Bitcoin for Billions: Building the Lightning Network with Elizabeth Stark | #SALTNY

Bitcoin for Billions: Building the Lightning Network with Elizabeth Stark, Chief Executive Officer & Co-Founder, Lightning Labs.

Moderated by Brett Messing, Partner, President & Chief Operating Officer, SkyBridge.

Powered by RedCircle

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MODERATOR

SPEAKER

Elizabeth Stark

Chief Executive Officer & Co-Founder

Lightning Labs

FULL BIO

Brett Messing

Partner, President & Chief Operating Officer

SkyBridge

FULL BIO

TIMESTAMPS

EPISODE TRANSCRIPT

Brett Messing: (00:07)
Well a year ago I was working out on a Peloton because it was a pandemic. And I was studying about Bitcoin because it was a pandemic. And I was listening to a podcast by Peter McCormack about the Lightning Network and I was blown away and I got off the podcast and I called Ross Stevens of NYDIG, our sponsor. And I said, can they really do that? Because if they can really do that, this is so much bigger than I realize. And he said, they can do that. You have to speak to Elizabeth Stark. So here we are. What is the Lightning Network? No E by the way, Lightning without an E. And why is it important?

Elizabeth Stark: (00:50)
Thanks, Brett. First of all, it's so incredible to be here today as a New Yorker with this crowd here, being in the financial center of the world and one of the tech centers of the world. So, Ross is correct. This is possible. And the Lightning Network is a technology that enables instant high volume transactions over Bitcoin. You can think of it as kind of this second layer as we call it or a transaction layer operating on top of the Bitcoin blockchain. So today on the internet, and by the way, I'm a tech geek. I come from the land of magic internet money as we say in the Bitcoin world. Today on the internet, it's really easy to send a photo in any application to somebody anywhere around the world instantly, right? You can do it in text message. You can send it via Twitter, WhatsApp, in a variety of ways. But why can't you send value?

Elizabeth Stark: (01:46)
So being the internet geek that I am, in the early days of the internet I wondered why can't you actually just send money? For example, I love music, to a musician, to a band, to a DJ, to somebody that created a video and just embed it natively in the internet. So the goal with Lightning is to be able to natively embed value and payments in the internet. In fact, the early creators of the internet, Tim Berners-Lee, in the early nineties envisioned that this would be the case back then. They created an error code it's called HTTP 402 payment required, which is kind of like 404 not found, it just was too early.

Elizabeth Stark: (02:21)
So when I learned about Bitcoin, I thought, this is really cool. You know, will this actually scale? And will people be able to use it to natively embed payments on the internet? And then I learned about the possibility of this second layer operating on top of Bitcoin that can scale it to billions of people and I was sold. And this was actually back in 2014 when I first learned about this concept. So a lots happened since then, and I'm excited to chat about it today.

Brett Messing: (02:47)
So what is a use case for the Lighting Network? Because you know, I think for many people they look at Bitcoin, they see the price go up, particularly I think Americans, they don't see the utility of it. And I think the thing that's interesting about Lightning is it is bringing utility to Bitcoin. So why don't we talk about what Lightning can do? Why are we so excited?

Elizabeth Stark: (03:11)
Definitely. So Bitcoin's first killer use case or killer app is that of Bitcoin the asset. So in 2009, Satoshi, third January 2009, the [inaudible 00:03:22] creator of Bitcoin launched the Bitcoin network. And everyone's familiar I'm thinking here today with Bitcoin the asset. You buy it, the price has gone up substantially. The community has a meme. We call it number go up technology, right? The idea that the price of Bitcoin will go up and there are only 21 million that ever exist. But what got me interested in Bitcoin was less of the asset element and more of the idea that Bitcoin can really be this internet of money. So with Lightning Network we're actually building Bitcoin, the monetary network, and it's really about three years old. So Lightning initially launched as a protocol in 2018 on the main Bitcoin network. We call that main net. My company, Lightning Labs built some of the leading tools for developers to build on this technology.

Elizabeth Stark: (04:06)
And the goal there is to have internet native digital money. If Bitcoin is just the equivalent of digital gold or a digital rock, then we don't actually tap into the use cases where you can natively embed payments on the internet and have programmable money. So the goal with Lightning is really to enable this. So you asked about use cases. So the way that I think about it, in the early days of the internet, people didn't envision the use cases that are commonplace to us today. Something like a Google, a Wikipedia, Airbnb and Uber, that's the same for the internet of money. There are all sorts of use cases. For example, in game payments for video game developers, streaming SATs, or Satoshis as we call it, for streamers, for podcasters, for people, creators on the internet. We also have the ability to have cross-border payments instantly with extremely low fees, adoption and emerging markets.

Elizabeth Stark: (04:56)
So there are these use cases that weren't previously possible. And then also people that did not previously have access. Some people think, okay, why do I need Bitcoin today? I have my credit card. Well, there are billions of people around the world that do not have access to the existing credit card networks who charge something like 250, maybe even 300 basis points for a transaction. And we're actually seeing today adoption in many of these markets. El Salvador, some people may have heard recently made Bitcoin legal tender. Today, Starbucks, there's a great company called IBEX Mercado, McDonald's, one called OpenNode and a variety of major retailers are using the Lightning network today, built on the technology that my company has created. Which if you'd asked me a couple months ago if this would happen, I probably would not have believed it, but welcome to 2021. So there are huge opportunities for people globally that don't have access to the financial rails that we do here in the US.

Brett Messing: (05:53)
So you mentioned like Uber and Airbnb, sort of disruptive technologies. It seemed to me that the thing that exploded in my mind when I heard about Lightning was the remittance market. And can you just explain how that works? So let's just say I'm sending money to someone in Mexico City on Lightning. I just think people would find it interesting just how functional it is.

Elizabeth Stark: (06:18)
Definitely. So there's some great companies already out there. There's one called Strike, another one called Paxful that are enabling cross-border payments with Bitcoin and Lightning. So the way that this would work is a user using a service could convert say US dollars to Bitcoin's sent over the Lightning network and Lightning enables these instant high volume transactions. And then it could be converted back at the point of receipt to say peso. And you have Western Union and major players out there that are charging very high fees, especially for low value transactions. You might have to physically go to a location. All this can be done with a smartphone, right? And we see in emerging markets a huge amount of smartphone penetration, many people have access to those. So in these markets, people are able to leapfrog over the outmoded technologies to be able to adopt instant, high volume transactions over Bitcoin and Lightning.

Elizabeth Stark: (07:13)
And one key element is people say, okay, volatility. That can be a question. Well, when you have instant transactions and you want to go from USD to Bitcoin over Lightning to another currency, say peso, you actually aren't exposed to that volatility, which is key. In that case, of course, some people want Bitcoin. I like to say, Bitcoin is a millennial retirement account. I have a number of friends here in New York City, they are very short on dollars and they hold a lot of Bitcoin as part of their strategy.

Elizabeth Stark: (07:40)
But it depends on the individual. But in this case, Bitcoin is serving as a value transport layer, as I like to think about it. And the vast majority of users in the future likely will not know that they're using Bitcoin. They just think they're sending value on the internet and maybe denominated in their local currency. And that's the way the internet works today. For example, people that use say email may not know that SMTP is a protocol underlying email. They just use their Gmail. Email's not even that cool anymore. But that will be the same with Bitcoin and Lightning and the internet of money.

Brett Messing: (08:14)
Okay. So we mentioned El Salvador, just like I guess in the development of Bitcoin, which you've been a part of for a long time now, big deal, little deal? I think when I think about what you're doing, you're really bringing Bitcoin to the masses. It's like, what does this mean Bitcoin being legal tender in a country?

Elizabeth Stark: (08:40)
Definitely. So my company Lightning Labs, we're about 25 people these days and we have a number of brilliant developers and credit, for example, to my co-founder and our CTO, his name is Olaoluwa Osuntokun, who was born in Nigeria, came to the US when he was younger and has seen the value of all of this, especially with family back in Nigeria, brilliant engineer. And so if you had told me even six months ago we would have seen nation state level adoption of both Bitcoin and Lightning, I would not have believed that. And it happened. And even though, El Salvador being a small nation, six some odd million people, I believe it is historic and significant that this level of adoption has occurred. And a number of retailers are now using the Lightning network. So Bitcoin, the community loves Twitter, right? People are on Twitter.

Elizabeth Stark: (09:37)
I'm sure you've seen a lot of that. And there was a tweet this week because last Tuesday was the launch of this law in El Salvador and a number of these retailers were using Lightning, the technology that we had built called L and D from my company, and a fee at Starbucks for a user paying over the Lightning network was five hundredths of a cent, which I thought was just incredible. I mean, compare that to the types of fees that people would pay for the traditional card networks. So there's a joke in the community about paying for coffee with Bitcoin and in the US it is not necessarily hard to pay for coffee, but in many other emerging markets, the rails are not there and they're actually able to use this technology. So to me, I believe it is quite significant. There's also been a domino effect.

Elizabeth Stark: (10:27)
There's a great company out there called Galoy who's building an app called Bitcoin Beach. And this actually is what got the whole El Salvador movement started. They have a community in the south of El Salvador, a surfing community, where they've been using Bitcoin and Lightning for two years now in what we call a circular economy. So their vendors don't have access to card networks, but they have smartphones. So they're actually using Bitcoin and Lightning to send and receive money and vendors are able to accept it. And to me, that community is just the big beginning. That company has heard from so many other governments, communities around the world that are interested in this technology. So El Salvador is the first, it's certainly not the last. And I believe we will see a variety of other particularly emerging market nations move forward on Bitcoin adoption.

Brett Messing: (11:13)
So you mentioned Twitter, which is important in the Bitcoin community, the community sort of lives on Twitter. No one or very few people have done more for Bitcoin than Jack Dorsey, who also had the wisdom to invest in Lightning Labs. Jack Dorsey, according to public reports is about to integrate Lightning into Twitter. Can you speak about, to the extent you can, what is forthcoming? Again, I think the thing that's really interesting is the utility and what services Lightning is empowering.

Elizabeth Stark: (11:50)
Definitely. So I'm just speaking from kind of the outside here as an observer. And yes, Jack Dorsey is one of our investors and has been incredibly helpful and also just somebody who really understood Bitcoin at the outset and seeing that it can be this native protocol for value and currency of the internet. And so I believe that fits into a strategy with Twitter. So part of what got me interested in Bitcoin and Lightning in the first place is this idea of internet native digital payments and the creator economy. And what better place for this than Twitter? Yes, the Bitcoin community loves to, sometimes they have lots of fights on Twitter and debates. I've definitely been in the middle of those, but also there are a lot of people that will create tweetstorms and post videos and have all sorts of really interesting, I mean, I learn so much from Twitter and it's a way for me to find really interesting links and research and discover new people.

Elizabeth Stark: (12:45)
We've made hires for Lightning Labs of people from Twitter. And we love memes in the Bitcoin and Lightning community. So the idea there is, well, okay, Bitcoin and Lightning enable instant high volume, low fee transactions around the world globally. If we were to use existing payment rails, and I think what they would likely do is have a variety of options. Some on the existing rails, some using Bitcoin and Lightning, you can get to far more people globally than you would be able to, and it makes a lot of sense. You have a younger population as well that very much wants more Bitcoin. They want to be able to hold us. They want to be able to earn Bitcoin. Sometimes people say, well, I don't want to spend Bitcoin, but Lightning enables people, unlike say a Visa, sometimes people say, okay, Lightning's like a decentralized Visa.

Elizabeth Stark: (13:30)
And there are elements of that, but you don't really earn money on Visa, but with Lightning you can. So we see a lot of really interesting use cases like the Twitter one, which will enable content creators to earn over Lightning. There's an incredible company called Stack, which enables people globally, Latin America, Southeast Asia, to earn Bitcoin over Lightning performing small tasks like for AI and machine learning. There's another one called Zebedee for internet gaming where today gamers in Brazil are earning more over Lightning with Bitcoin than they would in a normal job for their salary by actually just doing what they love, which is playing video games. So we're able to unlock these incredible opportunities that would not have previously been possible. And that's where I see Twitter fitting in as well.

Brett Messing: (14:13)
So it's sort of like tipping, right? Is that a way to think about it, right, that if I post something you think it's cool, Lightning's going to enable you to tip me in Bitcoin?

Elizabeth Stark: (14:26)
Yeah. I mean, there are all sorts of interesting examples. People could participate say in certain campaigns as well. There was a really incredible campaign recently where a group called Bitcoin Smiles in the Bitcoin community raised money for people in El Salvador who could not afford dental or hence smiles. And just, this community, people by the way, they do this on their nights and weekends, this is not their job. They just love it and they really care. And so you could have charity contributions and things like that as well. I think there are a lot of really interesting opportunities.

Brett Messing: (14:58)
So I want to just scope out a little bit, as I'm sure everyone can tell you're super enthusiastic about this. And the thing that brought you to it is sort of a passion for open source decentralized networks. I can speak for myself, I don't think I fully appreciated the significance of a decentralized network until recently. And I would say the China ban on mining hammered it home for me, but I'm probably still not as far along on it as I should be. Can you just speak to that? And I mean, I want to hear your answer, I'm sure other people do too as well.

Elizabeth Stark: (15:33)
Definitely. So the way that I like to think about it, being the internet geek that I am, in the early days of the internet folks may remember AOL, CompuServe, Prodigy, and the like, right? Those are proprietary networks. To have an AOL keyword, you had to go to AOL and get permission. And then there was a worldwide web and anybody could build on the web. And ultimately it was the web that won out in terms of all of the incredible sites and businesses that have been built on the web today. And I see the same for Bitcoin as this internet of money in that the ability for anybody to build on top of Bitcoin, you don't have to ask permission, you're able to do so and Lightning makes it easier for developers to build on top of it because you have these instant transactions as opposed to the 10 minute block time of Bitcoin. You have the scalability as opposed to the five to 10 transactions for a second.

Elizabeth Stark: (16:22)
And then you have the fees that can spike on the base layer of the Bitcoin blockchain. So the open nature of Bitcoin and Lightning means that it's available to people around the world. For example, there's an incredible entrepreneur named Bernard Parah out of Nigeria who just built an application called Bitnob. And he just spun up a group of developers, and now they have this business and they're building for Bitcoin and Lightning, and he didn't have to go and get permission. It's just open. And now you can use the Strike app to actually send remittances to Nigeria because Bernard was able to tap into this technology and the Lightning network. And to me, that's what's extremely powerful. And then some people might ask, okay, well, there are all these other cryptocurrencies, why focus on Bitcoin, as my company Lightning Labs and as our community in the Lightning Network community? And the answer is ultimately network effects.

Elizabeth Stark: (17:15)
Right now, Bitcoin is the most secure cryptocurrency. It has the most hash power for miners backing it up. And folks are probably well aware, it is the most valuable cryptocurrency with the most adoption around the world. And in emerging markets, it's even more so by the way. In Nigeria, 32% of Nigerians use cryptocurrency, the vast majority of which is Bitcoin. And then something like 50% of Nigerians are 18 and under. So there's a very young population that is very excited about this technology. And we see that in other places, in emerging markets and around the world. And of course here in the US, lots of incredible developers and builders on this technology. So my answer there is the idea that you have all these existing users, you have people that are building upon the technology. There's something called Metcalfe's law. And one of my favorite researchers, Lyn Alden has written a lot about that.

Elizabeth Stark: (18:08)
Check out her macro research and her Bitcoin research. And she has a piece on network effects. And she talks about how breaking a network effect means if something is not 10 times better, it will not break it. If it's slightly better, it's very difficult. So Bitcoin already has a substantial network effect. And there's a concept of Metcalfe's law, Robert Metcalfe, who created this for networks in the internet, as each individual user joins a network, the value of that network goes up exponentially. So to me, the open decentralized nature of Bitcoin combine with the network effects, and then you have Bitcoin, the monetary network, which is Lightning combined with Bitcoin the asset, that creates this virtuous cycle. And we call it a flywheel effect, which just keeps growing and growing. And we've seen a lot of network growth. A lot of people running these nodes on the network that are like servers, and a lot of developers building in the technology and an increasing amount of capital that is deployed onto Lightning as well.

Brett Messing: (19:02)
So we have a minute left, there are about a hundred something million people that own Bitcoin. And there are projections that in four years, that number will be billion, billion plus. What gets us from here to there? That's S curve stuff. That's an acceleration of adoption. What do you see as the driving forces for that?

Elizabeth Stark: (19:29)
At the end of the day, real use cases for real people in those categories of enabling use cases that weren't previously possible and enabling access for those that previously did not have it. And there's something in the broader, I'm in this cryptocurrency world in the industry, and in some cases I think people are working on solutions in search of a problem. And I really care about solving real problems for real people and making this technology accessible. In the early days of Bitcoin and Lightning, even three years ago, it was hard to use.

Elizabeth Stark: (20:02)
It was like command line based, it was like the early days of the internet. Now we're seeing it become more and more accessible, more and more usable. And I think in the early days, people underestimated the power of the internet. There's this great quote by an economist, by 2005 the internet's impact on the economy will be no greater than the fax machines. Clearly that person was wrong. And similarly, I think a lot of people underestimate Bitcoin and Lightning, but at the end of the day, I would highly recommend not to sleep on this technology as my friend Max Webster wrote because we're really at the beginning and there's so much left in store.

Brett Messing: (20:33)
All right. Fantastic. Well, thank you very much.

Elizabeth Stark: (20:36)
Thank you.

The Future of Private Markets with David Rubenstein & Jeff Blau | #SALTNY

The Future of Private Markets with David Rubenstein, Co-Founder & Co-Chairman, The Carlyle Group. Jeff Blau, Chief Executive Officer & Partner, Related Companies.

Moderated by Matt Brown, Founder, Chief Executive Officer & Chairman, CAIS.

Powered by RedCircle

Apple | Spotify | Amazon | Google | Stitcher

SPEAKERS

David Rubenstein

Co-Founder & Co-Chairman

The Carlyle Group

FULL BIO

Jeff Blau

Chief Executive Officer & Partner

Related Companies

FULL BIO

MODERATOR

Matt Brown

Founder, Chief Executive Officer & Chairman

CAIS

FULL BIO

TIMESTAMPS

EPISODE TRANSCRIPT

Matt Brown: (00:07)
David, Jeff, welcome.

David Rubenstein: (00:10)
Thank you for having us.

Jeff Blau: (00:11)
[crosstalk 00:00:11].

Matt Brown: (00:12)
My name is Matt Brown. I'm the founder and CEO of Case. I'm really honored to be with two great business leaders in the private market space. David Rubenstein, Jeff Blau. We have a somewhat limited window here, 35 minutes, but I don't think either need a big introduction, but I think we would love just to have you each to spend a second introduce yourselves and we'll dive right in.

Jeff Blau: (00:39)
So thank you for having us today. So I'm Jeff Blau, I'm the CEO of Related Companies. For those of you that don't know, we're a large real estate development company based here in New York City, right across the street. You might know the Hudson Yards that we built and own as well as Columbus Circle, which is now called Deutsche Bank Center, used to be Time Warner Center. Across the country, we develop in most of the major markets throughout the US, and then London outside. We employ about 4,000 people. Today one of the largest real estate development companies in the United States.

David Rubenstein: (01:15)
Okay. I'm David Rubenstein. I'm the co-founder and co-chairman of the Carlyle Group which is a global private equity firm operating in 35 different cities around the world. And we manage about $276 billion currently. And we are actively investing in this environment and we think it's a pretty attractive environment in many ways.

Matt Brown: (01:37)
Great, welcome. Today's panel creating value and democratizing access in a post pandemic world is our title. I think with David and Jeff, we could take this in a lot of different directions. So let's just kick off. The last decade has been just astronomical in terms of private markets growth, both on the real estate side, Jeff and David on the private equity side. Let's just talk about some of those drivers. What's going on in the environment that's propelling your areas for just such extreme growth?

David Rubenstein: (02:08)
Well, the charm and good looks of the founders of global private equity firms has probably been the principle driving factor would be my guess, but if you don't believe that, the returns have just been better than any other asset class. Private equity over the last 10 years, 15 years, 20 years, 30 years and so forth, and almost every year outperforms public equities by 300 to 500 basis points depending on the year and the [inaudible 00:02:31] and so forth. So people have consistently said, well, if I can get better rates of return, I should do that. Now I have a higher risk factor, but over the years, people have included that private equity and its various forms buyouts, venture capital, growth capital, infrastructure is not as risky as was thought to be the case 30 or 40 years ago. So if you don't have the high risk that people thought you had in these so-called alternative investments, and you're going to get a higher rate of return, people are willing to pay the higher fees involved and willing to have the longer holding period.

David Rubenstein: (03:01)
So that's basically what's driven is that the rates of return have just been more consistent and the industry is much more mature in the sense that the people in the industry are more sophisticated about avoiding bad deals and even though we're paying reasonably high prices by normal standards, the industry has so much more talent to make these companies work than it did 20 or 30 years ago. And I think people feel much more comfortable than they did 20 years ago in investing in this area.

David Rubenstein: (03:26)
20 years ago and obviously 20 years ago was a tragic occurrence right near in this site where we are today, 20 years ago, you had less than a trillion dollars invested in overall private equity, all assets [inaudible 00:03:41]. It was less than a trillion. Then you're all over private equity is probably eight to 9 trillion. So it's gone up dramatically in this 20 year period of time. And I think the rates of return have been very, very consistent and people believe they will be consistent in the future. And because interest rates have been low, it's been driving people to get out of traditional, fixed income kind of investments. And they go into things that are going to yield better than the low things you get on treasury bills or other corporate bonds.

Matt Brown: (04:07)
Jeff, what about the real estate world?

Jeff Blau: (04:08)
So I would say similar to private equity, if you think back 20, 30 years ago, real estate was never really considered an institutional asset class. And so spreads were wide and it was a lot of inefficiencies in the market over this period of time. People have institutionalized private investment in real estate assets, whether it's opportunistic investments through development acquisition, or even more recently, some of the very, very large core funds that have been created really as interest rates have come down so low, the spread that you can make owning real estate is greater than almost any other point in time.

Jeff Blau: (04:45)
And so there's been huge inflows into core ownership of real estate, providing steady recurring income, cash flow, and tax benefits to investors. And so if you look at it today, it's a much more institutionalized product and capital flows are really greater than they've ever been into the real estate sector.

Matt Brown: (05:04)
Just staying on that, we've been through a pretty dramatic 18 months. Different businesses have succeeded. Others have turned the lights off. They always do this when I start talking, by the way, I should have told you that. The COVID-

David Rubenstein: (05:21)
Actually, maybe our time is up already, I don't know.

Jeff Blau: (05:24)
Now we can see everybody.

Matt Brown: (05:26)
Anthony Scaramucci just wants to see what we're made of, I think.

David Rubenstein: (05:28)
Okay.

Matt Brown: (05:29)
See? I can see him with a little light switch. Jeff, the pandemic, the global pandemic has negatively impacted so many companies on the flip side. So many have been beneficiaries, specifically around the real estate industry and directly related. Walk us through kind of what the last 18 months have been for you, how you reposition the firm.

Jeff Blau: (05:54)
So I would say COVID has really thrown everything for a loop. It's been the wildest swings I could possibly imagine in the past 30 years in real estate. You almost saw this vacuum of people leaving cities, the core urban markets, apartment buildings emptying out, retail stores going out of business. People really even today aren't back as much in their offices.

Jeff Blau: (06:20)
And yet you look at the last 60, 90 days, you're seeing a complete reversal of that trend. So to give you some high level numbers, we own one of the largest apartment portfolios here in New York. So at its absolute peak, that portfolio went from 98% occupied to 83% occupied. In order to get people to sign leases, we were giving away three months rent. That portfolio is back to 99% occupied with no free rent. So basically we're kind of even plus 1-2% to pre COVID numbers. So that's been a remarkable swing and really, I think that's been around this timeframe, Labor Day, September, back to school, I think the Delta variant has put a little bit of a damper on return to office, but still, I think there's been a huge inflow of population back to the cities.

Jeff Blau: (07:12)
Now, condo sales have picked up again. We've had actually the last 60 days have been the most robust condo sales since 2013 here in New York. S we have seen a tremendous swing. It's been a pretty wild ride. I would say the other thing that's happened is people have further rediscovered what we would typically have called secondary cities. So our offices are in New York, Chicago, LA, San Francisco, Boston, DC. And that's where we've been most active, but there are great cities and we've always been small investors, but now have become much larger in Austin, Charlotte, Denver, West Palm beach. These were markets that we had typically called secondary, and I think there's been a lot more interest in those cities and think they'll really become primary markets for many people.

Matt Brown: (08:03)
Same question to you. I just want to ask one more question, but Jeff, a lot of people say, when will Manhattan be back? Being here in Manhattan. And of course back is a bit in air quotes. When is Manhattan back?

Jeff Blau: (08:14)
I do think a lot of Manhattan is back. If you just walk around... First of all, you can't get a reservation, you can't go out to dinner. The restaurants are packed and the West Village is packed. The meatpacking district is crowded on a Saturday. So New York is feeling like it's coming back. I would say the only thing that is not really back here are people's return to the office. And I think that's something we can talk about, but I think that's going to change a little bit over time and that's going to be a slower return.

David Rubenstein: (08:47)
For the country as a whole, the pandemic has been a tale of two cities. If you are uneducated, you work with your hands, you can't afford childcare, you don't have broadband, this has been a terrible time for you. And you've fallen further and further behind than where you were before. If you're in the financial service world and everybody here presumably is, this has been a pretty good time. The private equity world has done more deals, exited more deals, raised more money than any other time in its history. So if you'd flown in from Mars and said, okay, a pandemic is going to strike the entire world and particularly the United States where we've lost 650,000 people, how can the private equity world do so well? Well, there's lots of reasons for it, but technology enabled us to basically raise money, invest money, and exit deals and do road shows for IPOs and things like that without having to actually physically go anywhere.

David Rubenstein: (09:41)
So it's been amazing. And the question will be going forward, will people want to physically go travel around the world to raise money? Will people want to physically go on road shows again, the way they used to on IPOs, as opposed to doing virtually? Nobody knows the answer to that for sure. I suspect it'll be some homogenized kind of view of what will happen, but the private equity world could not be honestly in better shape. The hardest things in private equity right now are if you're a first fund. People don't like to put money into a first fund, unless they meet you in person, appropriately so. There's a due diligence standard. You have to meet the person.

David Rubenstein: (10:14)
So if you're raising a first fund, it has been more challenging now in this environment. But if you're raising a third fund, a fifth fund, an eighth fund, you can get your re-ups done if you have a reasonably good track record very, very quickly. And if you're doing deals, it saves a lot of wear and tear. You don't have to travel as much. So it's been a blessing in disguise for people who are in the financial service world. For people who are not in that world, the people I referred to earlier, this has been a terrible situation, and it's not going to get any better anytime soon, because we still have less than 35% of the people are not vaccinated yet. And that isn't probably going to change anytime soon.

Matt Brown: (10:51)
David, why would this great change in behavior to our benefit, virtual communication, the change in behavior, virtual communication now is stepping in-

David Rubenstein: (10:59)
You mean going forward?

Matt Brown: (11:00)
Yeah. Going forward.

David Rubenstein: (11:02)
Well, going forward, people are used to, let's say doing Zoom meetings now, but I think there's a feeling that once you can travel, probably you should reconnect with people. There's nothing quite like a personal connection which you can get when you're having lunch or a dinner with somebody or meet them in person. I think there'll be a feeling you should go out. But I don't think people will fly around the world to get a re-up on a fund when they can do it virtually. I think you won't have people traveling quite as much for business travel. I think that's pretty obvious to all of us, but the private equity world's biggest challenge going forward is probably whether prices are going to be so unattractive because they're so high that people feel compelled to do deals because they have a lot of money.

David Rubenstein: (11:46)
And then when the inevitable interest rate rise occurs at some point, presumably after the midterm election, you then see evaluations going down, whether people will run for the exits and say, okay, the great recession is here again. And so people are getting nervous. I don't see that on a rise anytime soon. I don't think interest rates are going to be raised, certainly not before the midterm election. And I don't think we're going to see any big tapering anytime soon, but clearly if we go to a normalized interest rate situation, there'll be some correction for sure.

Matt Brown: (12:13)
Jeff, what behavior has been changed do you think by the pandemic that you see in the real estate world that most likely will not change back?

Jeff Blau: (12:22)
Well as I was mentioning, I definitely think that there's a change in the way people use their office. I think companies, certainly larger companies will continue to have pretty much just as much office space as they have today. But I think there's going to be a lot more flexibility around how it's used. And I think whether it's four days a week or three days a week, I think companies are going to have to offer as a concession amenity to attract employees that flexibility in the workplace. Yet, when I talk to the heads of some of the big tech companies that say, oh, we can go remote, they will privately acknowledge that they really can't have culture creation, productivity, and innovation at home on Zoom.

Jeff Blau: (13:06)
And so what they're really trying to do is figure out how they coordinate this flexibility in the office. So maybe a whole group has to come in all the same four days or three days so that when they are in the office, it's much more of a collaboration effort that's happening. And that may help. That may force us to redesign how spaces are built out. There might be more meeting spaces, more gathering spaces, fewer private offices, but ultimately people are going to need to get back to the office and we're seeing it now in corporations actually taking more space in anticipation of all the growth that you just talked about, even though there's going to be that flexibility in the workplace.

Jeff Blau: (13:48)
And then the other thing David touched on, I do think that there will be some permanent changes in business travel. I think leisure travel people absolutely want to get back and leisure travel business has been unprecedented over the last 90 days as people felt a little bit freer to get out of the house, but we haven't seen the same levels of business travel yet when we had 2,500 people here today. So I think that's a great test to people gathering and getting together and staying at our Equinox hotel at Hudson Yards. Thank you for those of you staying there. And so it will be back, but I think business travel will be a slower recovery than the balance.

David Rubenstein: (14:30)
Great events in history tend to take a long time to have an impact in the way people live and work. So the industrial revolution took roughly a hundred years before people really changed the way they lived and work and became more of an industrial economy, an urban economy than an agricultural economy. The things we've lived through, it took maybe 25 years for the internet to really change our lives. It took smart phones, maybe four or five years to change our lives, social media, two or three years. In basically 18 months, we have changed the way we have we're going to live and work considerably. Yes, people are going to come back to the offices, but probably not five days a week and quite the way they did before. And people aren't going to travel quite the way they did before. So we've changed the way we live and work.

David Rubenstein: (15:11)
And those people that adapted this well are going to be quite successful. Private equity people tend to adapt pretty quickly. I think real estate people probably adapted pretty quickly. People in the financial service world adapted quickly, but all of us are fortunate because we have certain skills. We have certain technologies available to us. I think for the country itself, it's going to be a bit of problem before the country can really get back to where it was before for people who are at the bottom of the social and economic strata.

Matt Brown: (15:37)
David, many investors in the audience. We hear the word bubble when we think about private equity now, real estate. Most people don't believe there is a bubble. Where do you come on the private equity bubble that everyone seems to be hinting at?

David Rubenstein: (15:55)
Sir Isaac Newton, one of the smartest men who ever lived, he invested in the South Sea Corporation and he got out before it peaked. And he was upset with himself. He said, I'm a genius, but how come I got out and stocks still going up? So he went back in and ultimately was a bubble collapse. So people have a temptation to feel that they're missing something great. And so that's why people are still investing pretty heavily. They're afraid that they're going to miss something great. And maybe they will miss something. I think people have to be cautious, but you never know you're in a bubble until it's over. And as soon as we go into the next bubble and there's a bubble in some area and I'll think all of a sudden people will come out of the woodwork with their memos saying, well, I told you this. Of course, these memos were filed away.

David Rubenstein: (16:40)
They weren't given to people at the time or they weren't made public. People always were saying they predicted a bubble. Right now, I don't think we're in a bubble. Clearly, we're not in the kind of bubble where we had the 1999, 2000 internet bubble. They were kind companies with no earnings, no revenue, virtually nothing and that they had high valuations. I don't think that's quite the case today. The valuations are a bit high in some cases for some growth companies. But I do think that they are transforming the way we live and work in ways that I think we will grow into those valuations. So I don't think we're in a bubble, I'd say Palm Beach, real estate might be in a bubble in some cases, and maybe South Hampton and East Hampton real estate might be in a bubble. But generally I wouldn't think we're in a bubble of the type we have to worry about the way I felt we had to worry about things in 1999 or 2000.

Matt Brown: (17:27)
How would Carlyle reposition right now if you actually believed you were in a bubble? What are some of the immediate at things that you would be doing?

David Rubenstein: (17:35)
Well, it's difficult to talk about that because I'm afraid I'll be misquoted in saying that we are in a bubble. I don't think we are in a bubble, but if you were in a bubble, you would obviously slow down the amount of money you're putting out and people are putting out records amounts of money. People are afraid they're going to miss the next great thing. So anybody who thinks they're in a bubble should obviously slow things down, but go back to the companies you've already invested in and see whether they have debt that can tolerate some kind of slow down in repayment. Obviously most of the buyout deals today are done with covenant light debt, so it's tougher to default than it was 20 years ago. And so I think that people are much more experienced in dealing with downsides than they were 10 years ago or 20 years ago.

David Rubenstein: (18:19)
So I don't think we're in a bubble. There might be in certain sectors some people are too anxious to put money in some things. So some people would say cryptocurrency is a bubble. I don't subscribe to that view necessarily. I don't own any cryptocurrencies, but I know there are some people and people I've interviewed recently have said, yes, this thing is all going to zero. But of course, when am I going to go to zero? Who knows how long it's going to take. I would say cryptocurrencies clearly have a market. And I would not bet against it because I think that would be difficult, but at some point probably some of the air will come out some of the cryptocurrencies, I just don't know which ones.

Matt Brown: (18:55)
Jeff, speaking of West Palm beach and Palm beach, where I know you view that as a secondary city. I was there recently and I think I saw a property smaller than my first Manhattan apartment asking some of the neighborhood of 10 or 12 million dollars. What's going on down there? And same question to you. I know you don't believe we're in a real estate bubble right now, but tell us what's going on that space.

Jeff Blau: (19:20)
Right. Well, I think you have to separate out some of the very unusual special spots like Palm Beach, Hamptons, Aspen in terms of single family home prices that have really escalated during this period of time and then the institutional investment world in which many of us operate. So if you talk about the institutional investment world, I don't think that there's a bubble there in real estate either.

Jeff Blau: (19:45)
I think people are investing in real estate, essentially one of two ways where one is an opportunistic invest where we've been very successful over the past year investing in situations that have found themselves in trouble because of COVID. And we've been able to put out a lot of capital in that space through opportunistic investing, but really where the tremendous capital flows are now is a result of low interest rates. All right. And so you have to have a view on interest rates to determine if you think we're in a bubble or not, but people have been looking for alternatives to essentially 0% returns. And so investing in stabilized core assets and getting that spread in core real estate has been a great investment over the past several years. And I think you'll see that continue into the future. With regard to West Palm beach in particular, we have been very, very active in that market for a long time before COVID and I'll say unfortunately, maybe for New York, but it's good to be on the receiving end.

Jeff Blau: (20:53)
We've seen a lot of people move businesses, mostly smaller financial service firms, family offices, to Palm Beach. People have moved, put their kids in school down there and have taken office space and today we really control almost the entire class A office market in West Palm beach. And that has completely filled up over the last 12 months, as I said, mostly people from here. And so we are monitoring that shift back and forth. People typically aren't moving their businesses completely, but opening secondary satellite offices. And interesting in many cases also expanding here in New York at the same time. But West Palm has been, has been terrific.

Matt Brown: (21:40)
Qualified opportunity zones are somewhat the opposite of Palm Beach in many ways. That's an area of focus for related, maybe a quick brief description on the QOZ opportunity itself. And then how are you focusing on it at Related?

Jeff Blau: (21:56)
Sure. A qualified opportunity zone is an area designated by the federal government to encourage development in those areas or to encourage businesses to move to financially depressed neighborhoods by zip code. And essentially what it does is it allows you to sell an asset, whether it's a corporation, shares of a company, or a real estate asset, and reinvest that gain into something, real estate development, a new business in a qualified opportunity zone area, and you can defer the taxes on that gain until end of 2026. And then even when that tax comes due, you only owe 85% of what would have been due back then. And then the money sits invested for 10 years and all the earnings during that 10 year period is not taxed at all, has no tax on it. So it's been a great opportunity for people to move money from gains that are sold into qualified investment opportunity.

Jeff Blau: (23:02)
And we have made a business of investing in real estate assets, typically new construction development assets in qualified opportunity zones. So raising money from individuals, placing that money into qualified opportunity zone real estate developments, and then we hold and manage those assets to maturity at the end of the 10 years, at which point we'll sell those assets and return the capital on a tax deferred basis for the investors. So it's really been a great product and really has created a lot of investment in those areas throughout the country.

David Rubenstein: (23:37)
I personally invested in a large one associated with the Boston Housing Authority.

Jeff Blau: (23:41)
Should have gone into our.

David Rubenstein: (23:42)
[crosstalk 00:23:42].

Jeff Blau: (23:42)
You didn't come into our funds?

David Rubenstein: (23:44)
I didn't go into a fund, I did it directly, but-

Matt Brown: (23:47)
You can access his fund in our platform if you want.

David Rubenstein: (23:49)
But I do think that it has potential to be very attractive, but I didn't do it because it was the tax consideration because to qualify for the task consideration, sir, it's complicated. And obviously as you know, it doesn't work for everybody. On the other hand, there are some good investments in these areas, whether or not you take advantage of the tax zones or tax opportunity or not. But the lesson I wanted to talk to people about is this, very few people knew about this in the Trump tax cut. It was lobbied through by Sean Parker among others, and it was done, I would say relatively quietly, at least for the general public, when the bill was passed, people saw it was in there. You're going to see the same thing in this current tax bill.

David Rubenstein: (24:34)
We're not going to know what's in the tax bill until it passes. The tax bill probably won't pass until the last day in Congress or so. And at that point I suspect there'll be a lot of things in there. So look for lots of investment opportunities or tax advantaged investments opportunities in the new tax bill. I don't know, who's lobbying them through at the moment. I'm not, but there will be some in there because every tax bill has surprises just as this one was a surprise to many people in the investment world.

Matt Brown: (25:01)
David, speaking of the US government regulation, there's always been that delicate dance between the private equity titans and the SCC and the US government trying to regulate. What's the state of play right now? Is the government helping grow the businesses? Are they worried about oversight?

David Rubenstein: (25:21)
I think the government of the United States has a lot of challenges right now and I don't think their biggest challenge is trying to figure out how to make private equity do things that it's not otherwise doing because of market forces. So we have not been anybody's sites relatively speaking. And so there might be some changes in the tax bill that might affect private equity, but generally people in Washington are more worried about regulating cryptocurrencies or other things and not private equity in part because we haven't had a lot of things that attract attention.

David Rubenstein: (25:49)
When you have a lot of bankruptcies, that attracts attention. People lost a lot of money, that attracts attention. That hasn't happened in private equity for a very, very long time. And as a result, I think private equity is not something that the administration is focused on or Congress is focused on. There may be some modest changes, but generally I don't expect big changes coming out of Washington in the regulatory or legislative area that's going to affect adversely the private equity world.

Matt Brown: (26:13)
One area that the US government is being quite proactive in is trying to allow more and more individual investors to gain access so they're actually on the side of the individual investor.

David Rubenstein: (26:21)
This is an important point. If you are a graduate of Harvard, Yale, Princeton, any great school, and you majored in finance and you're brilliant, but you decide to go to work for Teach for America and you make a modest salary. You're not an accredited investor. If your father is really rich and you flunked out of a couple colleges, but he gave you a hundred million dollars, you're accredited investor. So you can then do whatever you want with that money. It does seem a little ass backwards that the person who needs the higher rate of return that private equity might give you can't get it because he or she is not accredited.

David Rubenstein: (26:55)
Whereas the idiot who has a lot of money, he can go do what he wants or she can do what you wants. So it does seem strange. And finally, I think Washington is raking up to this and they are going to do things that are going to make it easier to democratize private equity for people that probably can benefit from some of these higher returns that are available in this industry. And I think you'll see 401k checkoff plans and other kinds of things that people will be able to do regularly get into various private equity areas. There's some challenges, but I do think five years from now, 10 years from now, almost everybody that wants to be in some type of alternative investment can do so even if you're not wealthy.

Matt Brown: (27:30)
I think that's right. I think at least the background there is that they wanted you to have enough money that you could lose the capital and not be impacted. So they're effectively saying that these asset classes are overly risky. That narrative has completely changed. And now they're opening it up. Jeff, when you think about product development and new funds that you're launching, do you think about the wealth management community or the individual investor and fund structures and strategies that make more sense for them?

Jeff Blau: (28:01)
So this has been one of the big shifts over the last couple years into real estate, where most of our investors have been historically institutional investors. You're now seeing more and more individuals come in through aggregators and some of the big real estate private equity firms, Blackstone, Starwood have taken the lead on this. We're doing this now at Related in terms of going to start raising capital through wealth management channels for debt. And these more core type investments that we've talked about. Your firm has been very active on aggregating capital from investors, individual investors, and investing into funds that were typically only open to institutional investors. And so I do think there has been, as you said, democratization in real estate and that has attracted tremendous capital flows.

Matt Brown: (28:50)
What's driving the demand, David?

David Rubenstein: (28:52)
Well, interest rates are so low. So people don't get the kind of rate of return that they normally would want from their fixed income investments. People see other people making money and so they get jealous and they say other people money, they're not smarter than me, why can't I make money as well? And the returns have been pretty consistent and the RIA market is gigantic. I spoke this weekend on Saturday to a group in Kansas City, several thousand people in an RIA group. And it was one firm. And every time I go to make a speech in front of large audiences these days, it's generally terms of groups of large RIA groups that have aggregated are one firm. There's an enormous amount of money in the RIA world. And the RIAs are increasingly feeling that their clients are going to be well served by putting money into some private equity firms.

