beta testers! The only way to invest in our Fund in the early days was to download a developer version of our iOS app via TestFlight. As we moved from TestFlight to the version of the platform that is available to anyone today, our intrepid early investors and beta testers helped us discover and fix a whole host of unexpected hiccups.

We learned that people (or maybe just some of our friends and family) are not great at accurately entering their own data. That no matter how many times you remind them to use their full legal names, they’ll still try to open an account as “Bob” instead of “Robert.” These things matter for KYC!

We were fortunate to have very patient early investors willing to troubleshoot with us for hours as we realized our tech platform was rejecting individuals with hyphens or apostrophes in their names. For a time, our platform also flat rejected Brooklyn residents, refusing to acknowledge the borough as a valid address. Apologies to Brooklyn, and needless to say, that issue has long since been fixed!

In 2025, we publicly opened our platform to all investors. It was a terrifying moment, wondering whether folks outside our friends and family would want what we had built. It has been exhilarating to learn that the answer is in fact, yes. We’re incredibly grateful to the many investors who have joined us this year!

We’ve spent this year refining our platform, building out the infrastructure, and laying the groundwork to scale. We’re ready and excited to hit the ground running next year.

One more thing before I wrap up – we’re actively adding to the team. I’ll put it out here, in case you might know the perfect candidate. We’re hiring for a growth marketer, ideally someone with strong early-stage consumer company experience. You know how to reach me: askacio@ivyinvest.co!

Wishing you all a wonderful, healthy, and prosperous new year!

See you in two weeks,
Wendy

But now a new set of objections has been posed, and well, it was only a matter of time. The Institutional Limited Partners Association (ILPA) recently published a white paper, ILPA Retail Capital Analysis: Primer and Questions to Ask GPs.1 The discussion is less “retail investors ought to be protected” and more “retail investors might eat our opportunities.”

Let me preface here that I’m a fan of ILPA. I’m a fan of all the ways the organization has advanced the collective interests of institutional LPs investing in private markets. And I fully appreciate the issues raised. When I was in my prior foundation seat, much earlier in the rise of retail private market products, it was clear to me even then that there would inevitably be tensions between retail and institutional investors.

As you all know, I spent my entire career as an institutional investor. The advantages held by institutional investors over individual investors could fill weeks of this newsletter. It’s why we built Ivy Invest. I deeply believe in narrowing that gap, and expanding investment access for individual investors is a key step. So while I wasn’t surprised to see the criticisms raised by ILPA, I was a bit disappointed.

Alright, let’s get into it.

The white paper opens by discussing the rise of retail assets in private markets. Per ILPA, referencing data from Goldman Sachs, retail vehicles in private markets have seen a nearly 60% compound annual growth rate over the past four years and now total approximately $360 billion in assets. Of course, these evergreen retail vehicles are structurally very different from the drawdown vehicles used by institutional investors.

But, in a growing number of circumstances, these retail vehicles are investing in the exact same underlying portfolio holdings as the institutional funds. Where we ought to see cause for celebration (retail investors aren’t just being shunted into crappy investments!), some institutional LPs instead see cause for concern. Let that sink in for a minute.

The white paper continues by cataloging the ways in which retail vehicles might negatively impact institutional investors. And again, I totally understand the institutional LP viewpoint here. It’s perfectly natural for institutional LPs to want to protect the advantages they hold today. It’s just… not a great look.

A sampling of the points of contention:

• Investment talent: As retail vehicles grow in size and importance to investment firms, firm leadership is likely to pay greater attention to these offerings and their investor bases. Across firms, the most talented personnel may no longer be focused entirely on serving institutional investors.

• Co-Investments: Large institutional LPs value the ability to co-invest in deals alongside GPs. Co-investments can offer participating LPs additional exposure to attractive deals at lower fees (or in many cases, no fees/no carry). But with the rise of retail vehicles, a GP potentially can tap co-investment capital from that fee-paying retail vehicle, reducing the need to offer co-investments to institutional LPs.

• Deal flow: Retail vehicles generally require more consistent deployment of capital and consequently may see more underlying investments than a firm’s institutional funds. Supporting a greater volume of deal flow for retail vehicles may require more of a firm’s investment team’s time and attention.

• Decision making: The structural differences between evergreen retail and drawdown institutional funds may lead to conflicts in decision making, potentially around the timing of investments and exits, sizing, etc. Investment decisions may not always be made to best advantage a firm’s institutional drawdown funds.

• Valuation concerns: Valuations are a big deal in retail vehicles because they directly impact share prices for new subscriptions and redemptions, management fees, and performance fees. There could be periods where a retail vehicle’s strict valuation guidelines lead to changes in marks that then impact that firm’s institutional funds.2

I promise, I really am sympathetic to institutional LPs and their concerns here. Years ago, when it started becoming apparent that retail investors could become a larger part of GP capital bases, I was similarly reflexively defensive. Today, it’s hard for me not to see that reaction, and the concerns laid out by ILPA, as instead a reflection of institutional LP entitlement. Entitlement to the best opportunities, best investment talent, best returns.

Clearly, I don’t think those things should be reserved only for institutional LPs.3 And while I think the conflict between retail and institutional investors is unavoidable, I don’t think it’s insurmountable.

We should be having conversations about how to manage these tensions, how to collaborate on LP governance, and how innovation in product structures can serve both institutional and retail investors well. The retail shift is here to stay, and it’s accelerating. Everyone will be better served if institutional and retail capital can find ways to coexist in private markets productively.

Thanks for joining this week, and as always, reach out with questions: askacio@ivyinvest.co!

See you in two weeks,
Wendy

When a credit story shows up in the news, it’s almost always because a bad thing has happened. And lately, there have been a lot of credit stories in the news.

In fairness, some stories have been more observational. Say, perhaps, those of certain hyperscalers issuing bonds and getting a little creative with their financing measures.

Then there are the other headlines… Tricolor, First Brands, Renovo, Broadband Telecom, a cluster of bad loans at regional banks.1 Now these stories have been exciting (though not in a good way). They offer cautionary tales, detailing sudden collapses in value, accusations of fraud, and plenty of finger pointing.

Which brings us to this week’s topic. I received several questions all along a similar theme, so I’ll take the liberty of paraphrasing.

How concerned should investors be about credit markets generally, and private credit specifically?

When I see questions like this, my reflexive reaction is – well, yes of course, investors should always be a bit paranoid when it comes to credit.

But I also recognize that, in light of recent events, everything feels more fragile.

Before we dive in further, it’s worth noting that several of the recent major credit stories contained significant elements of fraud. Are there potentially other cases of fraud that could be revealed in the coming months? If I had to guess, I’d say yes. But any given case of fraud tends to be idiosyncratic, so I’ll refrain here from speculating on the likelihood of other cases showing up.

In some ways, asking how worried one should be about credit markets is much like asking how worried one should be about the stock market. One answer might be: like the stock market, U.S. credit markets are expensive relative to historical averages, as measured by spread premiums.

Take for example, investment grade corporate bonds, which as of yesterday are offering on average 85 bps of excess return in exchange for taking on the additional credit risk over Treasuries. Or high yield corporate bonds, which as of yesterday are offering on average an excess return of just over 300 bps above Treasuries.2

In conversations with managers, I’m hearing that leveraged loans are pricing at SOFR plus low to mid 400s. And anecdotally, first-lien unitranche private credit deals have been getting priced around SOFR plus 550 bps, and in some cases, below 500 bps.3

To those readers for whom the above sounds like gibberish, the takeaway here is that credit markets have been expensive for some time. We have been in an environment that offers higher base rates but increasingly compressed spreads. Not only are credit spreads low relative to risk free rates, but they are compressed relative to each other. In other words, the additional return generated for moving up each rung on the risk ladder is uncomfortably low.

In a balanced market, spreads should adequately compensate investors for taking on incremental credit risk. It would appear, however, that we have not been in a balanced market.

