This week, a special bonus episode!
I speak with Mike Kelly. He’s president and chief investment officer of Future Standard and a member of the firm’s management committee. We discuss his career on Wall Street, from his time at Omega Advisors and Tiger Management to his work today, including how he helped build Future Standard, a $90 billion multi-strategy platform for wealth management clients.
A transcript of our conversation is available below.
You can stream and download our full conversation, including any podcast extras, on Apple Podcasts, Spotify, , YouTube (audio), and Bloomberg. All of our earlier podcasts on your favorite pod hosts can be found here.
Be sure to check out our Masters in Business this weekend with Jack Raines, author of the new book, “Young Money: A Field Guide to Wealth and Purpose in Your Twenties.”
Transcript:
MASTERS IN BUSINESS: Mike Kelly
President and Chief Investment Officer, Future Standard
Host: Barry Ritholtz · Bloomberg Radio · Episode air date: August 5, 2026 · Running time 1:24
ANNOUNCER 00:00:02
Bloomberg Audio Studios, podcasts, radio, news. This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
BARRY RITHOLTZ 00:00:16
This week on the podcast, an extra special guest, Mike Kelly, has an absolutely fascinating career from Omega to Tiger, currently President and Chief Investment Officer at Future Standard. Really about as knowledgeable an individual as you’ll find covering private credit, infrastructure, and the wealth channel, and what the future of what we broadly call alternatives looks like. I thought this was fascinating, and I think you will also. With no further ado, my conversation with Mike Kelly.
Mike Kelly, welcome to Bloomberg.
MIKE KELLY 00:00:52
Thanks, Barry. It’s great to be here.
BARRY RITHOLTZ 00:00:54
So I’m fascinated by both your background and your career path, which is really, really interesting. But let’s roll back a little bit. Bachelor’s at Cornell, MBA from Stanford. What was the original career plan?
MIKE KELLY 00:01:12
So, taking a step back, I grew up on the border of Queens and Long Island. My dad was an NYPD cop in the South Bronx and in Queens. Mom raised the five of us kids in a traditional Irish American household and valued education.
I knew from a pretty early part of my life that I wanted to go into investing. I’ll tell you a little story. So when we turned 13 in my family, you got the big gift, and at the time I was a nerdy kid. I was into computers. My dad would drop me off at the Queens Village Public Library, and I would learn how to program on this Apple computer. They had just gotten the Apple IIe in. And for my 13th birthday, I asked my parents for — you got up to $300 — $300 of Apple stock. That was my request.
BARRY RITHOLTZ 00:02:07
Really? Wow.
MIKE KELLY 00:02:07
And the big day came. They gave me an envelope. I was really excited. I opened it up, and it was a savings bond for a local bank. And my parents noted the disappointment in my face and said, “You know what, Michael? We’re sorry, we don’t know how to buy stock.”
BARRY RITHOLTZ 00:02:25
This is, like, late eighties?
MIKE KELLY 00:02:26
This is ’83.
BARRY RITHOLTZ 00:02:26
’83, okay.
MIKE KELLY 00:02:26
So I said then and there, I am going to teach myself how to do this, how to invest in these companies. And I set out — I still have it, I have the notebook over here, I actually brought it with me — about stocks and all the things that I would read about investing and investing in the stock market. And so from an early, early part of my life, I wanted to go into investing.
And so throughout the years at Cornell, at the time, I did some great internships. One at a boiler room — they made a movie about that. One for Steve Wynn at the Mirage, which was exciting. And then I studied in Japan, studying the banking system there for one summer. And as I was coming back, the only firm that actually would interview me was Salomon Brothers. And so I wound up, fortunately, getting a job at Salomon Brothers.
BARRY RITHOLTZ 00:03:27
In what capacity? What would you do?
MIKE KELLY 00:03:27
In the financial institutions banking group.
BARRY RITHOLTZ 00:03:30
Okay. So you started as an i-banker, then—
MIKE KELLY 00:03:31
Started as an i-banker. Loved Salomon Brothers. Wound up going to the 42nd floor of Seven World Trade Center, which is where Michael Lewis wrote the book Liar’s Poker. So I wound up going to the fixed income trading floor for my third year and really got bit by the bug of markets. I knew I wanted to make the transition from investment banking over to the buy side. So as I headed off to Stanford Business School, that was my mission — to find my way into the buy side.
BARRY RITHOLTZ 00:04:05
So there’s a sort of urban legend that you kind of cold-called your way from Salomon Brothers into an internship with hedge fund legend Lee Cooperman at Omega. First of all, is that a true story? And if it is, walk us through that call.
MIKE KELLY 00:04:23
Right. So I was at Stanford and I knew I wanted to make this transition into the buy side. And in looking at the careers of the greatest minds in investing, they all seemed to be relegated to this corner of the market of hedge funds and private equity firms. We’re talking about the mid-nineties here, when people didn’t have a lot of understanding of what these firms actually did. But it struck me as an incredibly intense and exciting career path. Many of the people were very young and seemingly making a lot of money doing it, and really working on some dynamic investing strategies.
And so I had a directory. It was called the Van Hedge Fund directory. It was a printed-out piece of paper, like from a fax machine, and it had the names and addresses of, at the time, the top 25 hedge funds. So it had Bruce Kovner in there, and Paul Tudor Jones and George Soros. And so I went through this directory and literally called, from a payphone, these individuals.
BARRY RITHOLTZ 00:05:37
Come on. “Hey, Druckenmiller, it’s Mike Kelly.” That sort of call?
MIKE KELLY 00:05:42
Now, the disadvantage is most people were screening their calls. Their assistants were like, “Yeah, he’ll never call you back.” The advantage for me was one of those individuals, Lee Cooperman, often didn’t use an assistant and answered his own phone.
BARRY RITHOLTZ 00:05:58
He’s there at five in the morning, he’s there at eight at night. If you call outside of business hours, Lee’s the only guy in the office.
MIKE KELLY 00:06:05
And he picks up and goes, “Lee.” And that’s how he starts the conversation. “Mr. Cooperman, I’m a kid from the boroughs like you. I just want to break into the industry. I’ve worked at Salomon, but I’ve never been an investor before. I am willing to do whatever it takes. I am willing to sleep on my parents’ couch and work for you for free.”
And he said, “I only hire PhDs.”
BARRY RITHOLTZ 00:06:30
Really?
MIKE KELLY 00:06:30
And I said, “Well, I’m getting my MBA right now.” And he said, “No — poor, hungry, and driven.” And I was like, “Well, I’m all three of those. I check those boxes.” And he said, “Well, I’m a value investor and I like the price. You can come work for me for free.”
BARRY RITHOLTZ 00:06:47
No kidding. “I like the price.” Oh my God.
MIKE KELLY 00:06:50
I show up day one at Omega and Lee comes to me and says, “Let’s go to breakfast.” And I thought, this is amazing. I’m—
BARRY RITHOLTZ 00:07:00
In heaven.
MIKE KELLY 00:07:01
First day, and I’m going to breakfast with the legendary Lee Cooperman. So we go across the street — 100 Wall Street — we go across the street to an Au Bon Pain for breakfast, and we get to the counter, we order, and Lee turns to me and says, “You are buying.” So here I am, day one, and I’m already $30 in the hole in my illustrious investment career. But it turned out okay.
And that was how I got my start in the investment business, and in particular in hedge funds and the alternative investment business.
BARRY RITHOLTZ 00:07:36
That’s unbelievable. So after Omega, you leaped from Lee Cooperman to working under Julian Robertson at Tiger Management. How did that come about?
MIKE KELLY 00:07:47
So I had worked full-time after business school for Lee and for Omega Advisors. I received a phone call a few years later from Tiger Management. They were looking for someone in their macro trading and analyst group. And at that time, getting a call from Tiger was like getting a call from the New York Yankees. It was the illustrious, incredible firm. Was very honored and flattered, interviewed there.