Matt Brown: (29:41)
Well, Carlyle has done a great job on that. And just some numbers behind that, the RA channel advises between 10 and 12 trillion dollars in assets. That's excluding of course the larger wealth management firms like Morgan Stanley and Goldman, JP Morgan, just the RIA channel. Average allocation rates in the RIA space to alternatives are about 2%, so if you just project out what a 15, 20% allocation to alternative investments, whether it's real estate or private equity, we're now looking at a multi-trillion dollar jump all for the firms that want to be there.

David Rubenstein: (30:14)
Well, when private equity... It was in 1978 when the US government and, and Department of Labor said that ERISA funds could finally go into private equity or alternatives, and then Oregon and state of Washington, others went in and then they began having big allocations. And now you see typically for endowments, pension funds and so forth allocations somewhere between 15 and 20, 25%, in some cases, even 30, 35% to alternatives. The RIA channel isn't as high as that right now, people aren't putting as much in as higher percentage, but it will drift up to a higher number to reflect what I think the institutional market is recognized that the risks aren't as great as people thought, and the returns are much better than people thought.

Matt Brown: (30:54)
Jeff, there's this rise of the do it yourself investor. We're seeing it with Robinhood and Betterment and so forth. Now we're bringing serious institutional products, investment strategies into that market for the first time, which we all think is a positive. Who has responsibility for education or oversight to make sure that there's the right suitability in place? Is that now going to be put... If the SCC in Washington is loosening, that going to be pushed onto firms like you if we open up the channel for every individual to come in?

David Rubenstein: (31:30)
Well, my hope is that that people will feel they can write things in language that's understandable. Unfortunately, we now have a lot of legal documents that are very difficult for people to understand. I hope, and as we move forward, the things that educate people are going to be written in relatively simple English so that people can understand what they're really investing in, but particularly what the fees are and what the risks are. Sometimes if you read a prospectus, you really have a hard time figuring out what you're really getting into. So if the government of the United States does anything, I hope they will do a better job in educating people about the risk in simple English and the firms like ours have a responsibility to do that too. So I do hope that both sides, the firm that's doing the investing and the government will require people to really read something that's understandable before they go into some of these investments.

Jeff Blau: (32:24)
I also think it's you do have the wealth managers now in the middle of that. So there's one more group that's actually selling the product to the investors, whether it's a company like yours, or Morgan Stanley that is basically interacting between our documents and the individuals. And I think it's part of their responsibility to make sure that everything is explained properly.

Matt Brown: (32:47)
Do you think it's unusual that we can all board an airplane with an identification code that says you're a TSA, you're not a bad guy, but we still have to photocopy a picture of our driver's license to invest in a Blackstone fund and every other fund? When is innovation going to catch up here and just make this a little easier for people, because if you hope to attract the individual investor, it has to be simple and easy, understandable, but technology and speed and seamlessness has need to come into play here.

David Rubenstein: (33:18)
Well, I think that that is happening. And I think the technology world is such that now people are inventing things that'll do things like that and make it much easier so that you can invest in these kind of funds without having to fill out so many forms that you really can't understand or that take forever to get done that discourage people from doing it, but in the end, there's no such thing as a risk-free investment. Everything has some risk. I just think that people should be allowed to take a little bit more risk than maybe they're allowed to take today if they want to get higher rates of return other than what they've been doing and just putting things in treasury bills or something like that.

David Rubenstein: (33:51)
And the world's moving in that direction. And it's not just in the United States. Today, I would say roughly 60% of all private equity investments is still in the United States. So as the world moves forward and gets wealthier, you're going to see much more private equity and alternative investments in Europe and so-called emerging markets. It's going to take a while, but I do think at some point, you'll see the United States, not quite as dominant in the private equity world in the alternative world, as we currently are.

Matt Brown: (34:16)
Jeff, if you had to allocate a hundred dollars of your personal capital and limited to three buckets of investment strategy, either within the related umbrella or not within real estate, how are you waiting that right now, going for the current market and going forward?

Jeff Blau: (34:34)
I think about that all day, because that's where my money is allocated. But I would say you want to have a fair amount in opportunistic real estate assets because that's where you're going to get higher returns. But you also want to make sure that you have a bit of a nest egg and get current income and that's core. So I don't know, maybe I would probably be 60 to 70% and opportunistic in the balance [crosstalk 00:34:58]

Matt Brown: (34:58)
And what percent of an individual or an institutional portfolio should have real estate overall?

Jeff Blau: (35:04)
I think the pension funds today, you try to target between eight and 12% in real estate.

Matt Brown: (35:12)
David?

David Rubenstein: (35:12)
I would say that the greatest pleasure that you're going to get from investing is investing so you can give some of that money away. So I encourage all of you to think about your own philanthropic interests. All of us have thought recently in the last couple weeks and certainly in the last couple days about this country and some of the tragic times we've been through. And I think if people who think about what they can do to make this country better and give some of their money that they make from investing in real estate or private equity to things that I think makes the country better, I think you're going to feel much better about that.

David Rubenstein: (35:44)
And so I hope everybody here can just ask themselves, what are you doing to make the country a better place? What are you doing to give back to this country that made it possible for you to be as reasonably wealthy as you are? And I think when you find that thing and you give some money to it and give some time to it, you'll feel much better than even if you get a triple or quadruple on one of your investments.

Matt Brown: (36:03)
We're almost at time. I just want to ask you one last question each. You've both built and run great businesses. A lot of young people coming to work for you, with you, learning. If you were mentoring a young employee or an entrepreneur, what's the one piece of advice you'd give them?

David Rubenstein: (36:22)
Have intellectual curiosity, ask questions, read. You can't read too much. Learn how to write, learn how to speak, learn how to get along with people and have some humility about what you do if you accomplish something, because you'll get much further if you're humble. You'll get much further if you actually have intellectual curiosity and try to make yourself valuable to any organization you're in. Make certain that you're actually adding value. Specialize in something, know it well, and then help other people with their projects. As Ronald Reagan famously said, there's no limit to what humans can accomplish if they're willing to share the credit as well.

Matt Brown: (36:57)
Share the credit. Jeff?

Jeff Blau: (37:00)
I would say you have to pursue an area that you're passionate about. You have to enjoy what you do every day. And going back to what David said about philanthropy, a good portion of what we do all the time is focus our efforts on affordable housing development, because we think it's one of the most important things that we can do for cities and this country needs. And so being able to pursue a passion of mine, which is real estate development and being able to do that in an area where we're also doing good for society, I think that's really, that's the perfect career. And if you can position yourself that way, that's the best outcome.

Matt Brown: (37:35)
David, Jeff, thanks so much really enjoy it. Really appreciate it.

How COVID-19 Reshaped the Advice Industry | #SALTNY

How COVID-19 Reshaped the Advice Industry with David Bahnsen, Founder, Managing Partner & Chief Investment Officer, The Bahnsen Group. Karen Firestone, Chairman, Chief Executive Officer & Co-Founder, Aureus Asset Management. Josh Brown, Chief Executive Officer, Ritholtz Wealth Management.

Moderated by Sean Allocca, Deputy Managing Editor, InvestmentNews.

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SPEAKERS

David L. Bahnsen

Founder, Managing Partner & Chief Investment Officer

The Bahnsen Group

FULL BIO

Karen Firestone

Co-Founder, Chairman & Chief Executive Officer

Aureus Asset Management

FULL BIO

Josh Brown

Chief Executive Officer

Ritholtz Wealth Management

FULL BIO

MODERATOR

Sean Allocca

Deputy Managing Editor

InvestmentNews

FULL BIO

TIMESTAMPS

EPISODE TRANSCRIPT

David Bahnsen: (00:07)
New York was slightly different story, we reopened last summer, but we have a smaller presence in New York. We've doubled in size out here since, but it was easier to get away with kind of what was going on in New York than it was California, particularly Newport Beach where there was much less of a hysteria about things versus LA County. But I agree with Josh completely that all the technology apparatus pre-COVID was a very natural segue into what ended up taking place. We were big Salesforce users, we're big WhatsApp users, so there was the ability to use cloud and use digital communications internally where we didn't skip a beat.

David Bahnsen: (00:48)
The difference for us is... And I think there's a huge advantage for us right now versus all the wirehouses that aren't reopened and don't appear to have any intention of reopening their branches anytime soon... the client-facing aspect of the business. We have clients in 40 something states. We always have. There's a lot of remote communications, just like what Josh was talking about, when you have a national footprint, but to the extent that we have local presence, we really want the face-to-face. And we think it was a huge advantage for us last year that we were able to get in front of prospects and clients both through the second half of last year and all of this year, and we've reaped a lot of dividends from that.

David Bahnsen: (01:31)
This is something I remember when I was in training, coming out of dotcom, I was at a firm called PaineWebber, they got bought by UBS, and the then CEO, Jo Grano was giving us a speech about why we didn't need to be afraid of the e-trades and Schwabs and all this. And he said, there will never be a time in your life ever, where the really truly high net worth are... that you're going to be dis-intermediated. There's always going to be an industry for advice. And people were worried about that at the time, what they thought was cheap trading. I think it was like 20 bucks a trade or something. I remember throughout COVID thinking the same thing, the idea that we'll get to a point where this very well-established desire from high net worth people to have communion with their advisor, to have a face-to-face communication, to have events.

David Bahnsen: (02:22)
Events are a big part of our business too, like Josh was saying. We've started out doing them again. We had 250 people at a client dinner a few months ago in California, so we're back up and running our first event here in New York, it will be in another month. Larry Kudlow is an advisor on my team and he and I are going to speak together and that'll be packed out. And so those are the things that make you feel like you're getting back to normal. But the key issue for us is the face-to-face with the client where it's possible. I do not believe that can go away, I think people desire that personal relationship.

Sean Allocca: (02:57)
And so what have been... I mean, we'll give this one to you, Kari... some of the pain points that you've seen in the last 18 months in terms of the pandemic and how we overcome them at your firm? Have you seen similar things to Josh and David, or was your experience a little different?

Karen Firestone: (03:11)
Yeah. It's interesting to refer to it as pain points because I definitely feel that on March 17th in Boston, happened to be my birthday, when they closed the city because it was St Patrick's day and they said, "Everybody now, no restaurants, no bars, go home." It was painful to suddenly realize that we weren't going to be able to see each other. My office had not been virtual in the sense that Josh's, we worked together in the financial district in Boston, and that comradery was a big element to the company. And what we felt was sort of our cohesiveness and our clients often would come in... We have clients all around the country. We have clients in other countries, but we saw them frequently and we would talk to them sometimes. But coming into the office was something that they seemed to enjoy, or going to visit them. And suddenly having none of that and people working virtually was something to adapt to. We had the technology for it. We were all ready to do it. We had been using Zoom a little bit. We began obviously to use it all the time.

Karen Firestone: (04:22)
I found that... I have two very active dogs who were scratching on my office door at home. I said it's very hard for me to work here. And I began to ride my bike into downtown Boston every day, and there was nobody on the streets. There were no cars and there were no people when I got downtown. So I was in the office, I said, I'll open the mail. I can do wires. I mean, hadn't done anything like that for years. But I was there... Everybody was at home and we just progressed and we had to learn how to connect in a different way. That I think has been hard. Some people prefer to be in an office, prefer to talk to each other face-to-face, the clients or my colleagues.

Karen Firestone: (05:05)
I don't know if there are people who really work better in a sort of close knit relationship type environment, work better when they're not in the office. Yeah, there are some people who might, but it's hard to have that type of camaraderie, spontaneous discussion about investing as much when you can't sort of grab people, "Come on over into my office or into this conference room and let's chat about an idea." So that has been a part of what we've missed and part of the pain, but we've done well. We persevered. We started to come back. July six when everyone was vaccinated, that's when everybody was welcome to come back. And there are many days that everyone is back and some of the people or partners with small children have been home more, and some clients have asked if they would be able to come into the office. I think it's more a social thing, they're not seeing anybody so we're somebody to see, which we like. We hope it's fun for them.

Karen Firestone: (06:12)
But it's been a big adjustment. We can do it virtually. I don't think it's as much fun and this will change, of course, the way in which we do business forever, I think.

Sean Allocca: (06:27)
Sure. Interesting. So I think that's a good segue into another question that David kind of pointed to as well, which is when do we bring back employees into the office? Wall Street has postponed their plans, although they're pretty adamant that they want to get butts back in seats. Some of the other firms have been a little more lax about it and have a little more ability to work from home. What are your thoughts? What are the pros and cons? Do you want to start off, David? I knew you had a interesting take.

David Bahnsen: (06:53)
Yeah. But look, I have really strong opinions on it. I wrote an article in the New York Post last summer, and I sent a letter to the CEO of 25 firms in New York. A couple of them responded to me. I feel-

Josh Brown: (07:06)
I've been meaning to. I will.

David Bahnsen: (07:06)
Yeah. Josh and I had a great interchange on it, and there was some cussing and... No, look, the fact of the matter is, I think every firm has their own problems to solve. It's a lot easier... My firm now has 35 employees. When you're talking about JP and Goldman, so forth and they have hundreds of offices, let alone tens of thousands of employees. I think JP's case, it might be a million employees. I'm kind of more old school in the way that apparently Mr. Diamond and David Solomon are about this. But to the extent there's some that feel differently. I get it. It's just, I do believe I've built the firm around a certain culture and so that brand matters. And I think Karen's alluding to some of this, the inner action in the office is important for us.

David Bahnsen: (07:53)
I've also spent a long time in my career in branches. I was a managing director of Morgan Stanley for many years, and I never talked to anyone in the branch. First of all, they were all gone by two o'clock every day, I never saw them. And I got to know the people at our Chairman's Club trips more than I got to know the people in my own office. So the branches not reopening, might be a different story in the wirehouse world, but for us, it's an important thing. So my strong opinions are specific around what I believe about my company, but then also what I believe about supporting the cities. I couldn't stand seeing Manhattan last year with the coffee shops, and the dry cleaners, the laundromats, the bars, that type of thing, what it was doing economically to the city, I thought it was awful. And I wanted to see the big employers bring people back to support the infrastructure of the city. And I hope that, that will be expedited now here, post-vaccine. That's my take on it.

David Bahnsen: (08:45)
If I keep talking, I'll say something I'll regret.

Sean Allocca: (08:50)
How about you, Josh? I mean, you guys have been across the country already, right? So you have to take on mandatorily bringing back people to office, or...

Josh Brown: (08:56)
No, we're not mandatory. We kept the office open last summer like David did, but for a different reason. I was not there, but I have many millennial employees living in Manhattan and Long Island City in Brooklyn, and they don't want to be confined to a 1200-square foot a room all day. And so we had a clean, air conditioned, 5,000 square foot space on Bryant Park. They could get in, they could get out. They could be there with three other people and just hear someone else breathing, right? Like that stuff is meaningful, I think, just to have somewhere to go. A lot of these people... It's a 100 degrees outside in Manhattan in the summer, so you can only spend so much time out the element. You need a second space that's not your house, and all the Starbucks are closed.

Josh Brown: (09:48)
So I said, let's just reopen. I'm not worried about the liability. I don't think we're going to have a super spreader event with three kids sitting at laptops. So that's why we reopened and I've kept it that way. And what I've noticed.... Every week I go in on Thursday, we do a podcast, YouTube video there, we have guests, we made it vaccine mandatory to visit the office, whether you work here or not. But every week I see more people that work for us, and I even see people that work for us in other states, visiting New York just to spend a few days at the headquarters and just see each other. So I agree with what everyone said about, there is something important culturally about getting together in person. I just think we have to be realistic, the genie's out of the bottle and nobody is thinking, "I'm going back to exactly the way things were", especially people taking the Long Island railroad like myself every day.

Josh Brown: (10:51)
So here's one of the lesson I want to say, and this-

Karen Firestone: (10:54)
No, impossible.

Josh Brown: (10:55)
Yeah. Probably not.

Josh Brown: (10:56)
... this applies to client meetings too. It's not that no one's ever going to want to be together or meet, it's just that when we do do it, it's going to be really meaningful. People are really going to appreciate it. When you go see a client, now it's not obligatory. Now it's an event let's do lunch and we'll spend the first 30 minutes, "What vaccine did you get? I got Pfizer. Oh, I got..." We'll all do that, but so what? It's going to be like a powerful moment that you actually put on pants and left the house for me.

Karen Firestone: (11:27)
[crosstalk 00:11:27].

Josh Brown: (11:27)
So I think, on the whole, it's going to be a positive thing because now we're going to appreciate each other and each other's time more than we used to when it was just taken for granted and obligatory.

Josh Brown: (11:40)
Little applause for that. What's up? I appreciate you guys.

Sean Allocca: (11:42)
I felt it. I was feeling that.

Josh Brown: (11:42)
Happy you do feel.

Sean Allocca: (11:46)
You said Long Island railroad... New Jersey transit's probably way worse, but similar situation, so.

Josh Brown: (11:50)
It all sucks. Right.

Sean Allocca: (11:52)
Yeah, in both states, subsidized.

Sean Allocca: (11:55)
How about we switch gears a little bit and talk about maybe portfolio management and see if there's any trends or things that we saw there. It's been a-

Josh Brown: (12:06)
Did anyone mention crypto with this conference yet?

David Bahnsen: (12:07)
I haven't.

Josh Brown: (12:08)
Has that come up?

Sean Allocca: (12:08)
We're trying to stay away from it.

David Bahnsen: (12:10)
They have a breakout on it tomorrow.

Josh Brown: (12:11)
Okay.

Karen Firestone: (12:12)
Yeah. But I'm wearing something, so.

Josh Brown: (12:13)
I won't spoil it then.

Sean Allocca: (12:16)
So what have we seen there? We've seen some unprecedented market conditions and certain low interest rates never seen before. Were there any different trends you saw over the 18 months? Of course, we're going to get into crypto. But before we do that, how about, Karen, do you want to start us off?

Karen Firestone: (12:34)
So if we're talking about trends, well, what we've seen the last 18 months... This isn't just the last 18 months, but because interest rates have essentially been zero, we've all had to invest in a way assumes that fixed income, or cash, or the equivalent is really only for what you need to have available if you're spending money or you need to buy a house, and its other assets are going to fill the entire pot pretty much. I mean, that's the way I look at it. You're not going to get any return, how can we charge people a fee when they're making so little money. The fee is more than what you're earning on treasuries or whatever the high quality is that you're putting them into [inaudible 00:13:27] market. So we have done more investing over the last couple of years in assets that are alternative, whether it's more venture capital...

Karen Firestone: (13:39)
We've done venture capital since 2010, that was the first investment we did in venture. And private companies, we've seen more private companies. There are more opportunities that have come to us. We've done some private equity. We've done some real estate, real estate developments that groups have shown us.

Karen Firestone: (13:59)
And we used to have... And all of us who've been in the business for a while have understood that fixed income would be a reasonable proportion of people's portfolios... Elderly people who were retired, definitely, but much less now. And as the safety portion of the portfolio, no. So now we have other assets. There's more of that... We have had to spend more time devoted to learning about that they have more people in the company who look at non-equity asset classes. And I think that will continue as a trend. I mean, that's what all this is about. But it has never been as important, I think, as it is now, for nothing more than the fact that you can't have all the money in just equities as one might, unless you really just want to say that's the only asset class that we think is going to work and that's not been the case.

Sean Allocca: (14:57)
So I guess we have to jump into it then, digital assets. We can just go in a line here and just give our opinions. Obviously advisors need to know about it, even if they don't want to touch it. What say you, David.

David Bahnsen: (15:09)
Well, let me answer the other question because I don't have anything to say on the digital asset stuff at all.

Sean Allocca: (15:16)
It's okay.

David Bahnsen: (15:18)
It's really interesting to hear Karen's answer because I agree completely. We've done a lot more with private investing, we've done a lot more with venture, but I'm not sure that any of that is related to the events in the world of the last 18 months. In our case, I think that we just have had a migration of larger and larger clients that have needed those types of asset classes more. And there is a great deal flow out there. We've done a lot of direct deals, real estate, things of that nature. But I wouldn't associate that with the COVID moment. One of the things that's difficult for us, we have a high conviction, equity investing. We're never owning more than 25 to 30 stocks, all actively managed in-house at our firm, but we're dividend growth investors and dividend growth was very out of favor last year. And there's have been periods post-crisis where it's been in favor.

David Bahnsen: (16:12)
And it doesn't matter if I think it's about coming back in favor or not. You could make a yield spread argument, some other things, but it's never going to be tactical for us. It's always going to be evergreen. So whether or not, I think it's particularly appetizing this time or another is not really the pitch I'd want to make around it. We believe in it because of the recurrence of cash flows and the higher quality underlying investments.

David Bahnsen: (16:37)
In all seriousness on digital asset side, it isn't that I have any issue with those who are very interested in it. It's that, for us, we have a heavy focus on cashflow generative investments. We manage 3.2 billion at our firm, and we have roughly 85% of those in cashflow generative investments, either on the dividend equity side, or in credit, or even in alternatives and real estate, has a heavy cashflow bias.

David Bahnsen: (17:07)
We definitely have younger clients that ask about it. We have folks ask about it. I'm well aware that there are other firms that are building an incredible niche around it, but for us, it doesn't fit into the principles we built the business around. And so it's not something that has a big focus for us, although we do own some SkyBridge and so I guess we kind of got stuck with some of it. It's fabulous.

Karen Firestone: (17:28)
Yeah. Series G.

David Bahnsen: (17:28)
Yeah. But no, I'm kidding. They obviously have a bit of exposure in there. That's our take on it. I think my colleagues up here have a different approach than I do.

Karen Firestone: (17:38)
Well, it's interesting. I did a panel for Anthony once about cryptocurrency and Bitcoin and he asked me which side I wanted to take? And I said I didn't have a particularly strong point of view. Which side would you like me to take? He said, "Well, you can be against it." And I said-

Josh Brown: (17:59)
And then he pummeled you [crosstalk 00:18:00].

Karen Firestone: (18:01)
And I said, well, I'm going to have to read a lot about Bitcoin to come up with something, articulate to say. And my conclusion was that it's a risk asset. I think it's very little connected to inflation. I don't think it's particularly connected to gold. I think in terms of the safety and storage of value, I'm not sure that Jeff Bezos has decided that his money at JP Morgan, if it's there, isn't safe. I'm not sure that you need it as a [inaudible 00:18:33], but it's safe. And I understand it, it's a risk assets that people can play as they do other asset classes that have a high level of beta risk attached to them. Do we invest directly in Bitcoin? No. We have an allocation to some external managers that own Bitcoin, including SkyBridge's multi-strat fund.

Karen Firestone: (18:56)
We have a portfolio like David, 35 names. That's our sort of love and the background that we're from. I spent many years at Fidelity. I managed an equity fund. It was a growth fund. We're growth investors primarily and that's where my heart and soul is. But we, as I said, invest in a lot of places. If there's a place for digital assets cryptocurrency, I can see that for young people in particular who feel that's very important to them as long as they understand we cannot analyze it in the way we analyze any other assets. It is not a confidence of ours. It may be for other people. I don't feel that I'm particularly competent, but I can see the appeal and haven't denied including it in diversified portfolios.

Josh Brown: (19:51)
I think that when you look at the wealth management industry, the average age of a financial advisor is 59. We have a very old industry relative to almost every other industry there is other than let's say Walmart creator. There's very few industries this old. My average certified financial planner working at my farm is in their late 30s. We're also bringing in a majority of our clients from things like YouTube and social media. And so we're attracting young millionaires and young almost millionaires, and in some cases, young quinta-millionaires, deca-millionaire. Without a doubt, if your answer to these people is, there's no cashflow so I can't even have a conversation about it, you're not a candidate for their wealth, not their current wealth, definitely not their future wealth. And so it's very important, I think, for an advisor to not roll their eyes... Which I don't think anyone's doing anymore, but as recently, as two years ago when the price had plunged from 18,000 to 3,000, it was derision at advisor conferences. That part's over.

Josh Brown: (21:05)
So now the question is, our question, we call ourselves evidence-based investors. Very hard to be an evidence-based investor in a realm like this. So then the second question is, okay, if there's no evidentiary way to do this, what's the least bullshitty way to do this for clients? That's a scientific term.

Karen Firestone: (21:24)
Thank you.

Josh Brown: (21:25)
So then you're getting into questions like, well, are we really analyzing coins and tokens? Obviously, you're not doing that with a straight face. The people who created these things don't even know what they've created. So that's out. So the notion of us actively managing a portfolio of crypto is ludicrous. Right? Okay. So let's move that off the agenda. So then what's the next question? Well, do we think that people should have exposure? And the answer to that is actually more behavioral than anything else. If they feel they need to have that exposure, then the second part of that is, well, who should provide it? Should it be us, or should we tell them, go do it yourself at Coinbase?

Josh Brown: (22:07)
And there may not be a definitive right or wrong there so you might actually want to have two different approaches, give them permission to do it themselves without hanging their financial plan out to dry, right? Or, okay, we will do this in-house for you, but here are the parameters around which we'll do this, and here are the software providers we're comfortable using, and here's what we're doing on the cybersecurity side so that we don't wake up in the morning and somebody from Japan stole... You've got to go through this process and speak to the vendors. And in many cases, the vendors you encounter are in their infancy, right? You're not working with BNY Mellon, at least not yet. We'll get there.

Josh Brown: (22:47)
So there are all these considerations that have to take place as you go through this process to find the least bullshitty way to do crypto for a wealth management client. And then of course, fees, cost, trading cost, hidden costs. So you go through these iterations and then you say, well, do I want to be market cap weighted? Here's the problem with that? The back test looks fucking great, right? But you know intuitively Bitcoin's not going to go from $500 to $50,000 ever again. If it gets back to 500, you've got real problems, right? So you know the Bitcoin back test, throw it out.

Josh Brown: (23:26)
So what do you have? You don't have any cash flows. So then you say, well, there's a 100 other tokens and coins and various... So maybe I want an equal weight these things, because the next 500 to 50,000 might be among coins five through 10 by market cap. If I market cap weight, I end up with 70% Bitcoin, 25% Ethereum, and 5% all these other science projects, and maybe that's not the way to get true future upside in the asset class. So you've got to really, as a fiduciary, go through this in order, starting from how can I, with a straight face, say to clients, "Okay, I'm a certified financial planner. Now I'm ready to manage your cryptocurrency." It's very, very hard time right now for wealth managers trying to keep up with what's going on in the culture and in the markets, but also not end up making a huge mistake for the people that trust them with their assets.

Josh Brown: (24:30)
So I don't envy any CIO at any RIA in this country. And mine happens to be my partner and I always say to him, when I overhear them talking about this stuff, "Thank God, that's your problem." I'm paying the electric bill, you deal with that. So that's my take on what's going on right now, and I think it's a fascinating time and a challenging time because of those factors.

Sean Allocca: (24:56)
Interesting. Yeah. Once it matures a little more and some of the bigger custodians get more involved, we might see some more acceptance or something. But yeah, it's certainly challenging for sure. Thanks for that. I know it was painful for you to answer the crypto, David, but I appreciate it.

Sean Allocca: (25:08)
How about this one, and Josh alluded to it, digital marketing, digital prospecting, all of these things came online. And just speak to the importance of maybe social media, blogging, content creation for advisors. It's obviously hugely successful for Josh. He just mentioned a lot of his clients are coming onboard through YouTube and other social media platforms. What's your take on how can advisors really [crosstalk 00:25:34] about this?

David Bahnsen: (25:34)
Yeah. So this is I'm real passionate about, Josh is a master at this. He's been incredible, but I disagree with every everyone who tells me how well Josh has done because of the medium. I disagree. I think it's the content. The shit Josh puts out is super good. It always has been.

Josh Brown: (25:48)
Thank you so much.

David Bahnsen: (25:49)
And if he was putting it out typed on a piece of paper and mailing it to people, it would still be compelling to read.

Josh Brown: (25:54)
Thank you.

David Bahnsen: (25:55)
Those 1970s newsletters were kind of big, you may recall.

Karen Firestone: (25:58)
He doesn't recall.

David Bahnsen: (25:58)
And so it's the content. It's not the medium. Now, of course, he's kept up with the times and has found the right delivery of it. I built my practice, previously the wirehouse, now as independent RIA through content creation as well. It's different, but we have a point of view, there's things I'm passionate about, I want to speak them to the world and then I have absolutely no care in the world who likes it and who doesn't. I just let the chips fall where they may, and I'm very comfortable with that. And so, yeah, social media, YouTube television, books I've written, there's a lot of different mediums out there, but this is all pre-COVID, just like it obviously was for Josh.

Josh Brown: (26:36)
David, do you agree that this is no longer a choice? It's essential because if we position ourselves as being partly.... or the psychological component being really important to whether or not our clients can stick to the investments we recommend. If we don't start off with people who are aligned with us philosophically in some way, and you're just randomly meeting people and putting them into portfolios, it's going to be way too hard to get them through periods of time, like 2020, for example. I feel like you have that as part of your secret sauce and some of the best RIAs today, they have that baseline of people came to me because of my ideas, not because I threw a steak dinner and they want it to look the plate, like [crosstalk 00:27:26].

David Bahnsen: (27:25)
There was a point at which I realized that people were not coming to me for my good looks.

Josh Brown: (27:29)
Right.

David Bahnsen: (27:30)
And that shared alignment of values, of beliefs, of whatever it may be, it's incredibly important because we all are in a business that requires trust and the stickiness of the client is that they trust you through hard times, not through good times. The secret of the business and the great multi-trillion dollar, I think, problem out there is that a ton of clients do not move from their advisor only because the markets have mostly been good. There's a ton of vulnerability and relationships out there. The ones that aren't vulnerable, it's because there's a connection and that connection comes out of trust. For us, we build a lot of our trust out of what Josh was talking about, people believe in what we believe in. And I think that's very important.

David Bahnsen: (28:11)
There are people that maybe are... Like not everyone should go on television, not everyone's real good at doing that. Not everyone should necessarily write. But maybe someone in their firm, someone who has a passion and authenticity... I remember at Morgan Stanley when they first said we're going to allow our advisors to do social media, but you had to tweet someone else's links out. So they'd have like a David Doris who... He's a buddy of mine, writes good stuff... But you were like a mouthpiece for the firm's content or something. And I thought, okay, I don't think that's what Twitter is really all about. That didn't seem to do a lot for me. When people could start putting out their own stuff, and you can just have a point of view, you can make people upset. You can make people not like you. But you then have that chance to build that connection, that trust, I think is very important to what we do. Content as a service is not going away.

Sean Allocca: (28:59)
Awesome. Thank you for that. We have about two minutes left, so we need to do a quick lightning round, just some final thoughts. Maybe we'll start with you, Karen, what's the big takeaway for advisors moving forward?

Karen Firestone: (29:09)
Well, I'll tell you something that I think is increasingly important, which is that when people come to look for you or a firm, they, more than you think, look at who's at the firm. And I mean, I'm obviously a co-founder, I'm a woman, Co-Founder, I'm the CEO and Chairman of a company. We're five billion in assets. It matters to me, it's important to me that Aureus is a firm with a woman CEO. It also matters to some of our clients. It matters who are the people there? I know this sounds like I'm spewing ESG. That's not what I'm saying. I just think that it is now a factor, people will say, oh, it's really great that you've got a woman who's a founder. I think having a mix of ideas and people in a company is important, but I think that the clients also increasingly think it's important... Individuals, families, and institutions. So I'd keep that in mind.

Karen Firestone: (30:17)
I would also say in terms of content, because it's something we've talked. Digital, Josh is a master. David writes, I write. I've written a book. I write for Harvard Business Review, for cnbc.com. I'm on CNBC. I think all of that helps. I don't have time to do any more of that than I do now. And if I had more time, that might be more helpful. It has to be mostly performance. We have really good performance, that's what brings the clients to us.

Josh Brown: (30:45)
There goes your lightning round, by the way.

Sean Allocca: (30:45)
Yeah. [crosstalk 00:30:48].

David Bahnsen: (30:48)
A takeaway for a financial industry is advice is not going away, the need for relationships is not going away, comes from establishing competence and likability. I try to at least do one of those.

Sean Allocca: (30:59)
Awesome. Thanks.

Sean Allocca: (31:00)
Josh, we'll end with you.

Josh Brown: (31:02)
I would just like to say, it's been a pleasure of seeing David and Kari again and meeting you, Sean.

David Bahnsen: (31:08)
Five.

Karen Firestone: (31:08)
Right on.

Sean Allocca: (31:08)
[crosstalk 00:31:08].

Josh Brown: (31:08)
And thank you guys all for coming to our session. Thank you.

Karen Firestone: (31:11)
Thank you.

Sean Allocca: (31:12)
Give it up for these guys.

Sean Allocca: (31:12)
Thank you so much.

Investing to Catalyze Positive Change | #SALTNY

Investing to Catalyze Positive Change with Noel Pacarro Brown, Investing with Impact Director & Financial Advisor, Conscious Wealth Management Group at Morgan Stanley. Matt Salloway, Chief Executive Officer, GSI Ventures. Rosemary Sagar, Chief Investment Officer, Kingdon Foundation. Thomas Haug, Managing Member, Aspen Tree Advisory.

Moderated by Steven Saltzstein, Chief Executive Officer, FORCE Family Office.

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SPEAKERS

Noel Pacarro Brown

Investing with Impact Director & Financial Advisor

Conscious Wealth Management Group at Morgan Stanley

FULL BIO

Matthew Salloway

Chief Executive Officer

GSI Ventures

FULL BIO

Rosemary Sagar

Chief Investment Officer

Kingdon Foundation

FULL BIO

Thomas J.A. Haug

Managing Member

Aspen Tree Advisory

FULL BIO

MODERATOR

Steven Saltzstein

Chief Executive Officer

FORCE Family Office

FULL BIO

TIMESTAMPS

EPISODE TRANSCRIPT

Steve Saltzstein: (00:06)
Good morning, I'm Steve Saltzstein. I'm the CEO of a FORCE Family Office. I want to thank you all for joining us today. FORCE stands for, family office research, consulting and events, and we are the largest network of investment seeking family offices in the US. Basically, what we do, is we bring families together to share intellectual capital, best practices, meet best in class service providers. But ultimately, what we do is, we bring families together in the context of co-investing and we have made so many different co-investment alliances and relationships. It's now my pleasure to welcome the rest of the panel. Noel.

Noel Pacarro Brown: (00:49)
Hi, I'm Noel Pacarro Brown. I'm with The Conscious Wealth Management Group at Morgan Stanley. We are a wealth management team that focuses on impact investing and bringing families together like Steve.

Matt Salloway: (01:03)
Hi, good morning. I'm Matt Salloway. I'm the CEO of GSI Ventures, which is a single family office for a member of the Saudi royal family. GSI stands for growth, sustainability, and integrity. I'm also the co-founder and managing partner of SIP Global Partners, which is a performance-based global VC fund investing in the 5G economy. Very nice to be here.

Rosemary Sagar: (01:28)
Hi, I'm Rosemary Sagar and I manage the charitable assets for Mark Kingdon at Kingdon Capital. Kingdon Capital is one of the oldest hedge funds in New York, it was set up in '83 and the charitable foundation was set up in the late '90s. And I've been there almost 17 years now and have more of an institutional background. I ran the international investment division at US Trust and international equities at GE Investments, which was managing the pension fund.

Thomas Haug: (02:08)
Good morning. I'm Thomas Haug. Is my mic on?

Rosemary Sagar: (02:11)
Mm-hmm (affirmative).

Thomas Haug: (02:11)
I'm Thomas Haug, managing member of Aspen Tree Advisory. Aspen Tree Advisory is a multifamily office based here in New York, best city in the world. We have a consulting and advisory practice primarily for family offices. And for a number of years, I have served on Steven Saltzstein's board. So thank you for joining us this morning.

Steve Saltzstein: (02:32)
So Rosemary, let's start with you. Can you talk about how running a family office, you think about the dynamics of impact investing and this morning we're here to talk about creating positive change. How do you think about that in regards to your asset allocation model?

Rosemary Sagar: (02:51)
Since we have this family office perspective and the institutional perspective, I think it's a good idea to sort of think impact investing as a ... It's both art and science and the institutional perspective has been very much ... Well, moving more and more to the science end. And there's been some very good innovations the last few years on metrics, in terms of compiling data and actually measuring the impact. But for family offices, my view is, it's more at the art end of the spectrum. And it's more of the question of, "Okay, what does impact mean to the individual family office?" So speaking for us, I mean, the theme here is positive impact, but we'll take it a step further.

Rosemary Sagar: (03:43)
We want to make a difference and there's different ways of making a difference and therefore ... Matt, does something completely different from what we do, but we take the global holistic view of ... We can make donations and we can invest with impact and making a difference but ultimately we want to make the biggest difference possible, and what's the best way to get there?

Steve Saltzstein: (04:14)
So how do you decide where to put your money? How do you decide what investments to make?

Rosemary Sagar: (04:22)
Okay. I should explain that, we're just three officers of the foundation and Mark and Anla, his wife, do the donating and I do the investing and they are very passionate about a handful of causes and are very involved on the boards. So it's sort of probably, 80/20 or 90/10 or something where the balances is thinly spread, but the whole concentration is so that truly a difference can be made. And so we need high returns for that. So we will never have the luxury of sacrificing returns to make an impact on the investing side, because ultimately, that's the more direct way of making an impact through donations. So that's what I mean by looking at it holistically. We've looked at SRI and there's a lot to be said, but it hasn't suited our needs because ultimately, it would leave us with too low returns for the most part, even though there are correlation benefits.

Steve Saltzstein: (05:34)
So Tom, just following up on that question. Do you think being an impact investor you have to sacrifice returns?

Thomas Haug: (05:44)
So I don't. I think impact investing was thought of very differently years ago. And as of late, I actually think there are certain impact investments that generate equal or more significant alpha then traditionally thought.

Steve Saltzstein: (06:01)
Right.

Thomas Haug: (06:02)
And I feel like there is much more of a focus on impact today than there ever has been before.

Steve Saltzstein: (06:10)
Right, Noel.

Noel Pacarro Brown: (06:11)
I would agree with that. I mean, those institutions, these organizations that are actually channeling capital for change are not just looking at profitability at all costs. They're bringing in all the other nonfinancial data in order to really hone in an opportunity. And it's that looking so expansively that allows to mitigate risk. It also sees greater opportunities. So if anything, the folks that I work with actually believe that type of approach is going to lead to a greater outcome, both on the financial and impact side.

Steve Saltzstein: (06:47)
Matt, you have a global effort with the prince you're, running offices in Japan, where you're partnered with NTT DoCoMo in Saudi Arabia and the US. How do you think about it globally?

Matt Salloway: (07:02)
We spend a lot of time when we started the family office about five years ago. How are we going to create the right mission statement, the right values? And when we took a step back and I'll quote not to get a little cheesy, but I'll call Ralph Waldo Emerson, who said, "To leave the world better than you found it, that is to have succeeded." And I think, from the family that I work with, we wanted to find a way to obviously protect our capital and grow it, but also to find a way to make an impact. And that's what we're trying to do. GSI, the values, the core values are pillars, growth, sustainability and integrity. It took a while to come up with those ideals. And they basically, embody how we look to invest, how we look to partner with folks.

Matt Salloway: (07:56)
Technology for us is an area where we believe we can make the biggest impact. We have a foundation, the family has a foundation. The foundation is focused on many important causes. I'm sure like Rosemary's family, but on the investing side, we are returns driven. And that's a fact, I mean, that's how we look at everything. When we get into technology, we started a fund about two years ago with NTT. The fund is mostly investing in North America, but being abridge into Japan, the Middle East. We believe we can have a true impact on other economies. Bridge the gap, other cultures. Improve the quality of life aligned sort of with the values in Saudi, specifically a vision 2030. Moving away from oil and, and becoming more sustainable. So the way that we approach it, I think it's unique to each family, but it's all about making a difference, but also growing our capital.

Steve Saltzstein: (08:56)
You have to mind the return, so to speak, but do you give extra weight if something is going to make a positive impact in the world?

Matt Salloway: (09:06)
We definitely do. And again, we have a broad view of impact. So we're investing in disruptive technologies. For example, we're investing in 5G, ORAN. A company called Parallel Wireless, which is bringing connectivity to rural areas around the world. If you look on their website just to give them a plug, they actually were bringing Afghanistan. They were in Nigeria, a lot of areas that don't have connectivity. So that's one area, we're also doing workplace safety technology. So making sure employees can safely do their jobs and not have injuries, which can devastate families. Again, it's about the returns, but we want to make sure that there is something positive, broadly speaking that can occur from our investments.

Steve Saltzstein: (10:03)
Are you ever concerned about maybe doing too good a job in the sense that like, for instance, when the ride sharing companies went to India, there were all these protests. The Indian taxi drivers were up in arms because it was hurting their lifestyle and they didn't want to have to go through the transition. You ever wonder that you're kind of piercing the veil, so to speak?

Matt Salloway: (10:25)
That's a great question. You can look at it from every side, it's not easy, obviously creating automation and taking away jobs. There's a lot of impact to, to families. And so you have to really take a hard line stance and say, "Is it doing more good than, than not?" And obviously, bringing technologies to new countries is a challenge and every country has its own values and needs. You're absolutely right, we have to be mindful of that. We've tried to be that way. I mean, we're working in two of the most, I'd say insular countries, Japan and Saudi Arabia, very different demographics. One is the oldest economy in Japan, Saudi is one of the youngest economies. I think 75% of the population is under the age of 40 in Saudi.

Matt Salloway: (11:20)
So we have to be mindful. There's also different values, religious values. So there's a lot that goes into what we think about, but fundamentally we want to invest in the best technology that we believe can really change the world.

Steve Saltzstein: (11:36)
Noel, can you look at impact in a non-correlated lens?

Noel Pacarro Brown: (11:42)
Before, we go there. I was hoping to address something you said, Matt, which was that you want to be effective in the places where you're investing. And I think some of the conversation around ESG is the S part, the social factor, the focus on human capital. And we hear a lot about DEI and why it's important because channeling capital to places where it's usually not there, it's the right thing to do. But it's also the smart thing to do, because if you have folks on the ground who understand these issues in these cultures, in these regions, that's a better investment. You're getting more data. And it's not data that we see on the balance sheet. And it's not even data that we can see in the UN Sustainability Development Goals, but it's having actual connectivity and people that understand how to make the investment most effective and lift all folks together.