Instead, this is a market in which, for lack of a better description, there is a lot of capital sloshing around out there that needs to be put to work. And for various reasons, there hasn’t been as much primary issuance and new supply (e.g., fewer transactions in private equity means fewer loans issued). I’m oversimplifying here, but where there is more demand than supply, pricing goes up. That’s the state of the market, and the recent credit stories, though headline-grabbing, do not appear to have made much of a dent on the overall conditions described above.

All that said, I want to point out that I was also being serious in my initial response. I meant it when I said that investors should always be a bit paranoid when it comes to credit. Not just in the moments when credit headlines grab our attention.

In my experience, investors often underappreciate risk in credit investments. Unlike equity investments, which carry unlimited upside, credit investments have capped upside. In the very best scenario, investors earn their contractual yields and return of capital. In the worst outcome, investors can suffer total wipeouts.

This lopsided return distribution means that mistakes in credit portfolios are more costly. There is less upside available across a credit portfolio to make up for losses that might occur. To state the obvious, when investing in credit, it’s important to select managers with strong underwriting capabilities.

But that often isn’t enough. Even managers with the best credit underwriting processes are still likely to experience defaults at some point over the life of their funds. Things happen. Companies and investments can go sideways for a myriad of unforeseeable reasons. Who predicted a global pandemic in 2020? Risk management, which is always important, is that much more so in credit investing.

Everything we’ve discussed so far pertains to credit markets generally, but I do think it’s appropriate to acknowledge that there are also challenges specific to private credit. Although the most prominent recent failures, Tricolor and First Brands, arguably occurred in public market securities (i.e., Tricolor issued ABS and First Brands issued leveraged loans), the losses and recriminations extended to private credit.4

Witnessing the collapse of Tricolor and First Brands in public markets brought to the forefront concerns around the lack of transparency and price discovery in private markets. What is the risk that private loans are not accurately priced? And how widespread might that risk be? It is decidedly not a good look to have certain stressed loans marked at dramatically different valuations across private credit firms.5

I’m inclined to think that, as with all other asset classes and strategies, there is wide variation in manager quality. I fully suspect there are managers carrying questionable marks out there. But there are also managers that have been more conservative around structuring, documentation, and terms.

And should things go wrong, which they inevitably will from time to time, those credit managers with deep workout experience and the ability to navigate restructurings are likely to offer their investors a very different outcome.

Thanks for the questions! As always, please reach out: askacio@ivyinvest.co.

See you in two weeks,
Wendy

In my early analyst days, I remember feeling awestruck by the portfolio managers in our investment portfolio. For some folks, the environment might be enough to advance their investment skills. The consistent exposure to great managers enough to make them adept at assessing managers. But not for me.

I was absorbing an enormous amount of wisdom and investment insights from the senior members of our team, but independently connecting the dots at the time was still hard. And to be fair, I was a good analyst, I could execute just about any due diligence process handed to me. I just couldn’t wrap my head around how our team chose any one manager over all the other managers that looked borderline indistinguishable.

It didn’t help that my younger self found senior endowment & foundation investors broadly to be intimidating. These experienced investors exhibited such impressive investment judgment and depth of understanding. For a stretch, I wasn’t sure if I would ever get there.

Of course, spoiler alert, I did eventually figure it out. Over time, I managed to develop my own investment opinions, insights, and instincts. I woke up one day, and I too had the ability to parse between managers, to distinguish between several seemingly similar firms.

This week’s question really struck a nerve for me. One of the things that brings me tremendous professional and personal joy is having the opportunity to sit with younger endowment and foundation investment professionals. I love hearing about how they found their way to their organizations, what they’re learning, how they’re navigating their way forward. I love chatting with them about their favorite parts of the job. And I’m always delighted when they have a question that I might be able to help answer.

I recently had the chance to join a group of these young investment professionals as a guest speaker and was posed the following question.

How do I make the jump from Analyst/Associate to Director and beyond? What do I need to do to take those next steps in my career?

For all the reasons I described above, this question really resonated with me. It also made me reflect on the circumstances of an endowment and foundation career – this is a profession that doesn’t clearly lay out a rubric for advancement. There are no agreed upon qualifications from institution to institution. We’re all taught that we should learn to be great investors, but what does that even mean?

I suppose this is as good a place as any to put some standards out into the world.

Let’s start with Analyst and Associate responsibilities and expectations. As an analyst or associate, you’re likely focusing on due diligence from an implementation standpoint. You’re assigned a manager to work on, and then you set off to analyze all the data you can get your hands on. You’re participating in manager meetings alongside the senior members of your team, and occasionally running meetings on your own to gather additional information.

In most investment offices (or at least I hope it’s most) there’s a lot of scaffolding around you as an analyst or associate. When it comes to manager research, you’re trained in how to underwrite individual managers from beginning to end. During that underwriting process, you’re typically guided by senior team members toward appropriate market comparisons, so you start to learn the investment landscape for various strategies. By the end of any one process, you’ll have learned all about the chosen manager’s strategy, how the manager executes that strategy, and why your team has conviction in that particular manager.

What you typically are not asked to do, as an analyst or associate, is to run the full manager search. That ask comes at the next level, as an Investment Officer or Director. And moving from underwriting a manager to selecting the manager to underwrite requires a step function change in investment capabilities.

To answer your first question directly, to make the jump from Analyst/Associate to Director, you need to be prepared to run the full manager search. Part of the task is tactical – identify all the managers that should be included in the search. As part of this sourcing and mapping exercise, you’ll pull internal and external databases, but you should also have a ready network to tap into of LPs and GPs, placement agents, and cap intro folks. This is the easier step.

The harder step, by far, is creating your own mental model for how you’ll assess each of these managers. Take this as just one person’s approach, but I would go so far as to encourage adopting a strict discipline of ranking the managers as you go. As you meet with and assess the managers you’ve mapped out, how does each compare to all the other prior managers you’ve met? Be intellectually honest about your rankings.

This exercise is likely to feel odd at first, and you might notice that many managers will cluster in the middle of the pack of your mental model. Force ranking the managers you’re evaluating in your manager search requires you to make distinctions. Sometimes the challenge is that managers appear too similar. Other times, you may be tempted to say, these managers are too different, it’s not really an apples-to-apples comparison. That may be, but you should still be able to define for yourself which is more suitable for your specific institution’s portfolio.

If you force yourself to find distinctions among managers, you can test and validate over time whether the differences you key in on matter for eventual outcomes. The ability to build your mental model is, in some ways, just a product of seeing enough stuff – enough managers, enough strategies, enough successful and unsuccessful investments.

That’s the great thing about being long-term investors in this business. By the time you finish out your Analyst/Associate years, you should start to notice whether the qualities that you thought were important actually were important. Whether the risks that you thought you saw, really were risks. Whether there were risks that you totally missed, that you didn’t appreciate. You’ll have some sense of when complexity is worth unpacking and when it’s just uncompensated risk.

Of course, as you go through your manager search, you may or may not find that elusive exceptional manager.1 If you do, you will have honed your understanding and appreciation for what makes them an exceptional manager.

I’ve gone on too long already, but let’s briefly take it a step further. If the shift from Analyst/Associate to Investment Officer/Director is marked by the ability to run a manager search, then the shift to Managing Director/Asset Class Head is marked by the ability to identify the necessary manager search.2

It’s yet another step function upward in capabilities. A senior investment professional needs to be able to look across the portfolio (or their coverage of the portfolio) and identify the gaps. Where does the portfolio need additional or different investments? And equally, if not more importantly, what no longer makes sense? In my experience, proactively identifying when an existing manager is no longer a fit is oftentimes far harder than sourcing new managers.

And finally, since you asked explicitly what steps you need to take to advance your career, let’s be upfront about what it will likely take logistically to keep moving up. If you were to map out the career paths of the many senior members of the endowment and foundation community, you’ll find that they almost all changed investment offices throughout their careers. In fact, some have switched many times.3

Investment offices tend to be small. There isn’t always space to continue progressing at your current office. Build your network, and build a good reputation, because you may need to lean on both to take that next step.

I would also argue that there are ancillary benefits to experiencing several investment offices over your career. These can be opportunities to compare how various investment offices operate, allowing you to pick up different practices along the way. And of course, there’s the natural benefit of an expanded network of colleagues.