BARRY RITHOLTZ 00:08:14
Let me interrupt you a second just to remind listeners that the 1980s and 1990s were peak hedge fund years. They were masters of the universe. They put up the best numbers. For any investor that wanted to allocate to them, it was not easy to get into any of those funds. The world changed after the financial crisis, but that was the golden era of hedge funds, wasn’t it?
MIKE KELLY 00:08:41
Most definitely. And I think what I appreciated the most about those first few firms I worked at — Salomon, Omega Advisors, Tiger Management — there was a commonality of culture, in that these were very intense work environments with very intellectually curious individuals who were super smart but liked to have fun, and were a joy to be around and learn from. And so I really enjoyed the aspects of the culture of those environments in my early career and really got a lot out of it. And it really appealed to my personality, kind of an obsessive, intense personality. So I really enjoyed that.
But going to Tiger was incredible. A very young group of people who have obviously gone on to do great things in their investment careers, a really intellectually challenging place to work. But I learned a ton about investing from Lee and from Julian and from the other individuals that I worked with, and it sort of shaped my investment philosophy as time went on.
BARRY RITHOLTZ 00:09:52
I’m curious, because there are obviously such different styles. Lee is a deep value guy. Tiger is known as momentum and growth and technology — a very, very different opportunity set. What did you learn from each of those? How different were Julian’s and Lee’s approaches?
MIKE KELLY 00:10:13
Well, I think Julian and Lee, at the inception of it, both had a very value-oriented approach. I think within Tiger there was an evolution over time and an adaptation — even with some of the Tiger Cubs — of adopting a more growth-oriented strategy. But it was a time when doing real intense work could uncover really great long and short opportunities. I do think years later, decades later, it became much more difficult with indexation and ETFs, and the market structure changed.
But back then, I would say from an investment philosophy standpoint, there was a view that every single day you rebuy your portfolio. It doesn’t matter if you’re losing money or you’re in the money, you’ve made a double already. If you own it, think about it and re-underwrite it as if you just bought it today. And are you as excited, from a long and short perspective, about that opportunity in the go-forward period? And I think that discipline of re-underwriting your holdings every single day is something that’s remained with me.
I think secondly, I would say what I would call a variant perception — or what is called a variant perception, something that Michael Steinhardt popularized — of, when you make an investment, how is your view different from the market? Because if you want to outperform the market, you can’t just agree with the thesis that’s already embedded in the price or value of an investment. And so that variant perception of, how do you look at it differently — you’re either more bullish about that opportunity, or you think that opportunity is overdone and so you’re either selling or you’re shorting, or what have you.
And so I think that variant perception is really, really an important aspect of the philosophy. Having investment conviction is another principle. Go all in, do your work, get to a high-conviction thesis, but hold it loosely. Hold on loosely, like—
BARRY RITHOLTZ 00:12:13
“Strong opinions, loosely held” is the expression I heard years ago.
MIKE KELLY 00:12:17
Right, that’s exactly right. Because if you have disconfirming evidence, don’t ignore it. Don’t double down with your escalation of commitment. Re-underwrite it and ask yourself, well, maybe I have to change my mind. The greatest investors, in my mind — someone like Stanley Druckenmiller — is willing to change his mind all the time based on new information. And so I think these principles form an investment philosophy that, if you don’t know what your competitive advantage is in making an investment, whether you’re a private market investor or a public market investor, you probably don’t have a reason to be in that investment in the first place.
BARRY RITHOLTZ 00:12:50
That’s exactly right. I love the concept of re-underwriting. So many new investors — and I started on a trading desk — any position you had, you had to justify every moment you owned it. Hey, this is capital. I can turn this into capital in a millisecond. Would you buy this if this was back as cash and not as a holding? Where you bought it, whether you are underwater or ahead, is totally irrelevant. Would you continue to re-underwrite that? That’s a great way to describe that. I’m really impressed with that.
So from Tiger, you go to FrontPoint Partners and helped turn it into a truly institutionalized hedge fund. Tell us a little bit about FrontPoint.
MIKE KELLY 00:13:34
So I got a call from the two original founders of FrontPoint and they asked me to look at the business plan and to give them a critique, which I did. I thought it was fascinating. At the time, a lot of hedge funds were frankly run almost like family offices as a business.
BARRY RITHOLTZ 00:13:51
A third of the capital was the founders’, half the time anyway, not precisely.
MIKE KELLY 00:13:55
Right. And most of the investment capital came from ultra-high-net-worth and family offices, like the Memphis mafia and others. And so there was a view that institutions would begin to embrace alternative strategies, and for them to embrace alternative strategies, the firms they would allocate capital to would need to look like the institutional asset managers they were used to, like in the traditional mutual fund business. But a lot of hedge funds didn’t look and feel that way. They were run more like family offices.
And so we had a view that by forming a real institutional-quality asset management firm that would house diversified strategies and managers who could provide absolute return strategies to these institutional clients, that that would be embraced — embraced because of the excellence of the investment teams, but also by the world-class asset management infrastructure that we would build with FrontPoint. And so that was the thesis. You’re going back to 2000 now, and to be invited to join a firm — and these guys were in their fifties, I was 29, 30 years old — to build a company was an exciting thing for me at the time.
I still wanted to become Paul Tudor Jones. I wanted to be a macro investor, I wanted to be an investment manager, but I thought I’ll start by helping these individuals build this firm, and then I’ll go back to running a fund, probably at FrontPoint.
BARRY RITHOLTZ 00:15:29
Didn’t you begin at FrontPoint as CIO and eventually become co-CEO? Is that right?
MIKE KELLY 00:15:34
I was the head of manager selection and overseeing the investment teams. Then I became chief investment officer and head of the multi-strategy, and then I became co-CEO of the firm. So it was an evolution over time. But at the outset, hiring the investment teams, overseeing what they were doing, picking and selecting them, was a fascinating job for me. I loved learning about different approaches — Market Wizards, Stock Market Wizards, all the different ways you could skin a cat with investing. So it was like a kid in a candy store.
And I began to reflect on my career at that time, in that everyone goes into the investment business with the mindset of, I want to become a great investor. I want to become Warren Buffett, I want to become Julian Robertson, I want to become Paul Tudor Jones. I was no different. That is a very crowded pond, and a lot of luck and things have to go your way to conspire to result that way, to become one of the top decile, quartile managers out there.
And I thought at the time, building an asset management company like this, like I’m doing with my partners at FrontPoint — I’m a young guy, I’ve got my whole career ahead of me — no one ever sets out in the investment world wanting to become Larry Fink, right? Or Chip Mason, who built Legg Mason. They want to become Warren Buffett or Julian Robertson. And I thought, actually, if I spent my career building asset management companies and managing them, that could be a pretty robust career. I could really enjoy myself. And it’s a pond no one seems to be fishing in, and maybe 20 years from now this might result in something. And so it was at that moment, within FrontPoint, that I began to move away from investing professionally in the markets and more toward building investment organizations and overseeing investment managers and strategies.
BARRY RITHOLTZ 00:17:21
So the next step along your career path, you joined ORIX Asset Management as CEO?
MIKE KELLY 00:17:28
Right. So we had sold FrontPoint to Morgan Stanley. I had run it with my partner there for a few years. I was hired away by ORIX to be the CEO of their asset management unit. It’s a Japanese holding company. They were looking to diversify their holdings into the US and into various industries, one of them being asset management. They had a lot of capital to deploy and a low cost of capital, being a Japanese holding company, and I thought I could exceed that hurdle and build something here.
So it was back in 2012, and it was during the PIGS crisis, in thinking about where could we acquire compelling asset management capabil—
BARRY RITHOLTZ 00:18:07
Capabilities. Let me interrupt you. For the people who might not have been trading through it — whatever the PIGS crisis was: Portugal, Italy, Greece, Spain, is that right? Spain?