Noel Pacarro Brown: (12:30)
So just to play on the conversation around metrics, and maybe we go there next, I'm not sure, but there's lots of ways to look at it, but I think ultimately having people on the ground and connectivity with the communities in which you're serving is critical to this conversation.

Steve Saltzstein: (12:47)
Well, let's talk about measurement. I think we're going through a phase where there needs, and there's going to be standardization. I mean, obviously you're hearing it from the SEC, you're seeing it in Europe and there all these kind of international scales. Do you have any sense of who you think has the best model? Specifically, your high net worth individuals or family offices can think about it?

Noel Pacarro Brown: (13:12)
So for us personally, we actually work with several different asset managers who I find brilliant. Just like any other investment, you're going to find asset managers who have deep knowledge, but also expertise with people in the field. Analysts who are looking at things to find inefficiencies. That's really what we're here to do. And so, if an asset manager is doing that well and using both the financial and non-financial data in a way that's not just looking at the point of profitability over the next quarter, but generational change. Then you're going to find a really good solution. So for our team, we look at all the different asset managers, most of them think way beyond the next 10 years. And we relay that back to our clients and say, "How does this fit with the way that you're thinking about your desire to make an impact?" And then we go from there.

Steve Saltzstein: (14:03)
Tom, do you think that family offices are better suited to make impact investments because they can think in terms of generations?

Thomas Haug: (14:11)
So I think the time horizon for family office is definitely more significant and lengthier than some other investors. So when you look at the time horizon of an impact investment, number one, you're looking to make change. Number two, you're looking to take as much time as needed to effectuate that change. And number three, the return profile may be more significant, if you have the patience to wait it out. So 100%, I do think impact has become a focus for families more and more over recent years for that reason.

Steve Saltzstein: (14:48)
Rosemary, you're probably known as the smartest family office investor in New York. I think that's really true. How should folks think about the best place on the balance sheet to deploy their capital in regards to debt facilities, equity, prep, things of that nature in order to have the most positive impact?

Rosemary Sagar: (15:10)
We look at all the alternatives, basically. We have a very fundamental process. So we look for the sustainable performance and through that lens, even before impact became a thing, we would avoid any negative impact because by definition it's not sustainable. I mean, that's our main assumption, so it would be screened out. Going back probably 15 plus years. We have invested in a variety of strategies that have positive impact and actually, several of the best impact is on the lending side, on the credit side. So we're in two SBIC funds and that's helping smaller businesses that wouldn't have access to financing, otherwise. And it is highly profitable too. The best case, I mean, our Holy Grail is we want to have higher returns, while making positive impact in our investments and then have even more funds to then deploy in donations and have an another whammy on the same play so to speak.

Steve Saltzstein: (16:34)
Right.

Rosemary Sagar: (16:35)
That's the [crosstalk 00:16:35].

Steve Saltzstein: (16:35)
So the ends justifies the means, so to speak.

Rosemary Sagar: (16:38)
Yeah, but I have to say, I think that ... I hate to generalize, but it's probably in the direct investments that you have the biggest bang for the buck. So we have invested in a company that got breakthrough status for a medical device that helps in oncology surgery and basically highlights every last cancer cell during surgery and allows clean margins, reduces the need for a second surgery by more than 40% and that sort of thing. So we're expecting a very positive outcome for the exit. And in the meantime, we're basically changing the future for so many cancer patients. And ultimately, all our proceeds are going to get donated.

Steve Saltzstein: (17:36)
I think I showed you that deal.

Rosemary Sagar: (17:40)
I showed you that one.

Steve Saltzstein: (17:41)
Fair enough, fair enough. Matt, you're kind of playing both sides in the sense that you have a family office and you have a fund. So where do you think you can make the most positive change? Is it through direct investments from the family office or is it in some sort of LP structure?

Matt Salloway: (17:59)
Well, I take a very holistic approach. I don't think that there's an answer that one is better than the other. I think in unity, we're able to do a lot more. And we started this fund because we had such a strong family office infrastructure. We were investing in tech companies in the US and bringing them into the Middle East. And we were doing that also for our own returns. It wasn't just impact. The fund came about because we were doing, I think, fairly well. And we partnered with some close colleagues of ours in Japan, who were doing the same thing, bringing technology to Japan. And we felt, if we combine this ecosystem, it would be probably one of the most unique. I mean, being able to bring tech companies into Japan and Saudi. Japan being the third largest economy, Saudi being one of the largest economies in the Gulf. We felt like that would really have a positive impact, not only on our portfolio, but also on the world, the way that we're trying to bring together. I think it's a combination of both, is the answer. If that makes sense.

Thomas Haug: (19:06)
And Steve, if I could just make a quick comment. Most of the people that are here that know the trail of how Aspen Tree has evolved. I was very good at selecting managers and selecting professionals that knew how to run investment portfolios. And I think there very much is a place for that. And just because you're hearing more and more today about family office, co-investments and collaboration. Especially, in and surrounding the impact space, I think there very much is a place for managed portfolios and at certain points, it's a good thing to leave it up to the professionals.

Steve Saltzstein: (19:50)
Tom, let me ask a follow-up question, which is, today, now more than ever, there are a myriad of different financial structures and sectors within the sector that you can take advantage of. I mean, you can get involved in impact through EV, through water generation, through diversity and inclusion, but you can also do it through a SPAC, through bonds, whatever it might be. How should a family office think about kind of that giant spectrum of opportunities?

Thomas Haug: (20:20)
So I think it really comes up to their investment thesis and what their overall portfolio construction looks like outside of the impact space. If a family has a lot of exposure to a certain sector, but they are still looking to make a philanthropic portion of their portfolio. I think it's important to just make sure that there's not too much overlap when you say, maybe exercising SPAC opportunities, which we've heard tons about, or doing some sort of more public offering. When you think of impact investing recently, I think we think about private investments. We think of private companies, we think of funds, but there are plenty of public vehicles that you can make an impact and exercise investments through.

Steve Saltzstein: (21:15)
How do you guys ... And just open it up to all of you. How do you guys think about the concept of opting out versus opting in? And what I mean by opting in is, if you look at Engine No. 1, which is this small hedge fund that recently got three board seats on Exxon's board and they did that all under the auspices of hoping to change their policy on climate change. It couldn't be more activists versus folks who just basically say like, "All right, I'm going to completely stay out of investing in oil and gas because it's increasing greenhouse gases."

Thomas Haug: (21:46)
Steve, I'm going to make one comment and then turn it over to the panel. So in that scenario, if you look at that, they took one fifth of the company's board seats. And I think there is going to be a very positive change surrounding that. That's big, I mean, three board seats out of what, 15.

Steve Saltzstein: (22:08)
Yeah.

Thomas Haug: (22:09)
Yeah.

Noel Pacarro Brown: (22:10)
I see this as an opportunity for influence and ultimately, usually that's the investment, but now you can have additional influence. And so for us, it's been a way to help even the younger investors. The next generation get really engaged because oftentimes, they don't know what it is to feel power and influence quite yet. But in this conversation around, and we talk to them about the group, As You Sow and proxy voting and shareholder engagements for the public side, it starts to come alive. And so it to me, is the somewhat democratization of the capital markets, because every investor, not just those with the most capital can feel that their vote counts and it's going to be doing something.

Noel Pacarro Brown: (22:53)
So we love that conversation, but we would never impose it. I do have clients who live in the rainforest in Hawaii and say, "I'm a passive person have discreet. I don't want my name on anything." But have the asset managers vote and do my proxy voting.

Matt Salloway: (23:11)
I'm sorry, I would add one other thing. And I think, the question gets to the point of how impact has really become mainstream in some ways. I mean, we participated in 2015 in an impact investment conference at Harvard University, they do a great job. I'll give them a plug, James Gifford and Falco, who I think are two of the leaders in impact. We brought together some of the leading families, we talked about, how next generation families can get more involved in impact. And it was so much more limited. Now, every bank has an impact officer. There's a lot more of these funds, there's these metrics. Obviously, you have to make sure, if there are people in the audience that are looking to get into impact, you have to make sure that there's real teeth to the screening and what people are saying. But I think, at the end of the day, it's amazing how far we've come and how much there's been a push for the entire industry.

Rosemary Sagar: (24:17)
I might add also, I think back to your question. I think activism is a very essential ingredient for having impact, but I think the main difference probably between the opting in, opting out, is the timescale of change because being activists is hopefully going to accelerate the pace of change dramatically versus opting out and withholding capital and funding from undesirable behavior. So that's how I view it.

Steve Saltzstein: (24:49)
Are family offices and ultra high net worths, are they looking at climate change as a risk factor when they're considering making allocations out of the portfolio?

Noel Pacarro Brown: (24:59)
Absolutely. Yeah. I mean, at least for our investors, for an asset manager that doesn't even consider it. They say, "How do you risk manage?" It's just very obvious. Of course, I'm from Hawaii. So we live on an island and I do work on the West Coast, so we're seeing it real time. It's our lived experience. And so to not consider that, when you're managing capital seems like, what world are you in? So no, it's not just risk, it's opportunity. So it's one thing to be a responsible corporation. It's another to actually create solutions. And so I think when it comes to family offices that are leading the charge, like some of the folks here, they get to be slightly more innovative and be the tip of the spear, which then creates opportunities that are scalable for the rest of everyone else to participate in.

Noel Pacarro Brown: (25:47)
But those innovative solutions start with that private investment, oftentimes not all have access to. So we're really leaning on the folks who can, to make those investments, so that we can follow suit and bring more capital to the opportunity.

Steve Saltzstein: (26:03)
Well, do you think, because your business is Hawaii, Oregon, and California.

Noel Pacarro Brown: (26:10)
Yeah, mostly.

Steve Saltzstein: (26:11)
Do you feel that there's kind of an East Coast, West Coast thing, when it comes to the recognition and real application of impact investing?

Noel Pacarro Brown: (26:19)
Yes and no. I mean, we find kindred spirits here in the city and they've been amazing. This is going to be a little bit of a fan girl moment, but when I heard Justin Rockefeller speak, it was like, "Oh, yes. Absolutely." He gets it. He's got friends who get it and he's not from the West Coast. So no, I think that absolutely in Silicon Valley, there's a focus on innovation. There's a focus on what's going to be happening 10, 20 years from now. And so that type of thinking and creativity is just a beautiful environment to be having these types of conversations around impact solutions. Not to mention, I think people are a little more connected. I don't want to generalize, but most part, connected to nature and the effects of climate. And also, there is more focus on social justice in these hubs like San Francisco, LA, Seattle.

Noel Pacarro Brown: (27:07)
So I think the conversation is, it's not like learning a foreign language. It's definitely, everyone's speaking in this way. And so I'm excited to be able to have our business there and serve the families, we do.

Steve Saltzstein: (27:22)
Tom, I'd venture to say, no one in this room knows more family offices than you do. Do you hear from them, or do they reflect thinking about impact investing differently based on where they're living in the country?

Thomas Haug: (27:42)
You gave me a very tough question, if you think of California emissions and you think of lowering greenhouse gases and environmental, obviously you think of California. You think of the West Coast, I think that has changed. If you think of, Shane who we had here yesterday, he's dedicated his life and invested a lot of money into the EV space to lower greenhouse gas emissions. There are other companies that are New York-based that-

Steve Saltzstein: (28:18)
By the way, just to be clear, that's Shane McMahon from the McMahon family in Connecticut that founded WWE and WWF.

Thomas Haug: (28:28)
Yeah, if you look at some other companies that I work with, their mission is to lower greenhouse gas emissions. They are based in New York and Colorado. I do think, across the country, people have realized that lowering emissions and raising standards is very important, when you think about the current administration's mission to plug leaking wellheads and focus on alternative fuel sources and everything else. I think that's something that spans across the country at this point. And then when you look at technological advancement that drives most of the impact today, New York is a hub, Seattle is a hub, California's a hub. The Southeast is becoming a hub. So think it is pretty broad, in my opinion.

Steve Saltzstein: (29:29)
Matt, you really put your money where your mouth is, and not only with GSI, but you also are a film producer and the common theme in your films is social justice, diversity and inclusion. I'd be surprised, if anybody else in this room has really done more for their mission then you have. Can you just talk about, what you're doing with, with producing? You're a polymath, by the way. He's an attorney, he runs this great family office. He's got a fund, I don't know, just got engaged and he's an executive producer or producer on all these films. Can you just talk about that.

Matt Salloway: (30:13)
Thank you. I think for that, I'm going to have to put you in the next film.

Steve Saltzstein: (30:15)
Exactly.

Matt Salloway: (30:19)
Just to combine worlds, the first female Saudi director made a ... I think she spoke a few years ago and she said, "Art can really take hold of you. It can open your mind." I've always had a passion for art and film as a vehicle to change the way we think, to educate, to inspire. And again, we try to make commercial films. It's not just about making a film solely for the message. It's a combination similar to what we do with the family office and the fund, but I've been fortunate to be part of over 10 films. Our most recent film is called, Worth. It's the story of Ken Feinberg, who was the 911 special master. He was really tasked with the role of determining the value of human life. And obviously, it was a transformation as he went from kind of very matter of fact, trying to figure out a formula to really understanding and becoming so much more empathic and going through a transformation to understand what the families were going through and to understand what our worth is in humanity, regardless of what we do and how much we make. We're all in a sense the same.

Matt Salloway: (31:49)
And so we were fortunate, that came out ... That's on Netflix. If everyone wants to check out Michael Keaton plays, Ken and Stanley Tucci plays the other lead. We were fortunate to be part of the Butler, which was a civil rights film. And for me, that was a passion. My mother was very involved with civil rights. So a lot of these movies I think can make a real difference in the way we think about the world and that's the way we also approach our investments in technology, in the family office. How can we, as I said, at the very beginning, leave the world better than when we found it.

Thomas Haug: (32:24)
And Matt, I would like to personally thank you for the last film you produced, as a 911 rescue and recovery worker coming up on 20 years this year. It's heavy in a lot of our hearts and you released that film at the right time and I really appreciate it to keep the memories alive.

Matt Salloway: (32:43)
Absolutely. Thank you for your service.

Noel Pacarro Brown: (32:46)
I guess I would offer that those same stories are embedded in the families that we serve. So a lot of them created wealth that may have had implications that they didn't expect, whether they created greater inequality, or they actually created some part in the climate crisis. So what I see, is this great opportunity to bring family back together, to go back to the source of the wealth, understanding what was done and say, "Okay, and now what can we do with it?" And so it becomes this point of healing often and also inspiration for the next generation, because so many times when we see with families that have created enormous amounts of wealth, the children become kind of the shadow of that established wealth. And you try to find ways to engage them in order to not live a toxic type of scenario, just by pure physics of that experience.

Noel Pacarro Brown: (33:41)
And it's this conversation around impact investing, where we get them into talking about what can we do about this family legacy? Which yes, it started in this way, but now we're redefining it. And so I see this just like your work in film. I feel like this is our mini stage to help the families that we're working with.

Steve Saltzstein: (34:03)
However, sometimes impact investing can alienate people or just the concept of it. Some people use the term global warming, some people use the term climate change and certain people get very sensitive about that. And I'm just wondering, if impact investing can hurt your co-investment relationships. I mean, a lot of times, and I'm not talking about where I am on the political spectrum, but a lot of times I sit in a room and I just keep my mouth shut. I'm just curious, have you seen that at all? Because certainly look, there's a lot of red state families and blue state families. Do you see, or at any times feel alienated by whatever the agenda of the family office is?

Matt Salloway: (34:58)
I don't know if this addresses your question, but we look at a lot of investments as a family office and we consider ourselves impact investors. Do we lead with that when ... Probably not, but we're returns driven investors. If someone shares a fund with us, that is an impact investment, are we skeptical? Is there a question whether that will still have a returns priority? I think five years ago, there might've been more of that stigma. I think it's changed. I think the way that we look at impact and the way that families are approaching it and especially with technology, I mean the Yale endowment is now putting over 20% of their portfolio into venture. Whether you agree or don't agree, there's so much capital going in, but that's the gold standard of portfolio allocation. They're putting 20%.

Matt Salloway: (35:59)
So there's a lot more opportunities to do impact investments, maybe not your traditional, just a clean energy or all these metrics. But I think because of the amount of sort of technology opportunities and the way the market is, there's more and more opportunities there to become active.

Steve Saltzstein: (36:20)
Rosemary, can you talk a little bit about co-investment relationships, as a family office, how do you develop them? Who do you trust, et cetera?

Rosemary Sagar: (36:31)
Well, we've been doing it long enough that we have a good network between Mark and myself. We have tended to go for the situations, where we have a personal relationship from the past or whatever, and we have a high comfort level. That's what it boils down to. We like direct investing, but we don't do a lot of it because we're a very lean team and you really have to be on top of those investments. You have to have a champion. So co-investing has been the better way to proceed because then you're making sure that there is good brains purely focused on that investment and nothing else. So that's been our preferred route. And at the same time also, I mean, we're a 100% invested in alternatives, which by definition are very liquid. And when you get into PE structured investments and venture and whatever. Yeah, we just don't do 10 year horizons. We don't have the patience for that because we have to produce donations all the time.

Rosemary Sagar: (37:45)
So doing co-investments has also been a way for us to shorten that time period and shorten the duration of the investment, because that way by the time we co-invest in a particular investment generally, at a later series, we're closer to exit and much better transparency, so the risk goes down. Typically, it'll be lower multiple at that stage, but it'll be a higher IRR.

Steve Saltzstein: (38:12)
Right.

Rosemary Sagar: (38:15)
That's kind of our sweet spot. So we've done that different ways. A recent investment of ours was actually in a co-investment fund of a venture capital fund of funds firm on the West Coast. I mean, there's a particular angle to it because they're mainly ... A lot of the GP and a lot of the LPs are athletes that actually are become preferred LPs in individual investments because they test out the products in consumer and wellness and so on and therefore, their preferred. And we were able to get into the final round before the close of this co-investment fund, where about 40% was already invested and with some exits imminent. So we managed to shorten that timeframe. We're already getting distributions, returns impact because of the underlying investments and a shorter duration.

Steve Saltzstein: (39:25)
Does anyone on the panel look at carbon credits? Because there are a number of technologies out there that have no real fundamental business model, other than carbon credits. For instance, I don't know if you saw last week in the Journal, there was an article about, I'll call it an unfactory, in Iceland that was pulling carbon out of the air. The only way that they're going to have a sustainable business model is carbon credits. So I'm just curious if, folks are looking at that.

Noel Pacarro Brown: (39:54)
I belong to a big firm on purpose, because I would rather have those analysts that are focused on that, give me the report to know, and I think it's still young and it's still an exciting opportunity that we want a little more research on before we allocate any funds. Yeah.

Thomas Haug: (40:14)
I'll just add, we've heard a lot in recent days about carbon credits, but there has been very little guidance. I do think there will be families that will take advantage of carbon credits because it works for them. But I think a lot of family foundations and families will also look for a returns based approach. They'll proceed with a philanthropic endeavor, if there's zero return or zero alpha being generated, you have to have a need for those carbon credits.

Steve Saltzstein: (40:54)
Right. I think we have time for a couple of questions from the audience, if anyone would like to ask one.

Speaker 6: (41:12)
What are you're ... Oh, okay. What are your thoughts also, on these kind of absurd cash yields that some of these crypto corporations have been promising that are collateralized, actually over collateralized in crypto assets like Bitcoin?

Noel Pacarro Brown: (41:27)
So you're speaking to the ESG impact investing panel.

Speaker 6: (41:30)
Right.

Noel Pacarro Brown: (41:30)
And so I don't think any one of us is a crypto expert. However, on our team, we did hire a partner who came from the digital currency world because we do see it as something we want to be knowledgeable about and we want to have network and some real expertise. So I wish I had her with me on this stage, but I would say, that the concern for us is really the climate effect and trying to mitigate and understand the actual trade-off between the use of digital currency and the impact it has on the climate.

Rosemary Sagar: (42:07)
I could add our perspective to that. Crypto has been very criticized for being environmentally unfriendly and huge consumer of energy and so on. So we have made only one investment, a recent investment in the space, and that's actually a fund that focuses on like the pickaxes and shovels in terms of the infrastructure required for cryptocurrencies. And the impact perspective is that they're making it more efficient and figuring out ways to use less energy and therefore, having an indirect impact in addition to hopefully being profitable.

Steve Saltzstein: (42:50)
Rosemary, look at El Salvador. El Salvador recently adopted crypto as their national currency or one of their national currencies. I don't know, is it possible that crypto perhaps can lift some of these developing nations, giving them kind of an alternative to either the dollar or whatever?

Rosemary Sagar: (43:12)
Yeah. Again, this comes to the elastic concept of impact because yes, it could uplift the masses, if it gets inflation under control and money supply and so on and therefore, helps to preserve the value of the currency. Yes. Again, it's sort of how far do you go on the definition of impact?

Steve Saltzstein: (43:39)
Right.

Thomas Haug: (43:39)
And there's a reason there has been so much focus on crypto during this conference and backstage I was talking to John and Jerry and I would encourage you to grab John's ear for a few minutes. In the case of El Salvador, I definitely think there is a net benefit and I think there will be a net benefit globally, but how do you frame that into impact? I guess that's ... We're a little confused.

Rosemary Sagar: (44:07)
I think there's a great argument to be made for impact in terms of the use of blockchain to protect farmers, to protect ... That sort of thing, prevent theft and increased security. All of that.

Speaker 7: (44:22)
Hi. I have a question. It's a little bit off topic, but we're sort of in a heightened regulatory environment, family offices, as an investment unit. Are there any risks to regulation? I don't know, if there are any lawyers on the panel.

Steve Saltzstein: (44:49)
I'll take that. I'm talking on a panel in a couple of weeks with Jeffries and Senator Corker and just about that, the new proposed regulation of family offices. Look, the number of family offices has skyrocketed and frankly, the investment power of family offices has multiplied tenfold over just the last five years. You never want to regulate things generally, but there also is a discussion to be had about, how much power they're wielding and do things just at least need to be looked at? I don't think that, that's absurd at all. I think we have time for one last question.

Speaker 8: (45:41)
Sorry.

Speaker 9: (45:47)
... quantitative metrics to get an idea, to measure the impact, if you could.

Noel Pacarro Brown: (45:55)
Right. I mean, we could be here all day. Thank you for that question. That's the beauty of the nonfinancial data. So Europe has its own measure, there's the UN Sustainability Development Goals. There's Sustainalytics, there's MSCI with buckets of analysts and they all have their own ratings. What we've done is basically triangulated data between three of our favorite data providers. And this is me, as in Morgan Stanley, we've had teams of people looking at what's the best to own. And so only through triangulating a database that's really focused on equity. One that's focused on carbon emissions. And one that's kind of broadly looking at sustainability. Then we can get a measure of how aligned a person's portfolio is to their values. So we've actually had to use multiple databases to come at some level of a relative marker. I don't know, if anyone else has other measures.

Steve Saltzstein: (46:51)
The last thing I'll say is that, the SDG criteria is being used as a way to give favorable treatment for impact investing through charging lower bond yields to folks that are ESG focused. So I think it's interesting anyway, it seems to be kind of a burgeoning area. I think we're out of time, unfortunately, but I want to thank our panel and thank you very much for joining us. Thank you all.

Rosemary Sagar: (47:22)
Thank you.

Building Innovative Crypto Trading Infrastructure | #SALTNY

Building Innovative Crypto Trading Infrastructure with John Peurifoy, Co-Founder & Chief Executive Officer, Floating Point Group. Raghu Yarlagadda, Co-Founder & Chief Executive Officer, FalconX. Basil Al Askari, Co-Founder & Chief Executive Officer, MidChains. Kapil Rathi, Co-Founder & Chief Executive Officer, CrossTower.

Moderated by Michael Bodley, Editor-in-Chief, TheStreet Crypto.

Powered by RedCircle

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SPEAKERS

John Peurifoy

Co-Founder & Chief Executive Officer

Floating Point Group

FULL BIO

Raghu Yarlagadda

Co-Founder & Chief Executive Officer

FalconX

FULL BIO

Basil Al Askari

Co-Founder & Chief Executive Officer

MidChains

FULL BIO

Kapil Rathi

Co-Founder & Chief Executive Officer

CrossTower

FULL BIO

MODERATOR

Michael Bodley

Editor-in-Chief

TheStreet Crypto

FULL BIO

TIMESTAMPS

EPISODE TRANSCRIPT

Michael Bodley: (00:07)
Awesome. Well, thanks so much for being here. Good to see some familiar faces in the crowd. Just a quick introduction again, we've got John from Floating Point here, Ragu from Falcon X, Bazel from Mitchains, and we've got Kapul from CrossTower. So, bit of background about myself. I'm a former hedge fund journalist who fell down the crypto rabbit hole at some point like everyone else. And I saw more and more portfolio managers at places like Millennium, Point72 had nice cushy jobs leaving to get into crypto, going back to 2017. I'm like, "What are they doing? Why are they doing this?" And eventually I decided to try and play some catch up. So, with that said, I was hoping that all of you could go down the line and kind of give, to use some superhero talk, your crypto origin story. What got you into the space?

John Peurifoy: (00:55)
More than happy to take it first. Although Michael, I can't quite compete with the seeing other people and jumping in, because I think that was the origin of how I got in. So, previously I was a researcher at MIT. I did a lot of work in data analytics and things like that. So, I did a lot of work in taking large sets of data, extracting patterns from them, analyzing trends and things like that. And I solved various problems in physics with that. But numbers are numbers. And if you've ever seen the movie Margin Call, there's a good quote, says the money's a little better in finance than rocket science. And so I joined the crypto space back in 2017, initially working as a fund and then previously transitioned to kind of being more of a services provider, doing execution settlement, things like that.

Raghu Yarlagadda: (01:36)
Great. And I started my career as an engineer, specialized in machine learning. After that I'm a senior entrepreneur. Started two companies. Got very lucky with both of them. Then someone gave me terrible advice. Engineers must go to business school. So, went to Harvard business school. Right after that, I joined Google. At Google I led a product line called Chromebooks. Did that for three years. Got incredibly lucky. It's one of the fastest platforms in Google in terms of revenue growth. Towards the later part of Google, some of the brightest engineers that I know were not shutting up about blockchain. And for me as an engineer, blockchain is probably one of the most inefficient databases that's out there. Say, "What are you talking about?"

Raghu Yarlagadda: (02:19)
But all my life, I chased the brightest engineers on the planet. So, I have nothing to lose and I partnered with them and we started jamming ideas. After a year of working with some of the brightest engineers on the planet, I had no question in my mind that a lot of world's value will be tokenized. Starting with crypto. We are seeing stable coins in the form of Fiat getting tokenized in the form of stable coins. Eventually fortune find the tokens. And CBDCs. So, super excited to basically jump on that mega trend. So, started building Falcon X about three and a half years back.

Basil Al Askari: (02:56)
Thanks everybody for having me here today. It's a real honor to kind of be around these role models in the space here. So Bazel [inaudible 00:03:04]. I think I'm the only guy on the panel here whose business is originally from Abu Dhabi, UAE. And previously I was in private equity. I looked at direct investments in the financial services sector. Bitcoin and crypto investing kind of caught my eye in 2016, 2017 on a personal level. And really just wanted to get involved from the perspective of seeing how we could get this industry to Abu Dhabi and to see how it fits in the space there. And three years later, we've got a licensed trading and custody venue.

Kapil Rathi: (03:40)
Hi guys. My name is [Kapul Rachi 00:03:41] . Thank you for having me here. My journey, I think I'm probably the most different one among this panel coming from a traditional wall street space. I started my journey on the floor of New York Stock Exchange. Had a technology background, but after spending seven, eight months on the floor of New York Stock Exchange in 2003, I realized that this yelling and screaming and trading is not going to last that long. So, I pivoted towards electronic trading. I helped build couple of electronic options. Exchanges, IIC, bats, then ended up at CVOE. And then in 2016 and '17, I got involved into a few projects at CBOE at bats, the first ETF on Bitcoin, the future's on Bitcoin. And this sort of kind of hit me that what electronic trading has done to the traditional trading market, the way we knew floor exchanges. Finance generally has not been disrupted by technology.

Kapil Rathi: (04:46)
We know Apple, Netflix, they have been disrupting many other industries, but I think the banks have done an amazing job in protecting their turf. They know how to play that regulatory angle. I think electronic trading is probably the only space till now that has touched the finance industry and digital asset is probably going to be the next innovation that has the power to disrupt. So, for me, it was almost like a dejavu moment. I got to jump in this. I'm not going to be one of the floor traders sitting on the other side. Here I am in this rabbit hole.

Michael Bodley: (05:24)
So, crypto gets a lot of headlines where we're all talking about the institutionalization of the space. Right? What Wall Street bank is going to be jumping in in next? What kind of traditional hedge fund? But then you stick a step back and you look at the flows and it's still mostly dominated by retail investors. So, just kind of throwing out for the room a two part question here, which is the first, would you agree with that categorization that it's still a retail space? And when you're building your trading platforms, these guys have some of the best trading platforms in the business, how do you cater to both retail and institutional investors? Because they have both very different needs in terms of order flow, in terms of best execution, even in terms of counterparties. Right?

John Peurifoy: (06:04)
So, I'm happy to maybe take the first part and then I'll defer to the experts for the second. So, I agree with you. Retail dominates the space. Right? You can see that in public filings, you can see this in analysis, you can see this in just general discourse. Right? You can look at the Coinbase filings and still the majority of their volume's coming from the retail. And that's not assumed to be kind of dominated by institution until 2024, 2025. But I think the important comment to say about the institutional side is I would kind of split institutions a little bit. I think it's a little bit unfair to generally categorize them. You're definitely seeing a lot of institutions in crypto. Right? You're seeing Renaissance. You're seeing HFT firms. You're seeing a lot of groups. But really I think a lot of that's more prop trading capital, more family office, things like that where their regulatory burdens are lower. Right?

John Peurifoy: (06:47)
Their mandates are more broad. Their regulatory filings are less stringent. More of the actual more say pension funds or insurance, things like that, I think that's definitely still taking time getting into the space. And you're seeing that. Right? And in particular you're almost seeing them choose different ways of allocating that. Right? You saw that with [Andreson's 00:07:05] raise of 2.2. You saw that with [TenT's 00:07:05] raise of 750 million. Right? You're seeing them almost allocate to kind of funds of funds or more crypto native funds. And that's how they're getting that exposure. So, I think it's definitely true. Retail dominates the space. It will for some time. But institutions, I think, it's more interesting to kind of split it up and think about how are they thinking about the allocation side. But maybe the second question in terms of technology, be curious to you guys' thoughts.

Raghu Yarlagadda: (07:28)
Yeah. In terms of the split, I do think institutions are almost at par with retail. Now the measurement systems, if you look at it, the coin market caps and the exchange flows, that is one part of the overall flows. There is a lot of institutional data pool trading that's happening. Over the OTC desk and the rest of the places. So, I think about half the volume in the space is actually institutional. And the second very interesting artifact is institutional is not only half, but it's growing incredibly fast. If you look at the amount of volumes on Binance, the most recent quote that I heard is it's about 60, 70% is institutional market makers that are on there. Now the question is, yeah, it's a small collaboration whether retail or institution is bigger. Institutional is growing incredibly fast. That has proven over the last three years.

Raghu Yarlagadda: (08:19)
And in terms of what type of institutions are coming, there is a sea change in terms of the type of institutions. When we first started the company for two years, it was quote unquote the crypto natives, AKA the hedge funds that are built in crypto, buy crypto, and only crypto. From the last year, especially May 2020 onwards, we went from 80% crypto native on Falcon X, which is the largest institution platform, to about 50% is crypto native and 50% is traditional institutions. So, that's a huge change. Now the last part, before we go to the technology side of things, why are institutions coming? I typically hear three things.

Raghu Yarlagadda: (08:58)
The first and foremost, Bitcoin being an inflationary hedge. That is something that is very important for institutions, especially as the world is printing a lot of money. The second thing is uncolation with the traditional asset classes. The third thing is the yield generation. When your banks are paying zero on 40 basis points, crypto in different form factors is paying about 400 to 600 basis points simply because the volatility is there so the traders are willing to take that money and fund their positions. As a result, the interest rate of the yield generation is very high. As a result, institutional growth is happening, but I completely agree with you guys that it's debatable which is big.

Basil Al Askari: (09:38)
I definitely agree with all the points raised and maybe to add further to that, what at least we're starting to see is kind of a convergence of interest from institutional retail. Having to cater to both types of investors from the same venue to maximize kind of liquidity exposure. And, at least as an international farm, what we're trying to as well build up with our infrastructure is to be able to offer a window for international institutions to get exposure to this very big kind of retail investor base that we know exists. And that at least dominates in my part of the world for now.

Kapil Rathi: (10:14)
So, I'll probably take a little positive view. I think 2017 bull run was all about retail. 2020 bull run, '21 bull run is about institution. What we have seen, and for those who don't know CrossTower, we are an institutional focus, a Wall Street grid infrastructure exchange. When institutions in 2020 started coming, they quickly noticed that there are certain fundamental gap in this infrastructure. The prices to trade are still very high. The market is really fragmented. There is no best execution benchmark. The products that institutions need to come in this market space, trade financing, portfolio margining, these products don't really exist. Investment products are really limited. They're very opaque. The best you can do is gray scale, which trades 20% up and 20% down. So, I think institution demand started happening in 2020. The infrastructure probably was not ready for this institution demand.

Kapil Rathi: (11:22)
In last one and a half year, operators like Falcon X, us, we have started kind of satisfying the demand. And that has helped explode the growth of institution. If I break it into two part institution as market makers, high frequency market makers, they didn't have a place to go with the Coinbases and the Krakens of the world. Now they have platform where they can actually manage risk properly. Same thing on the institution side. The custody has always been a problem. Now we have qualified custodians. So, I think in the last one and a half year, the story is all about institution. Retail honestly has moved on beyond the CFI. They are now in DeFi. And that's one area where I think institution is still kind of lagging behind.

Michael Bodley: (12:12)
Custody is a really important aspect of this. Right? Just convincing institutions that you are a good, safe place to store their assets. Many of which may not understand how to do that themselves. So, I'm wondering when you all are offering custodial solutions or you're talking to counterparties who might offer them, how do you vet that? And then what's the educational piece where you're going after potential business development, potential new clients, and convincing them that this is the right way to go about doing it?

Kapil Rathi: (12:42)
Yeah. I'll take this, John, maybe in the reverse order from here. Last week, two weeks ago, we were in Texas. We were presenting in front of 400 pension funds. And the type of cautions... We actually asked the question, "Anybody here invest in crypto?" Literally five hands went up. So, the fire fighters, policemen, these sort of standard fire pension funds, I think they are still craving for a lot of education. There were some really fundamental questions about how do I know it's not illegal. A big portion of traditional large asset group is still skeptical about this asset class.

Kapil Rathi: (13:39)
We actually just participated in a survey with the asset managers, endowments, pension funds, they highlighted three main issues. Why they are sitting on the sideline. Number one is education. They still are not clear of what this a asset class is able to. So, us as an industry, we have to do a lot of work to educate pension funds and endowments. Number two is regulatory uncertainty. I think until we have a clarity from DC, we will see some of these large asset managers and pension funds sitting on the sideline. And then number three is operational risk. Managing private keys, managing issues related to cyber security. They are front and center of these institutions. They are still looking to kind of find the solutions.

Kapil Rathi: (14:34)
Funds like us try to kind of ease it out for them. We create wrapper for them to get exposure to this asset class, without worrying about these type of risks. We have created products that are very similar to other products they are investing so they're getting market exposure but they're not worried about the regulatory exposure or an operational exposure. So, there's a lot of education that still need to do. There's an opportunity to innovate products, to bring institution in this system.

Basil Al Askari: (15:04)
Definitely I agree with that. I think the goal is to get institutions interested in acquiring spot exposure to the asset. And I think that's been less popular because of all the reasons that that were just raised. Where I kind of see things moving in a different order, from at least a Middle East perspective, is that regulations seem to have come first for us. And having now this very clear framework, the next step is to then educate the general market on how we're doing things within the regulatory framework. That this regulatory framework exists and that we are operating under it and heavily scrutinized by it in order to provide that comfort. And sort of with that comes the technology governance, governance associated with getting these licenses, and also the very institutionalized workflows and processes when it comes to custody in particular.

Raghu Yarlagadda: (16:02)
Yeah. I think if you look at what institutions care about, the first thing is custody. Trading credit. So, these are three things that institutions care about. Custody. I need access to the safest custodian possible, which gives me the ability to diversify my portfolio. It's not just about Bitcoin anymore. That was 2017. It's about Bitcoin, Ethereum, and a lot of people are talking about a lot of layer one solutions similar to Ethereum. So, talking about the custody part of it, 2017, it was a nightmare. Why is it a nightmare? It actually very difficult, fundamental problems solving crypto. You lose your private keys, you lose your money. It's as simple as that. That was 2017. From 2017 to 2020, one of the fundamental shift in the ecosystem is how seamless custody has picked up. Right? The reason why it became seamless is you can not simply go to one custodian and then park all your assets there.

Raghu Yarlagadda: (16:56)
That was 2017, 2016. Now what some of the biggest hedge funds on the planet, what they're doing is whether it's Falcon X or players like anyone on this panel, they come to us and they look for how do we think about my custody strategy. From that standpoint, we understand whether they are thinking about Bitcoin and Ethereum only, or are they going to be much more diversified? So, what we are doing is based on their needs, we help them pass to custody solutions. Sometimes to cater to Bitcoin specifically, sometimes to cater to Ethereum, Solana, and some of these other tokens. So, lot of hedge funds are now taking up multi custodian path through our white glove service providers like Falcon X or any of those brokerages in the market. As a result, it became much, much more seamless. So, in 2021, if you were thinking about [assets 00:17:47] , custody is not the first thing that you think anymore. That was 2017.

Raghu Yarlagadda: (17:51)
And I think that's going to become far more seamless because security in the space took a leap frog in terms of what happened over the last three years. If you look at the number of exchange hacks, they're actually coming down over a period of time. So, that's a good move because all the players are collaborating on the back. We see a sense of security hack anywhere in the industry, all of us are talking in terms of how to improve the industry going forward. So, custody, I think, it's a largely solved problem, number one. Number two, it's the approach to custody these days is multi custodian footprint where you're not just relying on one custodian through whoever your brokerage is.

John Peurifoy: (18:30)
Yeah. I think Ragu's point on this is actually really good. I'm really glad you asked this question. Right? I think it's something that I'm really passionate about. And if you think about it, crypto solves two of the hardest problems in society. Right? It solves data privacy and it solves worker automation. And I think those are really fundamental problems, but the question is why don't you see crypto see larger adoption? Or why do you see crypto being more so used for speculation reasons instead of the others? I think the reality is it's a different framework. Right? Crypto is a bare asset. That is a very foreign concept. Right? That is a reality and a factuality, which both empowers it to be such a disruptive technology, but at the same time contains massive risk. Exactly as you were phrasing, if you lose your private keys, you lose your money.

John Peurifoy: (19:06)
And so I think since crypto's a bare asset, it's something that is very top of mind and people talk about a lot. I actually think the point made about kind of the diversification of people on the custodian side, I think it's very fair. Right? That's something that we kind of saw and it's something that we've observed in the space where when you talk to people about custody, it's really a broader conversation about risk. Right? It's really a broader conversation around what are my exposure points? Where can I be vulnerable from a technology side? Where can I be vulnerable from a counterparty side? Where can I be vulnerable from pricing side? And so I think when you start thinking about it in that way, kind of talking about it as a custodial strategy, I think that's actually really beautiful terminology for it. And I think you're right on the technology.

John Peurifoy: (19:42)
And I think what you guys are mentioning on more of the regulation side, I think is very true. Right? In the US, it was pretty crazy when the Office of the Comptroller came out and said, "Yeah, banks can actually start custody in crypto." Right? And you saw that after July of last year, you really saw proliferation across most of the system. And I think that the reality is that while the technical side of this can be well understood. Right? There's technologies like MPC, hot wallet, cold storage. Right? These are things that are well understood. I don't think it's true that they're well understood in the regulatory frameworks. And I don't think they will be for a while. That's why you saw banks coming in with non-deliverable forwards because they can structure them under is does and it's much more straightforward framework. So, in some, I would say I think custody is something top of mind for people.

John Peurifoy: (20:18)
I think when you think about crypto, that is a paradigm shifting idea that is going to be with us for forever. And I think you're always going to see two classes of people say my keys, your keys. Do I keep them here? Do I not? There's always going to be these ideas. Think about it from a custodial strategy, I think it makes a lot of sense if you're an institution. So talk. These are conversations that we have. I assume similar conversations across the rest of the panel. And I think the other side of it is being mindful of the regulation. Right? And being mindful of how that's changing over time, because it's really funny how you were actually mentioning that different places were being more innovative than the US. Because I agree with you. I think actually the US is far behind a lot of that. So anyways, that's how I think about custody. Right? I think this is something top of mind. I think technology is getting there and it's getting pretty good. I think the regulation will take a little bit of time to get there.

Michael Bodley: (20:59)
Branches mean exactly what I was going to ask next, which is regulation. I'm sure everyone saw lots of headlines about the infrastructure bill. Right? Lots of concerns in the US about regulation. So, just the kind of broach the third rail here, do US regulators at the federal level understand cryptocurrencies? And do they understand your businesses?

John Peurifoy: (21:20)
Someone else want to start with this? The blockchain caucus is really cool.

Kapil Rathi: (21:22)
Yeah, I'll go. Of course, after spending 20 years in that regulator world have helped for SCC regulated exchanges working. It takes two years to work with SCC to bring something new. Those who don't know, if you want to build a regulated entity in US for crypto, it's a totally fragmented structure. If you are trading derivatives, it's regulated by CFTC. If you're trading spot, you have to get license from treasury and then you have to get licenses from 50 different states. And most of these states... Forget about the lawyers in DC don't know how fast this blockchain and crypto technology is moving. Expecting a state regulator to understand what is blockchain? What is crypto? I think it's just not fair.