As always, thanks for reading! And if you have other questions, please don’t hesitate to reach out: askacio@ivyinvest.co.

See you in two weeks,
Wendy

What we haven’t discussed, is whether any given investment office should exist in the first place. It’s a sensitive topic, but it’s probably more straightforward than most organizations might like to admit.

This week’s question comes from a reader who engages with a lot of smaller endowments and foundations, and these institutions often pose the same question.

Are we big enough to have our own internal investment office? At what size does it make sense?

As a quick aside before diving in – while this specific query focuses on endowments and foundations, I think the spirit of the question cuts across investor types. It’s natural for investors, whether individual or institutional, to want greater control over their portfolios. But it often may be far more rational, and potentially more successful, to outsource the effort.1 I’ll direct my response below toward endowments and foundations, but I think the considerations are broadly applicable.

Ok, back to the question at hand. I suspect that institutions asking these questions might be hoping for affirmative responses. I get it. There are certain things that an internal investment office can do that would be very difficult to replicate externally. As I noted above, internal management offers greater control over processes and investments. An internal team can build a highly customized portfolio to meet the needs and preferences of the institution. Having an internal investment office might also carry with it a certain cachet. But ultimately, running an effective internal investment office is expensive. For smaller institutions, the math often just doesn’t pencil out.

I’m going to draw a blunt line in the sand, acknowledging that there are exceptions (there are always exceptions): $1 billion. That’s the size above which an institution probably should take on the cost and complexity of an internal investment office. On the flip side, the farther an institution is below $1 billion, the less sense it makes to run the function internally.

Let me also be explicit, in case it isn’t obvious considering my own professional background – I am a huge proponent of internal investment offices. Internal investment offices generally can be more nimble, more readily access selective managers and strategies, and invest more “out of the box.” They also build and retain institutional knowledge that should, over time, compound into better decision making, specific to the needs of that institution.

Having spent my career inside internal investment offices, I also know how complex they are to run. How dependent they are on good governance and effective collaboration to achieve their full potential. How tough the competition is for the best talent to fill their investment and operations roles. All of these constraints add up to higher costs than some institutions are able or willing to bear. And here I’ll express an opinion that is more controversial than it should be – a poorly resourced internal investment office is worse than none at all.

For institutions without internal investment offices, the alternatives broadly fall under the category of Outsourced Chief Investment Officer (“OCIO”). These offerings are exactly what they sound like – third party consultants overseeing, with or without discretion, institutional investment portfolios.

There are a huge number of OCIO shops these days, and the ensuing competition has significantly compressed fees over the past two decades. Per Cerulli Associates’ 2024 OCIO Providers Survey, OCIO advisory fees typically fall between 0.21% to 0.30% for nonprofits at or below $100 million of assets.2 That’s an investment management cost of between $210,000 to $300,000 for a $100 million endowment or foundation.

There’s no way to run an effective internal investment office with that budget. That budget could afford an institution the salary and benefits of a single mid-level endowment professional, with nothing else left over for software, support, travel – all the things that allow an investment office to do its job well.

Of course, there are tradeoffs. When that $100 million institution works with an OCIO, it will likely build its portfolio with selections from a set of established menu options. And that’s not a knock on OCIOs. OCIOs bring plenty of other scale benefits to their smaller clients (e.g., reduced management fees and/or better fund terms through aggregated client assets), who arguably benefit far more from that scale than are hurt by the absence of a niche manager here or there.

Even at or below $500 million, it’s hard to imagine an institution could overcome the budget and talent constraints to realize the benefits of an internal investment office.3 From $500 million to $1 billion, it’s a little murkier. Between the bookends of OCIO and full internal investment team, there’s a spectrum that might include some internal staff coupled with some third party consultant/extension of staff services.

Perhaps I’m coming across as having too harsh an opinion on this matter. I stand by it. Across the board – institutions, family offices, individuals – investors would benefit by asking themselves more frequently: do I have a reason to do this myself? Do I possess a sourcing, execution, or skill advantage? If not, can I realistically acquire these advantages at a reasonable cost and in a reasonable time frame? Sometimes the answer is no, and that is perfectly ok.

Alright, that’s it for this week. Thanks for joining, and as always, please reach out with questions: askacio@ivyinvest.co!

See you in two weeks,
Wendy

We are way past the days when “democratization of alts” meant niche fintech platforms offering single asset, often esoteric investments. The landscape today is far broader and deeper, with active participation from high-quality, experienced alternative fund managers.

So this week, I’ll deviate again from our usual format. Instead of responding to a reader question, I want to take a beat and reflect on both the progress and the ongoing challenges in the drive to bring alternative and private markets to retail and individual investors.

The Momentum is Real

I’ve previously highlighted the trend of established alternative asset managers innovating on their product lineups and rolling out registered evergreen closed-end interval and tender offer funds (CEFs). Compared to traditional private drawdown funds, these CEFs, for a variety of structural reasons, tend to be easier to digest for retail investors and the financial advisors that service retail investors.

For starters, CEFs have the flexibility to accept investors at varying wealth levels, including those at the accredited investor level or even below. Lowering the wealth hurdle naturally eases access for retail investors. Other features include: 1) evergreen investment with immediate exposure versus private commitments funds that experience J-curves and require capital call management; 2) periodic liquidity, even if limited – CEFs typically offer quarterly liquidity with a fund-level gate; and 3) easier tax documents – CEFs issue 1099-DIVs vs. private funds that issue K-1s.

Taken altogether, it makes sense that these registered CEF structures have increasingly become the wrapper of choice to bring alternative investment strategies to a retail audience. When I wrote about this topic a year ago, there were 230 of these closed-end interval and tender offer funds, managing $175 billion dollars in assets.1 As of September 30, 2025, there are now 304 closed-end interval and tender offer funds, managing $252 billion in assets.2 The number of funds has increased by 32% and the level of assets has increased by 45%. And while these numbers are still small relative to the size and scale of alternative investments in traditional drawdown structures, they demonstrate that the pace of adoption is picking up.

The success of retail-oriented strategies (including those outside the registered CEF world), when measured by AUM growth, is remarkable. The data on hand is a little outdated, but I’ll use KKR’s experience in retail-oriented strategies as a prime example.3

• In Q4 2023, KKR reported on an earnings call that the firm was raising $500 million a month across the firm’s retail funds.4

• By June 2024, just two quarters later, KKR reported inflows of closer to $900 million a month across retail funds.5

• As of June 2025, KKR’s retail funds reported reaching $25 billion in assets.6

Like I’ve said before, the directional flow of dollars toward alternative investment strategies seems to me an indication that retail investors are eager for more options. More specifically, they want options from credible, experienced investors.7

But Challenges Persist

One of the more predictable, if slightly ironic, challenges to arise alongside the expansion of retail-oriented alternative funds is the inevitable shift from not enough choices to too many choices, particularly in certain strategies.8 Benchmarking evergreen strategies in private credit and private equity has become a new and increasingly sought-after endeavor. There is little agreed-upon consensus at the moment, though I suspect investors will coalesce around some solutions provider in the coming years.9

In general, evaluating alternative investment firms, funds, and strategies is fundamentally a different exercise than what most individual investors are used to. Even if the industry is able to create more investment access points, it’s unclear if there’s a way to create more information access points. Institutional investors engage in due diligence processes that are functionally not possible for most individual investors to replicate.

That said, investment access is still uneven. For many of the retail-oriented alternative funds, financial advisors remain the primary distribution channel. Individual investors without dedicated wealth advisors will continue to face friction when trying to allocate capital to these private market funds from established alternative asset managers.

When we launched Ivy Invest, we built around the thesis that all individual investors deserve access to institutional-quality alternatives. Since then, the product landscape has evolved in a lot of compelling ways. But for individual investors, many alternative funds are still hard to find, hard to understand, and hard to access. So our goal remains unchanged: provide individual investors with an institutional endowment approach to alternatives, but let’s make the experience modern, transparent, and easy.

I think we’re still in the early innings of the alternative investments to retail investors phenomenon, but things are progressing quickly. I’ll keep you posted from time to time as the landscape continues to take shape.