MIKE KELLY 00:18:19
That’s correct, that’s correct. And at that time, the European Central Bank and some of the local national banks of these European countries were encouraging financial parties to divest of their non-core holdings. And so as we were thinking about where in the world could we deploy capital to acquire asset management capabilities, Europe seemed a logical place because there was forced selling happening. And so there was a jewel in the crown of Rabobank Holdings, the private bank in the Netherlands. And they needed to divest of Robeco, which had been around for—
BARRY RITHOLTZ 00:18:58
Which was giant back then.
MIKE KELLY 00:18:59
$300 billion plus. And they had purchased that historically and had owned it, but it was non-core to their private bank. And so we positioned ourselves as an advantageous buyer to them. We purchased it at a very attractive valuation. It was the largest in ORIX’s history.
BARRY RITHOLTZ 00:19:22
Wow.
MIKE KELLY 00:19:22
We acquired that capability. And at the time it was exciting to get that deal done. We had bought other stakes in other managers in the alternative space, but really I wanted to do something more entrepreneurial again. And so I began to look at, what is the next business within asset management — like FrontPoint — that I could set my career out to build? And that is how the inception of coming across what was then Franklin Square, now Future Standard, came about.
BARRY RITHOLTZ 00:19:58
So when you joined, did you join as CIO or president, or what was the initial role?
MIKE KELLY 00:20:04
Yeah, so I was introduced to Michael Forman, the founder of Franklin Square, through a headhunter friend of mine, Scott Fletcher. And I was also introduced by Bennett Goodman and Doug Ostrover at GSO in Blackstone. And they had encouraged me to go meet with their partner who they had partnered with. As I was describing what I thought the next big thing in asset management would be, it would be the arc of history of bringing alternatives from family offices and ultra-high-net-worth throughout the eighties and nineties, and then the endowment model with David Swensen, and eventually institutions began adopting it. The one constituency that was still left out were the individual investors below ultra-high-net-worth and family offices. And so I had a view that at some point that would change, and I wanted to help effectuate that change. And that is where I was introduced to Michael Forman and his vision for what he was doing with Franklin Square, and had been doing.
And he had built this incredible chassis around productizing and distributing income strategies, and convinced me to join up with him as president — to go join him and be the chief investment officer, help build out the asset management capability. Now, at the time, Franklin Square was a product and distribution firm, so they were creating the wrappers and distributing them, but other external parties — at the time, Blackstone — were the ones sub-advising and providing all of the investment acumen.
And as I would describe it today, and I use this analogy of Netflix: it was like seeing the red envelopes and DVDs. But Michael had created this incredible distribution engine, a hundred-million-person mailing list type of distribution capability. And just like Netflix figured out how to digitize their business and create their own in-house TV and movie studio, that was my pitch to Michael — you could eventually diversify this product base and you could bring in-house capabilities, so long as the quality is still very high. You can put it through these channels and offer them to private wealth clients. And so that’s what we set out to do.
BARRY RITHOLTZ 00:22:27
Really, really fascinating. Coming up, we continue our conversation with Mike Kelly, Chief Investment Officer and President of Future Standard, discussing how he helped build the company into a $90 billion multi-strategy platform for wealth management clients. I’m Barry Ritholtz, you’re listening to Masters in Business on Bloomberg Radio.
BARRY RITHOLTZ 00:23:01
I’m Barry Ritholtz, you’re listening to Masters in Business on Bloomberg Radio. My extra special guest this week is Mike Kelly. He’s president and Chief Investment Officer of Future Standard. They are an alternatives manager focused on the wealth channel, running over $90 billion in client assets.
When you joined, what was Franklin Square — before it became Future Standard, FS Investments? They effectively had one credit strategy plus whatever they were reselling on behalf of other people. A little over $10 billion. You’re almost 10 times the size now, with a full multi-strategy platform. How did that evolution come about? What were the key inflection points? Was that a tough sale to get everybody in-house to accept that, hey, we have a nice little business here, Mike, why do you want to mess with it?
MIKE KELLY 00:23:56
Right. Well, there was a nice business there, and change comes with resistance. But I think we’ve had a fortuitous progress of change over the last 12 years. And I would say it started out with forming multiple partnerships with various outside firms that Michael and I had relationships with — the likes of KKR and GoldenTree, Rialto in real estate, EIG, Magnetar, Wilshire — in order to create some diversified strategies that we could offer to clients with best-of-breed managers across various disciplines.
And so that was the first stage of evolution, moving into more of a multi-manager architecture. Concurrent to that, I began to hire internal talent, which is something similar to what I had done at FrontPoint, and brought in individuals like Andrew Beckman and helped him build out his internal private credit team. We made some acquisitions as well — Chiron Asset Management, Portfolio Advisors, Post Road Group — in various disciplines. And so it was a combination of an evolution of external partnerships, in-house hiring and talent and development and growing those, and inorganic acquisitions of capabilities and managers to bring on.
And I’d say, starting from this inception of packaging and distribution, we then evolved into a diversified asset manager. And then, after the series of in-house capabilities and acquisitions, we adapted the firm into what I would call a true alternative platform. And I’ll distinguish a platform from a diversified asset manager, because I do think they are different. A diversified asset manager, you have different strategies that you offer to clients, but those strategies don’t have to interrelate at all with one another, and there may be no shared set of relationships or gleaned insights or what have you. A platform, as I would call it, is more interwoven. There’s more collaboration, there’s shared underwriting, there’s shared origination and relationships for deal flow, there’s an exchange of insights and specializations, all with the intention of improving outcomes for clients. And that evolution, if you will — it’s easy to whiteboard that out and describe, we’re going to do this. To your point, it’s really hard to actually execute on that.
BARRY RITHOLTZ 00:26:52
So there’s an underlying thesis in this. Once this full platform is built out, hey, there is a giant wealth channel that a lot of alts are not tapping into. It’s the next great frontier. High-net-worth, mass affluent want the same sort of access to strategies that they see foundations, endowments, institutions having access to. Tell us a little bit about how you see that opportunity. How large is it? How much has already been captured? Where are we in the cycle of this getting pushed out to mom-and-pop investors?
MIKE KELLY 00:27:30
So, backing up to when Michael first started Franklin Square — this is now back in ’07, ’08, launched the fund in January of ’09. So auspicious, great timing for a credit strategy and delivering income to individual investors through the independent broker-dealer channel. And if you remember that time, you had this declining yield environment and the Fed cutting rates over that course of time. And so there was a search for income, particularly for retirement accounts.
And so in the early days, a lot of our offerings were income strategies, income-oriented — whether it’s middle market lending, CLOs, offering real estate lending strategies and so forth. So, generating income. And I think we saw that post the great financial crisis, banks would begin to withdraw from those lending activities and cede those over to asset managers and direct lenders like ourselves, but also that private wealth and individual investors would begin to embrace these strategies to pick up income sources. And so those two trends, I think we got correct.
What we probably didn’t foresee was the adoption curve. I think we probably assumed it would be more linear than it actually turned out to be. It took longer. You think about it — this is now going back, I mean, Franklin Square was started almost 20 years ago. It’s very topical today and we’ve seen a lot of flows in the last five-plus years, but it has been more recent that adoption is picking up and being spoken about across the entire industry. So I do think there’s been this arc of evolution and adoption, but I would tell you, Barry, it’s still very much in the early days, given the dynamics of private companies and their capital needs.
BARRY RITHOLTZ 00:29:27
So let’s put that into a little context. The 2010s — you not only had zero interest rate policy, ZIRP, you had QE, you had Operation Twist. The Fed did everything it could do to make cash trash and force people off the sidelines. Hence TINA, there is no alternative, became popular. In hindsight, it’s kind of surprising that it took private credit as long as it did to really find a bid. You would think that in that era of zero interest rates, hey, we’re going to give you 7%, but it’s variable — if the Fed raises rates, we should see a bump up in yields. What was it like building out into that environment, not just as an executive but also as an investor, as a CIO?