Kapil Rathi: (22:19)
It is really hard to operate a regulated infrastructure in US at this point. And my past experience has told me that regulation has sometimes benefited an industry. I kind of help grew up in the options industry. Equity industry. When reg NMS came in, it brought cost down for customers back in '04, '05. Retail wasn't even trading options. It was only a professional or an asset class for nerds. And then now everybody's trading options. That has a lot to do with regulation, because now we have put together proper investment protection mechanism in place. Those things don't exist in crypto. Overall, I think we need a proper regulatory infrastructure. The current structure is not healthy especially when we are competing with some other nations. Switzerland and Europe is well ahead of us. Let's see where it goes. Of course there is a lot of tussle between SSE and CFTC, but we need to have some proper regulation in this.

Basil Al Askari: (23:37)
I can't really comment necessarily on the situation here, but what I can say is about fragmentation and we look at regulatory fragmentation globally. I don't think that's a unique problem to the jurisdiction here, but it's a global problem. And we're starting to see certain regulators look at the space and how things should be regulated in very different ways. Even in neighboring countries in the Middle East, for example, or neighboring cities in the Middle East that have different free zones. What the takeaway there is that until there's a good precedent for rules to be set and processes to be followed. It's going to be drastically different depending on where you are and which regulator is looking at it before it gets uniform. And I think the uniformity is kind of where we need to be as far as setting up globalized infrastructure.

Raghu Yarlagadda: (24:33)
Yeah. Completely agree with that. Number one, institutions care about regulation. Period. If you expect crypto to be a mainstream asset class, you cannot have crypto without US institutions participating. US institutions will only come if the regulatory clarity is better than where it is. But the amazing news is over the last three years, there was a sea change in terms of how regulators approach crypto. For three reasons. First and foremost, I think this is not as talked as often, but this drives industries. Right? Whether it's internet or e-commerce. The amount of venture funding or the amount of equity funding with all of us that can help us educate regulators and help navigate regulation is one of the most important metrics for an industry to become mainstream. In the early days of internet, this was exactly the problem. People don't know how to process payments. Regulators didn't know either. E-commerce. E-commerce was banned from the country that I come from. India e-commerce was banned.

Raghu Yarlagadda: (25:34)
So, the largest e-commerce company in India was based out of Singapore. So, what happened is in whether it's internet or e-commerce, venture money, getting confident that crypto is the next big thing is the single most important tipping point. And that happened around 2018. If you look at the number of crypto companies and the amount of money that all of us put together raised is staggering them up. So, the first thing that we are going to do with that money is to make sure that we play really well with regulators. So, we are spending a lot of time educating regulators. So, number one, we are using all the venture money to make sure that regulators understand and come up with the framework. Now, once we have the willingness to pay, willingness to do, is there a willingness to do or come to the table from the regulatory standpoint?

Raghu Yarlagadda: (26:25)
Absolutely. Yes. Infrastructure bill definitely was very noisy because of the collapsed timeline that it came with. But the amount of limelight crypto got in a close to a trillion dollar infrastructure bill where 50 billion dollars, or 35 to 50 billion dollars was related to crypto. The amount of limelight crypto got was just incredible. Those conversations are still going. So, what that means is we are actually seeing collaboration from the other side. Number three, regulators also understand that two pressure points if they don't solve regulation for crypto. First is decentralized finance. For those of you in the room who are not familiar with that, this is like finance without any middlemen. What that means is with or without regulators, decentralized finance is just spiking up significantly. So, it's important for regulators to understand that decentralized finance is spiking up so that we better regulate the crypto markets fast enough. Otherwise, a lot more people will transition to decentralized finance.

Raghu Yarlagadda: (27:21)
The second thing is there is competition between countries. There is a massive competition in terms of the global reserve system. The global currency of the future. So, from that standpoint, whether it's China testing its own CBDC or El Salvador legalizing Bitcoin as the legal tender, there is enormous pressure for regulators to move in. I think for the next two to three years. However, I don't think all of this is going to happen in six months. The next two to three years, regulators are going to provide a lot more clarity, which is going to be super helpful for institutional investors. But the one thing that's different from 2017, 2018 to 2020 is most of the hedge funds who are coming, the five or top ten hedge funds are already in crypto. They see this as the future. They're in crypto, they're working with regulators all by themselves. They're also working with industry to navigate this. So, I'm quite optimistic, but definitely at least here in the US, there is a major bridge to cross. I completely agree with you guys. It's fragmented.

John Peurifoy: (28:24)
Yeah. Coindesk has a really good podcast on this where they actually interviewed some of the senators involved with the infrastructure bill. So, if you guys are interested to learn more, a hundred percent highly recommend it. Shout out to the team there who are kind of crafting it. Regulation is fertilizer. Right? That was a really good quote that the CEO of Wisdom Tree once told me. And I think it's really true. Right? The reality is institutions don't want to touch something unless it's regulated. And as we were talking about earlier with Bazel, the reality is that you took three years kind of getting it right with the regulators in order to make sure the institutions were comfortable touching that. Right? Full stop. That makes a lot of sense. And I think that it's certainly true. In the infrastructure bill, particularly, it's quite interesting.

John Peurifoy: (29:00)
Fred Wilson also has a really good quote that says if you consider it back to say when the Internet was coming out. Right? The two big questions were data encryption. This was a foreign concept to people. Is it valid? Is it a safe way to do it? How is on-prem versus cloud? How do these things work? Right? And then the second question was around actually how you do taxation. Right? How does sales tax work state by state? And it's interesting because you really saw a very focused group, both by the private industry at the time, as well as by various consortiums to really educate people about this.

John Peurifoy: (29:29)
And I think you're right, the limelight that crypto got out of the infrastructure bill was actually pretty compelling. Right? What it's argued to generate about 20 billion dollars more in revenue out of it. But the reality is that we probably got more than... I don't know if we got more than 20 billion. 20 billion can buy you a lot, but crypto got outsized exposure unquestionably, and I think it's certainly fair that the fact that the amendment didn't actually get reworked or an amendment got passed. Right? There were two different amendments proposed. One just striking it entirely from the bill. The second actually reworking it to at least give better definitions over what institutions are. Right? That was the big point of contention in the bill was really what is an institution? Are you going to require everyone in crypto to report? Certain groups? How do you kind of play those angles?

John Peurifoy: (30:08)
So, I think with respect to the infrastructure bill, I think it was very exciting because it definitely gave a lot of attention to a lot of the key issues. I think how this question gets solved is I think it gets solved through very dedicated and focused education. And I think it's going to, honestly, this is kind of an issue that it'll be make or break in the next year. It's actually going to probably be really interesting to watch because I think it has the potential to really shape the future. Right? And I think that's the really exciting part. Yeah. And you're exactly right about DeFi. What DeFi is right now at about 80 billion dollars locked in protocols. It was at 20 billion in March. You're seeing a four X gain. It's unquestionable that if people are going to be serious about this space, you have to tackle these questions. So, anyways, those are kind of some of the thoughts on the infrastructure bill and regulation in general.

Michael Bodley: (30:46)
So, as Ragu put it, there's a competition between countries. Right? Who's going to get this done first? Who's going to get this done right? There's also a growing competition for talent. Right? In the space. And I'm wondering, I was talking to an equity trader, who will remain unnamed because he's happy at his current job, earlier today who was saying he's interested in making the jump to a crypto firm. Right? Doesn't know a lot about it. Doesn't know how to trade it. But wants that kind of a seat. So, you all operating growing companies, when you're looking to make a hire, do you care how much crypto experience someone has? Are we at that point in the cycle? Would you be comfortable hiring a talented derivatives trader to help build out your infrastructure from a Wall Street firm? How much is this crypto native versus not argument matter?

John Peurifoy: (31:29)
Yeah. Okay. So, I'll actually give a controversial answer to this. I'd be actually really curious what you guys say. So, we work very much in technology. Right? So, we're building systems like enabling institutions to be able to trade directly on exchanges, enabling institutions to take advantage of things like staking or things like that. Right? These are things that are near and dear to our heart. So, I think the reality is that now in the space, it depends on the role. Right? I think if you're looking for a back-end engineer to build something or you're looking for a front-end engineer to kind of get it done. Yeah, I think that's reasonable. Right? Or you're looking for someone on the op side of the business. I do think it's reasonable on the sales side. And if you're doing roles, building actually on chains themselves, I think those are actually where blockchain experience is starting to be more critical. So, I'd say unquestionably, everyone can still break in. But I do think you're starting to see some of the sea shift, at least in terms of specific roles. Be curious what you guys are saying.

Raghu Yarlagadda: (32:20)
Agreed. I think the most important nuance is by function. If you are thinking about an engineering role, whether you worked on four X, whether you worked on traditional equities or crypto, for the most part, it doesn't matter. A lot of crypto infrastructure today, about 90% of the volume flows on crypto, flows on centralized systems. And these centralized systems are very similar to how you actually architect traditional equity system. So, if you're thinking about a software engineer, there's no issue at all. You need to jump to crypto ASAP because we are hiring. So, there's lot of interest in terms of bringing people from the traditional space so that we don't reinvent the wheel all the time. But exactly as what John pointed out, there are functions where crypto experience is very, very helpful. Sales on the market making side. When you're selling to the projects that are out there, if you're acting like a Goldman Sachs taking Snowflake public, you better understand everything there is to understand about Snowflake. Those places, the crypto experience counts.

Raghu Yarlagadda: (33:24)
But, in summary, as a much more broader statement, crypto is still in the very early stages. We are in the second or third innings of crypto. So, if you're considering or thinking about crypto, now is a good time to jump in because this is going to be the next 10, 20 years of finance. Because what finance really cares about is three things. Right? Can it be truly 24/7? I still can't believe that most of your banks, most of your trading, doesn't work over the weekend. Would you be okay if Google and Facebook doesn't work over the weekend? So, how are we all okay with traditional infrastructure not working 24/7. So, it's not crypto, it's digital assets. And digital assets provide you 24/7. It's truly elastic and it's truly global. And any kind of talent who's excited to basically make these three things happen need to come to Falcon X. We're all hiring. Falcon X is also hiring.

John Peurifoy: (34:11)
Yeah, I was going to ask we're all hiring, I assume. Right? Like very rapidly.

Kapil Rathi: (34:16)
Yeah. Can't wait.

Basil Al Askari: (34:19)
Yeah. So, definitely agree with you guys. It really depends on the role, but I think in general, in the Middle East for example, talent is scarce. Specifically talent with crypto experience. So, I'd say more often than not, we let people break in. Especially when it comes to ops rules. Ops rules, I think, are the easiest for people coming out of traditional finance to kind of readapt themselves and just learn the products and really what they're operating. And it's just workflows at the end of the day. So, fully agree with the rest guys.

Kapil Rathi: (34:51)
Yeah. So, I have sort of kind of two comments to that. Number one, it depends on the company's mission. For someone like us, our mission is to bridge the gap. Bring digital asset to mainstream. Especially we are institution focus. So, for us, the traditional Wall Street talent actually is working out really well. Of course, there is always a demand for tech talent. For a company who's actually building a DeFi protocol, probably the Wall Street talent is not going to be helpful. I think the two main challenges as the operator of am institution focused business, number one, COVID has changed the whole landscape about hiring and talent. You can't really compete with the exchanges or operators in Ukraine or China or in Asia somewhere, because the talent outside of US is much more economical.

Kapil Rathi: (35:55)
So, bring that has been the sort of biggest challenge for us is of course Wall Street demands a pretty good substantial amount of investment if you want to bring that type of talent. And I think overall we are looking at both outside and inside. We actually in fact just launched CrossTower India and we are hiring Wall Street caliber talent from there, not just necessarily technology compliance, regulation, legal. So, any crypto infrastructure you're building, you have to see it as a global. Get a dip into the global talent pool. Just the staying local talent pool is not going to help because you're competing with some really cheap or at least low expensive operators out there.

Michael Bodley: (36:43)
Yeah. Well I think we're up on time. Thank you all so much. Don't forget to drop your resumes off with these guys in the back and we'll see you at the happy hour.

Do We Need a Digital Dollar? The Future of Central Bank Digital Currencies | #SALTNY

Do We Need a Digital Dollar? The Future of Central Bank Digital Currencies with Yaya J. Fanusie, Adjunct Senior Fellow, Center for a New American Security (CNAS). Julia Friedlander, C. Boyden Gray Senior Fellow & Deputy Director of the GeoEconomics Center, Atlantic Council.

Moderated by Michael Greenwald, Director of Digital Asset Education, Tiedemann Advisors.

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SPEAKERS

Yaya J. Fanusie

Adjunct Senior Fellow

Center for a New American Security (CNAS)

FULL BIO

Julia Friedlander

Deputy Director of the GeoEconomics Center

Atlantic Council

FULL BIO

MODERATOR

Michael Greenwald

Director

Tiedemann Advisors

FULL BIO

TIMESTAMPS

EPISODE TRANSCRIPT

Michael Greenwald: (00:07)
Future role of central bank digital currencies. It seems that the US dollar is at a critical inflection point, and that we're in an era of dollar dominance. We've been stuck at this era since 9/11 and afterwards. And so, Julia, I want to start with you, how do we move from an era of dollar dominance to dollar innovation?

Julia Friedlander: (00:33)
Thanks, Michael. And it's a pleasure to be here today to chat about a very crucial topic that bridges between national security and financial policy. To start out, I would say, we've been in a period of undoubted benefit from the dollar, in the Bretton Woods system in the interwar period and post 9/11, when the dollar really became one of the principal tools at fighting international crime and terrorist financing. But things are changing, the global environment. We've opened markets up incredibly, according to a US model over the past 70 years, and other countries have certainly learned to benefit from that. So as we move into a period of increasing digitization and the economy of global growth, we need to enter a new period where you the US dollar becomes a force for US innovation and for technology growth, and not just to preserve the status quo that we have enjoyed for the past [inaudible 00:01:41]

Michael Greenwald: (01:41)
So, Yaya, does dollar innovation mean a digital dollar? I mean, we'll get to what China's doing and what other countries are doing, but should the United States react to move to a digital dollar right now, and is that good for the United States?

Yaya J. Fanusie: (02:00)
Well, Michael, it all depends on how you assess the world around you, what's happening? I would frame it as the format of digital money is changing. So it's not even necessarily about dollar innovation, it's about digital money innovation. Previously, digital money has been the purview of financial institutions; where we use PayPal, or Zelle, or Venmo. Now, it is just the fact that there is a stretching of what's possible in terms of digital money. That's happening, whether the US makes a policy decision to create account-based or token-based central bank digital currency, it's happening. So really, I think, we have to frame the problem, or we have to frame the situation, which is digital money is changing. And if we're going to operate in this new environment, we're going to have to do something that's, maybe, at the end of this panel, we'll decide exactly what that is.

Michael Greenwald: (03:01)
So, Julia, it seems to me that we're in a multi-polar world, and we are really entering a period of a basket of currencies, where countries are retreating from the dollar. They're looking to go around the dollar at every turn. I've heard you say this in recent testimony on the Hill. Can we live in a world where DeFi, central bank digital currencies, a digital dollar, and stablecoins live alongside each other in a future global digital wallet? Is that possible?

Julia Friedlander: (03:37)
Yeah, I think so. I mean, we have to design it carefully, and the road there might not be easy. To preface what you were saying, Michael, I mean, of course, I'd also like to caution that the retreat from the dollar will be very gradual. And that if you see the international holdings of a dollar drop by a half a percent or something, so there should be no cause for alarm. I also don't necessarily think that the emergence of strong, properly regulated currencies alongside the dollar should be something to be discouraged, like the pound, the yen, the euro, for example.

Julia Friedlander: (04:15)
So I think that the framework, we shouldn't paint a false dichotomy between saying, we're going to have a CBDC and that leaves no room for stablecoins, or that leaves no room for crypto. In the world that is emerging, that we are trying to create for ourselves, there is ostensibly a role for essential bank digital currency, perhaps in direct payments between governments and individuals; for digital wallet in the form of fiat-backed stablecoin that facilitates retail payments, and then also crypto as an investment vehicle. All these things are possible.

Michael Greenwald: (04:54)
So, Yaya, to push you. 25 years ago, the dollar was at 75% global central bank reserves. Today, it's below 60%. I don't see any data pushing it up above 60 right now. It seems to be in a downward trend. So with that, has the United States become complacent about the dollar. Its complacency are Kryptonite, and our only alternative is to get on board with the 80 plus central banks that are developing a central bank digital currency right now.

Yaya J. Fanusie: (05:30)
Well, I think our moms always told us, if someone were to jump off of a bridge, would you do it? And she was telling us that that wasn't the reason to do anything. So I take the same, I think we should take the same approach. It may very well be that the United States should launch a CBDC, but it shouldn't be because other countries are doing it. It should really be because we have assessed... And I know we're going to talk about China and other countries, but you mentioned other countries. What are other countries doing? They're assessing the technology, they're assessing their currency, they're assessing the global economy. And many of them have decided that, "Oh, this technological innovation could allow us to do something that will help our currency, our economy, et cetera."

Yaya J. Fanusie: (06:16)
I think the US needs to do the same. We have to get away from this dichotomy like Julia said of, "Oh, it is this type of CBDC or it is nothing, and it's just crypto stablecoins." That's not the policy posture. The posture should be, let's assess it, and let's not see the legacy, the status quo of digital money be intrinsic, or in perpetuity that that's going to be the way things are.

Michael Greenwald: (06:43)
So, Julia, it seems, though, that the United States is a proactive country. But it seems that we have been admiring what other countries are doing. And the Feds are supposed to come out with a white paper this month or early next month about the usefulness of a digital dollar verse stablecoins. For the first time in a long time, I'm seeing a great debate at the Fed between Lael Brainard, pushing a digital dollar; Randal Quarles and his great Parachute Pants speech, pushing stablecoins. Is there a point in the middle, and why is the United States admiring other countries rise right now?

Julia Friedlander: (07:25)
You could say we're admiring the problem, but also the United States bears a very particular role in the global economy, as the global reserve currency. It's a very different story, if you are a small island economy looking at a digital inclusion and financial inclusion and your GDP is a couple billion dollars a year. So I think that the caution that some members of the Federal Reserve, Chair Powell first and foremost, is not to be directly criticized. But on the other hand, as you say the US has always been at the forefront of financial regulation, and it shouldn't give that role over to other countries that might create a framework and design structure for central bank digital currencies that do not work in the US interest or of the global financial sector at large.

Julia Friedlander: (08:25)
So the US's role should, as Yaya says, not necessarily to jump into the deep end and say, "We're going to have a central bank digital currency as soon as we physically can." But to create new fora to develop standards that are globally applicable. And this is, we would argue with the Atlanta Council, first and foremost, in the G20 format to develop these standards before it's a little bit too late and other models have gone far enough that we cannot pedal backwards.

Michael Greenwald: (09:06)
So, Yaya, speaking of our allies, it seems that we're in an era of a new digital asset foreign policy. You have authoritarian governments like China, Russia, Iran. You've seen what Belarus is doing in the last couple of weeks. Using central bank digital currencies for control to understand the consumer and every turn, where you then have other central banks like Sweden or allied countries of the United States trying to use CBDCs for equity, for inclusion, to promote the consumer. Talk about what China is doing, and are they creating a precedent for other authoritarian countries to follow?

Yaya J. Fanusie: (09:55)
What China is doing should be framed as less a currency issue, which is how most of the public is talking about it, and more of a data issue. So if the stance is going to be, "Oh, the digital yuan versus the dollar, of course, the digital yuan will not win." That's actually not really the issue. And I don't think China, from my looking at it over at the Center for a New American Security, we produced a report on China's digital currency. And we assess that China's playing a different game of strategy with this project. It's really trying to develop a digitized economy, and is trying to lay down infrastructure where the government can capture financial data, in a way that it can't with the current infrastructure where Alipay and WeChat and the companies behind them do not provide direct access of data access to the government.

Yaya J. Fanusie: (10:52)
So China's trying to create this new infrastructure and collect more data and analyze it. And I would say it would support digital authoritarianism. And so that's the way to see it. And then there's also maybe the competitive advantage. As China is able to collect, as the government is able to collect more data, it can innovate with the data. And I think we should see that China is operating under the idea that the nation with the best data wins. I think that's how it sees its pursuit of the CBDC.

Michael Greenwald: (11:25)
So, Julia, on that point about data, and obviously cyber is being a huge tool used right now, do we need a new National Security Strategy in the United States? The last one highlighted great-power competition. We all know great-power competition. Do we need to be more strategic about the US dollar rather than seeing it as a long term threat, admiring that down the road, should it be seen in a short and medium lens for the United States to actually be proactive, given what Yaya just said about China?

Julia Friedlander: (12:03)
Yes. But I think that it's something that's much more easily said than done. I've been part of the drafting process for National Security Strategies. It's a catchall process, where everybody feeds in a little bit, and what comes at the sausage making process is always a big compromise. It is very hard, and I'll say this as a structural issue of someone who works at economic statecraft. This is the intersection between finance, economics, and national security. Both of us work in the space that to frame economic and financial issues using national security language. And what makes it so nice to be able to speak with a community like you guys today, because I'd grown up in the Washington National Security Framework is to understand the role that financial markets play in national security going forward.

Julia Friedlander: (12:56)
I almost feel sometimes, and I don't want to be alarmist when I say this, especially with Department of Defense colleagues around, but it almost feels like financial market integration is the new nuclear deterrence. And how do you manage that appropriately with cross border transactions and geopolitical tensions? And so I I don't necessarily think it has to be framed in terms of the dollar itself, but understanding and being able to speak capital markets language in the halls of the Department of Defense. And it's hard.

Michael Greenwald: (13:30)
So, Yaya, back to China. It seems there's consensus in Washington that China's far off from internationalizing the digital yuan. They haven't been able to change Belt and Road into digital yuan yet. They haven't been able to really change SWIFT. They haven't been able to have cross-border contracts. Why are we waiting for China to internationalize? Why are we waiting for China to make improvements, rather than us fix our own plumbing here in the United States?

Yaya J. Fanusie: (14:08)
I wouldn't say that we're waiting for China to... We being US policy makers. I think there a good contrast that you're pointing out, which is America, we have a very complex system, our democratic system. It's not so easy to lay out a top down strategy. Maybe even getting back to the idea of the National Security Strategy idea when it comes to finance. It's not our thing to implant this, "Hey, this is the direction we're going to go." And then everyone fall in line. That is a Chinese Communist Party methodology, how you structure the economy. And that's actually what we see happening.

Yaya J. Fanusie: (14:48)
So what we're seeing, while we're... I won't say we're twiddling our thumbs. I'm not going to say that about the US policy. But while we're having discussion papers that might come out in a few weeks about a CBDC, like our first white paper, China has already assessed the strategic direction of the economy. It has done research for several years on digital currency, it has produced just pilots white paper. And now it is solely trickling down into the rest of the economy, the financial sector, big banks, small banks, and they're falling in line. So it's not that we are waiting for them, but they are positioned differently. We have to figure out what's the US approach to innovation.

Michael Greenwald: (15:31)
So, Julia, on that point, since the United States is in the white paper phase. And we all know what happens when things go at committee and things go to white paper, usually not that much action in the short-term. Does the United States need to convene a new digital asset Bretton Woods, where even if the United States isn't ready yet to create a digital dollar, and we're a couple of years off, we can convene the EU key-allied central bank governors, New Zealand, Sweden, Japan, and create a new digital asset framework. We're all sitting here today and there's no guardrails, regulatory-wise, yet for the digital asset space. Everyone's yearning for it. Shouldn't the United States convene that group under a new digital asset Bretton Woods?

Julia Friedlander: (16:21)
I think it could be useful. I don't necessarily know if using the term Bretton Woods is putting a stamp on the format, especially because certain aspects of crypto and of the AML/CTF framework are being discussed in the Financial Action Task Force already. There are already a G7 working groups under the finance minister's track to discuss these things. But Michael, I think, you're right in the sense that we can develop a growing consensus first among partner nations who have a similar conception of the balance between privacy and regulation and free markets. And that's ultimately the bread and butter right there.

Michael Greenwald: (17:10)
So, Yaya, speaking of privacy, there's fear in the United States that if the United States creates a digital dollar, it'll follow the China's model. And that after 9/11, the PATRIOT Act used a lot of power to gain information about Americans. How can the United States create a balance, where it promotes the consumer, it promotes privacy, it promotes inclusion. Is that possible, and what type of framework would you envision around that?

Yaya J. Fanusie: (17:44)
Everything is possible right now because we're at this stage where CBDCs are being fleshed out. There is no one size fits all, there's no one way that... Everyone thinks is the way to go. Everything is really on the table. And so that's why it's important, in the US, for policy makers and the private sector to actually be asking that question, what does it look like?

Yaya J. Fanusie: (18:07)
I mean, I'll let you know that recently, I don't want to get too technical, but recently there was an academic research paper that came out of a university in Germany about how you could have a CBDC and have cash-like privacy. It's not really a policy question, it's a technical question. So we may say policy-wise, CBDC, they need to have a level of privacy. But then you need people to actually do the work and technically figure out the computer science of doing that. And there are people that are doing that. So we need to... Well, we have to get more in the game. I mean, that's an academic paper. Hopefully, our US policy makers have read it, since I got it.

Michael Greenwald: (18:46)
I've read it.

Yaya J. Fanusie: (18:47)
I sent them the email-

Michael Greenwald: (18:47)
I've read it.

Yaya J. Fanusie: (18:48)
Oh, you read it.

Michael Greenwald: (18:48)
I re-read all your stuff and Julia. Julia, let's pick back on privacy. So how do you envision the digital dollar working for the consumer? How would it work for all of us? Isn't all of our banking already digital? What does it mean for commercial banks? Will we need an Act of Congress? What do you think about the consumer, is this good for the consumer, or is this good for central banks because of responsive China?

Julia Friedlander: (19:21)
So they're all a bunch of different questions. I think the answer is that it really depends. The ability of CBDC, and this is a question that both of us received in our testimony in July in House Financial Services, was how do you actually reduce the cost of transaction essentially to nothing for underbanked or unbanked sectors of the population, those who did not receive their CARES Act checks in time, those who defaulted on loans as a result of friction in the payment system. Now, I mean, I think, Michael, you're correct to say there are improvements that can be made in commercial banking that would, I think, maybe take that role as well.

Julia Friedlander: (20:07)
And so what we also like to emphasize is that there is, again, in not creating this false dichotomy, is that central banks would never be able to implement this by themselves. They don't have the personnel, they don't have the technology, they don't have the client interface. And so the design of a central bank digital currency would, at least in the United States model assess, but defacto require cooperation with the private sector, which is a huge opportunity.

Michael Greenwald: (20:39)
So yeah.

Yaya J. Fanusie: (20:41)
I just wanted to jump on the issue, because I want to maybe give an example of like... Because you had asked before about the framework, what it should look like. So practically, most of the CBDC papers out there say that the government would not necessarily have direct access in real time to transactions. But here's the question, all of these proposals do say that for AML/CTF reasons, they'll be able to get this information. So here's a practical issue. So how do we manage the fact that government doesn't have access to your transactions? But let's say they can, let's say eventually they do. And let's say a bad guy went to your store. You own a store, bad guy went to your store, and they get not only his data, but your data. Now that they've unmasked you, what do they do with that data? You're not the suspect, but now it's in their database. So this is a policy question, and it's a technical question. This is why is practical [crosstalk 00:21:38]

Michael Greenwald: (21:38)
And this came up after 9/11 with SWIFT. And Julia, we all tracked terrorist financing, so that's become a key issue. So does a digital dollar make it easier for the United States to track terrorist financing? What are the illicit finance implications, as we know, terrorist financing moves outside of banks more than it does inside of banks right now. So what does it mean for those implications?

Julia Friedlander: (22:10)
I actually think that it provides an increasing incentive for illicit financial actors to leave the formal financial system. I think this is a conversation that we were having, in the context of China and saying, "Well, won't the Chinese designers reuse this with the purpose of evading US sanctions?" If I were a money launderer, I would absolutely not use a system that, regardless of the design choice implemented, provides greater oversight into where the money's moving. There are very good ways to launder money without a CBDC.

Julia Friedlander: (22:47)
I think you touched a nail in the head here, in the sense that US authorities currently have to go through a due diligence, subpoena process to have access to financial data that is possessed by or held by a commercial entity. With a CBDC, there is a potential that there would be direct access by the central bank. That's not necessarily true. You were talking about Act of Congress. Most people believe that there would have to be amendment to the Federal Reserve Act to be able to implement a CBDC, you can write in privacy and consumer protections into that.

Michael Greenwald: (23:27)
So, Yaya, moving forward. It seems that there's a lot of competition right now at digital asset space. That stablecoins have one narrative, CBDC have the other narrative, Ethereum is pushing its own narrative and others. What is the argument you see where stablecoins and a digital dollar can coexist given, like we saw during COVID, getting payments to people quicker, a stable coin couldn't do that. So can't they coexist?

Yaya J. Fanusie: (24:07)
Yeah. There's not going to be one coin to rule them all, necessarily one digital currency to rule them all. And I think the reason why that would be the case, the reason for coexistence, it doesn't say which one would be prominent or most prominent. But the reason for coexistence is simply because you can't put the technologies back into the bottle. And so even as regulators figure out, as the US decides, "Okay, we're going to go with the CBDC, or we're going to regulate stablecoins in this way." Even as we do that, I don't think there's anything we can do to say, stop cryptocurrencies from existing. That just doesn't exist.

Yaya J. Fanusie: (24:44)
So I think the world we are going to see is one where these different formats of digital money exists. Some of them will have certain use cases. Some of them may become less prominent, or their uses will shift. Maybe stablecoin once they get more regulated, they're going to be used for a specific thing. Maybe Bitcoin is going to be used for a specific thing. Maybe more people will be using CBDCs, but I think they will all exist to different degrees.

Michael Greenwald: (25:09)
So building on that, Julia, you know that I follow the art market very closely. And I think that speaking of markets, the art market has truly legitimized digital assets in the last couple years. And we've seen how it's playing out. How do you envision markets like the art market using a digital dollar? Won't it be easier, won't the compliance costs in others be less because it's a digital dollar and it's governed to buy the central bank?

Julia Friedlander: (25:42)
It's possible. I know you moderator here, but to put it back on you-

Yaya J. Fanusie: (25:49)
Ask him.

Julia Friedlander: (25:49)
Yeah, exactly. I'll ask you a question. I mean, do holders of physical assets of value actually see... I mean, obviously there's frictionless movement of payment and potentially a greater transparency in the providence of a... If that's where you're going with, but do you actually see that taking off?

Michael Greenwald: (26:11)
Well, I think that when it comes to the art market, reputational risk is everything. And so these auction houses want to make sure they know where it's coming from. And I think they don't always know the beneficial owner, as we discussed. And so I think if there's a system where they can use a digital dollar and there's a framework in place, you could see more of a surge in art sales because of that, because it's quicker, cuts faster. So I think it's going to have to be part of whatever framework comes as speed, efficiency, but also protection. One thing that I want to touch on with you is predictions. And do you envision the digital dollar becoming a political issue where this could be on the debate eight stage in the next presidential election?

Yaya J. Fanusie: (27:05)
I don't know if that would ruin the ratings of debates if they're talking about CBDC by then. Actually, I'm going to take a different tack. So the CBDC could be a political debate issue. I could actually see it. But you know what? Maybe more prominent, something we haven't mentioned, which I should have, the idea of digital ID. Digital ID, digital identification, like a national ID is something that probably has to happen for a lot of this stuff to work. A lot of the CBDC stuff, a lot of the privacy stuff, a digital identity. And that's something that we don't have in the United States. A lot of countries are trying to figure it out. So I can imagine a world where we figure out we want a CBDC, but then we figure out, "Oh, well, maybe we need to have a digital ID to make that work." And I could see that being a huge debate issue and a provocative controversial one.

Julia Friedlander: (27:59)
But hard to imagine that being necessarily partisan. Because I think we see in the regulation of a digital space, even if you're talking about anti-trust or taxation, there are different coalitions that are not Democrat or Republican, necessarily. So if it's coming up on the debate stage would be very interesting. I think, for me, I see the question about government-sponsored finance versus private enterprise being the way that it's framed.

Michael Greenwald: (28:29)
So last lightning round question. We have around a minute and a half left. Yaya, so we're at the Beijing Olympics, and we've got the digital asset awards ceremony. And right now, would you consider that the gold medal in the digital asset space goes to Beijing, and you've got probably Sweden, given their work on central bank digital currencies, are they getting silver? And then you have perhaps the Euros getting bronze. How do we help the United States not be in the stands watching this ceremony and get on the medal stand?

Yaya J. Fanusie: (29:09)
Understand that we're in the trials right now. So we have to show up. We have to show up to the trials, figure out where we want to focus and what our training regimen would be. But we just have to, I think, realize that the games are going on. That's step one.

Michael Greenwald: (29:25)
Julia.

Julia Friedlander: (29:28)
I like the metaphor. I agree that we need to put our imprint on this now. I'm not necessarily concerned that next year, if China pilots a CBDC at the Beijing Olympics for limited trials, that it is any imminent threat to US personnel who are there, or to the potential for the United States to leap frog.

Michael Greenwald: (29:53)
Julia, Yaya. It's a pleasure. Thank you very much.

Yaya J. Fanusie: (29:56)
Thank you.

The Evolution of Long-Term Asset Allocation | #SALTNY

The Evolution of Long-Term Asset Allocation with Al Kim, Director of Investments, Helmsley Charitable Trust. Geeta Kapadia, Associate Treasurer of Investments, Yale New Haven Health System. Angelique Sellers, Managing Director of Investments, Pennsylvania State University Office of Investment Management.

Moderated by Bill Kelly, Chief Executive Officer, CAIA Association

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SPEAKERS

Al Kim

Director of Investments

Helmsley Charitable Trust

FULL BIO

Geeta Kapadia

Associate Treasurer

Yale New Haven Health System

FULL BIO

Angelique Sellers

Senior Director, Portfolio Management

Penn State University

FULL BIO

MODERATOR

William J. Kelly

Chief Executive Officer

CAIA Association

FULL BIO

TIMESTAMPS

EPISODE TRANSCRIPT

Bill Kelly: (00:08)
Good afternoon, and thanks for joining. This panel is going to be talking about the evolution of long term asset allocation and maybe some of the views would be a little bit less sanguine than some of the things I've heard over the last couple of days, and we're in the middle of a very bullish market. The risk on trade is alive and well, and we're going to maybe try to get the allocator view.

Bill Kelly: (00:28)
Not necessarily lost on me, it may be the folks in the audience, and I'm not sure if Nick or anybody else in [Case IQ 00:00:34] is here, but up in the Salt Stage, probably literally above us, is the evolution of the private markets investing, the GP side. So, maybe we could do a point-counterpoint or split screen on Case IQ I think would be very interesting. Or, we can maybe crash that party afterwards.

Bill Kelly: (00:49)
Perhaps I'll have my panel introduce themselves first. I think the bios are in the program, but maybe just to hit the high points, and your plan, and Al I'll start with you.

Al Kim: (01:01)
Thanks Bill. So Al Kim. I'm with the Helmsley Charitable Trust, which is a private foundation based in New York. Helmsley's mission, overall, is to help improve lives in the US and globally by supporting and funding various healthcare research initiatives. So Type 1 diabetes and Crohn's disease being two of our bigger programs. On the investment side, we manage an eight-and-a-half-billion dollar endowment. We invest across asset classes, we are very opportunistic, and we implement using a concentrated approach in our manager relationships.

Bill Kelly: (01:38)
Thanks, Al. Geeta?

Geeta Kapadia: (01:40)
I'm Geeta Kapadia and I head up the investment team at Yale New Haven Health System. We are the academic medical center associated with Yale University based in New Haven, Connecticut. My team and I manage about $5.6 billion worth of investible assets covering defined benefit, defined contribution, and endowment-like assets. We manage across the spectrum, from very plain vanilla fixed income, all the way to private equity, venture capital and real estate.

Bill Kelly: (02:06)
Thanks.

Angelique Sellers: (02:07)
I'm Angelique Sellers, Managing Director of Investments at Penn State University. I don't think I need to tell you what Penn State does, but we manage a pool of assets of about 6.1 billion and, much like my fellow panelists, allocated from anything from fixed income to private equity venture, natural resources, commodities. You name it, we probably have it.

Bill Kelly: (02:33)
Thanks Angelique.

Bill Kelly: (02:34)
So since you have the mic, maybe I'll start with you and work our way around. So I saw recently Abu Dhabi Investment Authority, who by all accounts is a very sophisticated allocator sovereign wealth fund, and they just put their annual report out and for a pretty secretive organization there was a lot of public information in there. The name of the report is called Prudent Global Growth, and their 30-year return annualized is 7.2%. Probably a little bit below what many public funds are shooting for as a bogey. So I want to start the conversation by saying that being an allocator is not an easy job and this space has gotten very, very complex. The endowment model is now over 50 years old, so maybe starting with private equity, which has gotten a lot of play at this conference in the marketplace, is that an asset class, in your view, or more of a very complex industry?

Angelique Sellers: (03:28)
In our view, it is more of a complex industry and we've been very bottom up about it. We don't have any particular buckets to fill generally in our portfolio, so when we look for managers we can create a bucket rather than have a bucket and put the manager in there. And so, on the private equity side, it is a very difficult job right now, given where things stand in terms of evaluations, which has already been discussed at this conference. But we're still finding opportunities. We're looking more kind of a sector focus, a little bit more differentiation, and we're looking at smaller deal sizes, and managers kind of focused on that right now.

Bill Kelly: (04:08)
So, Geeta, may be the same theme, and I'm going to leave ADIA after this, but they describe private equity as intense and accelerating in terms of the competition. What do you think about the current vintage year and accessing, perhaps, different vintage years either through secondaries, or do you think about co-investing or direct investing? And maybe your plan is such a size that some of those are not viable.

Geeta Kapadia: (04:31)
I think there's a lot of opportunity for investors such as us, but it's often quite difficult to differentiate between true opportunity and what may be a temporary area of interest for us. So we're very fortunate in that we tend to be, similar to Alan and Angelique, we tend to be very long term investors. So when we consider opportunities in the private space, we're really able to think of them over a 10 to 20 year time frame. We've been very fortunate in that we don't really look at cyclical parts of whether or not parts of the market are attractive, or less attractive, or overvalued, or undervalued. We're really just trying to make consistent commitments over time. We may be able to participate through a co-invest or secondaries opportunity, but really similar to the way Angelique described it, we're really looking at very bottom up fundamental opportunities that seem to partner well with what we're trying to achieve over the long term. They can manifest themselves through a variety of different structures or deals.

Bill Kelly: (05:35)
And the importance on manager selection on the process?

Geeta Kapadia: (05:38)
We feel very strongly about very fundamental manager due diligence, particularly on the private side. Again, we feel like there's a lot of uncertainty and so, to be able to really understand the managers with which we're partnering, is probably the highest priority. It's been difficult during COVID, obviously more difficult than it was in the past, but in some ways it has presented us with new opportunities to meet fellow allocators, to do reference checks with other investment managers, talk to leaders in the industry and really just feel like we have even more pieces to the puzzle to be able to make a good investment decision.

Bill Kelly: (06:13)
Al, maybe just closing out, the discussion of private equity, maybe the view from Helmsley in terms of how you think about this market in terms of sector geography, the SME space versus the buyout space, how do you think about allocating to private equity?

Al Kim: (06:29)
I guess, compared to other foundations based in New York that have been around for decades, the Helmsley Trust is actually fairly new. The team really got started in 2010, upon the 2007 passing of Leona Helmsley. The Helmsley team was in a place where it essentially started the investment office from scratch. It convinced our investment committee and trustees to build out a private capital program from nothing. Ten years later, it definitely has been a journey. In the beginning we started investing in private debt strategies in order to mitigate the J-curve, and to the extent possible to not report a negative return, while at the same time trying to knock on some of the best VC managers out there to see if we can get access to their funds.

Al Kim: (07:28)
I think the last 5-10 years have shown, and have proved to our trustees and our committee, that private capital definitely has a place in Helmsley's portfolio long term. Our target when we first launched the program was 25% of Helmsley's overall portfolio. We have since increased that target to 35, and through very good appreciation we're currently sitting at 40. And so, we are very strong believers. If you look at our performance in that segment, the last five years, we've been up 25% annualized returns. That's probably more than 10% above what we've gotten from our public equity, or liquid market, segment. We invest with conviction. I think some segments within private capital, like venture, if you can't access very good managers, I don't think you should be invested at all. And for Helmsley, fortunately, some of the big VC managers have blessed us with allocations, and have let us in, and so we're leveraging those relationships that we have to continue to build out our private capital program.

Bill Kelly: (08:45)
I want to ask you a follow-up question on private debt with maybe another lead. I'm not a big Twitter guy, but when it comes to [Salt 00:08:54], you've got to get your Twitter game together. I posted something on Twitter last night that I saw, that the European hedge fund index is now yielding 2.34%, where inflation is at three. So in a real basis you don't have to be a math major to understand that that is upside down and negative. So, when you think about private debt, or maybe you could take this as a general question too Al, that if I think about the Sharpe ratio related to [alt 00:09:20], it doesn't necessarily play all the time but being compensated for a unit of risk being taken is something every investor should be thinking about. So, either generally or more specifically in the private debt market, is it hard to find opportunity at this stage of the market where rates are so low, and particularly if you can't even get up a positive real spread on high yield.

Al Kim: (09:42)
At Helmsley, how we structure our portfolio is at the highest level we have what we call "safe assets" which are investment-grade bonds and assets that we could essentially liquid within a couple of days. Then we have our return-generating segment which has three separate components. The liquid segment, the semi-liquid segment and the illiquid segment. We don't categorize those assets by asset classes, it's by liquidity because we think, as a grant making organization, having enough liquidity to fund our grants year over year is our main objective.