As always, thanks for joining this week! Reach out with questions to: askacio@ivyinvest.co.

See you in two weeks,
Wendy

Bots took the CFA test,
And aced it with AI finesse.
While humans still cram,
Bots breezed Level III’s exam,
In minutes, no coffee, no stress.

ChatGPT and Claude might be able to pass the CFA exams, but they’ll still need to meet the 3-year work requirement to become ChatGPT, CFA and Claude, CFA.

Modern endowment investing seemed to originate with Swensen’s “Yale Model,” but in the past couple decades there have been experiments in the broader allocator world (e.g., TPA portfolio management). Which of these portfolio allocation strategies do you think will hold up for the next 10 years, and what further innovations do you think the industry might take?

I’ve admittedly been sitting on this question for a while. For one thing, I have only an outsider’s perspective on the total portfolio approach (TPA), whereas I’m intimately familiar with endowment investing, which is generally associated with a strategic asset allocation approach (SAA). For another, TPA has generally not been widely adopted by U.S. institutional investors.

Now that latter point could be changing, as CalPERS (California Public Employees’ Retirement System), the largest U.S. public pension plan, is considering a move to TPA1. Before I go any further, let me provide some background. And also a warning: this is about to get pretty dry. While I think discussions on portfolio management philosophies are interesting, I’m deeply aware that not everyone would agree! For everyone who didn’t ask this question, feel free to stay or go, I won’t be offended.

Ok, some basic outlines:

• Strategic asset allocation (SAA) is the portfolio construction approach used by most U.S. institutional investors. SAA involves setting long-term target allocations across asset classes (e.g., public equities, fixed income, private equity, real assets, etc.), typically revisited every few years.

• Total portfolio approach (TPA) is a portfolio construction approach that focuses on a portfolio’s total exposure to risk factors (e.g. equity beta, interest rates, liquidity, etc). TPA is more widely used among sovereign wealth funds, including Singapore’s GIC, Australia’s Future Fund, and New Zealand’s Superannuation Fund.

TPA has been gaining support and traction because of its commitment to flexibility. In theory, each and every new investment is evaluated not in an asset class context, but instead in terms of how the investment impacts the overall portfolio. Its advantages are obvious when considering potentially compelling investment opportunities that don’t neatly fit into asset class categories – for instance debt and equity hybrid strategies, like capital solutions. These in-between strategies might not have an obvious home within a traditional SAA framework.

In theory, SAA is more inflexible, with explicit targets to pre-specified investments. In practice, the gap between TPA and SAA is not necessarily that wide. The criticism I’ve seen and heard regarding SAA tends to fall into a few categories:

• Rigid asset class categories, excluding investments that don’t “fit neatly”

• Siloed and/or territorial asset class decision making that is suboptimal from a big picture, total portfolio perspective

• Investing to “fill buckets” and potentially missing out on the larger universe of available opportunities

I hear these criticisms, and my immediate reaction is – these are stupid problems to have. I’m not saying they aren’t real or don’t occur. They absolutely do. But an organization facing these problems doesn’t have an investment approach issue. It has a governance issue. And likely some team structure and incentive issues too.

An SAA framework doesn’t preclude investment teams from coordinating across the portfolio. Equity risk can still be tracked and managed across public and private holdings. Reporting might be organized by asset class, but risk exposures (sector, geography, factors, etc.) can still be monitored and evaluated at the portfolio level. And investment decisions can and should still be optimized for total portfolio outlook.

What SAA does provide over TPA is a clearer approach to benchmarking and relative performance measurement at both the investment and total portfolio level. I suppose reasonable minds can differ over how much that matters.

I suspect it’s not a coincidence that the early TPA adopters have been those with extraordinarily large pools of capital. The challenge of managing over 700 billion CAD2 (which translates to over $500 billion USD) for the Canadian Pension Plan is different from that of managing a $5 billion or even $50 billion endowment or foundation. It’s easier to coordinate across a smaller team, and similarly, it’s easier to invest nimbly across a smaller portfolio.

At a certain portfolio size, TPA probably does make the most sense. It focuses the team on a unified picture of portfolio exposures, risks, and opportunities. It’s a different kind of discipline in portfolio management. Again, I’ll caveat that this is my understanding of TPA as an external observer. I’m sure I’m missing some nuances.

So which portfolio strategy holds up over the next 10 years? Probably both? I don’t see E&Fs moving away from using the SAA approach, provided they’re not facing the very avoidable problems we discussed above. And the TPA approach seems to serve large sovereign and pension funds well. I don’t think we should be surprised that these fundamentally different investors might ultimately prefer different approaches.

And as for additional innovations, your guess is as good as mine. Are there better ways to measure risk? Are there better ways to improve decision making across the portfolio? Are there ways to do these things more quickly and cost effectively across the portfolio? I think so, and I think investment offices are experimenting around the edges. I don’t know how portfolio management will evolve, but I’m certain it will continue to advance, especially as (circling back to where we started) teams figure out how to incorporate AI into their processes.

Thanks for the question, and as always, feel free to reach out: askacio@ivyinvest.co!

See you in two weeks,
Wendy

While prepping for a panel discussion on ways that emerging managers can engage with potential nonprofit LPs, the conversation turned briefly to the challenges faced by diverse emerging managers. There was a time when diverse emerging managers were a hot topic. Whether sincerely or performatively, LPs and GPs would actively discuss the ways in which the industry could better support these managers. It wasn’t really that long ago, but it certainly feels like it was a different era.

Where do things stand today? As far as I can tell, the individuals and LPs that cared about expanding the GP universe before it was trendy, still do. And bluntly, the ones that didn’t, never did. The landscape may look and feel changed, but silver lining, I think the signals from LPs on this front are now arguably clearer and more reliable.

On to this week’s question:

Why would LPs care about the J-curve of different private strategies? I keep seeing it in managers' decks and I just don't understand why it matters for illiquid strategies. Either way, someone has to manage liquidity, accounting for capital call uncertainty and deployment period.

It’s a good question, and you’re right. Institutional LPs increasingly care about the J-curve. Somewhere along the way, J-curves shifted from being more of an academic consideration to being one more factor in how GPs are evaluated.

Before we go further, I’ll quickly explain the J-curve for those who might be less familiar. Outside of private market investing and maybe parts of economic theory, it’s not exactly a commonly referenced term.

In the most basic sense, the term J-curve literally describes the shape of a curve that is graphed from a set of data points. Typically, the y-axis represents whatever value is being measured, and the x-axis references the passage of time. Conceptually, something that experiences a J-curve is something that experiences negative values for a time before eventually experiencing positive value.

As it specifically pertains to private market funds, J-curves help describe how investors experience the performance of drawdown funds. I’ve written before about the mechanics of private market investing through drawdown structures, where investors are subject to a period of capital calls at the outset of each investment. During this period, investors also typically experience negative returns, as funds accrue fees and expenses but fund investments (e.g., private companies acquired by a buyout firm) have not yet had time to generate value. Eventually, the expectation over time is that the investments do increase in value, and the private fund performance turns positive, ideally meaningfully so. The chart below provides a generic visualization of this J-curve pattern.

Turning back to the question – why do LPs care about the J-curve? Particularly if, as long-term investors, the eventual total returns of funds are presumably far more important.

Well, I think there are a few reasons, some admittedly more straightforward than others. Let’s start with the ones that are probably easiest to appreciate.

When investors talk about variations in J-curves, they’re typically focusing on differences in the duration of that negative return period and/or the depth of the negative return (temporarily) experienced. All else equal, a shorter J-curve is better than a longer one, and a shallower J-curve is better than a deeper one. I think the rationale here is fairly apparent – getting to a positive return more quickly is generally preferable.

Of course, all else is usually not equal, but you get the idea. For two different strategies that generate similar total returns, the path for either set of returns can serve as a meaningful differentiator.

Another situation where differences in J-curves are more readily tangible: nascent private investment programs. In a mature private investment program, the portfolio as a whole is past the J-curve. Any new commitment might incrementally generate negative returns but probably won’t send the return profile of the total private program back into negative territory.