MIKE KELLY 00:30:17
Yeah, I would say two things. One’s a market backdrop issue and one’s more of an operational issue. On the market backdrop issue, I define this golden era of investing as post-Volcker, like 1987 up until 2021 as we’re coming out of COVID. And if you look at a chart of spectacular US stocks and bond prices, 60/40 made incredible sense. You had disinflationary forces, you had benign demographics, you had globalization, and it was great to set it and forget it with a 60/40 mix.
BARRY RITHOLTZ 00:30:54
That era was a 35-year bull market in bonds. It’s incredible — there are long stretches where fixed income is outperforming equity in that run.
MIKE KELLY 00:31:05
Right. So why do you need an alternative, right? If the music sounds great, you don’t need alternative music. When the music is all crap, Nirvana comes along, right? And so I think the experience that investors had was, prove to me I need something else. And it hasn’t really been — particularly with fixed income, right, when you think about the experience of the last six years or so, where high duration fixed income has not been great at all. That’s 40% of your traditional portfolio, right? That just stopped working overnight. And so that catalyzed a lot more inquiry into diversified sources of private market income, private returns, and so forth.
The other issue that slowed the adoption curve is on the operational infrastructure side. And it’s something that the likes of Lawrence at iCapital and Matt at CAIS had been solving for, but it was really clunky in the early days. You had double layers of fees, you had feeder funds, you had high loads, K-1s. K-1s, nightmare. It’s just not something that the individual investor and their advisors wanted to embrace, understandably, because you had to fill out by hand a sub doc for every single investor.
And so both the market backdrop changing and morphing and opening up people’s minds, as well as access and operational infrastructure — and we’ll get to this, but education, which we’re clumsily getting our way to, educating on these strategies, how they work, these structures, how to embrace them, how to incorporate them into portfolios — that took time. It just took time for the whole industry to get there. And I feel like we’re finally at the point where we’re arriving. But as I said earlier, I still look at this adoption and penetration from these investors as very early.
BARRY RITHOLTZ 00:33:03
How much of an accelerant was 2022 with the — what was it, 550 basis points of rate hikes? If you’re long duration, well, that’s going to really leave a mark. What did that year do to acceptance of alternatives from that wealth channel?
MIKE KELLY 00:33:23
So, two things. One was positive and one was more of a challenge. The positive side of things was that with the backup of duration, of long yields, that began to challenge the traditional fixed income side of the portfolio. So if you think about the traditional fixed income portfolio — I think about credit, fixed income risk in three ways: liquidity, credit risk, and duration. And so most people had very long duration, highly liquid, low credit risk investments in treasuries and agency bonds and mortgage securities, municipal securities, that began to fail them and not provide the ballast against equities it had been. And it didn’t provide the income, because duration was working against you. So that was a positive force for, let’s find something else.
The negative force was going from zero to 5%. People went from not earning anything on their cash and needing to deploy it to make any money, to, oh wait a minute, I haven’t made money on my cash in a long time. 5% sounds pretty good.
BARRY RITHOLTZ 00:34:28
Money market five and change was great. It was especially—
MIKE KELLY 00:34:32
When you hadn’t had that for a long time. Yeah, for sure. And so you began to see some hoarding of cash balances that only began to be deployed as the Fed started to cut those rates again.
BARRY RITHOLTZ 00:34:45
I would imagine the inverted yield curve around that time was problematic also. Why do I want to tie up money if liquid money market is yielding even more?
MIKE KELLY 00:34:54
Most definitely.
BARRY RITHOLTZ 00:34:55
Really interesting. So you’ve described the current environment as having created a new investing imperative — focus, research, flexibility to change course, conviction. Tell us about what you see as the modern investing imperative around alternatives.
MIKE KELLY 00:35:18
Right. So we all know about the decline in the number of publicly traded companies. If we were coming out of college, it was 9,000; today, barely 4,000. Both the number of private companies and the size of private companies has exploded. And the opportunity to invest in these private companies has increased dramatically, as well as the access and the availability, and those companies taking advantage of access to private equity and direct lending sources of financing.
And that allows for a much broader palette for investors to build portfolios with, by accessing those companies. And I would say, Barry, increasingly, in order to get diversification — to build diversification — you do have to look outside of public stocks and bonds. The stock market is becoming less and less representative of the total economy than it used to be. It’s very concentrated right now in AI infrastructure, in the Mag Seven and the buildout there.
And you have a myriad number of private companies of small to midsize and some larger size that provide you access to what’s really driving the US economy. We call that the middle market. And the middle market is a couple hundred thousand plus companies that drive the US economy that are not publicly traded. We define the middle market as companies of a billion dollars of enterprise value and down, so sort of lower and core middle market. And these are businesses that frankly are fast growing. They’re a fragmented ecosystem, they’re hard to find. But if you can navigate and invest directly in these businesses, or lend to these businesses, it’s a very attractive access for investors.
BARRY RITHOLTZ 00:37:10
So let’s talk a little bit about that. I like to step back and take the 30,000-foot view to kind of get a sense of how this evolved. My general sense was you had a lot of consolidation with big money center banks following the financial crisis, even the decade leading up to it, and it felt like much of Wall Street, much of the giant banks, just kept moving up market and left these huge swaths of billion-dollar companies behind. Because let’s be honest, what’s a billion-dollar company? It’s small change to them, right? Is that what created the opening for all of this private credit, real estate financing, private debt? There’s this whole world that used to be traditional banks. Explain that transition a little bit.
MIKE KELLY 00:38:01
So, as I spoke about earlier, I started my career at Salomon in FIG banking, and we would talk about merging banks, and we had these old CDs that you would take with bank information and merge the banking world and pitch banks on why they should consolidate. Well, they did, throughout the eighties, nineties, and two thousands. The banking world became much more consolidated into these four mega banks that hoovered up a number of regional banks. So this is a confluence of factors — that was one factor. The great financial crisis and Dodd-Frank and risk capital rules was another big factor, of driving higher capital requirements for banks and their activities.
You also had banks increasingly looking towards generating fee income versus making loans on their balance sheet. In other words, they wanted to be in the moving business, not the storage business, because that’s what their publicly traded shareholders were valuing. And so they answered that call. And so increasingly they began to step back from those lending activities, particularly to midsize private companies and real estate activities.
And that allowed for asset management companies — who, I would estimate, have very attractive asset-liability matches within their lending activities — to step into that opportunity and provide that financing capital through closed-end funds, through BDCs, through different structures, to be able to lend and provide access to the individual investor to generate income off those lending activities. And so I think all of those things provided the opening, and it’s been a market share shift from the banking system to the direct lending and asset management world in private lending.
BARRY RITHOLTZ 00:39:57
Really interesting. Last question on the evolution of Future Standard. You’ve served roles both as chief investment officer and CEO, co-CEO. As CIO, you think about generating returns. As a CEO, you have to think about everything else — people, infrastructure, clients, culture, systems, right? How do you integrate those two very different sets of responsibilities?
MIKE KELLY 00:40:29
Right. So in terms of thinking about the role, overseeing the investment teams and investment strategies is a big part of what I do as chief investment officer. I like to use the analogy of — I like to be the Rick Rubin in the room of really talented professionals, provide an environment by which they can do their best work, and then get the hell out of the way. And so you have to identify the talent, you help to work and develop them, you have to work with their process, how and why they make decisions as individuals and teams of individuals, make sure that their priorities align with our clients and the firm overall, give them all the resources that they need to do their job — and increasingly their more sophisticated resource requests, like around AI deployment and things of that nature — and then get out of their way, allow them to do their best work.