Al Kim: (10:18)
Within each of the categories we have different return hurdles. Now these aren't set in stone, but for anyone on our team to try to pitch something that gets into our liquid segment, it really needs to deliver at least a 15% net return and something in the 1.5-1.6x at least. Essentially, because we're fully invested in our liquid segment, those commitment dollars are competing with some of the big VC managers and those managers are returning well into the 20s if not 30s. For our liquid segment, I would say mid 15s at least. Our semi-liquid segment, which is where we include hedge funds, I would say it's really hard to convince the team to buy something within that segment that's below 10%.

Al Kim: (11:12)
It is hard to try to squeeze private debt into our portfolio. I have tried and gotten vetoed down, but with the current spreads on private debt, it's very challenging.

Bill Kelly: (11:28)
So Geeta, I was going to try to work through some verticals. I have a hedge fund question if you want to follow up on private debt you can too, but hedge funds have been, I think to some degree unfairly, become a bit of a punching bag over the last 12 years. If you look at it as an asset class, maybe deserved. If you look at it as a complex industry with many different strategies tucked inside, maybe a bit unfair. But there's an interesting debate about hedge funds. Are they diversifiers or return enhancers? Do you have a view, one way or the other, and how do hedge funds work their way into your plan?

Geeta Kapadia: (12:02)
We think of hedge funds as a little bit of both. From a diversification standpoint, there's the clear argument to be made relative to the long only side of the portfolio, and potentially if there's a fixed income allocation as well. We try and be very deliberate about our hedge fund portfolio and think about those assets, not only in their own absolute return type frame, but also in a bigger picture holistic sense as it relates to the total portfolio. We may have exposure to a number of different industries, securities, geographies, but separating the hedge funds out from the rest of the portfolio may make it look very different than the actual exposure. So we think of it definitely as a diversifier, but we also expect them to be able to add value over the long term.

Geeta Kapadia: (12:51)
Each of those names in that portfolio are very specifically selected and evaluated to be able to add a certain part, or to play a certain role I should say, within the overall total endowment.

Bill Kelly: (13:04)
At this stage of the market, tail risk hedging, does that work its way into the asset allocation mix?

Geeta Kapadia: (13:11)
We've thought a lot about it and we've met with a lot of providers in this space because we think there is a lot of potential opportunity there as it relates to payments that need to be made. As a health system, as you can imagine, over the last year and a half we've learned quite a bit about what liquidity means, and particularly to a finance leadership of the health system. It's thought of on a daily basis. Very closely we think about it. We have talked about tail risk hedging. We haven't implemented yet, but I think there are a lot of good players in that asset class that we may be talking to over the next year or so.

Bill Kelly: (13:48)
Angelique from Penn State, hedging, hedge funds?

Angelique Sellers: (13:52)
Hedge funds. We have about 11-12% in hedge strategies, but they are diversifiers for us. We established a long time ago that we're not going to do strategies that have too much beta in them. For these reasons we don't do long short equity typically, because with 60 percent, 70% net long it's something that we have never done. Collectively, they have a beta of pretty much zero to anything, but we also benchmark them to Barclay's Agg, so all they have to do is to do better than bonds. That's how we position that, is a bond substitute without the duration risk and that makes a little bit more money.

Bill Kelly: (14:34)
Al, anything from Helmsley on...?

Al Kim: (14:38)
So our semi-liquid segment that I mentioned, which includes investments that Helmsley invests in vehicles with up to two years of liquidity, where essentially we can put our money into a fund, and if we were to redeem, if we can get our money back within two years, those types of vehicles, which includes hedge funds, fall in our semi-liquid segment. The framework I talked about before, we definitely see it as a return-generating asset. If you look at the five hedge funds that we have in our current portfolio, the lowest returning one is a long short credit, a special situations fund, that since inception has done a 10% net return with a 5% volatility. The other ones are pretty much equity-based strategies, whether it's healthcare or technology, really based on some of the themes that we have and some of the sectors that our team has where we think those sectors will benefit long term. And so, the hedge funds that we have tend to be long biased, and they definitely are exposed to having draw downs.

Al Kim: (15:49)
In terms of hedging, we have had experience investing in a macro manager that has gone net short and we've ended up having a bad experience with that and we ended up terminating that manager. But, if you look at our overall asset allocation framework, we really toggle between safe assets and return-generating assets and manage that allocation. We really view that as our hedge against downturns in the market. So if you look at our asset allocation today, we're currently sitting 24% in safe assets. So the Barclays Agg and cash. While we are believers in the endowment model and in privates, the question you asked earlier, we are very different from other traditional endowments because we have such a big buffer of safe assets. We really viewed that as a hedge, and going into the pandemic we also had about 25% in safe assets. We think having that dry powder to invest and redeploy when the markets get shaky really helped us navigate the pandemic and the market downturn going into the pandemic.

Bill Kelly: (17:07)
Geeta, just to maybe complete the circuit here, maybe just real estate, infrastructure. Real estate has been topical because of the commercial real estate and return to work, whatever that might mean, around commercial office buildings. And then infrastructure, obviously we've got a big bill that is in the works of being passed. Are either one of those areas that interest your plan.

Geeta Kapadia: (17:28)
Yes, we've been investing in both of those spaces over the past two-plus years. We have looked quite a bit more closely at real estate, particularly as many of the managers that we partner with are really looking at those Class A spaces. New York City, Washington DC, all of the cities where you would expect there would be quite a bit of disruption based on COVID. We've been very fortunate in that they have held up quite well, and in some cases have actually used this opportunity to partner and become very, very hands on with the managers on site, with the tenants. And so, in that space we've been, I would say, pleasantly surprised or maybe a bit optimistic, more optimistic than we thought we'd be. We continue to make investments. We don't see the last year and a half as changing what our plan was before the pandemic. We continue to engage with those managers and those GPs, and continue to talk about new fundraising and are pleased that people are still in the market and still getting plenty of LPs on board. It's been better than we expected it would be.

Bill Kelly: (18:42)
Angelique, I want to touch on maybe cryptos. You've got a student population who is very activist, to some degree, around fossil fuels but is your plan... are you in cryptos, or any kind of NFT's, or any of these emerging platforms?

Angelique Sellers: (18:59)
We've done some research and we have ended up allocated capital to a venture firm that is dedicated crypto specialists, but they don't do coins or anything like that. They invest in- [crosstalk 00:19:14].

Bill Kelly: (19:13)
So it's like the infrastructure.

Angelique Sellers: (19:15)
...the whole infrastructure, the digital infrastructure. In terms of crypto itself, we kind of disagree internally. We have a couple of people who are pushing and saying that this is something we need to be jumping into, and some people who are saying, "No, not yet." So we continue doing research but, anecdotally, I'm part of this email group which has about 60 other institutions. I emailed out asking about who's involved in crypto. I probably got five responses. Two of them were involved, and the others said we're doing research, and the rest of the people said they're not doing anything. So I think there's a lot more talk going on on the institutional investing side. Some bigger institutions have pulled the trigger and did some things, but my peer group nobody is really doing much. More on the venture side. We have some other exposure on the venture, but not in actual... I'm not saying... I just don't know enough about it, so I'm on the side that says, "Let's just wait, hang on a minute." We haven't really pulled the trigger on the liquid side.

Bill Kelly: (20:25)
I'm going to come back to that at the end around some of these disruptive technologies. Angelique, maybe just staying with you for a moment as a university endowment. Harvard, I think it was Harvard, that is divesting from fossil fuels and it seems like there's an activist movement in this direction. I want to pivot more toward ESG. Does Penn State have a view on ESG? Or maybe more specifically, climate? I think ESG has become a very confusing set of risks, and it's hard to manage ESG. But maybe you can focus on climate and how you think about that around natural resources, moving toward renewables and investments there.

Angelique Sellers: (21:02)
In terms of endowment, we didn't have the mandate, and we still don't, so the board resolution doesn't mention anything about it. Having said that, the university itself is obviously doing all kinds of things. There's sustainability office. Generally, university overall, since it's such a big school, probably can make more impact from that perspective and you have to look at all kinds of different areas of research and things like that than the endowment itself. We haven't really had too much of a push, but we're looking at it ourselves because I don't think it's a trend you can ignore.

Angelique Sellers: (21:37)
We're also looking at how we can make money on the trend. So, instead of arguing with the student body, we actually asked a couple of students to intern during the summer and they did a lot of work in terms of sustainability, and surveyed other institutions as to what they're doing. We're trying to formulate some kind of a policy, but it just hasn't happened yet. But, we found some investments. We've made a commitment to a renewables manager on the private equity side, and also working on the public side, interestingly enough, with our oil trader who's starting a fund that's going to be focused on trading carbon allowances.

Angelique Sellers: (22:21)
Metals, because even if you have windmills, you still need to build them of something, right? And also some equities that are focused on batteries, and hydrogen and stuff like that. We're trying to do well by doing good, if you will. That's kind of where we are.

Bill Kelly: (22:41)
I think this double bottom line is still very, very difficult and I think that last point you made about the wind blows the hardest and the sun shines the brightest where people are not, and we need that midstream infrastructure if we're going to get it to the masses. I think that some of these oil and gas companies have built great midstream capabilities.

Bill Kelly: (23:00)
Maybe working our way back this way, Geeta, your views on maybe climate more specifically than ESG for the moment.

Geeta Kapadia: (23:10)
We've thought about the topic quite a bit, as you have to if you're in this space. I think, similar to Penn State, we have not come up with a formal policy yet. I think it will be driven by our team, as opposed to from the top down. I think our board is quite happy to think that we're doing what we should be doing, and to let us have at it. We expect to bring a formal recommendation to our board in the next probably six months as it relates to how we want to intentionally invest. That's the phrase I've been using within my team. There are just so many aspects to it. Climate, obviously, extremely important but you know ESG covers such a wide range of topics that in some sense it's almost overwhelming to try and think about how you would even put things down within a policy. Particularly as we're not a faith-based medical center, we are an academic in some sense, medical center and so we are working very closely with the people at the university, because they have had to confront this quite regularly due to student activity, and just trying to make sure that the types of investments we're making are aligned with the mission, and vision, and values of the organization. Which we think we're doing, but I think we could be a little bit more deliberate about it going forward.

Bill Kelly: (24:26)
Is greenwashing a big problem?

Geeta Kapadia: (24:30)
It's something we're spending time on, for sure because I think it could very easily be something that creeps up on us and we don't realize it, and then we now have to have a more formal evaluation of it to the extent that it's been part of our portfolio, or it could be part of our portfolio.

Bill Kelly: (24:49)
Al, your views? I don't know, in the endowment space it might be different. You don't have a constituency maybe pushing this as an agenda item, but what are your views at Helmsley?

Al Kim: (25:01)
Like Geeta said, Helmsley doesn't have a dedicated allocation to ESG, or to energy, or climate. Having said that, we have over the last 7-8 years, committed and invested in some fossil fuel investments and we've had very mixed results. What we found in terms of investing in energy is that you not only have to pick the right manager, but you also have to get the vintage year right because the commodity cycle is so long and it could either really hurt you or really help you. For us, we said any commitment we make in the private capital segment, it really just needs to stand on its own. If we invest in energy or ESG or anything like that, we're going to be very opportunistic. Our team has been doing a lot of work in the climate space because we think that this transition to a low carbon emission world is a theme that's going to last for decades. We've probably met with 20 or so managers in this space, but we focus more on the VC and growth equity type managers that focus on investing in the technology to solve some of these environmental and climate tech issues. So far, we haven't met anyone that's made it to the finish line, but we are doing a lot of work in that space.

Bill Kelly: (26:33)
Maybe a couple things, maybe off climate, but on the topic of ESG, transparency and the culture in relation between the GP and LP. Maybe Angelique, I'll start with you. What's the current state of play in terms of transparency around GP and LP, and you hear things about the use of credit lines to fund LP commitments that have an impact on returns. Is transparency where it needs to be, because now we're talking about democratization or less sophisticated investor accessing these GPS and we've got to be thinking about a client-first mentality? If we can't get it right in the institutional world, I fear that we're not going to get it right when we go more retail based with democratization.

Angelique Sellers: (27:15)
I feel like we have decent enough transparency without GP. This is one of the things that we require, and if we can't get the information that we need out of them, life is too short kind of a situation. That said, I mean obviously some of the venture firms are fairly sensitive to the right to know and all of that, and so we are not subject to that, but every time we talk to some venture managers we have to write them a letter and explain and how it all works, and some of them are really difficult to get in if you have that kind of situation with the right to know act.

Bill Kelly: (27:53)
Geeta, maybe a slightly a different theme. Certainly, the CAIA Association, and myself personally, have been very committed to DEI, which has been very topical and that can manifest itself in many ways. I've made a point that I will not get involved in panels that don't have some level of gender or race diversity. It doesn't very often play out this well, with the three of you, but I do want to point out that this is an important undertaking and actions matter more than words. Maybe talk about it from your vantage point, both as a woman, as a professional and what your expectations are as you hire managers and their commitment to DEI.

Geeta Kapadia: (28:34)
It's a topic that's very near and dear to my heart, and one that I spend a lot of time on just thinking about, talking about with peers. With my colleagues, with leadership and with managers. It's kind of disappointing that it's 2021 and it feels like we're still in the same space that we were when I started in the business. We recently did an evaluation from a DEI perspective of our current portfolio and it's really bad. Very, very bad, and it's very disappointing because internally I felt like I've been having this conversation. I know I've been having it, but clearly I haven't been having it in a way that it has affected any change.

Geeta Kapadia: (29:16)
We're all in very fortunate positions and obviously, Bill you as well, in that we do have a fair amount of leverage as it relates to making an impact at some of these organizations. I think we have to be very deliberate about, similar to the way you phrased it, "We're not going to do business with you if you're not addressing this issue in some way." It's not about doing the right thing. I mean, it is about doing the right thing, but it's about making money, right? It's about returns. Diversity adds to returns, so to have everyone in the same room and look the same, and speak the same, and went to the same colleges, that's not really going to add value over the long term. So, we're very committed to it. I have a lot of difficult conversations ahead of me, I can already feel that, but I think it's important. And, to your point, there's no reason to have a panel with all men anymore. There's just so many good female investment professionals, and professionals of color that it's very easy to have a diverse group of people.

Geeta Kapadia: (30:25)
You talked a little bit about Twitter. There's quite a lot of, for people who are in financial Twitter, there's a lot of chatter about it. It's very interesting, some of the people who I follow that have done some great work in this space, and they're fighting the good fight. I hope I can help in some way.

Bill Kelly: (30:44)
Maybe an observation, not an excuse. I think one of the challenges we face on many fronts is that this is a great industry. It's really not a profession. I think the law profession, the accounting profession, the medical profession has done a very good job of moving this direction. My wife graduated med school almost 35 years ago and her class was 50% women, 35 years ago. It's harder for us to get that channel going and there's a lot of great organizations, I think 100 Women in Finance is a sponsor here, we've just got to figure out better partnership there as well.

Bill Kelly: (31:19)
So we just have about eight minutes left and I want the final discussion about digital disruption because it has been a big topic at this conference. Every session I'm in somehow, someway it comes up. It may not reflect itself in an asset allocation decision by any of you, but it's certainly on the forefront around algos, or maybe hedge funds that are using algo-based decision making models. Al, maybe starting with you, how does this affect Helmsley? Are you thinking about it? Are you seeing managers that have more algo-based, data-driven investment processes?

Al Kim: (32:04)
In the hedge fund space, the hedge fund managers that we invest with are all based on just bottom up fundamental research, so not necessarily quantitative based. Having said that, in several pockets within our portfolio, whether it's some of our long only quant managers that are introducing some machine learning analytics factors into their models, or whether it's some of our VC managers building out data systems to figure out what's going on in the startup world, we are starting to see some of that technology being used across our managers, but it's not like we're necessarily committing or allocated to a fund specifically focused on that. Having said that, in terms of broader disruption, whether it's technological disruption or whether it's disruption in the healthcare space, we really try to find managers that can, especially in the VC space, identify the trends and then invest behind those trends. That's why, within our private capital portfolio, we have such a big allocation to venture and growth equity. I think that represents about 25% of our overall portfolio, so about 2/3 of our overall privates.

Bill Kelly: (33:35)
So Angelique, maybe a slightly different angle on this, and being from Boston a couple observations. One is I worked for a Trust Company, a custodian early on in my career and I always thought that was a horrible business. Less than one basis point, you need to make it up in securities lending and short-term investment funds. Brown Brothers was acquired by State Street, two local Boston operations at least headquartered there. I look at that acquisition, I say "Wow, this space has changed a lot and data is the new oil, and the amount of data that these custodian banks have, and the impact of that data, could be enormous." I don't know if you deal with your custodian or not, but are you expecting more and different things from your custodian and data from them, and analytics that help you make any kind of decisions, either around operational, alpha, or investment decisions?

Angelique Sellers: (34:27)
We do. We actually changed custodians a few years ago for that very reason, because we've had the same one for so long that we were wondering what else is out there. And so obviously technology, it was a big aspect of it in terms of reporting and everything, the custodian. I don't personally deal with custodian all that much, but I remember we were going through that process. We're kind of doing the same thing with consultants right now. Looking around. We don't have too many right now, we have one, but we want to know what's out there and obviously technology is a big part of that RFP process. I think you just have to, and the managers also, even fundamental analysts, you have to have data, you have to have technology. Computer can process things a lot faster, and I think those who don't pay attention to that stuff are going to miss out in the end.

Bill Kelly: (35:19)
I saw recently that DTCC is talking about going to T+1, and I was thinking when I started in this industry it was T+5. I just looked up, just today, to see how long it took us to get from T+3 to T+2. It took us 24 years, and to now be talking about T+1 measured in days, it's beyond silly. It should be measured in nanoseconds. It's crazy. So Geeta, from your standpoint, any disruptive technologies or opportunities around either managers or operational alpha?

Geeta Kapadia: (35:53)
Similar to Angelique, we also changed custodians a couple years ago, and are also thinking about our use of consultants. I think that that old model of the traditional field consultant is very different now, and a big part of that is due to the advances that we've been able to take advantage of in technology. There seem to be so many ways that we can use tech in our day-to-day investment process that I think we're a little behind the curve relative to other allocators in this space. There's a lot that we should be doing that we're not doing yet, so I think that the providers who can harness that, and can sell it as a real advantage relative to their competitors, are going to be the ones that are the most interesting to us.

Geeta Kapadia: (36:44)
From a manager perspective, we're very similar to Al. We're very bottom up, fundamentally focused. I get plenty of emails where I just have to say we don't really do quant. That being said, I think there are a lot of ways that fundamental managers can take the these technological advances that we've seen and enhance their process, enhance the way they do business. Whether it's trading, or whether it's analysis, whether it's [expo 00:37:10] review attribution, there's just a lot out there that are more pieces of that puzzle that we should be thinking about as we make investment decisions.

Bill Kelly: (37:22)
We're just down to a handful of minutes, so I think we're moving toward closing time. I think it's always good to put a ribbon or a capstone around this. Either a closing observation, something we missed. Al I'll maybe give you first crack.

Al Kim: (37:36)
So I guess a general comment. I think the last 5-10 years from the allocator's perspective, it's been fairly easy to generate strong returns. Essentially, if you had more risk, more higher allocations to equities, higher allocations to venture and tack, then you did really well. I think, given how quickly the markets have recovered following the pandemic, and given how extreme the valuations are today, the next several years are going to be much more difficult to generate returns on beta alone. I think for every allocator and organization, you really just have to figure out what skill sets and advantages do you have. Helmsley, as well. What advantages does Helmsley have compared to other allocating peer organizations? And really try to build and identify investments that leverage that edge, and that skill set of the team members that we have on our team. I think that's the only way we can invest with conviction with evaluations today.

Bill Kelly: (38:48)
Thanks Al. Geeta?

Geeta Kapadia: (38:50)
I would just take that idea a little bit further and say it's probably time for us to spend some good, solid block of our research and thinking about what is it we're missing? What are the gaps in our process? What are the gaps in our team? Where are skills that we're lacking. I could think off the top of my head at least three or four that, "We could really use some work," or, "We could really use some expertise in this area." I think making those hard decisions, and thinking about where's the best use of our dollar. Every dollar that we spend on the investment team is one less dollar that goes to providing health care to our community, so we need to be very thoughtful and very deliberate about how we spend our money. Some of that is probably going to be thinking through what tools are out there that we should be using.

Bill Kelly: (39:40)
Thanks Geeta. Angelique, final word?

Angelique Sellers: (39:43)
Well, one thing I'll say that's unrelated. I'm reading this book, it's called Subtract, and everything I'm hearing we always talk about adding things, and we're kind of predisposed to add things, and we're incentivized to do. Sometimes, like Al for example, they have a very concentrated portfolio and sometimes it's worth it to take a look and say well, "What can I subtract, instead of just keep adding things?" I'll wrap it up on this.

Bill Kelly: (40:08)
I think it's an excellent point. Weed the garden. Critically important. Please join me in thanking the panel.

Geeta Kapadia: (40:14)
Thank you.

Programmable Biology & Institutional Innovation | #SALTNY

Programmable Biology & Institutional Innovation with Jason Kelly, Founder, Ginkgo Bioworks. Dr. Uma Valeti, Chief Executive Officer & Founder, UPSIDE Foods.

Moderated by AJ Scaramucci, Managing Director, The SALT Fund.

Powered by RedCircle

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SPEAKERS

Jason Kelly

Co-Founder & Chief Executive Officer

Ginkgo Bioworks

FULL BIO

Uma Valeti

Chief Executive Officer & Founder

UPSIDE Foods

FULL BIO

MODERATOR

AJ Scaramucci

Founder & Managing Partner

SALT Fund

FULL BIO

TIMESTAMPS

EPISODE TRANSCRIPT

AJ Scaramucci: (00:04)
Welcome Jason, welcome Uma. Happy to have you at SALT. This is a topic on something I'm extremely passionate about, the intersection of software and biology. I'd love to start with you, Jason. So back in 2008, you and your team at MIT really predicted this technological Renaissance in biotech, you saw the convergence of technologies, including CRISPR for gene editing, low cost genome sequencing, using software to literally program cells. And today you're synthesizing things in the food industry, things in the pharma industry, among others.

AJ Scaramucci: (00:51)
This Friday, guys, this Friday, Jason is taking his company public in what will be the largest biotech IPO of all time, raising $1.6 billion from Viking, ARC, and a number of others. Can you explain to the audience what programmable biology is and what the vision for Ginkgo is?

Jason Kelly: (01:14)
Yeah, happy to do it. So the core idea is that inside of every cell is digital code in the form of DNA, so it's ATCs and Gs, it's not zeros and ones like in a computer, but you can read that code with DNA sequencing, genomics, and you can write that code, and this is really important, with DNA synthesis, DNA printing, which literally means you go on a computer, you type ATCGGG you hit print, and out of our labs in Boston or other companies like twist Bioscience in San Francisco, a piece of DNA gets printed.

Jason Kelly: (01:48)
And so if you can read and write code and you have a machine that would run it, which is sort of how we think of a cell, you're programming. And so the idea behind Ginkgo, we realize this idea, like you mentioned back at MIT, because we were engineers that came into biology later in life, computer scientists, mechanical engineers and so on, and there's this realization that, well, if you look across all of life, the DNA is the same, and inside of every cell, the infrastructure is the same to read that code. And so why is it that you don't have the kind of horizontal platforms like we saw in computers? Where are the operating systems? Where's the Amazon Web Services?

Jason Kelly: (02:29)
The idea behind Ginkgo was, well, let's build that. What does the platform look like that makes it easier and faster to program cells year over year? What application? All the applications. Just like you wouldn't ask, what application is Windows being written for, it's all of them. Which website is AWS for? It's all of them. The idea behind Ginkgo is, what engineered cell are you trying to produce? All of them. And our customers basically come to us, ask us to program them a cell, and then we deliver for them, and then we make money like Apple would in the app store. We basically take a royalty of value share on the value of that end app.

Jason Kelly: (03:08)
We'll talk about it today, but that can range, like AJ mentioned from you have $100 million joint venture with Bayer crop science to engineer microbes or produce fertilizer. We just announced a partnership that concluded with a company called Aldevron, which is one of the biggest MRNA vaccine manufacturers, where we optimized a cell to produce vaccinia capping enzyme, one of the supply chain components in MRNA vaccines. To Roche and antibiotics. To we work with Altria's joint venture Kronos in Canvas. All of these things are actually cell programs.

Jason Kelly: (03:40)
Real excited to be here today to talk about how that technology is improving and share it with you all. And yes, we all are listing. We're excited about it. We're going to trade as DNA, which used to be Genentech's old ticker before they got bought by Roche, which is, for a bio nerd like me is like Nirvana, so I got really excited about it on Friday.

AJ Scaramucci: (04:00)
That's awesome. So moving to you, Uma. So just to rattle off a few quick stats, I think 33% of the planet's non-ice land mass is used for agriculture. We're seeing 80 billion animals a year being slaughtered. And not only that, the demand for meat is expected to double by 2030. Can you explain what you're doing to change this, to solve this problem? And also what the essence of cultivated meat is?

Uma Valeti: (04:33)
Absolutely. AJ, it's great to be here back in New York. So cultivated meat is a field that's moving rapidly from science fiction into reality, and the idea behind this is you could cultivate meat directly from animal cells without having to raise an animal. So this has been a field in the waiting for the last several decades. You've put a lot of stats on the table, but I want to restate some of them because they're so important.

Uma Valeti: (04:58)
We right now have seven and a half billion people, and we eat about 75 to 80 billion animals every year. And the demand of meat is supposed to double by 2050. That means we need to figure out a way to grow 150 billion animals every year to feed 10 billion people. And these numbers are just mind boggling because of the amount of meat that needs to be produced, and in doing so, it clearly have a clear impact on the environment, climate, animal welfare, and health.

Uma Valeti: (05:26)
The idea for cultivated meat that Upside Foods pioneered is in late 2015 we started the company saying we want to grow meat from animal cells so you don't have to raise billions of animals every year. And we started off in 2016, we released first a beef meatball, and that just blew people's minds because we took a few cells from an adult cow, the cow doesn't need to be slaughtered, by the way, for this, and we grew it into a meatball and did a tasting, the Wall Street Journal wrote about it. And it just took off in people's minds because imagine if you can start producing meat across any species, meat, poultry, seafood, and you start doing it with significantly less resources.

Uma Valeti: (06:09)
Because when you think about a beef cattle, it takes about two to three years to get to slaughter. For a pig, it's about a year. For a chicken it's two to three months. If you think about those lifespans for those animals, and we can do all of that in two to three weeks independent of any species, it could be beef or it could be tuna, that opens up an enormous opportunity. And that's really what Upside Foods has pioneered.

Uma Valeti: (06:38)
We have done beef in 2016. We've done chicken and duck in 2017. We are just in the process of building the first production facility that can show end to end production of meat in a clean environment, right from the first cells. So we expect people to come on tour. We call it a slaughterless house. It's just obviously in trend with all the things we want to see happening in the next 10, 20 years in the world reduce use of resources, reduce greenhouse gas emissions, improving awareness of where food is coming from.

Uma Valeti: (07:08)
I think we are tapping onto a trend just like you've seen in 2008 of programming biology. We think we can basically bring any edible species of meat, poultry, or seafood to the world.

AJ Scaramucci: (07:18)
Wow. You guys have a lot of intersectionality in your work and in your companies, and one of the big mega trends in the food and ag tech industry in recent decades has been plant-based alternatives to meat products. You see Beyond, Impossible, in the burger category, you see people like Oatly in the milk category, and this has been phenomenal. Many of these companies are now listed publicly.

AJ Scaramucci: (07:48)
But there are two other paradigm shifts in the space we're also seeing, maybe in the earlier phase. One is precision fermentation, this is an area you do a ton of work on. You've got another joint venture in Motif, which is operating in the dairy industry, and let's perhaps start there, and then we'll go to Uma. I'd love for you to compare and contrast the differences and distinctions and the nutritional profiles of these things like Impossible and Beyond relative to what you're working on. Start with Jason.

Jason Kelly: (08:18)
I think there's going to be two generations here, and I can speak to the first one, Uma may speak to the second. So the first generation is exactly what you're saying, things like the Impossible burger, which, by the way, I know you're a vegetarian, I'm not a vegetarian. I grew up having a cheeseburger every day for lunch, and so you bite into an Impossible burger, it's pretty interesting. It bleeds.

Jason Kelly: (08:43)
That's a bit weird. There's not a lot of blood in plants, so how are they doing that? And what they've done is they've taken the gene for hemoglobin, which is the protein that makes blood red, and they take a yeast cell, like a brewer's yeast, and they program the genome, which is what we were just talking about, you're essentially installing some new code in there. It's ATCs and Gs, but it's new code. And then you grow that yeast cell up almost in a brewery, except instead of beer coming out, hemoglobin comes out. And then you add that back into this veggie burger and suddenly it smells right, tastes right, it's the Impossible Whopper at Burger King. First real innovation, as far as I'm concerned, in the burger industry, probably in 100 years or something.

Jason Kelly: (09:23)
There are other animal proteins like hemoglobin. There are key proteins in milk that makes cheese stretchy. If you've ever had a vegan cheese, it's not a great experience. That's because there's no casein in vegetables. And so these types of proteins will be made by fermentation of microbes or yeast, and then added back into largely plant-based products. That's the first generation and one of our app developers, Motif, is doing exactly that at Ginkgo.

Uma Valeti: (09:49)
I want to add onto that. So there's a couple of generations of food that are evolving very rapidly and Beyond and Impossible, and all plant based categories have done a fantastic job improving awareness of why food has to come from a place where it can be scalable, sustainable. And I think they've done great in improving even the quality of taste of vegetarian products. The burgers used to taste really terrible, and imagine what Beyond and Impossible, they've made them tastier. And they've done it through various combinations of color, taste, flavors, and they've used recombinant proteins in the case of Impossible to make it have the little ion or metallic paste when you bite into a burger. And that's been fantastic.

Uma Valeti: (10:28)
I think the evolution is going to be continuously going to, what's the holy grail? When we think about the food that we all fall in love with, for 10,000 years meats been the central plate. And when you think about what's on the central plate, it's a piece of steak or a piece of chicken breast, there's billions of cells in that and cells are the building blocks of all food. And what we're trying to do is to say, well, let's take the cells, keep them intact, because the cells are already programmed with the DNA or the code of what they're supposed to do, and let the cells grow on their own way that nature has already programmed them to do, and we provide them with the nutrients and the cells make the proteins, they make the fats, they make the little molecules that give you the taste and the texture and the aroma.

Uma Valeti: (11:13)
In our view, we think the palette is enormous. We don't think that one single protein can really make up for all the millions of molecules in a cell, so we're trying to harness the power of a cell and say, let's figure out a way to find the best quality cells for any species, and let's grow them outside the constraints of an animal, and that's step one.

Uma Valeti: (11:34)
So you put a product that has the taste and the texture, aroma, features, and then the next step, this is where I get really excited as a cardiologist is, what don't we start making the meat that we eat healthier? Can we start making it better for patients that have risk of developing cardiovascular disease or already have cardiovascular disease? Can we make this meet how characters that do not provoke inflammation in the human body?

Uma Valeti: (12:00)
Think about athletes. They want high, bioavailable, dense, protein. What if you make meat with higher protein? Think about patients with chronic kidney disease, they love to eat meat but as a doc I used to write the prescription, low protein, two gram sodium diet. Now what if I can tell them, you can eat meat, you could eat chicken, you can beef, but we can keep it low protein so your kidneys don't have to bear the brunt of that demand.

Uma Valeti: (12:22)
It opens up the pallet in a very different way and that's really what I'm excited about this generation of bringing meat to the table that maybe for the next 10,000 years could start evolving differently.

AJ Scaramucci: (12:33)
So to yes and this a bit, there are 400,000 plant species that are edible to us humans. We're eating less than 5%. And that's agnostic of culture, whether you're here in the US, China, Europe, et cetera. And in the meat category, there's a few animals that we eat. It's really just cows, chickens, pigs, et cetera, a very narrow experiential band. And I'm curious, for you, Uma, perhaps, first, where do you see this going? What other unique combinations of food and protein do you expect to see on plates going forward in the future?

Uma Valeti: (13:15)
It's a great question. I think Upside Foods is starting by launching chicken first. So we've already said Upside chicken is going to hit the markets as soon as we get regulatory approval, but we're working with the FDA and USDA to do that.

Uma Valeti: (13:26)
We picked chicken because chicken is universally loved in every culture and it's very versatile to cook, and that's the reason for chicken. But we have a portfolio of products that we're working on that includes beef, and pork, and seafood, crustaceans. But the thing that, as you talk about what's the next generation products, there's only a small number of animal species that are being eaten right now because it's easy to grow them in confined spaces. But what if we take those confines out? That we can literally take any edible cell from meat, poultry, seafood species, and start producing them in a clean environment.

Uma Valeti: (13:57)
Now game animals don't have to be at risk. The biodiversity doesn't have to be as much as the risk, especially if you're hunting them down for meat. That opens up an incredible possibility. And think about seafood. There's enormous numbers of species we don't even know about, but we're just losing them on mass because of whether it's deforestation in the Amazon, or, if you watch Seaspiracy there's a pretty nice account of what's happening with the species.

Uma Valeti: (14:22)
We think that if it's for food for humans, we can solve that problem. In doing so, then you have a ripple effect. You don't have to plant lots of crops in the Amazon. You don't have to transport... Transportation of meat is a huge burden. If you start producing meat locally, that just changes everything. Local, regional, decreased transportation, not need to have the level of refrigeration and fear of salmonella are E.coli. I think it opens up a lot of possibilities.

AJ Scaramucci: (14:51)
Sure.

Jason Kelly: (14:52)
So have you tried to do it? Have you tried to grow cells from like a panther or something just to see if you can grow them?

Uma Valeti: (14:59)
Our engineering and scientific team are incredibly creative. They'd love to get their hands... I can tell you, we have someone who is actively trying to figure out, can we bring the wooly mammoth back? So it goes back pretty far away, so it's not for a lack of imagination.

Jason Kelly: (15:13)
Mammoth steaks.

Uma Valeti: (15:14)
As a business, we need to make sure it's right front and center we're putting products people want to eat right now.

AJ Scaramucci: (15:19)
I want to move to another really hot button issue, particularly here today with Dr. Scott Gottlieb here, and that's the pandemic. And Jason, you've been operating on hyperdrive at Ginkgo. In the midst of the breakout last March you were working in collaboration with not only US government, but also Moderna to help synthesize different aspects of the MRNA vaccine. I'd love your commentary on where things are today in regards to the pandemic, from your perspective, and secondarily, how you guys at Ginkgo are thinking about prevention of future pandemics, how are you building a societal immune system, if you will?

Jason Kelly: (16:05)
This is a super good question. I think one of the interesting things about the pandemic is we now have a lot more broad based awareness of biology. Everybody suddenly knows... My parents know what MRNA is and PCR tests and all these things. And so that's actually a good moment, I think, and not a great situation right now globally with the pandemic, but it's not a situation that is leaving our minds tomorrow. And so I think actually we're a little bit lucky in this happening before we got very good at programming biology. In other words, we're just at the beginning, we're just inflecting. It's kind of like semiconductors in the 50s or 60s, or personal computers in the 80s, with synthetic biology today, programming cells.

Jason Kelly: (16:50)
And so we're getting a chance to build the equivalent of cybersecurity before the internet, and that's what COVID offers us an opportunity to do. And so I think that the big pillars to this are rapid vaccine manufacturing, rapid therapeutic development, and then surveillance testing. In other words, monitoring, kind of like you would with a weather satellite, so that what's going on.

Jason Kelly: (17:14)
We were lucky enough to be able to help. Obviously I mentioned this project we did with Aldevron, one of the vaccine manufacturers, to optimize the production of one of these enzymes that's used in the MRNA vaccine manufacturing process of places like Moderna.

Jason Kelly: (17:27)
The other area we've actually spent a lot of time in is in the surveillance testing category. So at this point we're doing, I believe, more K-12 testing in the country than anybody right now, which the country's done a good job giving a lot of money to states to say, hey, let's keep schools open by monitoring so that you could close a classroom, not a school, and that's the power of having this ability to see what's going on, to allow governors and other leaders to have less disruptive public health interventions, less quarantining, these sorts of things, while in the midst of an epidemic. And that, I think, is something we need as a country just from a national security footing at a minimum, and certainly during COVID so that our lives can be more normal.

Jason Kelly: (18:09)
We're happy to be participating in it. It is certainly a big problem, but I think you are seeing the country, and the rest of the world, muscle up to build the technology that hopefully then persists to make it way harder for us to get hit this hard again in the future.

AJ Scaramucci: (18:26)
Definitely. And to double click on this a bit, Jason, so there's been a number of talks this week about longevity, cellular reprogramming, Yamanaka factors among other things. You've got quite a bit going on in the cellular therapeutic space, in the biotech space, synthesizing small molecules among other things. Can you touch a bit more on that?

Jason Kelly: (18:51)
The good thing about Ginkgo is we're not a product company. So I mentioned all these things we're doing, that vaccine [inaudible 00:18:58], that's Aldevron's product. The work we're doing in antibiotics, that's Roche's product. And so there is a big opportunity.

Jason Kelly: (19:04)
We just announced a partnership with Biogen, one of the big gene therapy companies, to work in AAVs back in the first quarter of this year, earlier this year. That whole category of cell and gene therapy, I think particularly after the success of MRNA vaccines, you're going to see that category get substantially bigger in the future. You're getting manufacturing built out to make it cheaper. All these things are happening right now. So we expect that to be something that a lot of our customers come asking for in the next couple of years, would be, hey, Ginkgo, could you program me a more efficient gene therapy or cell therapy, TCRs, things like that, for sure.

AJ Scaramucci: (19:41)
And over to you, Uma. I mean, I remember, I think it was back in 2009, there was a breakout of H1N1, or the swine flu, and there were 153,000 people killed over a six month period. That was, at the time, an unmitigated disaster. Today, you've got COVID-19, there's over four and a half people dead in the last 14 months. Both of those instances emergent, one from a wet market in Wuhan, the other from a slaughter house. I'd love for you to touch on how what you're doing really affects food security, both here in the US and abroad.

Uma Valeti: (20:23)
Thank you for asking the question here. This pandemic has touched us really closely. I lost my dad to COVID about seven months ago, and I lost a first cousin to COVID about nine months ago, and this was all before vaccines were available. And after vaccines were available, my dad's family members, my mom's family members, all got vaccinated and they all survived after getting COVID.

Uma Valeti: (20:50)
It's very clear how we innovated under pressure and got the vaccines out. So I lost my dear dad, who has been a big supporter. He's a veterinarian, by the way. I grew up with him, with cattle, sheep, everything around me. But nature has given us a clear mandate to adapt and if we continue to raise animals in intense confined production facilities like we have now, it's just a place of intense concern. It's like a, I won't want to use the word, but it's a ticking dash dash.

Uma Valeti: (21:24)
So every effort should be made for us, number one, to walk back from that with what we've done to produce food. And that's where I hope cultivated meat can play a big role. It's going to take a long time to transition away from the number of animals we are raising and that is still needed to put high quality protein on the plates. Meat alternatives, plant based, are doing a great job, but if we want to preserve the choice of eating delicious meat, that is climate friendly, that is healthy, and doesn't increase the risks of pandemics. I think this is a really big opportunity for us.

Uma Valeti: (21:55)
Even before COVID we were talking about this all the time, but during the last 18 months, the amount of interest in the work we're doing just has gone up 10 X, and there's dozens of companies across the world, in nearly every meat producing country, meat consuming country, that have been started. Governments have been giving grants on this, undergrad and PhD research programs have been started, lots of regulatory agencies are really active thinking through how can we get these products out to market? So I think we have a pretty big opportunity to adapt, and it's just the time to pay attention to it.

AJ Scaramucci: (22:26)
Uma, you've done a lot of R&D across many different cell types. You seem to have settled on chicken as your beachhead product. When can we taste it? When will it be out in the world? And does is your product pipeline look like today?

Uma Valeti: (22:42)
Absolutely. So we announced Upside chicken will be coming to the market. We are awaiting regulatory approval from the FDA and the USDA. The agencies have been remarkable in producing a guidance on how we can regulate the cultivated meat industry [inaudible 00:22:57] working with them. So we've announced our first partner, Dominique Crenn, who's one of five three Michelin star women chefs in the world, and she's in the Bay Area. So we plan to release our initial products through a collaboration with Dominique Crenn at Atelier Crenn restaurant, but just to follow up right after, there's a number of restaurant partners and also smaller grocery chains that we're talking to, and we hope to be able to announce that.

Uma Valeti: (23:20)
We can't make enough at the moment. That's really why the first industrial scale production facility opening in the Bay Area, I think it's going to be a crown jewel for innovation. But based on that, we expect to build much larger scale commercial production facilities in the US and also outside the US, that could make 10 to 20 to 50 million pounds of meat every year.

AJ Scaramucci: (23:43)
That's very exciting.

Uma Valeti: (23:44)
The of portfolio products, chicken will be our first one, but like I've said, we're working on beef and pork, seafood, and crustaceans. We want to be able to release them directly as an Upside brand, because we also see this as an incredible brand building opportunity, a platform that can bring the foods we love to the plate. So if I say what's our ultimate vision and goal, we want to be the most desirable brand of choice for meat lovers across the world in 10 years from now.

AJ Scaramucci: (24:12)
Fascinating. And as the last question we'll go to you, Jason. So really this programmable biology mega trend is just getting started. And I like to think about it myself as evolution going from natural selection to intelligent direction. We're now able to shape, shift, and program biology at will. Where does this go in another 10 years, in another 20 years, another 50 years? If you wouldn't mind.

Jason Kelly: (24:41)
What I think is cool about it is it's going to touch a whole bunch of different industries. The way I get it in my head is I think about computers. That was a programab;e technology, you put in different code, it does new things, it gets better every year. What industries did it disrupt? Well, media, finance, telecom, advertising, all the information based industries. Well, why is that? Well, a computer is a programmable machine, but fundamentally it moves information around, it moves bits, zeros, and ones.