A private investment program still under development, however, might be going through a portfolio level J-curve, with the aggregate private portfolio reflecting negative returns for a time. I imagine that LP is likely to care a lot about the expected return paths for incremental new commitments.1

Moving on now to use cases where reasonable minds might differ on the merits.

For some managers and strategies, touting shorter and shallower J-curves has become an effective marketing point. In a world where total returns are judged in a vacuum, strategies that can achieve positive returns more quickly but might ultimately generate lower total expected returns will have difficulty competing against strategies that might have prolonged initial periods of negative returns but higher total expected returns. Think private credit versus venture capital, for instance.

But since LPs generally don’t judge returns in a vacuum, it often does in fact matter how a strategy’s return profile fits into the context of the LP’s overall portfolio. Especially these days, where liquidity is often top of mind. A manager with a lower expected total return might instead point to faster distributions as an offsetting advantage.

Finally, some LP compensation structures effectively reward LPs for caring about the J-curve. There are wide variations in how institutional LPs are paid and incentivized. A not insignificant portion of institutional LPs focused on private markets are compensated based on their private portfolio performance as measured by internal rates of return (IRR). Under these circumstances, shallower and shorter J-curves (along with tactics used to improve J-curves) are generally preferable.2

When I decided to take on your question, I didn’t think I had that much to say about J-curves. For better or worse, I apparently do.

I guess all that’s left to say is, thanks for making it to the end of this fairly dry discussion! As always, reach out with questions: askacio@ivyinvest.co.

See you in two weeks,
Wendy

Since then, MicroStrategy moved on from issuing convertible bonds (there are only so many convertible arb investors) and started issuing preferred stock and most recently, common stock. At some point along the way, the company also changed its name to just Strategy, because, why not?

Strategy’s common stock shareholders, however, do not seem thrilled to have their ownership diluted through the latest additional common stock issuance. And this discontent is now showing up in the company’s share price. Fair enough. But that’s sort of beside the point, for me at least.

Given the nature of Ivy Invest, it should be no surprise that I’m always interested in the intersection of demand and access. One of the more notable side effects of Strategy operating as a Bitcoin treasury is that: 1) governance-wise, many institutional investors can invest in stocks, 2) governance-wise, many institutional investors cannot invest in Bitcoin, 3) some group of institutional investors want to invest in Bitcoin but governance-wise cannot, and so 4) Strategy is a clever, if imperfect, solution for that group of institutional investors.

Plenty has been written elsewhere about Strategy’s public share price and its premium over the value of the company’s Bitcoin. As I wrote the first time around, I have no particular interest in discussing Strategy’s capital structure or special insight into the value of Bitcoin. But I have tended to agree that the ability to solve the Bitcoin access problem for certain investors is worth something, some premium, for those investors.

Where there is high demand but inconsistent access, the market generally tries to find solutions. Sometimes, those solutions show up in unexpected places. And Strategy is, in its own way, an example of that dynamic.

Of course, the most obvious place where high demand meets inconsistent access has to be private market companies. More specifically, certain high growth private tech companies that appear often in news cycles. Which brings us, finally, to this week’s question.

The Robinhood proposal on tokenizing private companies is interesting. How will it work? Are the tokens going to be collateralized? Is it potentially a disaster waiting to happen given how much overhyped private companies can go up and how volatile retail flows can be?

I also find the Robinhood proposal super interesting! And I also, admittedly, share your questions around how it will all work. I unfortunately don’t have any more insider information than you do on the mechanics.

Recognizing that we can only guess at how it will all work, I still think the conversation is worth having. If nothing else, it’s a chance to reflect on how lopsided the demand versus access equation has become for some of these private market companies. That in turn is changing how these companies interact with capital markets. It is also leading to strange and distorted solutions for non-institutional investors looking for access, including the rise of multi-layer SPVs (like Russian nesting dolls, but with SPVs and fees instead of dolls).2

If we take a generous interpretation of Robinhood’s tokenization proposal, we might focus on how creatively it addresses the demand versus access challenge in private markets.3 Compared to some of the current solutions floating around, Robinhood’s approach feels like taking a sledgehammer to the access game.

And we may not know the specifics, but mechanically speaking, there are some assumptions here that might be safe to make. Robinhood has already announced its own blockchain.4 Presumably the tokens representing the digital versions of private company shares will be issued on the Robinhood blockchain. By virtue of being on the blockchain, transactions should be transparent and traceable. The chain of token owners should be verifiable, token pricing should be readily and constantly visible, and trading should be nearly instantaneous and efficient. If the ambition is to make access to private companies more readily available, these are huge shifts.

The gray area when it comes to tokenization (and this is the case not just for Robinhood, but any time we’re talking tokenization of a real world asset) is how ownership of the token relates to ownership of the real world asset. In this case, a key question might be: does any given Robinhood-issued private company token tie to the actual shares of that private company? If tokens are actually collateralized by shares of private companies (i.e., if Robinhood maintains ownership of the shares of each private company on which it issues tokens), then token owners could take some comfort in the value of their tokens being anchored by real world shares.

Now, I would argue that in the best case scenario for private company token holders, there would be an explicit transfer of ownership rights extended to the tokens. The private companies themselves would recognize token ownership as equivalent to share ownership. OpenAI’s explicit rejection of Robinhood’s proposal, however, suggests that investors probably should not count on this scenario.5

In other words, the likely assumption is that Robinhood-issued private company tokens will be, at best, backed by Robinhood’s ownership of shares.

I would be remiss if I didn’t point to the possibility that Robinhood could issue tokens without any company shares to serve as collateral. Or that even if there are shares to serve as collateral, the rules between tokens and Robinhood-owned shares (e.g., who gets to vote them) would still be up to Robinhood. It’s all still very much a mystery.

Finally, and I won’t get into it here, but there is a worthwhile debate to be had around whether Robinhood’s tokenization effort effectively allows companies to raise capital from public market investors while simultaneously circumventing the requirements for being an SEC-registered, publicly traded company. Some might say yes, and I would tend to agree.

On the other hand, the best/funniest counterpoint that I’ve heard – crypto often trades without intrinsic value, so really, from that perspective, there should be no expectation that Robinhood’s private company tokens have any intrinsic value either.

It’s a wild argument, but there you go.

And with that, I’ll wrap up this week’s newsletter. Thanks for joining! As always, reach out with questions: askacio@ivyinvest.co.

See you in two weeks,
Wendy

OpenAI very publicly and explicitly rejected Robinhood’s proposal to tokenize its shares, stating that the company had no part, and wanted no part, in the potential offering.2

I’ve shared some observations previously about how capital markets are shifting, with the line between public markets and private markets continuing to evolve. What I hadn’t considered in my earlier discussion was the possibility of intermediaries catering to investor desire for exposure to private companies over the preferences of private companies themselves. That is a new twist! But considering how much demand exists for access to these companies, perhaps I shouldn’t have been so surprised.

Did you see Vanguard recommended a new asset allocation portfolio of 70% fixed income and 30% equities? What should investors make of that allocation guideline?

Thanks for sharing the article – I hadn’t heard about it!3 I did a little digging, and it looks like the source information from Vanguard is here.

To summarize for anyone else who is also hearing about it for the first time, Vanguard announced a shift to a 30% equities/70% fixed income mix for its time-varying asset allocation portfolio. The heavy bond allocation (70%!) unsurprisingly has attracted attention from personal finance writers.4

Big picture, I think folks might be reading more into the latest recommendation than is warranted. Yes, Vanguard is recommending a 30% equities/70% fixed income portfolio. But if my understanding is correct, based on this report, Vanguard has actually been advocating for a majority fixed income portfolio for some time.5 At least when it comes to this version of its model portfolio, which Vanguard is calling its time-varying asset allocation portfolio.

And why is Vanguard making this bond-heavy recommendation? This time-varying asset allocation portfolio is simply an output based on a series of asset class return predictions, also known as capital market assumptions, that serve as the inputs.

Last November, I wrote about capital market assumptions after Goldman Sachs similarly made headlines for its attention-grabbing prediction: 3% annual return for the S&P 500 for the next 10 years.