And, as you pointed out, designing incentives, designing culture, reinforcing behavior is a big part of all of that. So that’s one big part of my job. Also interfacing with clients, both private wealth clients and institutional clients; strategy for the firm, internal strategy; corporate development, but also M&A and new deployment of acquisition of different strategies and products; and launching new products and new extensions of existing products is a big part of my role. And then reinforcing the culture overall of what we’re trying to build.
BARRY RITHOLTZ 00:42:01
And you mentioned earlier that the firm was selling into the broker-dealer networks. That seems to have evolved into more of RIA networks. Even the big shops like UBS and Morgan Stanley have kind of pivoted away from transactions to more fees. How has that transition affected who you’re selling products to?
MIKE KELLY 00:42:31
So over the last 15-plus years, there has been an evolution and a broadening of the types of platforms that have been embracing private market strategies, alternative investment strategies. There’s the wirehouses, so the big four names — Morgan Stanley, UBS, Merrill Lynch, Wells Fargo. There are the large RIAs like Rockefeller and Cerity that are building out their capabilities for independent advisors and growing quite tremendously. And then you have the independent broker-dealer channel, the LPLs of the world.
And so there’s an ecosystem of wealth platforms just here in the US that oversee 300,000 financial advisors and brokers in the United States. And all of those channels are increasingly embracing and hosting onto their platforms access to these types of strategies, through various phases of development within those platforms. I would say there’s a real spectrum of adoption.
When I started at what was then Franklin Square, talking to a big wirehouse like Morgan Stanley, they would tell you that a very small group of their advisors were doing the vast majority of alternatives business. Now, across 15,000-plus advisors, there’s a much broader and wider democratization of adoption of alternatives across theirs and other people’s platforms. But there are still a lot of individual investors and advisors who are still at 0% allocated to something other than a stock, bond, or cash. And that evolution is — that’s why I think we’re still in the very early innings.
BARRY RITHOLTZ 00:44:17
Really, really interesting. Coming up, we continue our conversation with Mike Kelly, president and Chief Investment Officer of Future Standard, discussing the state of alternatives today. I’m Barry Ritholtz, you’re listening to Masters in Business on Bloomberg Radio.
BARRY RITHOLTZ 00:44:48
I’m Barry Ritholtz. You are listening to Masters in Business on Bloomberg Radio. My extra special guest today is Mike Kelly. He is president and Chief Investment Officer of Future Standard. They are a $90 billion alternative platform focusing on private credit, private equity, real estate, infrastructure, and multi-asset strategies.
So it’s hard not to look at private credit today and not think this is becoming a juggernaut. Is that a sign of maturity, or is this just a lot of capital chasing not a lot of loans?
MIKE KELLY 00:45:23
So I’d start by saying that there is a misconception that private credit generally is becoming a bubble. And I consider myself a student of history and calamities, and I try to think about — if you look at the build of what we call private credit, the asset management’s direct lending to private companies, matching up against various situations in the past where we had true bubbles, you had an outgrowth of capital versus the economic driver of activity. We don’t have that today.
If you actually add up the pockets of what we really call private credit — which is not just direct lending, but high yield strategies, broadly syndicated loans and bank C&I loans, that’s private credit provision — it’s grown lockstep with the economy. The economy had gone from 12, 13 trillion before the great financial crisis. It’s 30 trillion today. And so it’s grown in lockstep. It’s just the market share has shifted to direct lenders and asset management away from banks, high yield, and broadly syndicated loans.
And so the opportunity in private credit is not outgrowing the underlying opportunities. These private companies are availing themselves of this private form of financing from asset management companies, and there’s a lot more of these private companies demanding this capital. So there is a balance between the supply and demand of this capital for the opportunity.
Now, having said that, in this search for yield that we talked about, there was an outgrowth of evergreen strategies and selling to the private wealth community, particularly within private credit strategies, in this demand for income. And we did see an explosion in a concentration, in crowdedness, in particular funds and pockets of large-cap lending that did result in very tight spreads, covenants being loosened, an increase in pay-in-kind, or PIK, over cash financing. And we also saw a concentration of lending to software companies. As rates were being cut and distributions were being cut within BDCs and private credit, we began to see that, coupled with the concerns about software exposure, begin to result in some redemptions. And that is where a lot of the headlines have been focused on private credit and negative sentiment around private credit, trying to get out of these structures when they’re having difficulty doing so.
I think the backdrop, though, is private credit is still a very valuable and value-enhancing component for most portfolios to generate income, despite some of the indigestion and negative headlines that have been developing.
BARRY RITHOLTZ 00:48:23
Let’s talk about those redemptions, because they always crack me up. We saw this a couple of years ago with BREIT and BCRED, which is — which part of five-year lockup is confusing to you? I don’t understand. And for the listener, a lot of these illiquid alternatives have a tiny gate, a 5% gate, which is really there as an accommodation when — I call it the widows and orphans clause, right? If the surgeon is hit by a bus and he leaves behind wife and kids, they perhaps shouldn’t be in an illiquid alternative in those circumstances.
But given that, let’s talk a little bit about the illiquidity premium, which some people look at as a bug but I think as a feature of this sort of investment. Tell us a little bit about how you think about illiquidity, and how do you communicate illiquidity or liquidity issues to potential investors?
MIKE KELLY 00:49:27
Well, I’d start by saying investing is all about trade-offs. There’s no right or wrong, no black or white. Alternatives aren’t better than traditional forms of investing. There’s just trade-offs. And the trade-offs within private market strategies and the structures that offer them is that you have the advantages of the potential for enhanced return through an illiquidity premium, or enhanced diversification from your public holdings. The trade-off of that is these are illiquid strategies, they are complex, and they are higher fees than public market strategies, ETFs and indices and things of that nature. And so you have to balance those before determining whether or not the trade-offs make sense for you, for your clients, for an institution, what have you.
And I really mentioned the illiquid part of it because these strategies are illiquid. Evergreen structures as wrappers around these illiquid underlying strategies did not make an illiquid private asset class liquid. It was just an access point. It provides its own advantages of continuous compounding and no capital calls and 1099s and so forth. But it didn’t turn an illiquid asset class into liquid. I never understood the term “semi-liquid,” which implies half liquid, which it’s not. These are not half-liquid private investments.
And so that, as a backdrop — a lot of it comes down to managing the expectations of what the trade-offs are. Going back to the advantages, you are providing capital, and in our case at Future Standard, we’re providing capital to a very fragmented ecosystem. We cherry-pick a handful of the best middle market, midsize private businesses, and we provide them with capital either through equity capital or through loans that we make to these companies. These companies are not massive in size and they can’t dictate final terms. And so we can lend to them at very advantageous prices that work for them, because they’re growing businesses. They need capital to grow, to acquire new businesses, to fund their operations. And so they’re not going to negotiate to the final basis point on spread. So we can provide a very attractive form of financing to them and pass along that income to individual investors for the private wealth community.
And so it works for both sides. And that form of income does come with an expectation of higher returns than what you’ll be able to replicate in the sort of mega-cap market or in the public fixed income market.
BARRY RITHOLTZ 00:52:12
Makes a lot of sense. Back in the day, this was thought of as an institutional product and a family office product. It began migrating downstream to ultra-high-net-worth and then high-net-worth. Now the question is, is this going to be marketed to mass affluent, 401(k)s, things like that? Who do you see as appropriate buyers of a variety of private credit products?
MIKE KELLY 00:52:42
So, we’ll start by saying, one of the reasons that at Future Standard we like working with advisors is nobody has a better finger on the pulse of suitability than the advisor to their clients. They will know, for their client base, risk preferences, liquidity preferences, their ability to understand these strategies and have them incorporated into their portfolio. We say that if you are going to allocate to a private market strategy like the ones we offer, if you’re not looking to allocate for at least the next four or five years or beyond, don’t make the allocation. If you need the liquidity in the next few years, there’s no guarantee — to our earlier point — that you’ll be availed of that liquidity.