Jason Kelly: (25:09)
Well, a cell is programmable. You put in new code, I swear to God, it does new things. Incredible. It literally runs on digital code. But it doesn't move information around, it moves atoms around. So if you think of the industries that are going to get disrupted in the next 10 to 20, 50 years, it's all the physical goods industries. It's building materials, it's electronics, it's food, it's all the stuff, all the things, that, by the way, you know what computers didn't disrupt, hamburgers. These industries have been left alone for the last 50 years of innovation and they're all biotech industries. They just don't realize it yet.

AJ Scaramucci: (25:42)
Fascinating. And with that, we've got an IPO coming out this Friday, keep an eye out for that at DNA. And hopefully we'll be tasting your chicken soon. [crosstalk 00:25:52]. Thanks, guys.

Uma Valeti: (25:53)
Thank you.

Inside the NFT Boom | #SALTNY

Inside the NFT Boom with G Money, Delphi INFINIT. Snowfro, Art Blocks. Justin Aversano, Twin Flames Artist. Noah Davis, Specialist, Head of Digital Art & Online Sales, Christie's. Priyanka Desai, Vice President of Operations, OpenLaw.

Moderated by Les Borsai, Co-Founder & Chief Strategy Officer, Wave Financial.

Powered by RedCircle

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SPEAKERS

G Money

Delphi INFINIT

FULL BIO

Erick Calderon (Snowfro)

Founder & Chief Executive Officer

Art Blocks

FULL BIO

Justin Aversano

Twin Flames Artist

FULL BIO

Noah Davis

Specialist, Head of Digital Art & Online Sales

Christie’s

FULL BIO

Priyanka Desai

Vice President of Operations

OpenLaw

FULL BIO

MODERATOR

Les Borsai

Co-Founder & Chief Strategy Officer

Wave Financial

FULL BIO

TIMESTAMPS

EPISODE TRANSCRIPT

Les Borsai: (00:07)
Thanks for being here today. My name is Les Borsai I'm a Co-founder of Wave Financial. We're one of the larger regulated asset managers that primarily do crypto and blockchain. I started my career in the music business so community has been something that's really special to me. I got involved in cryptocurrency in 2013. Bitcoin was really high at 200 back then and was destined to try to find the next one. And did the Ethereum presale and many other pre-sales. I want to start off, we're so lucky to have all these people. These people are the core to NFTs. So it's really great that SALT was open to let us do this and kind of let us do it our way. But why don't we start with introductions?

G Money: (00:55)
Hey guys, I'm GMoney. I'm a collector and investor in the NFT space. I'm well known for buying a CryptoPunk app at the beginning of the year and forming a thesis around it that went viral on crypto Twitter. And I've been pushing the space forward ever since.

Snowfro: (01:14)
Hi everybody. My name is Erick also known as Snowfro. I'm the founder of a NFT platform called Art Blocks. Have been in the generative space for a long time. Have been in the NFT space since claiming CryptoPunks in 2017 which is kind of the, at least for me, the beginning of this. And yeah, crazy to be here. Thank you very much for having me.

Justin Aversano: (01:34)
Hi everyone. I'm Justin Aversano. I'm an artist, a non-profit community art leader and an art collector as well. And I'm excited and grateful to be here. Thank you.

Noah Davis: (01:46)
Hi everybody. I'm Noah Davis and I'm definitely the newest transplant to the NFT space on the stage. I joined in March when I sold the Beeple NFT at Christie’s where I'm a specialist in the contemporary department now very, very much focused exclusively on NFTs.

Priyanka Desai: (02:04)
Hey everyone. I'm Priyanka Desai I work for a project called OpenLaw. OpenLaw has put together several different decentralized organizations including Flamingo which is an NFT DAO or collective of individuals that come together and purchase various NFTs including digital art, collectibles, digital land in different metaverses and invest in different NFT related projects.

Les Borsai: (02:31)
Okay, so let's start with community. And I want to do this kind of free form instead of like calling on people, jump in as it's a topic that might relate to you or be near and dear to your heart. So community has always been an important aspect in crypto, whether it's been for impact or just building economies around projects. Can you guys speak a little bit about the community and what it means? Any one of you.

Snowfro: (02:59)
I'll jump in kind of rewinding there. There's a platform called Discord. Discord is essentially like a Slack or a AOL instant messenger, I don't know how much everybody knows. But it's a big community, everybody gets together. And in 2017, right after the CryptoPunks project launched, CryptoPunks' project is 10,000 unique eight bit cartoons bases that are represented on the blockchain as an NFT or quasi NFT. A community was built then with about 20, 30 people. On a regular basis nerding out about this weird project of 10,000 pieces that everybody was just kind of like early on and kind of feeling this weird energy because this is where this all kind of started. Over the course of those four years, we've gone from 30 people, a hundred people, maybe a whole week with not a single comment in that chat. And then a couple of days where it was just like day after, comments every minute. To a community of about 20, 25,000 people where there hasn't been silence in that conversation for at least six months.

Snowfro: (04:04)
I mean not one moment when someone isn't typing. And what that means is that you have this individuality that's associated with owning something that's unique, a shard of the artist's vision, a shard of this NFT madness that's kind of happening. And people talk about that and they share it. And they describe what it means to them and then they describe what it represents. I'm represented by a green zombie with a bunch of hair, that's kind of how people know me in this space because that's how I'm represented in there. And that community, I don't know that has existed to that degree before.

Snowfro: (04:37)
I'm not a historian, I just think what we're experiencing is something different and disruptive from a human standpoint. Something that we can all kind of belong. Not belonging to the NFT space as a CryptoPunk owner could cost anywhere between a hundred and $600,000. So that level of inclusivity is gone. It's like if you had it, you had it. But there's projects that come around every day that allow a new level of inclusivity, a new level of originality. And I think there's something really special there that goes beyond the value of these JPEGs that are just selling for a lot of money.

Les Borsai: (05:12)
Pri can you talk about how community plays into a DAO and what a DAO is?

Priyanka Desai: (05:17)
Yeah, yeah. And I think that's a great primer. Discord is sort of the backbone for a lot of these NFT and internet communities. So if you're ever interested in a specific NFT collectible or something else, there's definitely a Discord for you. When anyone asks me how they can get involved, I just recommend popping into the CryptoPunks or Art Blocks Discord. So I'm just going to plug that for you guys right now. On the DAO side, that sounds complicated. It stands for Decentralized Autonomous Organization. OpenLaw launched Flamingo which is this NFT collective I was speaking about in the introduction in September of 2020. There's about I think 67 different members now, including GMoney and Snowfro here. The membership really, there's an active Discord community for Flamingo.

Priyanka Desai: (06:07)
We have weekly calls where we talk about different NFT collectibles, develop thesis and strategy around specific NFTs. Pop into different communities. And what's really nice about these DAO structures, and just to kind of background on what a DAO is, I kind of skipped over that. It's a way for all of these members of this DAO to pool together their capital and then self-govern through on-chain proposal processes and then proposals to really distribute these strategies or allocate capital to these strategies. So Flamingo as a collective owns about 220 punks. They own, I want to say over a thousand Art Blocks. And beyond that again digital land. They've invested in several NFT related projects as well. And so it's just like this wide swath where they have decided to allocate a certain percentage of their capital into these different categories. And so that one you're speaking to communities really, really important, and it's a really interesting way for these members to kind of cut through the noise of Twitter and the internet and maybe some of these other discourse and just come together and rally around specific projects that they're really excited about.

Les Borsai: (07:19)
One of the things I love about this space is really just the innovation and the disruption that happens in this space. If we take a look at DeFi, DeFi I think really came out of a frustration in finance which is good for this panel. NFTs to me kind of carried on that same ethos. And the disruption I'm talking about is obviously returns in DeFi and existing gallery systems and NFTs. Do you want to talk about that initial disruption?

G Money: (07:51)
Yeah so I think what really attracted me to the NFT ecosystem at first was if you have this view of assets going digital longterm, you want to be owning NFTs because everything in the real world is an NFT. So everything is non-fungible except for cash. So when I think about it through that lens and I think about the future and I think about the way things are headed, I'll give you a little anecdote. On the first day of quarantine last year I bought a PlayStation. I hadn't played a video game in over 10 years. I had to download Fortnite. I start playing Fortnite with my friends and their 12 year old nephews. And the first thing these kids ask is what skins did you buy? And I'm like skins? I'm like they don't give me any special powers. There's no way I'm spending $8 on a skin. Fast forward two or three weeks later, I'm buying every skin I could possibly get my hands on.

G Money: (08:47)
And so it was then, and this is before I knew what an NFT was. This was in March, April of 2020. And it was then that I was like that kid today is 12 years old. 10 years from now he's going to have his own discretionary income. He needs to be totally okay with owning an asset in a totally digital form, it doesn't need to be physical. So there's going to be this massive supercycle here over the next 10 to 20 years where more things will be coming in a digital format. So when I found NFT that started making sense to me right away. Where it's like here you can totally own an asset. It's provable on-chain with this immutable ledger which is the essence of blockchain. And you can have this ownership structure. So as I started formulating a thesis around NFTs, I was like well, I think that there's this massive supercycle over the longterm and NFT art and NFT assets will be one of the first ones that will be taking advantage of this.

Les Borsai: (09:42)
I think going along those same lines and thinking about curation, one of the things that's also been really amazing is the ability for Art Blocks or Christie's or even you Justin with the Twin Flames to really take, not just taste and perspective on an artist, but the ability to select those artists and support them. Do you guys want to talk a little bit about that and maybe quantum as well?

Justin Aversano: (10:09)
I'd like to talk a little bit more about how GMoney and I connected through the Discord that Snowfro was discussing earlier. And that conversation led to not only my work being collected by a whole plethora of new age, crypto art collectors but creating a public art exhibition around the art we are talking about. And I think it's important to recognize that without these communities we're creating online and integrating it in person in the public space. And I think that's a place where I like to spend my time is bridging the worlds of physical and digital and how we get our online community in a space like we are here all together right now. And it's as simple as the art leading the way, inspiring us to work together and create a public art exhibition like GMoney and I have curated through my nonprofit called Same Art Space.

Justin Aversano: (11:06)
The show was called Pixelated and we did three cities. We crowdfunded through the punk collector ship. And I think that alone, seeing collectors band together for art for the community, for the artists was probably the most impactful thing to witness because when have you seen Picasso collectors or Francis Bacon collectors get together and say, let's do public art around this as a unit? No, they're all putting in their vaults or they're putting in their homes. So I think the online distribution brought us together as not only friends and collectors and business partners but we're building the space out as we move forward. And I think it's incredible what just one online conversation can bring about. How we're here today because of this. I met all these people, these amazing trailblazers in the space through that one Discord and I think it's magic. What community can achieve if you just have the conversation with the person sitting next to you or the screen name you see. And I think that one conversation could change your lives, it has changed mine.

Noah Davis: (12:15)
You stole my joke. I was going to say nobody gets together from the Mark Rothko fan club to do an exhibition in the streets when a big Rothko comes to market. That's how Justin and I met. Justin contacted Christie's when we announced we were selling the CryptoPunks from the collection of Larva Labs and our evening sale. And Justin and SaveArtSpace did incredible work to realize this vision of the punks invading New York city through public advertisement. And that was incredible. I mean Justin and SaveArtSpace and G money helped to promote this sale in a really impactful and important way. And that just never happens with any other artist.

Les Borsai: (12:57)
One of the things that's really interesting and I'm actually curious about is how hard was it to sell Christie's on doing the CryptoPunks? Because I mean Christie's has been around since what? 1760. And follow up to that is how impactful is that for the NFT space? Does that validate the piece as real art? I mean not that it isn't real art.

Noah Davis: (13:19)
Yeah. So punks was easy because it was after Beeple. Beeple was a little trickier because that was the first art that doesn't exist that we sold. And I think that the timing was really crucial because we got this opportunity towards the end of the first round of the pandemic I guess, in the beginning of this year. And we had spent the last six or eight months doing a lot of things for the first time. So doing something for the first time is no longer scary. Usually Christie's is a very risk averse company, but it was actually surprisingly simple to get this across the finish line.

Noah Davis: (13:56)
And I think it was especially attractive because of the opportunity to take cryptocurrency for payment. That was actually the way that I wrapped up the entire opportunity for the business to review. We're selling this asset that is non-traditional. It doesn't technically have a physical representation so you don't have to photograph it. You don't have to take care of it, you don't have to insure it, that's all good. And we can take cryptocurrency for payment because I knew there were certain executives who were really curious about this and definitely very many of our top clients were really curious about when we were going to step into the cryptocurrency ray. So taking ETH for that NFT was really the way that we moved it all forward.

Les Borsai: (14:38)
And now you're doing a collaboration with Art Blocks. How does that come about where you make a decision on what you're going to collaborate on, what's coming next?

Noah Davis: (14:47)
So the Art Blocks consignment is coming from the collection of a guy who goes by the [inaudible 00:14:55] in Canada. And most of the works in the consignment were minted directly from the smart contract. So that's actually really a collaboration between Christie's and Barcella. But I'm working directly with Erick and Art Blocks to help to promote this consignment. We did an after dinner mints episode recently which is Snowfro's and Art Blocks weekly. Is it weekly?

Snowfro: (15:18)
Every Sunday.

Noah Davis: (15:19)
Every single week and talk about community. Weekly podcast, live podcast, video session I guess, with the people. So that's the new paradigm. It's really about engagement and having a constant connection and a meaningful, organic, true connection to your audience.

Les Borsai: (15:38)
Did it feel like a validation when Sotheby's did the Bored Ape?

Noah Davis: (15:42)
I'm not going to talk about Sotheby's brains.

Les Borsai: (15:47)
Considering you did it first it's okay.

Noah Davis: (15:48)
Well hey, no it's look. A 101 in one lot is a lot, that's all I'm going to say. I'd rather focus on one Ape at a time.

Les Borsai: (15:59)
Exactly. So let's, I mean obviously this is an audience of finance people. Let's talk now a little bit about NFTs as an asset class and where we see it going in finance. That might be a good one for you to start on.

G Money: (16:13)
Yeah. So one of the things to me that I found interesting right from the start, like I said earlier is that if everything in the real world is an NFT that means you can bring everything on-chain. So as I was thinking about that, I'm like okay, great. As I look 10, 20 years into the future besides just let's say this massive supercycle of younger kids growing up and being okay with digital ownership, what happens if we bring financial products on-chain, right? Where the market cap is massive? What happens if we bring mortgages on-chain? You're not going to bring mortgages on-chain tomorrow because there's trillions of dollars of assets there. But you need to kind of get that TVL, the total value locked up so that the chains prove themselves and they prove that they have that security.

G Money: (17:01)
And then over time, as people feel more comfortable with the security of all these assets, you will be bringing stuff on-chain. What is a mortgage? A mortgage is an NFT. What is a house? A house is an NFT. So as those things come on-chain, you're going to have this massive opportunity where these products and the photo calls are being built today to support the art market and collectibles and things that we know and understand as humans. But then long-term you're going to be getting all these assets that are coming. And that to me is a really interesting part from an investor standpoint. I've spent 20 years in traditional finance and to me, looking at NFTs I'm like wow, this is much the same way if you look at the global GDP and you take a look at the finance sector and what percentage is that of GDP. DeFi is going to be an important to NFTs but NFTs to me is the major market.

Les Borsai: (17:52)
NFTs definitely has a broader appeal, so it impacts so much more. Generative arts been around since the '60s. And we talk a lot about on-chain and off-chain and I'm not sure that everyone understands that. So we might want to just explain that a little bit. But we really saw the acceleration in sales I believe with anything that was on-chain. A lot of the great art that is sadly off-chain may not have the same impact. Is there a reason?

Snowfro: (18:22)
Well to touch on the concept of on-chain. So we say the phrase on-chain all the time. And what that basically means is that the information relevant to the asset, in this case an NFT is stored on the blockchain versus not stored. So within NFT, you can't actually put a home inside of the Ethereum blockchain. So it's considered an asset represented by a token. And the token is represented on the Ethereum blockchain. In the art world, a traditional NFT is stored as an image on a decentralized infrastructure in general called IPFS, InterPlanetary File Storage. That is not a blockchain. It is a source of information that can be managed and uploaded to by anybody, but it's not on the blockchain. What's on the blockchain is the actual proof of ownership based on cryptographic hash of the information that's on IPFS.

Snowfro: (19:25)
So sorry if I'm kind of losing you guys here but it's a little bit complex. But the point being is that even though there's a lot of commentary about stuff like art not being on-chain, no matter what, you can still prove that you own it. Even if these other sources and these infrastructure places go down, you can still prove that you own that digital photograph and that digital image with information that's stored on a chain. And really at that point it's your job when you buy a $10,000 piece of art that's not stored on-chain, for you to also put it on a thumb drive, maybe put it in a safe. If I go into a gallery and I buy a piece of art I'm not just going to shove it in a box, I'm going to be very careful with it. I'm going to put it on my wall.

Snowfro: (20:04)
And that responsibility lies within the NFT space as well. What he's alluding to with on-chain art is essentially all of the information or most of the information necessary to reproduce an image actually lives on the Ethereum blockchain which is beautiful but incredibly limiting as well. So in many cases, what I specialize in is generative art. Art Blocks is a platform that enables generative art to be created and managed on-chain. There's something really special to me about it being on-chain and to a lot of the community that participates but it's not the same. It's not like a one is better than the other. It's just two different technical qualities of NFTs that are to be discussed. Sorry if I totally lost you there. I don't know if that, does that kind of cover?

Les Borsai: (20:53)
I think that does. And the other thing is when we talk about chains, we're primarily talking about Ethereum right now. Even though we're seeing noise being made from Solana or Smart Chain, the Binance stuff. So can we talk about the differentiation with Ethereum? Obviously there's well culture that exists with Ethereum that drives a lot of these prices and how are other chains going to impact it and how important is Ethereum in the ecosystem?

Snowfro: (21:24)
Anybody else want to take that? I mean to me Ethereum is the gold standard. It's where I claimed my CryptoPunks. It's where I've been for the last four years. It does not mean that something not on Ethereum is not going to be successful. It's just Ethereum is the Christie's right of the blockchains. And so yeah, there's many other I'm sure auction houses.

Noah Davis: (21:49)
I think when good art starts appearing on Solana, that's going to change the conversation. But for right now, it's really just copy and paste what we already have on the Ethereum blockchain. So until that changes then this conversation is a little irrelevant. I think Solana is a great chain for DeFi. But right now for NFTs, as far as I can tell there's room for improvement.

G Money: (22:12)
So yeah. So as a collector one of the things that I always tell artists that are coming on-chain is like, drop it on Ethereum. There's a certain sense of gravitas with it. It's like branding. It's like if you're going to go on a side chain, you could be like the world's best artist but there is some sort of branding that goes around with it. If you're selling a piece for $10,000 or more, a couple of thousand dollars, do the hundred dollars amending costs necessarily matter? Not really in the long run.

Les Borsai: (22:42)
No, and for me, it's even something else. I take a look at DeFi and what they did in DeFi is they made markets. These are market makers and it's exactly what has happened with NFTs. So when we talk about someone buying the floor, because at the end of the day these are also financial instruments. That can't happen without the whale culture that exists in the Ethereum and I think a lot of the other chains don't have that. So can we speak about some of the whales and I won't call them out that might by the floor and we see the prices move. That's a good one for you.

G Money: (23:15)
You want to talk about people buying the floor?

Les Borsai: (23:18)
Yeah.

G Money: (23:18)
Okay. I mean it's just like a financial asset. It's like if you want to deploy money into a project, it's like you could buy something either at the really high end or you can buy something that's a floor, the cheapest ones. And those are generally more liquid. If you buy something at the really high end, when you do go to sell it, you might need an auction house to sell it. You won't get instant liquidity when you choose to sell it.

Les Borsai: (23:42)
I think I'm talking about buying the floor wide. Buying many pieces and it actually moves the price, sweeping the floor.

G Money: (23:48)
Yeah, it definitely happens. But I think the mindset is for sweeping the floor is I want to be able to, let's say if I want to get 10. I want to be able to sell them on the way up like kind of position size it and manage the risk. And I think that to me is a lot of the thought process behind sweeping floors.

Les Borsai: (24:10)
And in terms of that happening, obviously it creates value for the collectors. How does it impact the artist or does it?

G Money: (24:21)
Oh, the royalties. Every project has a different set of royalties but generally it's around somewhere between 5 and 10% for the most part. And so Justin can speak to that. When we spoke, I remember he came to me and he sold a hundred of his photos for half an ETH each. And they sold out in a week maybe.

Justin Aversano: (24:46)
Like three days.

G Money: (24:48)
In three days. And now you get, you have a 10% royalty?

Justin Aversano: (24:51)
10% royalty.

G Money: (24:53)
10% royalty. What was the last sale?

Justin Aversano: (24:54)
Like $2 million.

G Money: (24:57)
And that was a thousand dollars to original sale.

Justin Aversano: (25:01)
Yeah.

G Money: (25:02)
Yeah. So as an artist [crosstalk 00:25:05].

Justin Aversano: (25:04)
Royalties for me as an artist is the key most important part about NFTs in general because it's doing something that the traditional art world has lacked for living artists forever. And now the artists get to take their power back. And I think that's the most game changing aspect about... I guess the financial tools are great,, the liquidity is amazing. But I think as an artist, as a consumer and a user, an activist for it, it's like the royalties saved my life and changed my life and brought a whole new self-sustainability that I could only have dreamed of. But this new technology is literally the caretaker for artists to finally do their job and create art for humanity and not struggle or be in debt.

Justin Aversano: (25:52)
This allows you to propel and be abundant. And I think this is why I got into NFTs is simply because there was a royalty aspect and seeing it play out and receiving royalties changes your whole perspective. And once you understand that, you realize how important it is for not only in this moment with NFTs but for art moving forward forever. This is the new standard for artists signing contracts and smart contracts. It's like if you're not getting a royalty you don't do the job, you don't make the art.

Snowfro: (26:26)
There was a huge controversy about secondary market royalties in 2019 and 2020. And somebody just put it very simply. And I can't say this enough, NFTs are allowing artists to participate in their own success, period. That has never existed in the traditional art world. And that now exists on a weekly payout basis without having to have somebody like say, oh the check is in the plate. It literally is happening. And everybody in the space is being elevated as a result of it. We're not there yet where this happens automatically. This happens automatically with some platforms, not others, people are coming around. But the important part is that the precedent has been set and it's being abided to for some massive sales. So my best friend sold a NFT the other day for about $6 million. And he just turned around, he did it in a private sale. And he turned around and sent 5% to the artist which is the standard for Art Blocks. Two and a half percent to Art Blocks.

Snowfro: (27:29)
The platform is participating in its own success. The artist is participating in their own success. And what that does is it brings joy to the people selling the piece to a degree. Like it almost you can be proud, not shy or like awkward with the artist like oh man, I just sold your piece. I just sold your piece and I just sent you $300,000 because I sold your piece. And it's special. It sounds really crazy. I think there's no way that if you guys aren't totally ingrained in NFTs that this doesn't sound totally crazy. I think everything that we're saying has to sound crazy. Especially to anybody that's educated. And I mean it is, I think the more educated you are, the harder it is to just kind of really want to understand what's happening here. But I just encourage people just to take a step back and understand that everything that you've learned about community and art and intuition is changing here. And give it a chance and give it a shot because it's really special on so many different levels.

Noah Davis: (28:33)
I really want to say. Oh, I'm just going to say for the record, I'm all for it. For artists resale I think it's very much overdue. And probably the traditional art world needs to give artists a lot more credit than they normally do. I mean we wouldn't exist if it weren't for artists. So the idea that artists don't deserve to participate in their success is the idea that they weren't already participating in their success is really upsetting to me. That's part of why I gravitated towards NFTs because this stuff, I feel like there's a utopian edge to everything that we're talking about, a utopian capability or a possibility. And if I can help to push it forward then I'm all for that.

Snowfro: (29:15)
When Christie's secondary market royalties.

Noah Davis: (29:18)
So-

Snowfro: (29:18)
I say that jokingly. I spoke to Marcella who was actually going to manually pay out to the into the artists [crosstalk 00:29:25].

Noah Davis: (29:25)
Yeah. So this is the new paradigm. My clients are not going to great lengths to avoid compensating the artist. They are going to great lengths to compensate them. To do the thing that people used to try to not do.

Les Borsai: (29:39)
So innovations often have kind of pushed back from traditional infrastructures. I read something that [inaudible 00:29:47] had put out being kind of vehemently against NFTs.

Noah Davis: (29:50)
I used to intern there.

Les Borsai: (29:51)
What's that?

Noah Davis: (29:52)
I used to intern at Larry's shop.

Les Borsai: (29:54)
So the question is, well you probably got a call from Larry. How do you balance the innovations that you want to do and the way it moves forward when you're getting push back from these galleries that have the biggest artists in the world?

Noah Davis: (30:09)
Controversial, maybe hot take. But I think that those galleries that run the world are probably going to not run the world soon. And the people who will run the world have the mindset that GMoney was describing. My entree, my accidental entree to NFTs was also Fortnite. And I ended up in this position where I'm trying to explain the appeal of NFTs to the old guard frequently given I'm a specialist at Christie's. I was recently giving a talk in Aspen to people who had never heard of NFTs before, trying to wrap their mind around it. And I used the Fortnite example. And the guy I was engaging with the audience in the Q and A was like, oh so this is something that like kids are into right. And he said in a really kind of cynical way. And I said, yeah and do you know what kids turn into right? And there was this really awkward moment where he's like, oh yeah. So they're going to want this stuff. This is what people want going forward.

Les Borsai: (31:05)
We hear a lot about it being a bubble. We've seen a pull back over the last handful of days. What do you say to people who say it's a bubble? Pri, why don't you?

Priyanka Desai: (31:16)
Yeah, that's a good question. I firmly disagree. I feel like we're just kind of going. Of course, I'm a bit biased here. Flamingo as a community it's right now 67 people. We constantly are getting emails and individuals wanting to join this collective of people that are collecting NFTs. There's actually several DAOs that are spinning out of Flamingo. Some of the membership is overlapping but it's really to harness certain subcategories of NFTs. So for example, we have one that's going to be focused on the metaverse and buying digital land and building up the digital land, almost like a virtual real estate collective if you will. We have something that's in the gaming space, there's these games that are kind of dubbed play or earn. And so you play them and can earn real money for playing these games.

Priyanka Desai: (32:12)
And it's definitely mobilizing people in developing countries and all over the world. So setting up a guild for that. We talked about possibly shared ownership over a specific NFT. There's this alien punk that we have which we actually purchased back in January and are thinking about almost giving that to the community through a DAO structure where they can kind of decide the fate of this NFT and decide like whether or not it should be a podcaster or like a real character in the metaverse. And so thinking about beyond just collecting NFTs and it is a bubble is I guess in my view, a little bit simplistic just because there's so much energy around this community that we discussed. And there's so many more innovations happening around specific NFTs and NFT sub categories.

Priyanka Desai: (33:09)
I mean every single week on crypto Twitter or through Flamingo DAO I'm hearing about a new, incredible NFT. And so I think people are thinking really critically about this. For example I mean it's really still a pretty young, I guess as far as I mean the technology itself isn't that new, I guess it's been around for a couple of years. But as far as the mainstream institutional interest in NFTs through the auction houses and elsewhere, I think we're really just getting going. So yeah, it could be like a short-term. And there's a lot of it's commemorative to the price of ETH at a given moment. So some people might want to be liquid. They see the price of ETH going up so they're like, well, let me sell an NFT right now. And that drops the floor price for a couple NFTs. So there's some mechanic between the price of ETH and the price of an NFT. Oftentimes sometimes that doesn't affect certain collectibles. I think yeah.

Les Borsai: (34:15)
Anyone else want to touch on the bubble?

G Money: (34:17)
Yeah. To build on what PRI said is I agree. I think when price action escalates quickly, it's because there's a good narrative there. It's because people are getting excited. But more so than that it's like when people tell me, oh this is a bubble or whatever. To me, the way I look at the world is everything's in a bubble right now. I can make a case the S&P 500 is in a bubble. So to me, when I take a look at NFTs and I take a look at like every asset class and as an asset allocator. As somebody that positions my money for myself, of course I want to belong in NFTs because NFT has given me the most convexity on the upside. To me, being long, Art Blocks being long a path is the same exact trade as being long the S&P 500. But if I'm right, I'm going to get paid better because there's only a limited amount of quantity. There's a much smaller market. But to me it's like to people saying that it's in a bubble, you can thank your central bankers.

Les Borsai: (35:24)
Okay. So we've got about a little more than 20 minutes left. I wanted to open it up to questions because I'm sure there are some. I don't know if there's a mic out there. If not, just stand up and ask.

Speaker 7: (35:42)
[inaudible 00:35:42].

Noah Davis: (35:42)
Oh I have a funny answer to that one. I got a cold email from the IRS like karen@theirs.gov during the Beeple sale. But I just forwarded it to the lawyers so I don't know. But they're definitely interested. That's what the email said, we are interested in NFTs.

Les Borsai: (36:01)
Yeah, after the Beeple sell I'm sure.

Noah Davis: (36:03)
Yeah, right. During. Yeah, during the bidding. When the bidding was like at 13 million I think it was when I got that email.

Les Borsai: (36:08)
Wow. Anyone else want to touch on the tax question or should we move?

G Money: (36:12)
I mean, I'm based out of Puerto Rico so.

Snowfro: (36:17)
I should be out of Puerto Rico too I guess. The tax question is going to kind of overlap with the KYC question as well and kind of people revealing who they are. There's this kind of theme in crypto where there's a relative anonymity for three, four years. Three years I was this green CryptoPunk went by Snowfro. Now my name is out there and I feel like I can act like a normal human. But I miss very much my internet persona. But yeah, there's a lot of tax implications. There's some things that are actually pretty wild. Like for example in some countries there's a maximum to how much you can donate to charity. And so with for example, with our blogs, we are cognizant of kind of how intense things have been with the platform and are helping artists divert money to charity.

Snowfro: (37:08)
So we're a nine month old organization that has facilitated $28 million to charitable contributions in the last nine months. And what that means is that the artists might be, this is stuff that's actually breaking stuff. The artists might receive $3 million to give because they made $15 million in three minutes on a [inaudible 00:37:30]. But there's a maximum amount of contributions that they can make without actually having to be taxed for it. And so they're actually being taxed on the amount of money that they were going to give to charity. In some countries they're accountants, governments are asking for letters saying, where is this money coming from? It just seems like such an absurd amount of money. And there's some really serious tax implications kind of involved there because if they can't get an accountant because the accountant doesn't want to do the work because they don't have a really legitimate way of proving who made this purchase.

Snowfro: (38:00)
And in the crypto space nobody knows who made the purchase. It's just a bunch of numbers. There's some kind of concern there. And then finally, once you get into a point where you're regularly selling something for a pretty big chunk of money, the IRS says, I don't really care if it's crypto or not, we want to know who these buyers are. And so for tax implications and also just KYC implications. So it's all very, very, as a platform scary. But we have incredible regulators, people that come from regulation that we get to work with on a regular basis and consult with. And we're just going to be proactive. That's the best that can do. We can't actually take any measures because we don't know what those measures are.

Snowfro: (38:39)
The clarity is not there. So we're just being as proactive as we possibly can. And as transparent as we possibly can in anticipation of the government kind of coming in and saying, hey, we need more, we need more information. And I think in a year, just a year from now in this conference, there will be a much more direct answer. And I think the conversation, like core panel could exist specifically on taxation principles in the NFT.

Les Borsai: (39:07)
What about the regulatory concerns you just brought up? When we look at tokenization that's clearly security. Do you have any regulatory concerns at all being a platform?

Snowfro: (39:17)
We don't have regulatory concerns in terms of securities because we are, I mean as weird as it is, we are just selling art. But we are starting to get to a point in dollar value of per initial sales where it does start becoming a little bit more scary. So again, we're just going to be very proactive and ultimately KYCing inside the crypto space is like that one, just like you just don't do it.

Snowfro: (39:40)
But if we're forced to do it, we're going to do it. I mean I'm not shutting down Art Blocks because of some dogma of everybody having to be anonymous, I'm not. If we lose 80% of our market, we lose 80% of our market but we're going to comply because we think we're doing something that will transcend crypto. That's our target. I get to talk about that all the time. And to transcend crypto if it's required to KYC and for people to know who they are. Then that's what's going to be required. But we're not just going to jump into doing it for fun. I don't want people's data. I don't want to be responsible for anybody's information as long as I possibly can avoid it.

Priyanka Desai: (40:13)
And I would just like to add on the DAO side. With Flamingo, everything is really compliant. We make sure everything's above board. So on the KYC side, on the tax side, it is a limited liability company based in the US. Because it is for-profit, everyone has to be accredited. We get all the proper requisite information. Just mailed the annual KY1s last week. So in some sense, joining a DAO could mutualize some of those concerns which is great.

Les Borsai: (40:43)
I actually didn't know you did all that. So that's-

Priyanka Desai: (40:46)
Yeah, it's fun.

Les Borsai: (40:47)
Oh, there you go.

Noah Davis: (41:00)
I sold Beeple and I also sold Warhol like a month afterwards. So it already happened. But I loved the Beeple sale, it was really fun. I thought it was an incredible price and it sent a message to the world that what artists are doing in NFTs and virtual art is meaningful and valuable. But we already did Warhol. Damien Hirst has a collection of NFTs called The Currency. Tom Sachs has a really successful collection of NFTs, his Rockets. So we're already seeing that in real time.

Les Borsai: (41:33)
Yeah, I flew out here for the Rocket launch. It was fun. The global appeal is something that also really kind of creates impact around the sales. I mean are we seeing, when we list a Beeple versus a Warhol for instance. You're having a wider appeal with the Beeple right? Just based on the way it's been brought up and presented in the marketplace? That's actually a question.

Noah Davis: (41:55)
So the Beeple sale very much spoke to a specific new audience, new to Christie's audience. It's actually a very established and sophisticated audience in and of itself which is why I've just dove into this. But for Beeple we had more than 40 bidders place bids, something like 48 or 49. And there were 20 bidders above a million dollars which is amazing. But only three of those 40 plus bidders were previously known to Christie's. So everyone else is brand new. That kind of shift is just insane. We never see those numbers in any category ever. And especially for a nearly $7 million purchase is just kind of staggering.

Noah Davis: (42:38)
But with Warhol, when we did the Andy Warhol machine made NFTs, we did see more engagement from the traditional fine art world. Three of the five lots in that sale went to established collections. Two went to new NFT crypto collectors. But three went to people we've done business with previously. So we went from three people placing bids out of 50 in Beeple to three out of five of the lots in the Warhol sale going to the old world blue chip fine art collecting scene. So yeah, you're seeing a shift in real time too.

Les Borsai: (43:17)
Go ahead. And boy I can answer that one. So my perception on that is we just haven't got there yet with music. And when you have labels and publishers as rights holders, it's incredibly difficult to license content. So that puts musicians in a place of either owning the content outright so they can do things with it in terms of NFTs or do something that isn't music related. There's a whole bunch of complexity around that. And I also think the audience and you guys might disagree, they're not a hundred percent focused just on pure music NFTs right now. I think when we get into sharding and creating these other initiatives around those music NFTs, we'll see kind of more of a demand.

Noah Davis: (44:15)
I mean I think we'll also see a lot with 3LAU, with Royal, the platform that he's developed. So I don't know if you're familiar with 3LAU and, and his album sale by NFT but he also recently just announced the creation of a platform called Royal which will allow artists to basically sell futures for their careers. If you love an artist, I like to use the example of Nirvana because when Nirvana became super popular a lot of their initial fans resented that and they were seen as sellouts. But Royal what they're proposing is to allow the audience to also share in an artist success. So instead of leaving the concert and buying a t-shirt at the merch booth, you can buy a token. And based on when you buy that token, you potentially can profit off of the artist's success. So that's, to my understanding part of what 3LAU is trying to do with Royal. And I think it's one of the more innovative and exciting projects in the music NFT space so far.

Les Borsai: (45:14)
I think my kind of point on that is then you start to see the regulatory stuff kick in and that's going to be complicated. And the thing that's so great about 3LAU and RAC and all those guys is they were a part of the crypto community kind of way before and it shows the impact of being part of the community. And I think back to your question, when you have an artist that comes in to try to do an NFT. And I don't know about you guys, but when the NFTs first start really hitting, every artist in the world want to do one of these things because everyone wants to make a million bucks for a song. And I think that's where some of the problems are going to come in.

G Money: (46:45)
So thank you for the question. I think that's really relevant compared to stuff that's been going on over the last couple of days. I don't have anything against NFTs on other side chains. The thing that I've seen with Solana projects for the most part, I think Solana Monkey Business is great. I love the artwork. But what I've seen is a lot of copycat projects like Solana Punks, Bored Ape Punks, I don't know what they're called.

Snowfro: (47:12)
Solana Apes.

G Money: (47:13)
Yeah, whatever they're called. That's just copy and paste. So to me, that kind of like unless people within the Solana ecosystem can kind of self-regulate themselves. I'll use Tezos as a great example. There's a lot of great art on Tezos. There's a big collectors community going around Tezos because artists are going there, high-quality artists.

G Money: (47:34)
I think the advantages that Solana has is obviously backed by SPF. You have your On Labs which is going to make stuff much easier. But I think you need to bring the talent. And so to me, it's like I'm by no means a maxi for ETH NFTs but as a collector before. I wasn't first with punks. I bought punks a year ago. But to me it's like what do I see with regards to creativity and community and stuff like that? Interestingly enough I think I reached out to Monkey DAO literally yesterday or the day before because I'm interested in it. I haven't made a decision yet but it's interesting.

Les Borsai: (48:18)
I think the other thing we should touch on is the fact that when ETH launched, consensus did a really good job creating development on top of the chain. You have such a kind of outweighed proportion in terms of just development on Solana versus something like ETH. So those other guys got to catch up before they see the scale.

Snowfro: (48:40)
I also-

Priyanka Desai: (48:41)
Yeah.

Snowfro: (48:41)
Oh go.

Priyanka Desai: (48:43)
No, no I was just going to totally agree. I think the answer to the question, what we were touching on earlier about ETH. It's just the developer community there, the solidity language, everything there is just so far along in development that that's I think what we were noting towards more before. Solana, kind of agree that copy and paste thing is kind of. But yeah, Tezos is, I felt like we touched on that but the digital art community on Tezos I think is brilliant. And I think there's actually several people buying on Tezos since there's a lot of similar artists, both on EVE and Tezos. And Tezos is a bit less so it's almost like an arbitrage opportunity for a few people as well. So yeah, I think it's ETH is a starting point for sure.

Snowfro: (49:29)
I just want to like-

Noah Davis: (49:29)
Sorry for hurting Solana.

Snowfro: (49:30)
No I don't think hurting Solana shouldn't even be relevant here. Ethereum has been around for this many years and I think that they have to prove themselves. And so I am very much an ETH maximalist. However, anybody in this space that can be closed off to innovation of any sort is completely counterproductive to the reason why we have had success in this space. So there's a couple of things. Number one, Solana has trade-offs in terms of decentralization which will eventually be addressed as the chain grows but that is a very real trade off. Ethereum is significantly more decentralized than Solana at the time being. In exchange for that, you get millions of transactions per second, that's fantastic. On Art Blocks, our problem is not trying to be able to handle millions of transactions per se.

Snowfro: (50:21)
We are however interested in potentially having the minting of an Art Blocks piece happen on Solana while provenance exist on Ethereum layer one. So we believe at least that each blockchain will have a really good solid use case. And we will use each blockchain for each specific use case that it offers. And I think the friction is so high right now for new people entering this space and understanding what a gas fee is and purchasing something. And it costs you more than a meal just to pay the network to process your transaction because that's what it's like on Ethereum. And that's not what it's like on Solana. But that friction is already really high.

Snowfro: (51:04)
And understanding MetaMask, which is the bugin that everybody uses to operate on Ethereum is really high. And then asking that person that has decided to dive in to also try to wrap their brain around a whole another blockchain and potentially another extension and understanding that they're transacting on it's just too much. So Solana's going to have to prove itself. I believe in Solana, I have a couple of projects that I'd like to see happen on Solana. Right now there's a knockoff of my own project called Soul Squiggles that literally is copying my code and generating 10,000 my piece of art on Solana. And it's literally like every project on Solana right now that has come across my desk has been a knockoff. And I know that they're not all like that but it just feels.

Les Borsai: (51:54)
Well having said that, Noah, in the traditional art world, you can look at Warhol than anyone else. I mean it's the greatest compliments of derivative work from an artist. So I you can argue that CryptoPunks having so many derivative works elevated CryptoPunks.

Snowfro: (52:11)
Totally agree.

Noah Davis: (52:12)
100% yeah.

Snowfro: (52:14)
It's the derivative difference versus derivative and straight up just like carbon copy. That's where it kind of feels, I feel kind of naked on Solana. Just because my project is out there without my signature.

Noah Davis: (52:23)
It also is not using appropriation as a conceptual technique. It's really just about securing the bag and that is not cool.

Snowfro: (52:36)
Solana will be, there's internal conversations and we believe that Solana will be one of very few competing layer one blockchains that will be around in 5 years and 10 years. So I have nothing against Solana but it needs to work its way up. Much work has gone into Ethereum for another one to come in and within the first year start saying, well, what about me? No, let us get there. And that's my stance.

Noah Davis: (52:59)
It could be the Pepsi to the Coke. There will be a Pepsi.

Snowfro: (53:01)
Oh yeah, yeah There will.

Les Borsai: (53:02)
Go ahead.

G Money: (53:40)
So I'll take that. I think it's going to happen slowly over time and then suddenly. That's something we always use slowly then suddenly. I think the real advantage to that is to having stuff on chain. And every time we have a massive draw down in crypto, I love it because it just makes us more anti-fragile. In May, we had a 50% draw down and nobody needed to get bailed out. So what if I had mortgage backed securities on-chain and they're collateralized and everything. You have your counterparties and all this stuff. And then there's some seismic event that happens and it causes a massive draw down and you don't need central bankers coming in. So that's to me is the advantage you're not re-hypothecating a collateral. You don't necessarily have counterparty risk as much cause it's on-chain.