At the time, I wrote:

In 10 years’ time, we could find that Goldman (or another research desk) was right. Let’s say that in 2034, the historical 10-year annualized return of the S&P 500 does turn out to be 3%. But in any given year from now until then, the annual return could be significantly higher or lower – who knows which random walk we would take from here to there.

So what’s the point, and how should investors think about these estimates?

For starters, the muted expectations for large cap U.S. equities reflects a broadly accepted reality that the S&P 500 has experienced abnormally high returns in recent years. It would be reasonable to say that, to some extent, current valuations are factoring in future earnings growth, and many upside scenarios are already priced in. In short, it’s likely we’re enjoying high returns now at the expense of lower returns later.

After I wrote the above, we experienced Liberation Day tariffs and a volatile start to 2025. But that period was short-lived, and the S&P 500 is once again back to setting new highs. Anyone else feel like the April market drawdown was a lifetime ago?

Vanguard’s capital market assumptions reflect its belief that U.S. equities are trading above the firm’s measures of fair value. In an echo of what Goldman published last year, Vanguard’s latest capital market assumptions include the following forecasts of 10-year annualized returns:6

• U.S. equities to return 3.3% to 5.3%

• U.S. growth stocks to return 1.9% to 3.9%

• U. S. aggregate bonds to return 4.0% to 5.0%

To loosely paraphrase/interpret Vanguard’s conclusions here: 1) bonds are likely to offer equal or higher returns versus stocks; 2) bonds are generally less risky versus stocks; so 3) portfolios should hold more bonds, since they’ll offer equal or higher returns for less risk. In other words, put these capital market assumptions through a metaphorical blender (aka the Vanguard Asset Allocation Model), and out pops a recommendation – in this case, the time-varying asset allocation of 30% equities/70% fixed income.

One caveat to this recommendation, which again, relies on model-based capital market assumptions: in Vanguard’s model, like many others I’ve seen, the prediction range for equities is wider than that for bonds. That admittedly gives me some cause for pause when considering an allocation that recommends such a significant overweight to bonds.

A second caveat is that this recommendation holds only two options: stocks and bonds. Missing from Vanguard’s set of capital market assumptions are any set of investments outside of traditional public markets.

As I noted last November:

[A]lthough the individual asset class forecasts are interesting, the relative expectations between asset classes may be more useful. For example, JP Morgan expects that U.S. large cap equities will return 6.7% annualized over the next 10 years, but it expects that Private Equity will return 9.9% annualized over the next 10 years. Similarly, BlackRock expects U.S. equities to return 6.6% annualized over the next 10 years, but it expects that Private Equity will return 10.2%.7 These are just two examples, but across a sampling of capital market assumptions, certain relative return expectations are more consistent (one of which is, private equity is expected to outperform public equities by a reasonable margin).8

[P]utting it all together, these capital market assumptions (in aggregate) are a set of data points that can help inform asset allocation decisions. A lot of analysis on historical data, present conditions, and of course, future assumptions, go into these forecasts. And although I doubt they’ll be exactly right, I do think they’ll be generally, directionally correct. Which is to say, I believe the highest potential long-term future returns exist outside of public equities and bonds, and a diversified portfolio with public and private market investments will be better positioned over the coming years.

When I saw the article you shared, my first reaction was – how is Vanguard justifying this recommendation? After digging in, my second reaction was, half-jokingly – is this Vanguard’s way of trying to make the case for alternative investments down the road?9

To put a finer point on it, the 10-year expected annual return from Vanguard’s time-varying asset allocation portfolio is 5.5%. To me, and pretty much every institutional investor I could think of, that’s unacceptably low. After factoring in an estimated 2% for inflation, the Vanguard portfolio is basically predicting 3.5% annualized real returns for 10 years. No, thank you.

When even Vanguard is saying that public market portfolios might not offer much over the next 10 years, it’s no wonder investors are eager to access private markets.

Thanks for the question, and as always, please reach out with any others: askacio@ivyinvest.co!

See you in two weeks,
Wendy

From a pure spectator’s perspective, I’ll admit to finding the whole thing both fascinating and highly entertaining. I can appreciate the delicious irony of everyday investors, unknown to one another, banding together in unruly collectives to take advantage of hedge funds and their short positions.3

But as a participant in capital markets, I genuinely appreciate the role that short sellers play.4 It is hard to be a consistently successful short seller. Like, really hard (I’ll come back to this point).5

And so, I’d like to use this week’s newsletter to offer a brief commentary on short selling and its role in markets.

It’s popular to think of short sellers as enemies of companies and other investors alike. Yes, short sellers profit when stock prices decline. And yes, some firms are known to loudly criticize their target companies. But if we care about market efficiency, if we care about price discovery, if we believe that markets should reflect reality (sometimes I’m not sure we’re all on the same page on this one), then we should also probably acknowledge that short sellers help keep markets functioning.

Short sellers are, by the nature of their work, motivated to find and challenge inflated valuations. They look for overpriced companies with weak fundamentals, and their market participation contributes to correcting those pricing imbalances. At their most effective, short sellers have been whistleblowers, actively exposing some of the most infamous frauds, including Enron and Wirecard.

To put it bluntly, other investors rely, directly or indirectly, on short sellers to do the dirty work of surfacing red flags and company concerns. The short sellers are not always right. But when they are, their work benefits the rest of the market.

Now let’s circle back to my earlier comment on the difficulty of being a consistently successful short seller. For a fund, the mechanics of selling short a stock are: 1) borrow the stock from a prime broker; 2) sell the stock in the open market; 3) repurchase the stock; 4) return the stock to the prime broker.

It all starts with locating shares to borrow from the prime broker. Some stocks are easy to borrow, and others are hard – they literally get classified as “hard to borrow.” It does occasionally happen that an investor wants to sell a stock short, but there’s just no borrow.

Once the shares are located, the investor has to pay to borrow the shares. This borrow fee can be below 1% per year, or it can be over 100% per year. The borrow fee is unsurprisingly driven by supply and demand (i.e. higher fees when there is high demand to borrow coupled with low supply), and it can change during the period in which an investor is short the stock. Consequently, for a short seller, investment timing is usually really important.

And then there’s the payoff profile for short selling. For all of this trouble, the maximum gain on each short position is the value of the stock at the time of the short sale. Selling a stock at $50? If the stock goes to zero, which is the lowest it can go, the gain, excluding borrowing costs, is $50. The potential loss, however, is infinite – the stock can theoretically rise in value to any price (see aforementioned meme stocks). Consequently, for a short seller, appropriate position sizing is also really important.

Given the challenges, why do some investors choose to be short sellers? Well, I’ve met my fair share of stock pickers over the years, and from what I’ve seen, active short sellers are just built differently. Short selling is, as noted above, an inherently difficult task. Doing it well requires strong fundamental research capabilities coupled with strict risk discipline and a good pulse on markets from a structural standpoint. Of course, it also helps to be skeptically inclined.

Short sellers get a bad rap, but they apply (or at least they try to apply) discipline to markets in real time. They may not prevent bubbles, but they do at least make it harder for bubbles to grow unchallenged.

There’s money to be made, so it’s hardly an altruistic endeavor, but man, there are so many easier ways to make money! U.S. equity markets have been pretty much a one-way street since 2009. Short sellers choose to go against basic market tendencies. And for that, I think they deserve some credit and recognition.

Thanks for joining, and as always, reach out to: askacio@ivyinvest.co!

See you in two weeks,
Wendy

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45 newsletters and a little over a year later, Ask A CIO reaches a mix of LPs and GPs. And in keeping with the original ambition, it also reaches individual investors outside the world of institutional asset management. I think many of you found your way here through a podcast or another publication, perhaps the Meb Faber Show, the Purse, AAAIM High ELI, or Money Guide on the Side1 – please accept this belated welcome, and thanks for reading! And in case you were wondering, yes, the newsletter now also reaches my husband, who likes to remind me that he does in fact read each and every one.2

This newsletter has given me a creative outlet to share my thoughts and perspectives, and I greatly appreciate all the feedback and questions that have been sent my way over the past year. Truly, thank you (and please keep them coming).