And so the determination of suitability is at the advisor level, and I think that’s where it sits. You could make the argument that this should be relegated to those with net worth or income of a certain bracket or level. The regulators have their policies on that. But when it gets a little bit fuzzy, where someone is accredited but may or may not be suitable, I think the advisor is most positioned to be able to — and we would rather have fewer but more suitable investors as our client base than more and less suitable investors as our client base.
You asked the question about retirement accounts. I think there’s been a lot of headlines written about the big numbers that are being thrown around, 12 to 15 trillion of DC 401(k) plans. This, in my view, should be among the least controversial of places to think about incorporating less liquid private market strategies.
BARRY RITHOLTZ 00:54:27
Because you’re not tapping it for years—
MIKE KELLY 00:54:28
Or decades. You don’t need it for decades, right? Usually, for a young person in the retirement account, I think about my little brother, who’s a schoolteacher in Queens, and if he has a 30-year horizon or a 20-year horizon, why shouldn’t he have some allocation incorporated in, say, a target date fund, to long duration investments that might pick up an illiquidity premium if he doesn’t need the capital for a very long time?
BARRY RITHOLTZ 00:54:56
And that’s a couple hundred basis points over treasury easily. That’s the assumption.
MIKE KELLY 00:54:59
Easily. And also, let’s face it, a lot of the best investors in the world are still occupied in this world we call alternatives. And so why not avail yourself of the best investment minds and teams and firms that are out there and their capability sets? And so I do think there will be incorporation of private market strategies into retirement plans, into DC 401(k) plans. I think it’s going to be a much longer evolution than maybe some would like. It will also only be a subset of the 12 to 15 trillion out there, because you have to get the plan sponsors comfortable, right? And other constituents and players up to speed and comfortable with the risks and the fees and the liabilities and so forth. And so it’s going to be a small allocation, say 15% of a target date fund, and that’s going to be a subset of all of the capital out there.
So in the end, it’s an opportunity long term. It will be something that people can elect to have or not have. In the QDIA, it may be a qualified default; they may elect in, or so forth. That will evolve over time. But I do think the headlines are getting a little bit ahead of themselves, that there’s this wave of trillions of dollars that are about to go into alternatives.
BARRY RITHOLTZ 00:56:19
So you mentioned 60/40 earlier. I’m kind of hearing, hey, 60/40 is going to be changing over the next decade to something that’s maybe 60/25/15. Is that sort of a reasonable number set?
MIKE KELLY 00:56:35
So this will now get into my view on portfolios and portfolio allocation generally, which — I have a view that doesn’t match up with those numbers.
BARRY RITHOLTZ 00:56:47
Can I, before you say something — I always get into trouble when I say this, but hey, if you’re 20, 30, 40 and you have a reasonable risk tolerance, what the hell do you need bonds for, right? Like, people don’t like hearing that. But 60/40 — how about 90/10, if you have a 50-year time horizon? You just have to not mess it up at the worst possible moment. Where are you going with your pushback to 60/40?
MIKE KELLY 00:57:17
So, even though I’ve used the term “alternatives” throughout the discussion here, I don’t really like it. I think there’s a point in the future where we won’t call these strategies alternatives.
BARRY RITHOLTZ 00:57:30
Because they’re not all the same. There’s a broad dispersion of risk and returns there.
MIKE KELLY 00:57:36
That’s exactly right. And to use that other analogy, when everyone’s wearing a Nirvana T-shirt, it’s no longer alternative music, right? And let’s face it, there’s a much broader embrace of the strategies. Although it’s early, 88% of advisors surveyed have indicated that they plan to allocate capital for their clients to private market strategies. So this is not a niche embrace, this is a broad embrace, and so it’s becoming more mainstream.
And the reason I don’t like the numbers of 60/40 versus 50/30/20 is, when you think about alternatives as just this little peg — like a Trivial Pursuit peg on a circle — it doesn’t match up with how I think about portfolios. So if you think about private equity, private equity rhymes and looks a lot more, from a risk standpoint, like stocks than it does real estate credit.
BARRY RITHOLTZ 00:58:40
It’s right there in the name.
MIKE KELLY 00:58:42
Right. It’s equity, it’s for growth. And yet we relegate private equity into a bucket with things like real estate credit, even though they do very, very different things for your portfolio.
So the way I like to look at it is, there’s a part of your portfolio for growth, and those are all forms of equity, from public stocks and stock indices through to private equity and private company access through to venture capital and other forms of growth equity. You have your income portfolio, and that’s your lower risk, high duration, high liquidity treasuries and agency bonds through to other forms of income like less liquid private credit and other shorter duration, higher credit risk investment strategies. And then you have what I think is probably an introduction of something that we haven’t had to think about since the seventies, with a real asset category — commodities-based and precious metals, raw land and real estate, and things that in a more inflationary world, and a world where you need a more diversification of sources, you probably need. Infrastructure would be another example of that real asset category.
And within each of those three buckets of a portfolio, you have a spectrum of illiquidity and risk profile. And so for each allocator, they will need to determine, within their growth bucket, how much liquidity they need to generate the kind of growth, and how much risk they’re willing to bear into private equity and venture capital to build that growth bucket. And the same thing for their fixed income bucket, with degrees of credit risk, liquidity, duration, and then within their real asset bucket. And so I do believe, even though the world doesn’t really look at it that way, that we will eventually get to that point and no longer talk about the term “alternatives.”
BARRY RITHOLTZ 01:00:42
It’s going to be different types of income-producing properties and growth-producing products. Makes a lot of sense.
You mentioned earlier we saw a big uptick in interest rates, which suddenly is a double-edged sword — you’re getting yield. We now have a new Fed chair who seems to have surprised everybody by being a little bit hawkish, in the current environment of oil prices and tariffs and hopefully the end of war. But how do you think about the role of rates and the Fed? How does that impact the yield-producing portion of the alternative portfolios?
MIKE KELLY 01:01:24
Well, as I said earlier, I do think we’ve exited this golden era that ended roughly five years ago, into a more inflationary, deglobalized, less benign demographic backdrop. It will result in a higher resting heart rate for inflation. I’m not suggesting we’re going back to the seventies by any means, but there’s a dozen or so factors that will keep inflation more elevated, particularly in this deglobalized, localized world of supply chain breakdowns and so forth.
BARRY RITHOLTZ 01:01:54
The post-GFC zero rates — that’s it for our lifetime. Nobody really expects to see that again.
MIKE KELLY 01:02:00
I don’t expect to see that anytime soon, barring—
BARRY RITHOLTZ 01:02:04
A meteor from outer space, right? So what does that mean for the potential for various types of private credit to generate—
MIKE KELLY 01:02:14
Right. In that backdrop, you’re going to have higher rate uncertainty, higher volatility, and a need to look for other forms of income, other forms of floating rate exposure, right? If rates go up, floating rate exposure pays you more. It works against you with high duration investments; you begin to lose money on those. And so it does act as a balance to your traditional fixed income sources.
You will need diversification just generally in the world, given this economic backdrop and the need for obtaining resources and how you build out a diversified portfolio. And so these types of income strategies and private equity strategies and real asset, real estate, and infrastructure strategies are, again, a broader palette to paint from in a different environment than the one in which 60/40 was the perfect answer and a simplified answer of set it and forget it, and be able to have diversified, low volatility outcomes.
And so I do think the role of the Fed is trying to navigate this tug of war between the inflationary forces and perhaps the deflationary forces that AI may introduce to pockets of that economy. And so it’s a tougher job for Kevin Warsh, and he wants to go back potentially to less disclosure, maybe more Alan Greenspan-like communication style, where we have to divine the tea leaves a little bit more, right, and try to anticipate what’s going to happen. And that makes it trickier.