G Money: (54:27)
So to me, that is like the best advantage of all. We just had 20 or 30% draw down last weekend. Nobody needed to get bailed out. People that took on a ton of leverage, for sure. They lost a ton of money. But for the most part if you're operating well in the system you don't have to worry about losing your money. Which is kind of the essence of where crypto came from. Satoshi came up with Bitcoin from the depths of the financial crisis. So to me bringing these assets on-chain is just the perfect compliment to that.

Snowfro: (55:17)
Oh man. Oh yes. Oh my God.

G Money: (55:35)
He has good taste. He has great taste.

Speaker 8: (55:37)
[inaudible 00:55:37].

Snowfro: (55:37)
It's just growing pains. This is really happening fast for everybody here. It's simply, there's an oversubscribing towards what we have to offer and there's a limit to what we can offer. And there's more people that want something than what we have to offer. And our goal for example at Art Blocks long term is to have open projects ready for minting at any given moment in time. And we just can't get there right now because things are completely bad shit crazy. But we will because this is also, I don't think we're in a bubble but we're also in an unsustainable.

Snowfro: (56:42)
Somebody said the other day, if Art Blocks continued at its pace, it would be 10% of the entire worldwide art market. Like no, just like Solana can't have authority in decentralization in its first year, Art Blocks cannot have authority in the art world in its first year. And so it's just going to have to calm down a little bit. We're all just kind of waiting for that to happen. Really excited for it to calm down a little bit. And I promise you that there will be the ability to mint things on Art Blocks and other NFT platforms for 50 bucks, a hundred bucks in the next few months.

Noah Davis: (57:15)
Well you guys are also addressing this in real time too with like the Dutch auction style that you've rolled out more recently. So I mean that's the...

Snowfro: (57:24)
It's completely crazy. Oh I would disagree. I think it's very much doing what it's especially when there's not too much oversubscription. So last week both the attractions ended up with the very base price. That's exactly what we need. And I'm pretty. Not on the curated, but they also didn't drop. They didn't sell for $30,000 a piece either. But yeah no, I think we're on the right track and there's just a lot going on and a lot of things to address.

Noah Davis: (57:51)
And if the gas fees are high, it means that people want to use the network. So I think it's a good problem to have. It's the best problem you can have because it means there are tons of people knocking at the door.

Snowfro: (58:02)
For now but there was four months where it was not. So that's the thing. We just have to kind of be patient. A lot of people are coming in and be like, I can't participate. And I'm like, just wait a little bit because it is, you're right. Right now I don't introduce anybody new to Art Blocks right now. Whereas for four months I literally, anytime I was like check this out, for 200 bucks you can have this piece. I don't do it. I'm the founder so I'm not buying at these prices and I'm the founder. So we just kind of have to take a step back and understand that it is going to go back to normalcy. And if it doesn't then we're onto something really, really, really crazy here too.

Les Borsai: (58:35)
But it think that's also one of the cool things is I'm an advisor to an NFT thing. You guys are all owners of companies. And when a drop happens, often we don't get anything. There's been plenty of times where we couldn't get it. On the gas fees it's like there's enough demand with a lot of the hotter projects that the gas fees don't even matter. People are like pumping the gas to get the art.

G Money: (59:04)
Yeah I think with regards to user adoption it's like you just need a more consumer friendly thing. If you take a look at probably some of the more successful stuff in the space that brought in let's say normal people. You're looking at NBA Top Shot, Nifty Gateway. What do they have? They have a great user experience. Just because we don't have that just yet doesn't mean we won't get there. The beautiful thing is we're going to get there.

Snowfro: (59:29)
We will get there.

Les Borsai: (59:31)
I think we're going to have to wrap it up. But we want to thank SALT and the panel. Go ahead, Justin. Sorry.

Justin Aversano: (59:35)
Before we wrap it up I do want to say something and then we can clap. I think it is important what you said about assessability and education and onboarding. I think we're so locked up in our echo chambers it's like second nature at this point. But to step back into the place of how do we create accessibility for people who can't afford a thousand dollars Yesware. I think the way to do that is to create experiences and proof of attendance. Things one of us should have created a proof of attendance token and gave everyone here in NFT like the Los Robbie's. And I think that's a great start in getting people a wealth redistribution of some sort through NFTs. And I think as we keep having conferences and events and whatnot, we'll have those NFTs to be given out.

Justin Aversano: (01:00:26)
And I think that's where you could start. And maybe it's our responsibility to onboard and educate you all as well as creating the dialogue of what your feedback is like. Hey, how do we get involved and we want to. And I think it's how do we make it more accessible where the price isn't only for the 1%? And on top of that, I think I would love to end this conference with a positive note in saying I think NFTs and having a non-profit organization will create a huge disruption in how nonprofits will start fundraisings as an NFT as a tool. Just from my own experience with SaveArtSpace and seeing how we could raise like $500,000 in three days when it took us the past five years even accomplished that is a testament to what NFTs can achieve. If you have the right audience that will back you and we don't have to rely on donors anymore but just projects we create that create sustainable in perpetuity value. I think we'll start seeing a lot more nonprofits creating a wallet so they could take our crypto money.

Les Borsai: (01:01:33)
I want to thank SALT, Anthony and John for letting us do this. And thank the panelists.

Data Discovery to Data Intelligence | #SALTNY

Data Discovery to Data Intelligence with Heidi Lanford, Chief Data Officer, Fitch Group. Thomas J. Lee, Managing Partner & Head of Research, Fundstrat Global Advisors. Charles Poliacof, Chief Executive Officer, Knoema.

Moderated by Marc Lopresti, Co-Founder, BattleFin.

Powered by RedCircle

Apple | Spotify | Amazon | Google | Stitcher

SPEAKERS

Heidi Lanford

Chief Data Officer

The Fitch Group

FULL BIO

Thomas J. Lee

Managing Partner & Co-Founder

FundStrat

FULL BIO

Charles Poliacof

Chief Executive Officer

Knoema

FULL BIO

MODERATOR

Marc X. LoPresti

Co-Founder & Board Member

BattleFin

FULL BIO

TIMESTAMPS

EPISODE TRANSCRIPT

Marc LoPresti: (00:07)
Hello, everybody. My name is Mark Lopresti. I am the co-founder of a little company called BattleFin. You may have seen our pavilion down the hall on the fourth floor. I co-founded it with Tim Harrington, sitting there in the front row, about eight years ago or so. We were really early in the alternative data space. Very proud of what we've done since we founded the company. We've developed what we believe is one of the most compelling and robust platforms for alternative data. And we're going to get into that. This panel is of course all about data, from data discovery to data intelligence.

Marc LoPresti: (00:50)
But before we get into that, I want to say a big thank you to Anthony, the entire SkyBridge production team, John, Joe, Kat, everybody that makes this possible. We have an events business at BattleFin. I know a little bit about what it takes to put a production on of this magnitude. And I think you'd all agree this was an absolutely fantastic event to attend. We've loved every minute of it. And what a way to cap off my Salt experience, but with this unbelievably distinguished panel of experts that I have here with me.

Marc LoPresti: (01:25)
To my left is Heidi Lanford, from Fitch. To her left, a face you may be familiar with if you watch CNBC, Mr. Tom Lee from Fundstrat, one of the smartest people I know. And Mr. Charles Poliacof from Knoema. I have known Charles for a very long time, even before we were in the data business. So it pays to be nice to everybody because you never know when you may bump into them again. So, why don't we start? Heidi, a little bit of your background and what you're doing in Fitch with data?

Heidi Lanford: (01:58)
Sure. Sure. So nice to see everybody here, and thanks for having me. I started off my career as a data scientist and spent most of my formidable years working as a consultant and a data scientist. And then I spent my time before joining Fitch as the chief data officer, I had spent years in the technology space.

Heidi Lanford: (02:23)
And I recently joined from Red Hat open source software company that was acquired by IBM recently. And I have been really building strong, competitive data organizations as the latter part of my career. So really excited to be here. And I'm excited to represent Fitch.

Marc LoPresti: (02:44)
Thank you. Well, we're happy to have you. Tom?

Thomas J. Lee: (02:48)
My name is Tom Lee. I'm the co-founder and Head of Research for Fundstrat Global Advisors. It's a research advisory firm. We've really got two businesses. One is providing macro research and digital asset research to institutions in 22 countries. And we have a family office, a RIA business called FSInsight, and it's largely the same focus, which is education.

Thomas J. Lee: (03:16)
I'm very interested in doing this panel because I've been doing research for almost 30 years, really the first 15 as a wireless analyst. And when I started in '93, there were only 34 million cell phone users versus six billion today. So a lot of the business and knowledge that we needed to do to make equity calls, was gathering alternative data.

Marc LoPresti: (03:38)
And you touched on something. I want to put a pin in and come back to, the digitization of the modern economy and what that means for the data space. But that's a little teaser. But before we do, Charles, wonderful to have you on stage with us. Tell us a little bit of the company that you've built in your background.

Charles Poliacof: (03:54)
Yeah. So I am Charles Poliacof, the CEO of Knoema. For starters, I just want to thank you and Tim, and of course, SkyBridge and everybody else for putting this amazing event together. It is fantastic to be back, after having spent two years or so in this two-dimensional space. It's been great to be around people in a three-dimensional form again, and seeing a lot of folks that I haven't seen in a long time, and having the opportunity to interact with prospects and clients. It's been great. So, thank you for that.

Charles Poliacof: (04:21)
So a little bit about Knoema, a little bit about my background, although I'm probably not as interesting as these two folks here. So Knoema, we're a data technology company focused on making data accessible and usable. One thing that people know that are users of data is that there's far too much time that's probably spent making data useful. So we focus on three main pillars of capability. The first is discovery.

Charles Poliacof: (04:46)
So making sure that folks have access to data that they need, or new data sources that are interesting, that could potentially impact policy decision and investment thesis, or any sort of data-driven insight. The second is just around managing data pipelines. So data is the lifeblood of digitization. So somebody needs to manage that lifeblood, manage that infrastructure, making sure that everything is arriving in the formats that they're expected in, so that folks can consume that data on the other side.

Charles Poliacof: (05:14)
And lastly is workflow integration. As we all know, anybody that is a knowledge worker, works in their tool of choice. So looking at the color of my hair, you will guess that my tool of choice is probably Excel. But there are others that use Python, R, Tableau, Power BI, their own native applications. And that's really a core of what we do, is being able to integrate in those native applications so people can use their workflow or productivity tools of choice, so they can make those insight-based decisions.

Charles Poliacof: (05:42)
My background, I spent 15 years on the buy side, and then was part of the management team over at Novus, where we built a portfolio analytics solution which was focused on measuring portfolio manager skills. We'll talk about that a little bit later on in terms of what top line alpha and bottom line alpha actually means. And then part of the management team over at Visible Alpha, when it was a very early stage company. It's now a data stalwart. So, that's my background.

Marc LoPresti: (06:07)
So almost all of us on this panel are a good combination of TradFi, I think we're calling it now. I've heard that phrase used a few times this week. And DeFi and the data revolution. It probably makes sense just for a second to contextualize what we're talking about here. And what exactly is alternative data?

Marc LoPresti: (06:29)
And at BattleFin, we think about alternative data into 42 or 43 separate categories, but it is essentially that which you cannot derive from traditional sources like your Bloomberg Terminal, although that's obviously changing now as well. Satellite imagery, geolocation, credit card, point of sale receipt, email receipt data, sentiment, and many, many others.

Marc LoPresti: (06:56)
And this data, this resource, we often talk about alternative data as a resource or as a commodity, being used in ways that five or eight years ago we, when Tim and I started the company, we never could have anticipated. So Tom, maybe to have you start us off, you've been a data junkie, a self-proclaimed data nerd, part of why I love you. Tell me how you've observed the evolution of the use of alternative data in context of Fundstrat's work.

Thomas J. Lee: (07:28)
Yes. Well, first of all, alternative data has been a tool used by the best investors for decades. Many of you guys are probably familiar with Phil Fisher, and he wrote the book Common Stocks and Uncommon Profits. And his original thesis was visit companies, go visit warehouses, talk to sellers and vendors. That, he was the original.

Thomas J. Lee: (07:54)
That's the original alternative data model. And he had extraordinary returns, many 100X stocks. And I think in today's investment world, stock investors, the ones who really find the big opportunities are the ones that are exploiting alternative data, especially where they find variance versus either consensus or conventional views.

Thomas J. Lee: (08:15)
And I think in the past year with COVID, it's been enormously important to use alternative data to really have informed views on macro and investment decisions. Because in the past, people might have only looked at the bond market or VIX to have an understanding what the market is saying. But I think in the past year, there's been so much uncertainty created with COVID that the alternative data was critical for people who did well.

Marc LoPresti: (08:41)
And we were talking the other day about inflation by way of example, and how looking at these various traditional metrics to try to anticipate inflationary trends. How has using alternative data help refine that and make its predictive capabilities enhanced?

Thomas J. Lee: (09:01)
Inflation is a great example of why investors need alternative data right now, because in the past, CPI and understanding what the CPI print would be, has huge ripple effects across credit sector positioning, single stocks, and even commodity prices. And in this current context, we've got supply chain glitches, we've got shortages, and we've got demand build-up, and then explosion of demand. It's been very difficult for people to know what the real trajectory of inflation has been.

Thomas J. Lee: (09:35)
So I would say right now, if people are using alternative data to be informed about the trajectory of inflation, they're going to have a huge edge because it's the difference between thinking we're in ... As you know, there's a lot of people hyperventilating about inflation. I think a lot of our clients who've been using alternative data have realized a lot of these things are transitory, and you're seeing it play out. Even Stevie Cohen yesterday mentioned it. The bond market is telling us this is probably transitory.

Marc LoPresti: (10:01)
Right great. So Heidi, maybe turning to you.

Heidi Lanford: (10:04)
Yeah.

Marc LoPresti: (10:04)
So you've got a big job on your hands, building up this whole new division. Tell us how you are viewing the integration of alternative data into Fitch.

Heidi Lanford: (10:13)
So for us, I think this is a transformational shift in how organizations start thinking about data as a strategic asset. Whereas in the past, it has maybe been something that you go to IT or your tech team, and you ask them to provide you with data or give you access to things. As we start to see this data organization being a strategic asset for the firm, that's where over the past 10 years, a relatively new role, that chief data officer has emerged, because it is that strategic asset.

Heidi Lanford: (10:51)
It's a member of the C-suite. It is helping to influence new product innovation. And with that in mind, we have to recruit people who are not just great at the technology, data warehousing, data lakes, and data mesh. We're also looking for people that think about data as a product and how we can productize that, whether it's for our internal analysts that are consuming it, or our external customers that want to buy data from us.

Heidi Lanford: (11:21)
And so the talent and the recruitment is top of mind for me, as I've been building out my organization, because thinking about strategic players, great at technology, but also have that innovation and product mindset, this is not for the faint of heart. This is about moving resources and organization. This is a little bit about data is powerful. Data gives people in some ways, control. And to see that shift in mindset, it requires grit and determination from your leadership team and your company.

Marc LoPresti: (11:54)
And there are some practical challenges associated with it, too, I would imagine. Divergent datasets, different departments across the organization in different file formats and servers, and things of that nature.

Heidi Lanford: (12:04)
Absolutely. Yeah.

Marc LoPresti: (12:06)
That's a good transition. I know I see Charles chomping at the bit. That's a good transition to you and Knoema. That's a big part of what you guys do, right?

Charles Poliacof: (12:13)
That's a huge part of what we do. It's all about empowerment. What Heidi was talking about, data productization, the types of data assets that people used to rely upon 10 years ago, 15 years ago, channel checks, speaking to management. I know in the '90s, we used to send folks to the mall and count how many people were actually walking in and out of stores.

Charles Poliacof: (12:36)
And now all of a sudden, you have data that you can get in near real-time, maybe by looking at Carvana or some of these other inputs, near real-time visibility into what's going on in used car pricing, which is of course, influencing some of the inflation numbers. The Fed actually looks at those numbers, at least according to our friends over at M Science, which is one of the data providers we work with.

Charles Poliacof: (12:56)
But when you think about the challenges that organizations are going through right now, to be data-driven, to understand what that actually means, to be able to access different data products, there's a high variability problem. So there's a lot of data that comes from a lot of disparate sources. You have a subset of aggregators that collect a certain amount of data, but then you have a long tail of data that may or may not be relevant depending on the regime that you're in.

Charles Poliacof: (13:25)
And then there is the pain that you just surfaced before, Marc, which is this idea that folks need to build these connectors to constantly have this influx of products that could continue to inform their views, and then what it means to build an organization that supports that. And is an organization saddled with legacy technology? So it limits what they can actually do.

Charles Poliacof: (13:48)
Is an organization, to Heidi's point, thinking about data as an actual product, and an asset, and as an input that influences their digitization or digital strategy as they move forward? You see this in the insurance space. You see this in retail. You see this now in policymakers. The state of Texas is making all of their data available publicly, so they can attract capital to come in.

Charles Poliacof: (14:11)
So people are viewing data as a strategic asset. They are viewing data as an internal product. And I think those that continue to think that way, McKinsey just wrote a piece recently about this, are going to have a substantially greater advantage than those that do not. And again, I'll end on this point. I think it was Stevie Cohen and Dmitry Balyasny's panel when they talked about their firms that have enormous resources, and markets are fairly efficient.

Charles Poliacof: (14:36)
So understanding how to find those differentiated datasets and being able to unify them in a way where you can contextualize those insights. So you're not just relying on one or two datasets. That's going to be a big differentiator going forward, not just in our space, but in all industries.

Heidi Lanford: (14:55)
And use them over and over again.

Charles Poliacof: (14:55)
Sorry. Go ahead.

Heidi Lanford: (14:55)
And use them over and over again.

Charles Poliacof: (14:55)
Yeah. Yeah.

Heidi Lanford: (14:57)
All those great nuggets that you're talking about, or that Tom talked about, you don't want them to be one-offs. And that does require some discipline and getting into a data organization, and maybe doing some of those traditional things that we've done in terms of storing data.

Marc LoPresti: (15:13)
The challenges remaining are abundant. And that's one of the reasons why companies like Knoema and shameless plug, BattleFin are such an important part of the data industry. It's about aggregation, organization, curation, purification, and visualization.

Charles Poliacof: (15:30)
And I think one thing to think about also is I think a lot of firms, particularly in the financial services space, whether it's on the asset management side or even wealth management, there's been a very DYI mindset.

Charles Poliacof: (15:41)
And I feel like DYI should be left to like Home Depot and Lowe's. And folks really need to start thinking about what it means to leverage trusted partners. There's a lot of great new technology out there that can be leveraged to introduce ROI that didn't exist just two, three years ago.

Marc LoPresti: (16:00)
So Tom, maybe bringing it back to you, with Fundstrat's organization and structure, you really thought about it from the beginning as a data-driven organization.

Thomas J. Lee: (16:09)
That's right.

Marc LoPresti: (16:10)
Tell us a little bit about that process for you.

Thomas J. Lee: (16:14)
Well I would say Fundstrat, when we started the firm in 2014, we did come with a mindset that we wanted to do evidence-based research, and really help investors navigate markets not with opinions, but the idea of helping them understand future probabilities based on what we can observe.

Thomas J. Lee: (16:36)
And so capturing data and aggregating it, and ingesting it and cleaning it up has been really important. I think one of the challenges that we found with a lot of data is that one, there is a lot of noisy data and a lot of errors in the data. And sometimes things look like contemporaneous indicators, but they're not necessarily helpful with future.

Marc LoPresti: (17:02)
Give us an example. That's a great point. Give us an example there.

Thomas J. Lee: (17:05)
Well, some examples of things like ... Here's something interesting, because a client pointed this out to us once. So he felt that there were some things that really helped explain the PMIs on a real-time basis. And I would call that an observable relationship, but it didn't work influentially. We weren't able to then say, "Okay, well, six months from now, what are the values of these different things?"

Marc LoPresti: (17:31)
Right.

Thomas J. Lee: (17:32)
So now you need to make an inference. And if you don't know what those are, then you're just making it up. And now it's just an opinion. Yeah, so that's a challenge. And I think another thing we found was that sometimes, you can get a very complete picture from alternative data, but it only just tells you what everybody else knows.

Thomas J. Lee: (17:47)
And so it's difficult to find something that gives you an edge that's actionable. Like something, can it give you an idea of how a data point might look? Or is it going to help you understand positioning? But obviously, the goal would be something that helps you know where things are six months from now.

Marc LoPresti: (18:04)
So, what has worked? So we touched on inflation before, CPI, consumer confidence, very volatile in a COVID exit, whatever the heck that means, I'm not even sure at this point that I know. What's worked?

Marc LoPresti: (18:16)
Have you taken things like sentiment, which is one of the most popular categories on our platform, I think on yours as well, Charles? Has that helped with predictability, with actually extending the usefulness of these insights in the way that you've described?

Thomas J. Lee: (18:32)
Yeah. Marc, this is a great question, because we've found some really interesting things over the past year that are actually helpful. But then it's not clear to us if it's because of what's happened during COVID. Because in COVID, the world has become very digital. Really, last year, everybody lived a digital life.

Marc LoPresti: (18:51)
Right.

Thomas J. Lee: (18:52)
So things in a digital world are much more measurable. In fact, I think one of the most interesting conversations I had at JPMorgan was our economists had said that at the time, he said if you looked at the previous 15 years, 50% of all global GDP was pure digital. But the idea is that the next 20-year interval, it'll be 75% digital.

Marc LoPresti: (19:15)
That's an incredible statistic, right?

Thomas J. Lee: (19:17)
Yeah. And it probably goes to 95% in the following 20-year interval.

Marc LoPresti: (19:21)
Yeah. Yeah.

Thomas J. Lee: (19:22)
Which means alternative data becomes way more comprehensive than what the BEA collects, or what you can see in weekly claims. The cadence of the data is so different. So I think to us, what we think, and we brought in a new guy, Adam Gould, who's from Empirical Research, but he's going to be doing a lot of machine learning work, is that the shelf life of a lot of the products we develop might be quite short, too.

Thomas J. Lee: (19:47)
And of course, that's why we would want to use guys that you guys have on your platform, because it saves us the homework. Because now, we can just spend more time trying to curate it or understand it.

Marc LoPresti: (19:58)
Charles, so how are you positioning Knoema to help your clients address these challenges?

Charles Poliacof: (20:03)
So I do want to just address one point that Tom just made. I would say that on that last point, data tends to be a bit regime dependent. So you will see data assets become popular during a certain time period. And they ebb and flow. I would say three years ago, macro data was probably more focused for macro strategists. Now, macro data is a part of just about every strategy that's out there. So you'll see these data assets become more relevant or less relevant, depending on what regimes and themes are being surfaced.

Charles Poliacof: (20:34)
With respect to our clientele, we work with a really wide range of clients. So it's not just buy-side firms. It's buy-side firms. It's sell-side firms. It's corporations. It's wealth managers. It's government agencies. We work with data providers as well. So I would say there's two fold. I think one, for large organizations combining legacy data or first-party data assets with third-party data assets continues to be a challenge. And folks are really started figuring out how to optimize for that.

Charles Poliacof: (21:07)
You have legacy infrastructure, legacy technologies, and to some extent, some legacy thinking. So for example, in the wealth management space, I think a lot of people are starting to really try to understand what it means to have a customer 360 view. And what are those inputs that they can start to use? So, what are the primary datasets about my customer that I've already collected, that has to live inside some kind of a clean room? And then what kind of third-party data assets can I collect to have a more informed view? So investing preferences.

Charles Poliacof: (21:36)
Does my customer care about ESG, or socially important companies, or environmentally conscious companies? So if they do, I want to make sure that I start sending campaigns that are going to be interesting to them. So you have folks that are starting to build these data-driven practices. You're seeing this a lot in retail. You're seeing this a lot on the supply chain side. People really just trying to understand how they can react to supply chain disruption on the corporate side. So it goes on and on, and on, and on.

Charles Poliacof: (22:04)
With respect to the data providers side, I think data providers need to start to think what it means to offer a data product that is consumable. So, how do I create a data product? What does it mean to tickerize that product? What does it mean to start thinking about omni-channel distribution, so that my data could be consumed through various exchanges, through various portals, through various tools? You want to be a gateway and not a gate keeper. If you're a gatekeeper you're ... Sorry.

Marc LoPresti: (22:34)
No, please. No, it's really about making that process of discovery and ingestion doable, because you mentioned tickerization. We've been talking about that since the beginning of the data industry. Nobody's done it yet, right?

Charles Poliacof: (22:49)
Or even entity resolution.

Marc LoPresti: (22:50)
Right.

Charles Poliacof: (22:50)
So if I'm looking at Athleta, I want to know that that maps up to Gap. And somebody is taking the time to actually do that work. So I think on the data productization side, there's still some work to do. And that's what we found that we've been doing work to help customers. For example, on the Snowflake marketplace, we're a partner with Snowflake. And we're one of the largest contributors of public data over there.

Charles Poliacof: (23:10)
But we're also working with alternative data vendors to actually productize their data on the marketplace. So, what does it mean to actually create a data product? Great metadata tables, source data tables, all those things. It's not sexy work, but it's necessary work so that people can have access to these insights.

Marc LoPresti: (23:29)
And as we expand, as we've seen with our business at BattleFin, from when we started it to today, that evolution beyond just the hedge fund as the main consumer of alternative data, or even the financial services world, generally, as we expand out into more corporate use cases, government and NGO use cases, that prospect or that challenge of ingestion, standardization, and consumability and visualization, which we could do a panel just on that, becomes much more relevant. Heidi, challenges.

Heidi Lanford: (24:03)
Yeah.

Marc LoPresti: (24:03)
There's been a lot, and I'm going to give you a little hint on something I want you to touch on. There was huge, huge news in the data industry yesterday. There was an SEC settlement, the first time ever, ever. And I've been talking about it. For those of you that have the misfortune of listening to the regulatory and legal panels that I do for BattleFin over live or in person, or over Zoom, which are a real snooze if you can't fall asleep, this was big.

Marc LoPresti: (24:30)
We were talking about this. Is the Gensler Administration going to be the first to actually bring an enforcement action against a participant in the data industry? How do you see regulation, changing regulation as one of the challenges that you face in this massive project that you've undertaken?

Heidi Lanford: (24:46)
It definitely affects us because obviously part of our business on the rating side is highly regulated, and then part of our business on our solution side is not as regulated.

Marc LoPresti: (24:57)
Right.

Heidi Lanford: (24:57)
And I guess with everything, I think there's pros and cons to both. One of the benefits that a lot of people get from regulation if done well, is standardization and consistency.

Marc LoPresti: (25:10)
Yeah. Right.

Heidi Lanford: (25:11)
We've all read every week, an article in the paper about ESG, and how ESG scores are sometimes challenging to interpret and understand like for like, because they're done differently.

Marc LoPresti: (25:24)
There's no standardization.

Heidi Lanford: (25:25)
And I'm not suggesting that we regulate that, but Fitch just released a sustainable Fitch product actually today. And so we're all doing a lot in the ESG space, and we think we've got an innovative way to look at that. The con though, is if you over-regulate it and you've not necessarily got the right people who understand data who are making these regulations, becomes really challenging then, too.

Heidi Lanford: (25:52)
It's all about, we want to get the benefits of data. We want data to give us insights so that we can make better decisions. And if it becomes too bureaucratic in making those laws, that can hinder us. But I did want to actually touch on a topic that we've been talking about. And that's Tom talked a lot about, inference. And it's the classic causation and correlation thing.

Heidi Lanford: (26:16)
I'm not trying to steer things a different direction, but I think this really gets down to building a culture of data literacy within your organization. So again, and I don't know if data literacy has been a big topic as you've talked about in the past couple of days here, but data literacy is not creating a bunch of PhD data scientists in your organization.

Heidi Lanford: (26:41)
What it is, is educating those consumers of information so they can make the best decision possible and take action on it. That might mean offering some training and education on how to deal with missing values or data that's a little sketchy, or understanding the difference between causation and correlation and when to phone up a data scientist in your organization.

Heidi Lanford: (27:08)
And that's another part of my job, is to actually build out a data literacy program for our entire company, to get folks essentially comfortable and confident enough to work with data, and make those data-driven decisions. And it's not just a learning and development program. It is a cultural mind shift. And it's a thing now. People are relating data literacy to, it's like data as a second language. There are various dialects within data. There are levels of proficiency.

Heidi Lanford: (27:37)
There could be a fluent I dream in data versus I have conversational knowledge of data. And that's okay. But that's what this shift is about. And all these challenges we've been talking about, about integrating data and the platforms, they are going to be here for the next foreseeable future. It's just, are we going to get better at it using awesome tools like knowledge graph, and AI and ML, and RPA, and things like that?

Marc LoPresti: (28:05)
And challenging in particular, talking about the regulation or regulatory perspective, when we have an alphabet soup or dog's breakfast of regulators. Whether it's the FCC from the consumer privacy, from the SEC.

Marc LoPresti: (28:23)
It's not just one entity. We've got unfortunately, like a minute, 20 seconds on the clock. So in 30 seconds or less, starting with you, Tom, 2022, biggest thing you expect to see changes in alternative data. What's in store for us?

Thomas J. Lee: (28:41)
Wow. In 30 seconds? I'll just say, I think that the next 12 months are going to be really critical. And again, Stevie Cohen mentioned it yesterday. It's no longer going to be a macro market. This is going to be single, stock winners and losers, operating leverage, people connect with customers. This is really important to get the alternative data sources correct.

Marc LoPresti: (29:06)
Fantastic. Fantastic. Well, I want to thank ... I was going to do for all of you, but unfortunately I don't think we have enough time. I'm getting the nod from backstage. I want to thank all of you for joining us this afternoon and listening to this unbelievable panel. Charles, Tom, Heidi, thank you for agreeing to do this. It was absolutely my pleasure.

Marc LoPresti: (29:24)
We hope that we taught you something about alternative data and the evolution of the space. I'm sure all of my fellow panelists would be available to answer any questions that you have after the panel. And I would be remiss if I didn't invite you all. If you haven't already done so, well, hell if you have go again, come visit us at BattleFin on the fourth floor.

Amerivet: Producing Meaningful Opportunities for Veterans | #SALTNY

Amerivet: Producing Meaningful Opportunities for Veterans with Mercedes Elias, Co-Chief Executive Officer, AmeriVet Securities.

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SPEAKER

Mercedes Elias

Co-Chief Executive Officer

AmeriVet Securities

FULL BIO

TIMESTAMPS

EPISODE TRANSCRIPT

Mercedes Elias: (00:07)
Good morning. As I was preparing to come and speak today, I was talking to my team and I was thinking about the last time that I spoke to an audience about this size. I was actually about to brief a battalion of Marines, we were getting ready to go to combat in Afghanistan. I actually helped them set up their will in powers of attorney. And I was basically making sure that Marines didn't sign over the power of attorney to the stripper they met last weekend. But like Rachel said, my name is Mercedes Elias. I'm the co-CEO of AmeriVet Securities. We are a broker dealer that underwrites for transactions in the debt capital markets, equity capital markets, and public finance.

Mercedes Elias: (00:49)
Now, when we set up our firm as a service disabled veteran owned broker dealer, we had this thesis that if we were going to ask our constituents to be diversity inclusive and kind of support those initiatives, then we need to support our constituents as well. If you look at the makeup of our firm, we stand at about 55% military veterans, 35% minorities, and we actually have 15% women veterans. We actually take military veterans as they get off of active duty, we train them through our internship program, which we run throughout the year. So we have the traditional summer program like most of the big banks have, but we also have a spring program and a fall program.

Mercedes Elias: (01:30)
In that program, the majority of the time, we are giving these veterans their first chance, not only in corporate America but in finance. So we're taking them from the military, teaching them about that transition because of half of us that have served actually know what that's like and what that entails, and then we have the guys from Wall Street that have 20, 30 plus years experience mentoring these veterans and teaching them about different career paths and different kind of financial services roles.

Mercedes Elias: (01:57)
Now, we're a smaller firm and unlike the bigger banks we can't hire all the veterans that we train. But what we do do is help launch them and get them into the big banks. 50% of the interns that have come through our program have actually succeeded in getting full-time employment at places like Citibank, Goldman Sachs, Bank of America and others. The other 50% just happens to still be in school, either finishing their undergrad or pursuing their MBA at top colleges like Harvard and NYU.

Mercedes Elias: (02:24)
Outside of training veterans that want to get into finance. We actually do a considerable amount of work in the veteran community, working hand in hand with nonprofits that are supporting veterans, and we wanted to do a little bit more than write a check for $10,000, take a picture and shake hands. We wanted to see what are the nonprofits doing to help support veterans? How can we let the veterans know about the resources that are out there for them? So we work with these nonprofits to help them achieve their mission and at the same time help the veteran community.

Mercedes Elias: (02:54)
So, to kind of put it in perspective for you. We work with an organization called the Gary Sinise Foundation. If you know Gary Sinise he played Lieutenant Dan in Forest Gump. He does a considerable amount of work to take care of surviving spouses and children whose husband, mother, son, daughter, has been killed an active duty. We've hosted family members for the Macy's Thanksgiving Day Parade. Recently this summer we actually hosted an event for about 24 surviving spouses with a resiliency retreat to help them work through their grief and their loss.

Mercedes Elias: (03:23)
We've worked with another organization called Achilles International that helps adaptive sports athletes. So these are veterans who lost dilemma, they're learning how to work with their prosthetic. And they're finding purpose in kind of working to basically rebuild their lives and meeting other people that are doing so as well.

Mercedes Elias: (03:42)
So, over the course of the past few days, you've been hearing things like ESG initiatives, social impact, and you might be wondering how you can help and how you can contribute. By utilizing a firm like AmeriVet you can see very tangible results about how utilizing us creates this ripple to continue to support the veteran community. If you'd like to read more about us or just kind of about our capabilities, you can visit us at AmeriVetsecurities.com. Thank you very much.

The Future of Space: Exploring New Frontiers & Improving Life on Earth | #SALTNY

The Future of Space: Exploring New Frontiers & Improving Life on Earth with Chris Kemp, Founder & Chief Executive Officer, Astra. Delian Asparouhov, Co-Founder, Varda Space. Anousheh Ansari, Chief Executive Officer, XPRIZE Foundation.

Moderated by Justin Fishner-Wolfson, Founder & Managing Partner, 137 Ventures.

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SPEAKERS

Chris Kemp

Founder, Chairman & Chief Executive Officer

Astra

FULL BIO

Delian Asparouhov

Principal

Founders Fund

FULL BIO

Anousheh Ansari

Chief Executive Officer

XPRIZE Foundation

FULL BIO

MODERATOR

Justin Fishner-Wolfson

Founder & Managing Partner

137 Ventures

FULL BIO

TIMESTAMPS

EPISODE TRANSCRIPT

Justin Fishner-Wolfson: (00:07)
So thank you all for being here. I have the pleasure of hosting this panel with a bunch of really interesting people. Space usually wins for the most interesting topic that you can have with other folks. And today's a particularly auspicious day because there's also a launch in approximately four hours, where SpaceX is taking up an all-civilian crew for really the first time to space. So it's a great panel to have here.

Justin Fishner-Wolfson: (00:34)
We've got Chris, who's the founder of Astra, a launch company. We have Delian, who's both on investing side and a founder of Varda, which is working to build manufacturing in space. And then we have Anousheh who's actually been to space and probably makes for the most interesting person here, but also the CEO of the XPRIZE. I thought given today, it might be nice to start with your experiences in space, Anousheh. What does it mean that there is a civilian launch in probably four hours?

Anousheh Ansari: (01:06)
Yeah. I'm super excited about it, obviously. And it happens to be the 15th anniversary of my launch. So I think they planned it just for me. But I'm excited because it's a indicator of how far we've come. My family and I sponsored the first Ansari X Prize, which was about opening up space to commercial activities, to reduce the cost of launch, to open up access.

Anousheh Ansari: (01:32)
And the fact that we had so many launches this year for civilians, and this one being particularly important because you have four civilians without any astronauts on board, on their own, going to an orbit above the space station and spending three days in space, this has never been done before. And it shows that we have been able to create a safer, lower cost, plausible access to space.

Anousheh Ansari: (02:07)
And this will be one of hopefully, many that we will see. And if you haven't seen the story of the people who are launching, there's a documentary on Netflix called Countdown that tells their stories beautifully. And I will be watching and praying for their safe return tonight.

Justin Fishner-Wolfson: (02:29)
Given that this is the trend and you were one of, I don't know, approximately 500 people who's ever been to space, what does it mean to you to be very special today, but potentially not very special in the not too distant future, at least in that regard?

Anousheh Ansari: (02:44)
Yeah. No, I think just going to space will be special regardless. It's like now, a lot of people go to Mount Everest and go to the summit. Whoever is able to achieve that, it's a special moment in their life and it touches them in a different way. And I think space has that potential for humanity. For me, the experience of being in space has given me a complete new perspective on what's important in my life.

Anousheh Ansari: (03:11)
It has given me a global perspective on what's important and what I can do in my life. It relates to this world, this planet that we call home. And it has triggered the fact that we all know, we read reports, but when you're in space, you can see it with your own eyes that this beautiful planet, the only place we can call home right now, is changing and it's not going to be pleasant for us to live on it anymore.

Anousheh Ansari: (03:41)
And a lot of people talk about protecting our planet. It's we're not protecting the planet at all. We're protecting ourselves. The planet will be fine without us, probably better off without us. But if we want to continue living here, or have a plan B and go someplace else and live on another planet, which will not be as nice as our own planet still, so we need to pay attention.

Anousheh Ansari: (04:03)
And there's a lot of work we need to do. And that's why we need these type of conferences, investment, and the risk takers who are willing to invest in the future.

Justin Fishner-Wolfson: (04:12)
So this is a question for everyone, but Delian I thought maybe you could give us your perspective, having been both on the investor side and also the founder of a company that's in the space industry. Why now? This seems like there's been a huge proliferation of companies, both from launch to services, to actual space travel. What has changed in the last few years?

Delian Asparouhov: (04:38)
I always think of space as being three separate waves, and that we're only at the very beginning of the third wave, where the first wave was government funded hardware doing government projects, IE the Apollo days. Second phase being for the first time government-funded, but the hardware is produced by external groups. So the early work of SpaceX or Planet Labs being that second wave.

Delian Asparouhov: (05:01)
And the third wave being entirely commercially funded and entirely commercially built where now for the first time, there's companies that are going public, like Astra, and a recent one that also went public, Spire, where a significant portion of their revenues and what keeps the companies afloat is entirely commercial revenues. And obviously, that just has a much larger scale and depth than just being entirely based on the government four-year revenues.

Delian Asparouhov: (05:26)
And so I think that's what makes it fundamentally different is there was this glass ceiling in the space 2.0 days that you just should never break through because there's a limited scale that you can get to, versus now, just the scales that companies can operate at in terms of number of launches, satellites that are going up. The amount of engineers you can afford is just so much greater than anything that we've done in the private industry.

Delian Asparouhov: (05:46)
And that's what's allowing now for space to be safe enough and proliferated enough that you can actually have now, individual citizens out. Just as the Falcon 9 landing the first time was extremely exciting, I'm sure a day like today in another five years is also going to seem extremely boring. Like, "Oh, private civilians going up to space on a three-day trip? Grandma did that last week."

Anousheh Ansari: (06:07)
Yeah. And I think there is this really nice time where the Moore's law and miniaturization and reduction of causing satellites and other sensing technologies has enabled to have more customers for the launch companies that you mentioned. So if we didn't reduce the cost of access to space, they could build really cheap satellite, but they couldn't get it to space. So they need this type of solutions.

Justin Fishner-Wolfson: (06:33)
I think that's a great transition. I was lucky enough to invest in SpaceX in 2008. So it's been a very long time, but they've really brought down the cost of launch to enable this. It sounds like this is an enabling fact. But Chris you've built Astra.

Justin Fishner-Wolfson: (06:48)
You're really trying to accelerate that trend. Can you give people a sense of what the launch market looks like today? But I think more interestingly, what is the launch market going to look like in the next five to 10 years?

Chris Kemp: (07:01)
I think building on Anousheh, this isn't 1960 anymore. In 1960, when NASA built the Apollo and the Mercury or the Gemini programs, this was about 1% to 2% of GDP. NASA had hundreds of thousands of employees. They were hiring everyone who graduated. This was a program that was only possible if the resources of one of the most wealthy nations on the planet put a considerable amount of its wealth to work. SpaceX has now built Starship.

Chris Kemp: (07:37)
And you might think SpaceX has raised a lot of capital, but it's nothing compared to 2% of GDP. And so I think with what Astra is doing, we're building a rocket factory where we can churn out a rocket a day, like a car. The robots and the automation and the software that exists today, has enabled a level of safety, a level of cost efficiency, both in the production and the operation of these systems.

Chris Kemp: (08:00)
The idea that with a planet's constellation, a single employee runs a constellation of hundreds of satellites from a browser. The technology to make this accessible is as I think, the really big story here. And this year, will have maybe a dozen pure play space companies go public. Astra might have been the first, but there have been six since.

Chris Kemp: (08:25)
And some of these companies are going public through spec mergers or through direct offerings, but they're all going to have billions of dollars to help improve life on earth from space, to help connect the planet, observe the planet. Space is the ultimate high ground.

Chris Kemp: (08:42)
And now, we'll finally have all these entrepreneurs building disruptive technologies to provide global context, new sources of information. This will be probably the most significant decade in the history of space.

Justin Fishner-Wolfson: (09:01)
Delian touched on this when he mentioned that SpaceX landed the Falcon 9. It was really only six years ago. And so it's become not only passe, but expected. If the rocket doesn't land, people actually think that there was a huge problem. So, what are the sorts of things that are going to be passe as we look forward to what people are excited by now?

Justin Fishner-Wolfson: (09:24)
I remember at the beginning, I literally went to every SpaceX launch. If I did that now, I would probably just camp out in Florida and only be at SpaceX launches. There are so many of them, there're barely events. What are the things that people can look forward to being commonplace in the future?