Funny enough, the most common question I receive in person, or as part of a podcast or event interview, is one that has never entered my Ask A CIO inbox. But I assume that if it’s being posed frequently elsewhere, it would also be of interest to everyone that joins me here. So here it is.

Can you share an investment mistake, and what were your lessons learned?

I appreciate this question because there is enormous value in discussing mistakes. And nothing stays with you quite like the decisions you wish you could take back.

When I’ve previously answered this question, I’ve typically used a specific example. But when I reflect on that example, I find the whole discussion rather unsatisfying. An unavoidable challenge of diving into any one example is that the details can distract from the more useful universal lessons, the insights that carry over outside of those particulars.

I’d like to offer a better answer here. When it comes to investment mistakes, there’s one behavioral pattern in particular that I’ve seen play out over multiple instances. And not just in my own work. Get a few LPs together over drinks, and if we’re being honest, most of us will admit to having been down this path.

It’s the excitement around the “hard-to-access” but also hard to diligence manager. The one that [choose your big name LP] is invested with, alongside an LP base of over [choose your %] endowments and foundations. The manager is interested in taking in new capital, but only during a narrow window. The investment opportunity presents just enough urgency – sometimes real, sometimes manufactured – to trigger FOMO.3

Almost always, the manager is opening up for new capital after a period of exceptional recent performance. And this exceptional performance is repeatedly emphasized during the diligence process.

Speaking of the diligence process – this is where I want to draw a clear distinction.

There are hard to access managers that, when they’re ready to take in new capital, run a highly efficient and transparent diligence process. Data is plentiful, key investment personnel are available, answers are thorough, and no topic is off limits. It is possible, even if generally not preferable, to do high-conviction, soup to nuts diligence work on compressed timelines.

It's the other bucket that leads to the mistakes. The hard to access and hard to diligence manager. Here, diligence is rushed, and access to information is tighter than usual. Conversations with the investment team are hard to come by. And when they do occur, it can feel like the manager is reciting a script. It may not matter what question an LP asks, the answer invariably leads back to a prepared talking point that is readily found in the pitch deck. And it probably includes a performance highlight or two.

As an LP, it’s obvious the diligence process is not meeting the usual standards, but the investment window is closing. The past performance (which is no guarantee of future returns!) is excellent. It’s uncertain when this GP might accept new capital next.4 Oh, and other smart LPs are doing it too. So, against better judgment, the LP says yes, even though it doesn’t feel quite right.

I’m fairly certain most seasoned investors have one of these in their past. I know I do. And if not, they might have one in their future.5

To counter the temptation, I like to repeat a hard-earned line from one of my favorite investors/mentors/people: there’s always another train leaving the station. If the work isn’t where it needs to be, if access is limited, if the process is overly rushed, it’s ok to pass. No matter how “hard to access” the manager might be. There will be other opportunities.

Although the experience I’ve described up to this point is distinctly institutional, I suspect it will also be increasingly relevant for individual investors. As individual investors are gradually offered greater access to opportunities outside traditional stocks or ETFs, they may encounter special access funds to name brand GPs, with only weeks to make an investment decision. Or SPVs for private investments, with limited windows until the SPV closes.

These limited time opportunities may be truly great opportunities. But any decision process should almost certainly rely on more than just past performance, the presence of other high profile investors, and/or the “exclusiveness” of the investment.

Thanks for joining this week, and as always, reach out to: askacio@ivyinvest.co!

See you in two weeks,
Wendy

His perspective was simple and straightforward: eventually, every investor will have access to every investment. That over time, the long-term trend is almost always toward democratization (across all goods and services, not just investments). And if the march toward everyone choosing from the full menu is inevitable, and there will be a day when anyone can be an LP in anything, then the obvious question is – where are the resources to learn how to be an LP?

I’ve actually encountered variations of this question in different places and in different conversations. For whatever reason, this was the first time it really clicked for me. Maybe it was his certainty about the trajectory of where individual investing goes from here. Maybe it was his clarity on the type of information that needs to exist publicly.

The question as it’s been posed to me previously usually takes one of two forms. Either, what can individual investors learn from institutional investors? Or, how do institutional investors learn and train others?

To some extent, this newsletter has been my attempt to address the first variation of the question: an assortment of topics aimed at sharing some of the learnings, frameworks, and thought processes used by institutional investors. On the second variation, my answer has been some version of, it’s an apprenticeship business, which is both very true and very unsatisfying. The implication being that there’s no path for an individual investor to fully get up the learning curve.

And as things stand today, as unfair as it might be, it’s also accurate – there is no path for an individual investor to replicate what institutional investors do. There is no path to replicate the knowledge that is accrued over years of market experience, coupled with learnings from other investors and candidly, investment managers.

How did I form an opinion on natural resource investments? By learning from many other energy investors. From private conversations with producers, royalty owners, and stock pickers. I’ve looked at opportunities in traditional oil and gas, renewable energy, carbon credits and everything in between. I still have scars from the 2014-2016 energy bust, picked up during my time as an LP at a prior endowment. Pick any asset class or strategy, and my learning process will look very similar.

Yet, my friend’s very good question remains – where are the public resources to learn how to be an LP? And the not very good answer today is, they don’t truly exist yet.

As the universe of investable opportunities expands to include more investors, a sizable and vocal contingent of investors/experts/pundits is adamantly against said expansion. They’re not wrong. Individual investors don’t necessarily know what they’re getting themselves into. There is a lot of noise alongside many suboptimal investment options to sort through. And there are ample misalignments of interest.

But what’s the counterproposal? Continue gatekeeping the broader universe of investments for exclusively institutions and family offices? That can’t be right. Besides, I think that ship has sailed. The trend is moving very quickly toward broader access, maybe even toward a landscape where, as my friend would say, everyone can just invest in everything.

And in that future landscape, there really should be a set of resources to guide individuals on how to succeed as an LP.

What might those resources look like? Would they be general and high level, with advice on how to think about various asset classes and strategies relative to each other? Or would they need to be more specific and tactical, with pointers on how to conduct due diligence on managers? And what might those pointers look like if an investor doesn’t have the option to meet the manager? Like I said at the outset, I’m still unpacking.

One thing I am more certain about – part of learning to be an LP includes learning how to assess the data shared by investment managers. Which, of course, requires investment managers to share the data in the first place. Individual investors will have greater odds of success as GPs offer greater transparency and standardization of information.

And that, in a roundabout way (thanks for bearing with me!), leads me to this week’s otherwise brief question.

How important is position level transparency?1

If I were being flippant, my answer would be – very, obviously! Speaking for myself, but also many other LPs I know, more information is more information, and of course I prefer more over less.

But to answer your question more fully, I’ll answer the question you didn’t exactly ask, which is – why is position level transparency important? After all, it’s not like LPs can change any particular position in a GP’s portfolio. So why should LPs care so much?

As you know, institutional LPs invest across multiple strategies and multiple investment managers. Against this backdrop, position level transparency is exceedingly useful.

First, institutional LPs are rarely evaluating a manager in a vacuum. The decision to invest or not invest in any one manager is almost always considered in the context of the larger investment portfolio. At the most basic level, position level transparency allows LPs to gauge the degree of overlap, or lack thereof, with other managers in the portfolio.

Second, when LPs are able to observe overlapping positions, it leads to useful comparisons across managers. How are the manager theses the same or different? How did each manager source the investment? And, in the case of private portfolios, are there differences in how the investment is valued? If so, why? Like I said, incredibly telling and valuable information.

Third, position level transparency allows for better performance attribution analysis. Sure, managers can share a lot of useful composite data by sector, industry, geography, strategy, etc. But investors generally prefer to slice and dice the data directly. LPs can then organize and standardize the information the same way across managers, again allowing for better comparisons across GPs.

Finally, when LPs have adequate position level transparency across the portfolio, they can aggregate the portfolio by underlying holdings. This kind of transparency allows LPs to gather a much fuller understanding of what is in the total portfolio.

I’m sure there are other benefits I haven’t thought to highlight here, but I think you get where I’m coming from. On the surface, position level transparency might seem excessive and an unnecessary burden on GPs that might prefer not to share that data. But for LPs, the additional transparency is super valuable.