And if you’re building portfolios for the long term, incorporating these strategies in a diversified way, you will have countervailing balance within your portfolio. It won’t matter if the Fed’s going to raise or lower interest rates by 25 or 50 basis points if you’ve built a truly diversified portfolio.
BARRY RITHOLTZ 01:04:09
Makes a lot of sense. You mentioned some of the headline risk, and we’ve had a couple of minor blowups over the past year or so. Some people look at that as the first cockroach — I don’t know if that’s the right metaphor. I’m curious, what data points do you look at to just keep an eye on the health of private credit underwriting?
MIKE KELLY 01:04:32
So when you’re looking at private credit underwriting, you’re looking at default rates versus history. You’re looking at the situations where there are defaults and what losses ensue post those defaults. You’re looking at interest rate coverage ratios — so, the extent to which the businesses that you’re underwriting in a diversified portfolio can cover their interest payments. So you’re watching all of these metrics. You look at the value of the collateral underlying those businesses.
And I would say there is no systemic crisis broad-based within private credit today. We’re not seeing that. There are idiosyncratic stories, and when you have hundreds and hundreds of credits being underwritten, you’re always going to have individual circumstances of companies that are going bad or undertaking — you know, a fraud comes, a normal default rate comes. And it doesn’t, by the way — just because a company defaults doesn’t mean you lose money. I mean, historically, if you had a default rate of two or 3% and you lose half your money on that, you can do the math on how much your actual losses will translate over a period of time against the income that you’re generating in return. And so if you factor in the loss of 50 or a hundred basis points of loss against the ability to generate nine or 10% returns, you can do the math as to what that on a net basis will return for you.
Defaults today are well within historical ranges and are being well managed. Interest rate coverage ratios are well within historical ranges and are in a healthy range today. What we are seeing are pockets of weakness, pockets of vulnerability. And again, over the course of — we haven’t had an economic cycle since the great financial crisis. I don’t even count COVID, because it wasn’t an economic cycle. Even 2022 kind of came and went. It was barely a blip. And yet we’re always going to have some areas that are experiencing some disruption or some indigestion.
Right now you have software, which is an issue that AI is disrupting, but you have to sort through that. And healthcare services — there are some labor and reimbursement issues that have hit certain healthcare companies. Within software, no one knows. No one knows what the true impact of AI is going to be on software. My view is most companies will be fine and adapt and evolve their business models. There will be a subset of those companies that will be truly disrupted and where your collateral will not be worth very much.
But again, if you look at a mega-cap or large-cap lent private credit portfolio and you said 20% is allocated to software, and you thought 15% of that was going to have disruption and trouble, so now you’re relegating this down to about 3% of your portfolio — and even if that all went to zero and there was no collateral value and no recovery on any of those, that’s going to ensue over the next three to five years — three points of loss. So assume a straight-line amortization of those losses: about a point a year, or less than a point a year, off of a portfolio that generates 9%, 10%. So instead of nine or 10, it’s eight or nine, if all of that gets disrupted as expected.
In other words, this is not a catastrophe. This is a normal course of business with a pocket of sector weakness. I think that the private credit industry is still healthy. It still provides very attractive general returns. And this is all assumptions-based, and assumptions can change.
BARRY RITHOLTZ 01:08:08
And of course, of course.
MIKE KELLY 01:08:08
But as I look at the fundamental health of the private credit business, it’s still very much intact.
BARRY RITHOLTZ 01:08:18
Really, really interesting. I have one or two more questions before we get to our favorites. And I have to ask you, a 30,000-foot view: step back and look at the private credit landscape three years, five years, 10 years from now. What does it look like in terms of ongoing growth? How much do you think this is going to penetrate into the wealth channels? What does the industry look like out a couple of years?
MIKE KELLY 01:08:50
So when we talk about private credit — and often when you read about private credit in the press, it seems like one monolithic category — within private credit there are a Baskin-Robbins series of flavors that all get defined as private credit. And so you have senior credit, junior debt, mezz; you have CLOs; you have sponsored, non-sponsored, opportunistic credit; you have asset-backed finance; you have royalties and so forth. And so there are many different forms of credit to private entities and companies that we call private credit.
My expectation is those flavors will develop, they will begin to grow in size. The demands for that capital by those companies and entities will increase. We’re seeing the growth of insurance capital and an investment grade — most of what we call private credit is non-investment grade, but there’s the investment grade demand for private capital for these companies that is exploding in size. And Marc talks about that at Apollo. And there is all of this that’s developing over time, and I expect that to continue.
And then on the demand side, I expect that private wealth will continue to demand income. They will continue to struggle with traditional forms of fixed income and high duration assets. If my view on the macro world transpires as I think it will, they will continue to need to search for income through different sources. That’s both corporate income and real estate income and other forms of asset-backed income. And so that supply and demand will continue to grow lockstep with one another. And we will have a much larger ecosystem of what we call private credit in the future.
BARRY RITHOLTZ 01:10:51
So you were a trustee at the Stanford Graduate School of Business. You’re currently a trustee of the Tiger Foundation, as well as a board member at the Spotlight Foundation. Tell us a little bit about the work you do with these foundations.
MIKE KELLY 01:11:06
Yeah. So one of the things that Julian Robertson imparted on all of us at Tiger from a young age was, give back as much as you can as early as you can. Don’t wait until you’re about to die. And so I joined the Tiger Foundation probably over 20 years ago, which was Julian’s foundation at Tiger Management that funds not-for-profit initiatives in New York City to fight poverty. And have been doing that now — the Tiger Foundation’s been around at least 25 years or more. And so that’s been an exciting legacy for Julian and for all of us that worked together at Tiger. And I’m a trustee on that and work hand in hand with the other trustees in undertaking funding those initiatives.
The Spotlight Foundation was a group of Stanford Business School friends of ours. After we graduated, we decided to memorialize our friendship through a foundation that would fund not-for-profit entrepreneurs that were funding education initiatives — seeing how important education was in all of our lives personally, wanting to impact those people that didn’t have the same advantages and opportunities that we had. And so we fund a lot of education initiatives, particularly in less advantaged communities, and we fund the entrepreneurs, the ones who are doing earlier stage startups that could become the next KIPP charter schools of the world. Or we’ve funded the Seattle Girls School to bring science initiatives to girls within the inner city Seattle community. And so that’s something that is very near and dear to my heart.
BARRY RITHOLTZ 01:12:57
Sounds really interesting. All right, let’s jump to our favorite questions we ask all of our guests, starting with: tell us about your mentors who helped shape your career.
MIKE KELLY 01:13:09
Yeah. Well, I’ve had various mentors over time. Certainly would put Lee and Julian in that category — not as a personal mentorship, but more as individuals I observed and admired as investors. But also, when you’re looking at someone like Julian, how philanthropic he was and giving, and the way he treated people — I really admired that about him.
There was another individual who’s a mentor to me to this day, Gil Caffray. Gil was a partner at Tiger. He was my partner at FrontPoint as we built that firm. And Gil is an incredible human being. He’s smart and he has the highest integrity. He always treated everyone with respect. He was a direct individual — or is a direct individual — but he was never emotional. He just showed you how to treat clients with respect, how to treat your coworkers with respect. And it’s just somebody who mentored me personally and who I try to emulate every day.
BARRY RITHOLTZ 01:14:26
Really, really good answer. Let’s talk about books. What are some of your favorites? What are you reading currently?
MIKE KELLY 01:14:34
Book I’m reading currently, London Falling, by Patrick Radden Keefe, who wrote Empire of Pain and Say Nothing. He’s an incredible investigative journalist, writing this wild story, a true story, about a boy and a family within London in the eighties, nineties, and in the backdrop of London undergoing the changes it had. It is a fascinating piece of work. It’s one of the best books I’ve read, and I try to read a lot. In the last five years, I’ve really enjoyed that.
Best book all time, I would say, Man’s Search for Meaning. I read it in high school.
BARRY RITHOLTZ 01:15:17
Viktor—
MIKE KELLY 01:15:18
Viktor Frankl. I read it in high school, I reread it every year. It’s amazing that Viktor had the ability to have the mind frame he had through the horrors he faced, and how that mindset and your ability to attach meaning to what goes on in your life — you can’t control what happens to you, but you can control how you respond to it. I love all things stoicism.
BARRY RITHOLTZ 01:15:49
I was going to say, classic Marcus—
MIKE KELLY 01:15:52
Aurelius. Yeah, sure. But Viktor Frankl’s writing — I still have the torn pages of my high school copy with my pen marks. And I reread it every year. It’s an amazing book.
BARRY RITHOLTZ 01:16:06
Really, really interesting. What are you streaming these days? Tell us what sort of podcasts or Netflix, Amazon Prime you’re watching.
MIKE KELLY 01:16:15
So my wife and I love documentaries. We are watching The Dark Wizard right now, about Dean Potter, who was an extreme climber and extreme athlete. I love watching depictions of obsessive personalities. I think probably because I see some of that in myself, but I like watching people who are in other fields. So whether they’re athletes or extreme athletes or musicians or chefs, like Jiro Dreams of Sushi. The Bear is coming back out. The Last Dance — I love Kobe Bryant and Michael Jordan. Just people who pour themselves into what they do, because I always learn something about how they think about the world and pour themselves into what they do, as it applies to what I do and what I love to do. And so it’s one of the reasons I love watching some of these documentaries.
BARRY RITHOLTZ 01:17:17
So I have a couple of things I have to share with you. Have you ever read the book Endurance, about the Shackleton journey?
MIKE KELLY 01:17:17
Oh, absolutely.
BARRY RITHOLTZ 01:17:17
It reads like it’s fiction. It’s just — so, one of the best. And I’m drawing a blank. I think it was called Open, Andre Agassi’s—
MIKE KELLY 01:17:35
Also one of the best sports biographies, or autobiographies—
BARRY RITHOLTZ 01:17:37
Ever written. It’s just really, really interesting. And then I have to slip over to music, because you mentioned Nirvana twice, you mentioned Rick Rubin. You’re a big music fan, I assume. What genres? What ponds do you fish in?
MIKE KELLY 01:17:54
When I was younger, I was really into heavy metal. I still am — Rush and heavy metal and bands like that. And I played bass in a band. And nowadays it’s really — I’ll listen to Miles Davis, I’ll listen to Burning Spear and reggae, I’ll listen to Radiohead. I just finished Michael McDonald’s autobiography.
BARRY RITHOLTZ 01:18:26
I know what you’re about to say. Did you see — it’s on HBO — the Yacht Rock—
MIKE KELLY 01:18:31
Yacht documentary, or something they called it. It was—
BARRY RITHOLTZ 01:18:34
It’s just a yacht rock documentary.
MIKE KELLY 01:18:36
I love yacht music, yacht rock.
BARRY RITHOLTZ 01:18:38
It was so surprisingly good. I’m a big Steely Dan fan, so I expected to hate it. And there’s a brilliant line where he gets Donald Fagen on the phone and he’s just like—
MIKE KELLY 01:18:50
And he hated the fact that he called him yacht rock and he hung up on him, right? But like in the Michael McDonald autobiography, he talks about Steely Dan and their process. They were super obsessive. Every note counted. They would do take after take after take. It was very sort of Beatles, Beach Boys, right? For certain musicians — Miles Davis probably — who were just so intense about the process of creating music. And I love seeing that and I love learning from that.
BARRY RITHOLTZ 01:19:21
So there’s a YouTube series, or it’s a series that ended up on YouTube, called Classic Albums, and the making of Steely Dan’s Aja is insane. But they also give you a little history and show you — hey, you like my old solo? Here’s the 43 different guitar solos before they — and then they didn’t just take one, they patched 12 together. It’s pretty amazing. I think it’s called Classic Albums, and you could find a bunch of other stuff. But I thought the Steely Dan stuff was really—
MIKE KELLY 01:19:57
Oh yeah.
BARRY RITHOLTZ 01:19:57
Really interesting.
MIKE KELLY 01:19:57
The solo on “Kid Charlemagne.”
BARRY RITHOLTZ 01:19:59
It catches you every time. And I have a couple of years on you, but I’ll make you a tiny little bit jealous. I was in — I want to say high school — I saw Black Sabbath at Madison Square Garden, and this unknown band opened for them named Van Halen.
MIKE KELLY 01:20:16
Oh gosh.
BARRY RITHOLTZ 01:20:16
And it was insane. I’m not exaggerating.
MIKE KELLY 01:20:19
You did make me jealous just then.
BARRY RITHOLTZ 01:20:20
Is this what every concert is supposed to be like? I want to say I was 14, something like that.
MIKE KELLY 01:20:26
Wow.
BARRY RITHOLTZ 01:20:26
Head blown. All right, our final two questions. What sort of advice would you give to a recent college grad interested in a career in either alternative investments, private credit, what have you?
MIKE KELLY 01:20:44
So, in my view — and I have two young sons, well, 20 and 17, and it’s kind of the advice that I’ve given them — I believe the greatest definition or criteria of success going forward is going to be adaptation. So learn to adapt. Everything is being disrupted. Jobs are being disrupted, not replaced. They’re being disrupted. Careers, the world, your ability to try and fail and get up again. As the Japanese say, rise eight, fall seven. You’re actually supposed to put yourself out there and be resilient and adapt. And you’re going to need to. I think in the future that’s a really important mindset to have in the world we’re entering into and that is going to transpire.
Obsess about what you do as much as you can. Read everything you can get your hands on. Network to whatever extent you can. Meet people, put yourself out there, and do it in person. Don’t do it over Zoom. Get out there and immerse yourself in whatever it is that you’re doing.
And then finally, I would say, be the man or woman in the arena. I think there’s an over-fixation on likes and the comment section. Forget the comment section, forget the number of likes you have. Put yourself in the arena. There are always going to be weak critics sitting in the stands throwing rocks at you. Ignore them.
BARRY RITHOLTZ 01:22:29
That’s the famous quote from — was it Theodore Roosevelt? Teddy, right. The man in the arena. And our final question: what do you know about the world of alternative investments and private credit today that might have been helpful when you were first getting started, 30 or so years ago?
MIKE KELLY 01:22:48
So when I was starting out in the business, I viewed the markets as this giant puzzle that needed to be solved. And I like puzzles. So I thought, all right, I’ll take all of the classes and read all of the books on cracking the code and quantitative finance and derivative math and all of these things. And yes, over the years, I’ve used those.
But if I could go back and do it all over again, I would have taken far more psychology and philosophy classes and maybe fewer classes on building DCF models. Because as I think about my career and how it’s evolved, and my daily interactions, and even observing the markets, it’s far more driven by behavior than it is by math. At least the world I’ve occupied — I don’t work at Rentec. But it’s irrationality and incentives and behavior, for better or worse, that creates opportunities, that creates management challenges, what have you. But I would have studied more of the psychology and philosophy.
BARRY RITHOLTZ 01:23:59
Really, really interesting answer. Thank you, Mike, for being so generous with your time. We have been speaking with Mike Kelly, president and Chief Investment Officer at Future Standard.
If you enjoy this conversation, well, check out any of the 649 we’ve done over the past 12 years. You can find those at iTunes, Spotify, YouTube, Bloomberg, wherever you find your favorite podcasts. I would be remiss if I didn’t thank our crack staff that helps put these conversations together each week. Alexis Noriega is my video producer. Sean Russo is my researcher. Anna Luke is my podcast producer. I’m Barry Ritholtz. You are listening to Masters in Business on Bloomberg Radio.
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