Thanks for joining this week! As always, please reach out: askacio@ivyinvest.co!

See you in two weeks,
Wendy

If we asked folks outside the U.S., they would probably say the weirdest thing is that we have pharmaceutical ads in the first place (apparently, the U.S. and New Zealand are the only two countries that permit prescription drug ads). Which is probably the right answer.

After all, doesn’t it seem strange that someone would see one of these gimmicky ads and then be inspired to request a prescription from their doctor? But these ads are presumably effective. I mean, they must be, considering the sheer frequency with which we’re all subjected to them.2

I sometimes have similar thoughts about cold marketing emails from managers. Don’t get me wrong, many cold outreaches are thoughtful and considered. But others can be so generic, or outright off-putting, I have to wonder how many LPs actually respond.3

Which leads me to this week’s question, which I’ve received often in various forms.

How should GPs approach LPs? And how should GPs continue to engage an LP to build the relationship?

The first question – how to approach LPs – is relatively straightforward, though not necessarily easy. From a tactical standpoint, the first step is identifying the right contact within the investment office.

At a smaller investment office (e.g. four or fewer investment professionals), all contacts are relevant. At a larger investment office, the best contact is likely a mid- or senior level investment professional. Larger investment offices are often organized by asset class or by public vs private markets, which will also inform the right point of contact for any particular GP. There are always exceptions, but for larger investment offices, the Chief Investment Officer is generally not the right contact.4

When it comes to the outreach, a warm introduction is obviously best, and one from another LP is most likely to cut through a busy inbox. Absent that, a polite email clearly tailored for the specific investor being addressed can be very effective. Keep it brief, with a brief summary of strategy and relevant data points. Ideally include a deck (please don’t make the investor ask, because they probably won’t). Did I mention, keep it brief?

I’ll preface what I’m about to say next with, this is purely my opinion, and not all LPs will offer the same perspective. Placement agents on the private market side and cap intro teams on the public market side are valuable intermediaries. They allow LPs to see and assess multiple GPs and strategies quickly and efficiently. These intermediaries vary in terms of their focus, and candidly, their quality, but they’re generally very good at curating introductions.

As for the second question – how to continue engagement and build the relationship – I think there are two factors to consider. The first is how to engage, and the second is how often to engage.

So at this point, there’s been an initial meeting or point of contact with the LP. The initial contact might have been a formal diligence meeting, chatting at a conference, connecting at a networking event, etc.

The goal at this point is to understand how the LP views the GP in terms of priorities. Really there are only two possibilities. Either the LP is 1) actively working on a manager search for which the GP is relevant or 2) the GP is not a near term priority. If it’s the former, the LP will actively pull information from the GP. If the LP is actively pulling information, the GP’s next steps should be clear.

If the LP is not pulling information, or the LP stops pulling information, then the GP is not a near term priority.

If the GP is not a near term priority, again, there’s likely two possibilities. Either the LP is 1) interested in monitoring the GP and staying in touch or 2) not interested because the GP is not likely to ever be a fit for the program. If it’s the latter case, the GP’s next steps should also be clear, as disappointing as that might be.

As long as the LP is interested in staying in touch, there’s an opportunity to build a positive relationship. And in my personal experience, good LP/GP relationships tend to be built over a series of both formal and informal touch points, where investment updates are formal touch points and pretty much everything else is informal.

In terms of formal updates, quarterly letters are helpful. Some GPs host quarterly conference calls and invite prospective LPs. And when market conditions call for it, timely market commentaries are generally appreciated. But unless a prospective LP is specifically asking for it, they’re probably not interested in a one-on-one quarterly diligence call. Maybe semi-annually or even annually.

Informal touch points are both valuable and variable. This is ultimately a people business, and getting these interactions right can go a long way toward building trust and respect. These touch points can be anything from hosting an information session for a group of LPs to provide a market deep dive or simply making a helpful introduction. Fortunately or unfortunately, there’s no magic formula here.

I realize that some GPs may be frustrated by what I’ve described above. Large, established LPs with mature portfolios just don’t add many new managers each year. New investments are often sought out to replace existing investments, so there’s also a somewhat arbitrary element of needing to be the right strategy, at the right time. But that doesn’t mean there isn’t plenty to do in the interim.

Thanks for joining this week, and as always, reach out with questions: askacio@ivyinvest.co!

See you in two weeks,
Wendy

For anyone who hasn’t been reading obsessively about the coming tax changes, Congress is on the precipice of passing a large tax and spending bill, aka the “One Big Beautiful Bill Act.” Among many other proposals, the bill includes a new tiered university endowment excise tax. Certain university endowments are currently subject to a 1.4% tax. The bill proposes raising rates up to 21% for those institutions with the largest endowment assets on a per student basis.1 Should the bill pass in its current state, there will of course be many repercussions beyond just the need to reevaluate endowment investment strategies.

Before we dive in, let me make some obvious caveats – colleges and universities are not a monolith, and neither are their endowments. Aside from the size factor, there’s also wide variations in asset allocations and rates of contribution to institutional operating budgets. So extend me some grace here, as I’ll almost certainly overlook a lot of nuances in our discussion below.

Ok, back to your question. As you’ll no doubt be unsurprised to hear, the upcoming tax changes have been an active topic of conversation for university endowment (and private foundation) investment offices for months now. And these changes are coming at a time when some of these same soon-to-be impacted endowments are already grappling with other portfolio challenges, namely the slow pace of distributions from their private investments.

For anyone who hasn’t been reading obsessively about the state of private equity markets, distributions from private equity managers to their investors have been meaningfully below historical averages for three years and counting.2 I won’t get into the weeds on why here, since the question this week isn’t about private equity, but there are consequences to these lower distribution rates.

Most notably, institutional investors with mature private equity programs – like, say, those university endowments with some of the largest assets per student – often rely on distributions to fund ongoing commitments (capital calls) into those same private equity managers.3 Without expected distributions, institutions have to pull capital from elsewhere in the portfolio to fund ongoing private market investments.

So to recap, these university endowments are facing two distinct, but intertwined challenges. One is market and portfolio construction driven, and the other is policy driven. But both challenges require the same solution – raise liquidity.

And that’s exactly what the likely-to-be-hardest-hit universities have done so far. Multiple universities have moved quickly to issue bonds, with proceeds providing operating flexibility (and providing a release valve of sorts on endowment pressure).4 Some have also sought to raise liquidity through private equity secondary portfolio sales.5 6

That said, raising liquidity is likely just the first phase in how university endowments (and private foundations, which will also be subject to higher excise taxes) might manage through the potential tax increases. I suspect the second phase will involve taking a hard look at those investments where institutions are sitting on sizable unrealized gains. Some of these investments may be longstanding, multi-decade public equity holdings. If the difference between selling today versus selling in a year is keeping 98.6% or 79% of proceeds, it’s probably worth a conversation.

From there, I imagine there are entire swaths of the portfolio – particularly on the hedge fund side – that will be completely re-underwritten. Having invested in and/or evaluated a large cross section of hedge fund strategies, I’ll go out on a limb and say that there are a number of funds living in endowment and foundation portfolios that only make sense in a tax-exempt context.

And on a go forward basis, university endowments will need to take tax consequences into consideration when making new investments. Certain strategies that might once have offered the benefit of consistent and non-correlated but lower return streams may no longer make the cut. Ultimately, I’m sure there are learnings and strategies from institutional family offices, which have always been taxable, that will make their way into university endowment portfolios.

Whatever happens next, it will take time for university endowments to shift their positions. These are large, complex portfolios, with investments subject to various lock-ups and redemption schedules in just about every asset class, not just privates.

I’ll end on a personal note – it’s odd to be contemplating these questions around how endowments and foundations might account for taxes in investing. I spent over 17 years managing capital for these types of institutions. These investment offices prepare for all sorts of market conditions and scenarios. But to become taxable institutions? I don’t think anyone had that on their bingo cards.

Thanks for joining this week! As always, reach out with questions: askacio@ivyinvest.co.

See you in two weeks,
Wendy