Anousheh Ansari: (09:41)
I can maybe jump in. One thing that I try to talk about, how access to space is opening up new opportunities, comparing it to the internet era. So when companies like Netscape came around, just making it easy and understandable so people can be creative, created an opportunity. No one could predict what would come next. And none of the things we have today, anyone would've predicted it back then. But just opening up and creating a playground was important. And I think that's what we are doing.

Anousheh Ansari: (10:16)
I'm personally very interested in looking at how we can put things we're doing here on the surface of our planet, up in the orbit and do it more efficiently, and without an impact on our planet. I think there will be opportunities for manufacturing things in space. There are things that we can manufacture better in space than you can in the gravity well of our planet. So I think that's a huge opportunity. There are medical opportunities.

Anousheh Ansari: (10:46)
There are some problems to be solved, but I think maybe we can take our data centers, especially for non real-time applications, all the pictures that we get on our FaceTime and Instagram and all those things, we can put them and store them in computers that have already been built for space. So there may be opportunities like this that I think will be exciting to see happen.

Justin Fishner-Wolfson: (11:08)
You mentioned manufacturing. It seems like the easiest toss over to talk about Varda. We've seen in the current environment with the pandemic, that supply chains are very hard.

Justin Fishner-Wolfson: (11:20)
Can you talk a little bit about how to build manufacturing, not just on this planet that's easy, but you're going to do it in space? You're going to have to build the supply chains. What exists today and what needs to exist to make this work?

Delian Asparouhov: (11:32)
See, I think one thing that sometimes is underappreciated is the United States has been manufacturing in space now for almost a decade. They've just been small scale, like research projects that have been done on the International Space Station. But the reason that they've never gotten much larger than that comes back to supply chains, where if you're a commercial company relying on a research station that has a lot of safety, security protocol, et cetera, can be difficult to rely on when you need products on a regular basis.

Delian Asparouhov: (11:59)
And so that was the, I'd say intuition or thesis that we had around Varda, which was we're not going to try and do fundamentally new science. That's what the International Space Station is for. We're just going to take that work and scale it up in a way where now, commercial customers are going to be comfortable with us being a part of their supply chain because ideally, Chris prints a rocket every day.

Delian Asparouhov: (12:19)
We buy a launch on that rocket, send whatever good it is, whether it's fiber optic, semiconductors, pharmaceuticals, bring them back down to our customers down here on earth, I think the following day. And that relates my answer to your original question, which was, I think the thing that will become much more normalized over the next five to 10 years is people's lives outside of just the space community being touched by space.

Delian Asparouhov: (12:39)
Right now, it's really special if you get to be a Planet Lab satellite operator operating 100 satellites. But most people out in New York City don't really get to appreciate the benefits of space. Whereas I think five to 10 years from now, you're going to start to see whether it's a hobby of satellites being set up, or these types of products that can be produced in space impacting people's life down here on earth, and bringing the benefits of space to a much, much wider group than has ever had it before.

Justin Fishner-Wolfson: (13:03)
And Chris, you must be seeing this from a customer perspective. Who are the people that are ... What industries? You don't need to give us specific companies, but what are the industries that are buying launches today that you never would have done this historically?

Chris Kemp: (13:17)
I think that it has traditionally been government customers. That's just a small fraction of our current backlog of launches. We have over 50 launches under contract now. Most of them are commercial companies that have new sensors that are able to see CO2 in the atmosphere, or use radars to understand where things are moving around in the ocean, where weather patterns at much higher level of fidelity can be predicted to make aviation safer.

Chris Kemp: (13:47)
For each of these, there's probably a dozen companies that are competing to build technology to create some killer, and they all have to be in space. And when space was really hard to get to, that became a barrier. As companies like SpaceX and Astra and Rocket Lab and others are building these more affordable, but differentiated launch services, we can get them to space much more easily.

Chris Kemp: (14:13)
It just blows open the opportunity for new innovation. When a startup can get funded and fly in space, it's like back in the days where internet companies had to build data centers. Well, that was really hard. What's harder than building a data center is building a data center in space. So the more we can make space accessible, the more innovation and the more we're going to see more companies start up and solve really important problems.

Justin Fishner-Wolfson: (14:38)
So you mentioned this, and given your role with the XPRIZE, you've tried to catalyze commercial investors, commercial companies. Where do you see that going forward, and what do you think the role of government is in this industry, if it's not necessarily to help build launch anymore?

Anousheh Ansari: (14:58)
So I think specific to government, there are two areas that government can be helpful. When we launched our first competition, which now it's almost 20, 25 years, more than 25 years, we had to really fight hard. And it took us 10 years to get FAA to agree to give a launch license for our teams. And now, that group has become the group at FAA that gives launch licenses to commercial companies. So supportive regulatory system, at least a regulatory system that's open-minded to allow for innovation to happen, it's important.

Anousheh Ansari: (15:38)
The next stop is the moon. Right now, we're talking about commercial companies actually launching and landing on the moon. The ownership rights of who owns one what on the moon, and when you extract something and then say you bring it back, or you throw it back, you launch it back and it lands someplace else, who owns that? All these ownership, there are so many interesting question that needs to be solved, that I think regulatory bodies need to come together and make sure one, we use space for peaceful reasons, so we don't turn it into another war zone.

Anousheh Ansari: (16:15)
And two, that they create an environment of creativity and collaboration, so people can easily work together and innovate. That's I think very important. At XPRIZE, we're looking at the next 25 years. What can we do? Of course, the fact that we are launching so much, it's important for us to actually clean up after ourselves too. So we're looking at orbital debris as one area of work. We're looking at protecting our planet and asteroid impact. And how can we predict if there will be an asteroid impact? Because right now, we don't track all the objects in orbit easily.

Anousheh Ansari: (16:53)
And I think there are opportunities again for closed loop systems. If we're going to go to the moon, we need closed loop systems. They're good for space, but they will be also good for us here on earth. So there's innovation there that we're looking at. And fuel and energy. So when I say manufacturing, I also include manufacturing using Institute material for fuel, for building material and other things that we need, if we want to build a permanent habitat on the surface of the moon.

Justin Fishner-Wolfson: (17:25)
You mentioned regulatory. Where does the US fit into that, relative to international cooperation? Are you seeing leader at the US level? Are you seeing it elsewhere?

Anousheh Ansari: (17:38)
I'm seeing everyone protecting their IP and not even wanting to get to the table right now, because they don't have the right answer. And so they don't want to talk about it. That's what I'm seeing right now.

Justin Fishner-Wolfson: (17:49)
So it'll get sorted once it has to get sorted?

Anousheh Ansari: (17:53)
It has to get sorted. And the more they wait, the more difficult it will be. And maybe it's a good thing, because people will go there and they will make up their own rules. So then they have to catch up.

Justin Fishner-Wolfson: (18:03)
That has certainly happened throughout history.

Anousheh Ansari: (18:04)
Yes. Yes.

Justin Fishner-Wolfson: (18:06)
Delian, you're obviously investing, in addition to being a founder at Varda. How do you think about the regulatory environment? How do you think about the government in terms of support for companies that you're looking at within the sector of space?

Delian Asparouhov: (18:22)
I think one thing that's been a really exciting change in space specifically over the past, let's say three or four years, has been that both the DOD and NASA have recognized that they no longer have an innovation problem, but purely an adoption problem. That they are no longer the ones that are pushing the fold on technology as much, but they need to create systems to actually bring that in and draw that in.

Delian Asparouhov: (18:42)
And so as an investor, I think what it's allowed me to do is because you have institutions like the Defense Innovation Unit, that is the only acquisitions group that rolls up directly to the Secretary of Defense, now you can actually rely on the DOD and NASA as a much more consistent stepping stone for much deeper technologies.

Delian Asparouhov: (19:00)
I think in even 2008 or 2009 when you originally were investing in SpaceX, that in some ways was probably as far as one could possibly extend. Versus now, I feel like relative to where technology's at today, we can extend even further because you don't have to go through suing the Air Force to get them to give you contracts. Instead, now, there's just la much more standardized process for that. And if anything, they're incentivized for it.

Delian Asparouhov: (19:22)
DIU actually tracks how many venture dollars their companies actually raise, and very much wants to collaborate with private industry. And so I find it to be a really exciting time where things that previously I always talk about in space investing, you have to get careful to not go so far into the future that you're investing in sci-fi and just never make returns.

Delian Asparouhov: (19:40)
But I do feel like it has actually fundamentally shifted further out where maybe before, I had to really focus on okay, commercial revenues within four years versus now, it's like well, maybe the DOD satisfies even the first two or three. So maybe it's commercial revenues within seven years. And I think that's a really exciting time.

Justin Fishner-Wolfson: (19:56)
So you think there's a transition point that's happening, where the government can still step in for the first few years, but commercial revenues are close enough for commercial investors to take advantage of?

Delian Asparouhov: (20:06)
I still think in today's day and age, people talk about, "Oh, you should be investing on 20, 30, 40-year time horizons." I think it's also just hard to incentivize employees to work on such long time horizons. People want to see equity prices going up and things getting more exciting. And that's just hard to do unless you have somewhat near term commercial revenues. Otherwise, you do get this glass ceiling.

Delian Asparouhov: (20:25)
And yes, back in the day, we had 2% of the US' GDP focused on this and so the glass ceiling was really high. But right now, without the potential for commercial revenues, you're artificially limiting your company. So even if in theory, there were investors who were willing to invest on such long time horizons, I don't think employees are willing to.

Justin Fishner-Wolfson: (20:45)
This is very fundamentally venture investing. And the good thing is venture has a long time horizon. I don't think it has that long a time horizon. And you have this weird dynamic that venture time horizons are actually longer than human time horizons in many respects, so you need these things to line up to make the incentives work.

Chris Kemp: (21:03)
I think building on Delian's earlier phases here, when the phase was the government was paying for things, that's what led to the aerospace industry, where you have cost plus contracts. You can only have so much growth if your revenue is cost plus 10%. And so I think what's happened is we've seen a new space tech industry, just like there was the pharmaceutical became biotech. Because when you're commercially driven, you can grow revenues faster.

Chris Kemp: (21:30)
And so pure play space companies that are out building new capabilities, that are directly marketing new data that never existed, to new customers, are growing faster. They're growing the revenues faster. And so the way that analysts have to look at companies is not like an aerospace and defense cost plus selling 100 airplanes to United Airlines kind of business.

Chris Kemp: (21:51)
But it's about the growth that you would see when you have a pure play, tightly integrated, vertically integrated company. It's creating a new capability and delivering it to customers. I think we've entered the space tech era this year.

Justin Fishner-Wolfson: (22:06)
Right. Where it's now actually businesses, right?

Chris Kemp: (22:08)
Pure play.

Delian Asparouhov: (22:09)
That sell products, and are contractors.

Chris Kemp: (22:12)
That's right.

Delian Asparouhov: (22:12)
That's what I love about the DIU or amongst many of these various groups, AFRL, SpaceWorks, et cetera, that are now interested in no longer just providing contracts to commercial companies, then trying to convince them to follow our spec. But instead they saying, "Oh, you've got a product that's already on the market? Let me go utilize that product."

Delian Asparouhov: (22:27)
So I'm sure when certain DOD groups are coming to Chris and saying, "I would like a rocket lunch," they're not saying, "Oh, I need the rocket's paint to be this color, and for the engines to work like this, et cetera." They're just saying, "Oh great. You have a certain number of kilograms. You can get me to orbit. This is how much you're going to charge me? Great." This is now a product that I can purchase, rather than a contract that I'm trying to put together.

Chris Kemp: (22:44)
I guarantee NASA is not telling Elon how to build rockets.

Justin Fishner-Wolfson: (22:48)
I am pretty certain that they have a spec sheet that they very much dislike deviating from. There's been a lot of talk about all these mega constellations. SpaceX is obviously the furthest along in terms of launching and providing services.

Justin Fishner-Wolfson: (23:04)
Chris, how is that playing out from a launch perspective? Where are you seeing the innovation in these constellations? Because you mentioned Planet also. I think Planet and SpaceX represent 99% of the satellites in orbit.

Chris Kemp: (23:17)
Today.

Justin Fishner-Wolfson: (23:18)
Today. SpaceX may just continue to try to keep that number going.

Chris Kemp: (23:22)
Yeah. I think that there's probably half a dozen mega constellations that are either being deployed now or about to be deployed. And there are companies like Amazon that have designs around multi 1,000 satellite constellations. The difference is instead of a space-based capability being a billion-dollar satellite, developed over 10 years by an aerospace defense company, you're having high tech startups use the technology that's in your smartphone, and by the way, it's way better, and the satellites are flying lower, which means you're inside the earth's magnetosphere. So you don't have to worry about radiation. And you're also refreshing the satellites.

Chris Kemp: (23:59)
Even with Starlink, they're replacing the satellites with new satellites that have in-space laser links. So the kinds of technology refresh cycles, like in Moore's law and in the consumer electronics industry, is now applying to space. And that wasn't true even just a few years ago. And so the rate of innovation in these mega constellations is going to eclipse anything we've ever seen before. And as cars become covered in cameras and drive themselves, they're going to need software updates. They're going to need to take the data that they're collecting and bring it back up to the cloud. There will be an incredible revolution in how we think about space as being intertwined in what we do here.

Delian Asparouhov: (24:41)
These same trends are entirely what enabled Varda as well, where it's people talk about, "Oh, space manufacturing is finally viable because of decreasing launch costs." And it's like, yes, that's a portion of it. But in some ways, an even bigger portion is the fact that a decade ago, we would've had to build our entire space path from the ground up, entirely from scratch. It would've been a multi-billion dollar project.

Delian Asparouhov: (25:00)
Instead, today, I can focus on what we're particularly good at, which is making those products in space and then bringing them down. Everything from the flight computer to the solar panel, to the in-space propulsion, all that stuff has numerous commercial providers, all of whom are increasing their capabilities, decreasing their costs every single year. And that's a lot.

Delian Asparouhov: (25:19)
There'll be cost curves and capability increases that are actually allowing something like Varda to exist today. In some ways, even more so than the Falcon 9 becoming reusable. That's the cherry on top. But the fact that we can close a deal with Rocket Lab to purchase their Photon platform, which is their in-house satellite platform, rather than develop it ourselves is the only reason why something like Varda is capable to be done today.

Justin Fishner-Wolfson: (25:41)
Here, you're seeing a lot of stack developments that started in software, has moved into hardware, has now moved into the hardware of space. You talked a little bit about trying to invest in science, not science fiction. How can people draw the line as investors, for the things that are actually possible today, versus maybe one day?

Delian Asparouhov: (26:04)
I think these things are actually simple with logical analysis in the space industry, especially as I've gotten deeper into it. I think people think of space as this very broad, hand wavy. How do I actually understand it? But when you actually dive into it, the number of CEOs or founders that have raised north of let's say 10 million is actually probably on the order of I would guess 20. There isn't a space industry. There's 20 people.

Delian Asparouhov: (26:27)
And so if you can solve a problem for one of those 20 people in the next four years, then you have a viable company that's not sci-fi. And if you do not, then it's sci-fi because who's going to be your customer? And that's especially true if you're selling into space. Now, if you're selling the more broad groups, like Varda is, where it's like our customers aren't actually other space companies, it's a little different.

Delian Asparouhov: (26:46)
But a lot of times I get impatient on a space thing, and you're like, "Yes, we're going to sell to the other space companies." And I'm like, "Great. Which one?" They're like, "Some future hypothetical one." I'm like, "Okay. So in order for me to believe in your company, I also need to believe in a hypothetical other company that hasn't been started yet, doesn't exist, and nobody is working on to work in order for you to have a customer?"

Delian Asparouhov: (27:04)
That's I think, the simple delineation. If Chris or the other 19 CEOs aren't going to buy your stuff, there's probably nobody that will.

Justin Fishner-Wolfson: (27:11)
Right. I refer to that as startup squared. It's like, you need this startup to work, and then you need this other startup to work. And you're not really sure the likelihood of it, at least the second one. Chris, you've gone through the whole capital formation cycle in this industry. How has that conversation with investors evolved over the last ... When did you start Astra? How long has it been?

Chris Kemp: (27:31)
We started in 2016. Yeah, we're not yet five years old.

Justin Fishner-Wolfson: (27:34)
Okay. So I feel like that's a lifetime right now. So it's like the equivalent of 25 years. How has the conversation changed during that period?

Chris Kemp: (27:42)
Yeah. I think that if you go back five years, we were still in the pioneer and the hobbyist phase, if you will. So you look at Anousheh, you look at what Richard Branson and Jeff Bezos just did, they're pioneers. It's like the Charles Lindberghs and the Amelia Earharts of the space generation. And so tonight, when the SpaceX launch happens, we're going to go from being pioneers to being passengers. And I think that's a huge evolution. And going from the hobbyist to the entrepreneur phase is a huge evolution.

Chris Kemp: (28:15)
So now we see entrepreneurs going, and there are space funds. There are space ETFs. There are business models. There are companies, there are many companies going public in this space. So we've reached a point in history where space is mainstream, and we've got analysts saying it's going to be a one, two trillion-dollar industry with double digit growth over the next decade. That's a real business. And so it's not hobbyists anymore. It's real, it's venture capitalists, entrepreneurs, ETFs, analysts covering it as a sector, space tech sector.

Justin Fishner-Wolfson: (28:50)
I wanted to close with you, Anousheh, because I think there's something from ... I've talked to a few people who've been to space, and it always seems to very fundamentally change their viewpoint. And so maybe I would just close it with, what are the things that you wish people understood, had they had the opportunity to go to space like you've been?

Anousheh Ansari: (29:12)
It's an important question. And one of the reason I tell people I wish our policymaker, our leader, the government's leader would actually have this opportunity to go to space, because one fundamental truth that intuitively, but it becomes real when you're in space, is the fact that there's only one planet. That those maps that you see in geography books that has these lines drawn, there is nothing separating us.

Anousheh Ansari: (29:44)
If the pandemic taught us one thing, it's that you cannot contain anything, any particular part of the world. So problems spread, and good things spread too. So we need to look at our planet as our collective home, that it requires our collaboration to make it a viable place for life. And it requires us to live in peace and harmony, and in a sustainable manner with the environment we live in.

Anousheh Ansari: (30:13)
We do that in our own homes, but we think that our home protects us from everything else. And that's not true. This is a realization I had in space, and I really hoped I had a way to convey it. So it becomes part of the decision-making for everyone in every business, in everything you do in life, and everything you do on a daily basis.

Anousheh Ansari: (30:35)
Because that's what it takes to make this planet a place for all of us to have children, to raise our children and their grandchildren, and be very happy and hopeful about the future that we are going to have.

Justin Fishner-Wolfson: (30:51)
Well, hopefully, more people get that experience. And I want to thank all of you for having this conversation.

Anousheh Ansari: (30:57)
Thank you.

Delian Asparouhov: (30:58)
And thank you.

The Evolution of Private Market Investing | #SALTNY

The Evolution of Private Market Investing with Virginie Morgon, Chief Executive Officer, Eurazeo. Suzanne Streeter, Partner & Co-Chief Investment Officer, Partners Capital. Peter Gleysteen, Chief Executive Officer & Chief Investment Officer, AGL Credit Management. Thomas H. Lee, Chairman, Lee Equity Partners.

Moderated by Gerry Baker, Editor-at-Large, Wall Street Journal.

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SPEAKERS

Virginie Morgon

Chief Executive Officer

Eurazeo

FULL BIO

Suzanne Streeter

Partner & Co-Chief Investment Officer

Partners Capital Investment Group

FULL BIO

Peter Gleysteen

Founder, Chief Executive Officer & Chief Investment Officer

AGL Credit Management

FULL BIO

Thomas H. Lee

Chairman

AGL Credit Management

FULL BIO

MODERATOR

Gerard Baker

Editor-at-Large

The Wall Street Journal

FULL BIO

TIMESTAMPS

EPISODE TRANSCRIPT

Gerry Baker: (00:00)
Good afternoon. It's a great pleasure to be here. My name's Gerry Baker. I'm the Editor-at-Large of The Wall Street Journal based here in New York. It's a great pleasure, particular pleasure to be here in person after so many events that haven't been able to be conducted like that. It's great to be here in real life, IRL as my daughters would doubtlessly put it.

Gerry Baker: (00:27)
So thank you very much indeed all for being here. Hope you've been enjoying the session so far. It's great, particularly to see you all so wonderfully ready for a very interesting discussion. You all look particularly well presented, not quite as well presented as those characters at the MET Gala last night. I hope some of you managed to see that. And I don't see anybody, unfortunately, here wearing a tax-the-rich outfit as Alexandria Ocasio-Cortez was. Maybe that's to be expected of a hedge fund conference.

Gerry Baker: (00:58)
But anyway, we have a great panel, a great topic. We have a very ... We have a dauntingly broad topic, private markets. But I think we have a panel who can provide some real focus and some real insights into that. And I have some questions that I hope will provoke them a little to focus the topic down.

Gerry Baker: (01:20)
Obviously, private markets have been a remarkable expansion story for such a sustained period now, as you all know. I was just looking at some numbers. The entire private capital industry, according to Morgan Stanley estimates entire private capital sector accounts for about ... is carrying about $7.4 trillion. They estimate that it will continue to grow to 25 trillion by 2025 to illustrate, again, just another illustration of the scale of the extraordinary growth of all of the private markets, but of particularly private equity over the last 18 months since the pandemic hit.

Gerry Baker: (02:02)
The market cap of the big five private equity funds I checked today was at $80 billion in March of 2020 when the pandemic got underway, and it is now $250 billion, more than threefold increase. So it gives you a sense of this sustained increase.

Gerry Baker: (02:19)
So I want to get into the reasons behind this, whether this extraordinary growth can continue, differentiate obviously between the different types of private markets too because we've got a nicely diverse panel here who can talk about the various aspects.

Gerry Baker: (02:33)
So I'll introduce them. Obviously, to my immediate left is Tom Lee who's the chairman of AGL Credit Management. Thank you very much for being here. Virginie Morgon who's the CEO of Eurazeo in Paris, from Paris. Next to her, next to Virginie is Suzanne Streeter, who's Partner and Head of Private Equity and Real Estate at Partners Capital Investment. And on the extreme left, Peter Gleysteen, who we were talking backstage tells me that he's been in the field of private credit for just about as long as anybody, probably anybody any of us knows. He's the CEO and Chief Investment Officer of AGL Credit Management. So thanks all for being here.

Gerry Baker: (03:15)
Suzanne, I'm going to start with you. I'm going to give you, I'm going to quote something to you that Kewsong Lee, the Carlisle CEO said on an analyst call over the summer when he was describing the extraordinary performance of not only his company, but of private equity, private markets in general. And he put it like this. He said, "Deals are being completed on shorter timelines. Financings are being executed more quickly. Opportunities for exits are presenting themselves sooner. Funds are being raised faster than ever before. And accelerating impact from disruptive technology and changes from the pandemic are powering an increased demand for private capital across all sectors and regions."

Gerry Baker: (03:56)
I mean, being a kind of a cynical and contrarian journalist my response to that perhaps is to say, that sounds like it's time that things change. But is this as good as it gets? Can this ... Suzanne, sorry, can this continue?

Suzanne Streeter: (04:09)
Well, thank you Gerry. It's a great question. It certainly is an amazing time for private markets. The returns have been very strong, and all the data points that you mentioned are correct. And that's what we're experiencing and seeing ourselves.

Suzanne Streeter: (04:22)
I think there's no sign that anything is imminent. There's no change in sight. They also say that limited partners, people who are looking to invest in private markets are continuing to feel underallocated and are seeking alpha through private markets. So I don't see it as being a particular asset class that's imminent for decline or any significant risks. Obviously, even in the financial crisis, there were some bumps, but the asset class performed incredibly well. So we're still pretty confident that it'll continue for some period.

Gerry Baker: (04:54)
Tom, do you see anything to worry about given this extraordinary growth? Again, is it, are we just set fair for continued growth? Obviously, there'll be differential performance, but is the market overall, are these various markets from VC to private equity to private credit, are they just set fair for continued expansion on this scale?

Thomas Lee: (05:13)
Well, people like to say that private equity is the reciprocal of really bond rates for the values. And obviously, the rate on deaths, rate on bonds, rate on loans are very, very low. So people can borrow. Also, over many years, you will find that the private markets derive from the public markets. So you can't really separate them in terms of how they go. We think we can, but we can't. So as the public markets have had a strong rebound, so have the private markets. And right now things look very, very good.

Thomas Lee: (05:53)
Obviously, we're priced to perfection. Prices are very high. Prices that we're paying are very high. You'll see in the paper that in some cases, prices have gone at north of 20 times EBITDA, earnings before tax depreciation and amortization. So that's for a fast growth company, that's for a company with something possibly transformative happening, but we are in an extraordinary time. I'd like not to call it a bubble, but we certainly have to be sure of ourselves now.

Gerry Baker: (06:28)
Virginie, from a European perspective, and again, this boom has been global. There's been tremendous activity in Europe. UK is obviously not in the EU anymore, but UK has been very much a focus of inward in private investment. From the European perspective is this, these same conditions supporting continued growth do you think?

Virginie Morgon: (06:56)
Thanks Gerry, thanks for having me. Just to echo on both Suzanne and Thomas comments, I think the industry, so Suzanne was talking from an LP and allocator standpoint. And from a GP standpoint as always, an investor, we see also that industry growing very fast in the years to come and nothing happened by chance. We've professionalized. We're bringing more value add to our clients. The public market have been pretty volatile as well. So at least with private market, you get long-term alpha performance with significant operating support from the team. So the value add I believe is what really counts in how we've developed over the last decade.

Virginie Morgon: (07:39)
And to Thomas' comment, clearly prices are to be watched these days. Assets are more expensive. But if you do bring to the table value add transformation, buildups, operating leverage, ESG, responsibility, climate change, then you can potentially work hard on compensating the high price of your assets at inception and make decent and higher return than some of the public markets for your clients.

Virginie Morgon: (08:15)
As far as Europe is concerned, I think you find in some sectors better priced opportunities. Like if you take the tech industry, clearly something is happening in Europe. As we speak, finally, Europe is awakening, venture and growth, amazing entrepreneur, very strong academic level and training. And now, newcomers, significant money being poured into growing those companies, which are still less expensive than what you have in the US. I think that could be interesting from an investor standpoint. But overall, as you know, Gerry, the world is pretty global. So what you see in the US, you probably find in Europe as well.

Gerry Baker: (09:02)
Peter, we were talking about this backstage, I think it was Suzanne who pointed it out, but even if that Morgan Stanley forecast of $25 trillion for total private capital by 2025 is correct, that's still only a fraction of the total value of public markets, frankly, in the US alone. So that does suggest perhaps, you talk particularly from your perspective in private credit, but more generally that does suggest perhaps that there's plenty of headroom.

Peter Gleysteen: (09:30)
Plenty of headroom. And it's a huge opportunity because all of that private equity will be leveraged with private credit. And private credit in terms of the private markets, investing strategies and asset classes is highly complimentary because first of all, it's a cash income product. And this environment of virtually no yield in most products in private credit is still available. And depending on the strategy and the asset class could be available in size.

Peter Gleysteen: (10:00)
And then, needless to say, but as you just inferred, private credit is at the top of the capital stack of any given company. So it's safer. So you get a combination of income and safety, of course, depending on what the portfolio's like and how diversified and how low the correlations might be to other strategies. So credit is more popular, more interesting to people than it's ever been. And it has a long way to go.

Peter Gleysteen: (10:29)
I'll just add, there were some comments that were just made with how good could it get? Well, the world's changing. COVID is changing everything at a high level and a low level. And when that's happened, historically there've been a lot of business changes, have to be social changes and maybe political changes, but there's certainly business changes, which is fueling this record level of LBOs and MNA, which of course is financed with private credit. And these are new opportunities.

Peter Gleysteen: (10:59)
I'll also comment, you mentioned that I've been around the space a long time, since the '70s actually. I've never seen credit quality of new issue as good as it is now, and also well priced, meaning priced high, not low. So it's a very good time to be investing.

Gerry Baker: (11:15)
Tom, again, this growth has been going on for a long time. And as long as I've been a financial journalist, quite a long time, I've been reading articles saying that this, as private markets grow, they will be subject to diminishing returns. I mean, one of those kind of early drivers presumably of private markets was that still, especially in an environment of such low interest rates, that the drive for yield is such that there's been tremendous search for those opportunities. At some point, and yet again, as we've just been discussing this, the demand for private assets continues to grow exponentially it seems. Is the sector kind of exempt from the law of diminishing returns? I mean, can we expect this to go on?

Thomas Lee: (12:08)
Pardon me. Let me get very specific Gerry. In terms of return expectations in PE, in private equity, we always had a power or a standard, and that's that we should be returning a thousand over the concomitant public index. In other words, large cap buyouts really relate to in effect the S&P. If the S&P is say giving 8% a year over many, many years, so that large cap return should be about 18%. And therefore it sort of has been, look at the KK or Blackstone.

Thomas Lee: (12:42)
As you are going down into more of the midcap, okay, that return expectation goes up. Why? Because the smaller to midcap company is riskier. Okay? So that you as an investor need a higher return. So that return should be geared to the Russell say, and if the Russell was at 10 or 11, so then that thousand over is giving you into the low 20s. And so that has also been concomitantly true.

Thomas Lee: (13:10)
So I'm only saying that that's what the investor requires and that's what the market demands. And obviously, I think that Henry Kravis proved early on that if you can buy a really good company that's a really big company where the risk of failure is very low, that the LP, the limited partner is going to take a somewhat lower return than if you're in the more venturesome range, okay?

Gerry Baker: (13:39)
Suzanne, again, we talked about, you talked about low interest rates. How sensitive to the interest rate environment is the success of private markets? And if we did get some fairly encouragingly mildly benign inflation numbers today, but obviously, there's concern, continuing concern about rising inflation and ultimately minimum the withdrawal of all this credit from central banks and possibly high interest rates, how do you position yourself? What do your LP say about that? What's the sense of the role for private markets in possibly a changing interest rate environment?

Suzanne Streeter: (14:21)
Well, so we look at it as a limited partner in funds for most of our portfolio. And so it's really the first vintage year invest period, and sort of the whole period of the investment which is 10 to 12 years, and most companies are probably within the five to seven year range. So that's the fund life. And so if the interest rates rise during the life of the fund, your assets might be somewhat at risk because the opportunity cost of capital has sort of been damaged. But if you're over that series, that whole period, you may have a smoothing effect as well.

Suzanne Streeter: (14:56)
So we don't take into account much rising interest rates over a five year investment period because you're buying in along the way. And so it really does behoove the manager, the investor, to be focusing on operational value add versus just the financial engineering, which is what Partners Capital is always trying to underwrite.

Gerry Baker: (15:20)
Virginie, from your perspective, from your company's perspective, I think one of the things you've been seeing is a sort of a broadening of asset classes, right? And the idea of some of the private markets, private equity, well, becoming one stop operations for VC and private equity and credit. Tell us how that's developing, and again, what opportunities there are that you see from that development?

Virginie Morgon: (15:49)
Yeah. I mean, I see these and I'm sure this is shared by the audience and by my fellow partners on the stage. I mean, the growth of our industry, I think, is at least twofold. The first one that we've discussed so far, which is private equity, like equity investment behind entrepreneur and great management team, which is enlarging and growing. But also some complete new asset classes, which are being filled in, supported by players like us. I mean, think about private debt. The commercial bank have disappeared after the great financial crisis. At least I'm talking about the European markets where we, as private equity investor, we turn to private debt players, although it's more expensive, but it's more agile. We're really hand in hand as partners. So private debt as an asset class in private equity has emerged extremely strong over the last 12, 15 years.

Virginie Morgon: (16:48)
Think of financing the future, impact funds. Who is raising money? We are. Who is investing that money? We are. I mean, there's not that many source of capital if you want to invest in technology of the future impact climate, new businesses being concerned by climate and carbon neutrality. So think of us as not only growing what has been here for decades, but also inventing complete new way of developing and deploying resources, which you can't really find anywhere else, neither in the public market, nor through that many institutional financing. So I think we're filling some gaps with value add and commitment and real engagement behind some investment themes and belief.

Gerry Baker: (17:44)
Peter, on the interest rate question, private credit, again, you're a specialist and would seem to be particularly sensitive to that. How do you see that? How do you see the credit environment in the next couple of years and how it affects your particular sector of private markets?

Peter Gleysteen: (17:59)
Well, a traditional credit investing concern with interest rates is higher rates equals a higher interest burden on borrowers. So it's always been a historical credit concern. But in many, many years now that's really diminished because interest rates are so low and even any expectation of higher rates are still such low levels that given the credit quality of borrowers, the amount of excess cash flow that they generate it's not the concern that it once was. Interest rates are still relevant though, of course. And Suzanne said it's not about market timing. It's about averaging over time. With private credit, two comments I would make, and I'll come back to interest rates.

Peter Gleysteen: (18:37)
As Virginie was just saying, private credit offers a lot of opportunities, including for new types of businesses to get financed. In the US, private credits really breaks down to two big buckets. The traditional one, bank originated, broadly syndicated bank loans, the original form of private credit. Those loans are to private almost all, but not exclusively private, mid and large cap domestic US companies. If you want to have credit exposure to them, that's the only place you can get it. And that's a big part of the US economy and arguably the most stable. And these are not multinationals. It's the heart of the US economy, mid and large cap.

Peter Gleysteen: (19:17)
The other segment, which is new of course, is direct lending, which are small cap leverage borrowers, mainly private equity sponsored small businesses. That asset class is new though, and it's a result of banks for regulatory capital reasons pulling back from lending to smaller companies. So we've yet to see how that group of borrowers will fare in a '09 type recession, as opposed to a 2020 90-day recession.

Peter Gleysteen: (19:48)
This relates back to interest rates. It's a central for any investor in private credit because they're looking for yield. Now, the good news about private credit is spreads. Spreads have remained elevated mainly for market technical reasons, even though the underlying benchmark, which is currently live or soon-to-be SOFR is practically zero. So it's an attractive investment, even though effective there is no interest rate component to the return.

Gerry Baker: (20:16)
Obviously, it's been an extraordinary unprecedented in our lifetimes 18 months of this pandemic. I want to get an assessment from each of you on what your sense is of what's changing, what has changed, obviously, what's changed over the last year and a half, but I mean, what's changed structurally as you look out at the investing opportunities and the investing climate now over the next few years.

Gerry Baker: (20:40)
We've seen obviously extraordinary growth of technology, the use of technology. We've seen a very bifurcated economic performance between companies that have done extraordinarily well, accelerated in the last year and a half, and those that haven't. We've seen kind of a continuing hollowing out of retail, traditional retail. And I wonder, just want to get your sense of what of these changes that you've seen in the last year and a half are permanent, and again, how that affects your investment strategies, the way you look at the overall economy and the opportunities. Virginie, let's start with you. What's changed in the last year and a half, permanently changed?

Virginie Morgon: (21:26)
Many things, but a lot was already there before the crisis, wasn't it? So on the negative, and it's probably beyond just our conversation, I think the world, and that's extremely worrying, has become more indebted. There's this bifurcation with the happy fuse and the many left aside, education, women, child. So that's for another panel, I guess. And on the positive, which was already there but accelerated during the crisis, it's a more digital world, and thank God, it's a more responsible world. And I think, the election that you had at the beginning of the year in the US and the US rejoining the Paris Accord, all of this is going as far as I'm concerned in the right direction.

Virginie Morgon: (22:17)
So if you were pre-COVID a digital investor, you had digital talent in your team, you were technology driven, and if you were already committed and engaged into climate and carbon neutrality at whatever time horizon, and you had expertise in your team and conviction, you certainly came out of this crisis stronger than ever, because that's what client wants, that's what entrepreneur wants, companies in which we invest. And you would be astonished by what has really changed. At least, I'm testifying for Europe, which is the market I know best.

Virginie Morgon: (23:04)
But you are being chosen today by your clients and by the companies in which you invest you if you have that in your DNA. And that's very real. I mean, we are winning deals or we are winning clients' trust and support because many, many years ago, we at Eurazeo decided that we wanted to be acting responsibly long-term and having our own impact on society and climate. And this is now happening.

Virginie Morgon: (23:37)
So it's a thrill. If you have that expertise, if you have built that knowledge and those ... I mean, because this is heavy work. I mean, this is expertise. This is operating support. This is being a real ... an operator of diversity and change and climate. These are for me the big change. If you're a tech investor, I mean, you're winning these days. How long? I don't know, because it comes back to valuation. But it's for the long-term.

Gerry Baker: (24:03)
I want to talk a little bit later on about ESG and impacts in particular.

Virginie Morgon: (24:06)
Sure.

Gerry Baker: (24:06)
Some of the concerns that maybe have been raised by, hate to use the phrase, but greenwashing or companies posing as meeting certain environmental objectives while not actually doing so. But I do want to come back to that later. But Peter to you, what are your main ... What are the main lessons? I mean, we're still drawing them, obviously. What are the main lessons you've drawn from the last year and a half?

Peter Gleysteen: (24:31)
I think at least the two big ones are just, Virginie mentioned digitization, just how effective we've all been able to work remotely, but it's meant the further disintermediation of the non-knowledge worker or of the labor worker, which is good for productivity and company profitability that's arguably not a good thing for society. And it's accelerated. Those trends have been in place for a long time, but it's accelerated them and made them clearly structural. They're clearly structural and more potent.

Peter Gleysteen: (25:07)
And relatedly, with the previous administration, there was a heightened awareness of political risk, not only in the US but everywhere. And that, despite everyone's best hopes, that's not diminished. So if anything, I think we're living in an environment where political risk, both at the national level and international level's higher, which points to more volatility, certainly at the price level.

Peter Gleysteen: (25:36)
Now as a credit investor, as a long-term manager of credit investments, volatility is actually an investment opportunity. Depends on which, and certainly you would think that would be true also with private equity because these aren't ... We're talking about private markets, not public markets. But it does mean that the environment will be trickier going forward. It certainly is our expectation.

Gerry Baker: (26:00)
Suzanne, your sense of what are the structural changes that we are going to see as a result of the extraordinary events of the last year and a half?

Suzanne Streeter: (26:09)
Sure. I think I might echo what Virginie and Peter both said around productivity. One of the observations is just that everyone's captive. Everyone's sitting at home. Everyone's available. The number of management meetings that a private equity or venture capital firm can have are five times what could have been two years ago. The pipeline of deals that they're pursuing couldn't come to life because people are sitting home and having conversations.

Suzanne Streeter: (26:39)
I also look at it from the limited partner side and perhaps even from the, just the industry overall. It has become more inclusive because even small limited partners can access the general partner to have a meeting, to perform their due diligence without expensive time traveling to meet with them on their own ground.

Suzanne Streeter: (26:59)
So I look at it as a super efficient time. I think it will probably remain in place for a good period of time until animal spirits start to kick in and you have a lot of people running on planes and everyone else starts to feel left out. But in the meantime, it's been a really productive time, and you see it just throughout the industry.

Gerry Baker: (27:24)
Tom, your observations about the last ... the pandemic and its long-term changes it [crosstalk 00:27:30]

Thomas Lee: (27:31)
Your first premise was tremendously accurate. You talked about the velocity of change. Changes are happening at a rapid rate, changes all up and down the spectrum, so that we have to be very, very careful when we invest today because things are changing rapidly. I don't know if we want to talk about it now or later, but so often we're being asked to invest on a proforma EBITDA compilation of numbers that looks out into the future and that sort of calculates what the run rate EBITDA or the run rate profitability of the company should be or might be with a few things that are just happening during the next quarter. So anyway, that's something that we must be very, very careful of.

Thomas Lee: (28:25)
In terms of our own activities in this last pandemic period, and certainly Suzanne mentioned, the velocity, again, at which we are doing business is dramatically increased. The number of incoming transactions has increased the volume of work that we have, the volume of work that we have imposed on our own staffs. And having seen the Goldman Sachs revelation of, gee, we're working our younger people a hundred hours a week, and we looked around and said, "Oh my God, that's what we're doing too," and we just can't do it like that, because of course not having to travel into the office and so on and so forth, it became easier to impose on people. So anyway.

Thomas Lee: (29:11)
Information coming from companies digitally, the lack of travel, okay, compressed the timeframe of the receipt of this information and the digestion of the information and how we work with the companies, the number of acquisition opportunities that we are seeing. And then of course, if we're buying a company, if we're looking at buying, it isn't just us in a so-called auction. It's dozens of firms, possibly scores of firms, could be a hundred. Wow. Hopefully if we're selling a company, we're going to get that kind of result also. And that happens from time to time. But the entire activity level is very, very high.

Thomas Lee: (29:57)
Your very first question of the whole meeting is, is it indeed too hot not to cool down? But that's for another question. Thank you.

Gerry Baker: (30:07)
Let's talk about the broader climate. I want to talk about some of these ESG and impact and other issues too, in a moment. But, if you like, the kind of the broader cultural or political climate that we live in. I mean, again, one of the reasons, one of you has really talked about this, but one of the reasons private markets have been so attractive for so long is obviously because they're subject to less onerous regulations. And whether you're an investor or particularly whether you're someone who's considering going public versus staying private, the regulatory environment is obviously extremely important.

Gerry Baker: (30:46)
But we live in an environment where, especially here in the United States, we have a democratic administration. We have a democratic Congress, which has signaled its determination to take, if you like, a more, should we say, aggressive approach towards some business practices.

Gerry Baker: (31:00)
And I wonder, as private markets grow at these kind of rates that we've been talking about, they're obviously not going to, by definition they're not going to be subject to the same kind of regulatory environment that public markets are. But Suzanne, maybe I could start with you. Is that something we're going to see ... Are we going to see more pressure for regulation, for scrutiny than we have right now? Or do you think that's just ... that would just kill off the opportunity represented by private investing?

Suzanne Streeter: (31:33)
Well, regulation it's always been in the wings and the private equity industry's been able to sort of navigate it pretty effectively. I think, relative to public markets however, it's still really under the radar in terms of just the market to market risk of the portfolio, which valuations is probably the one thing that would come under the scrutiny first and foremost from a regulatory perspective.

Suzanne Streeter: (32:01)
But being a public company, you think about all the costs imposed on the company to address climate, to address various diversity inclusion initiatives, all really positive, but in a private company context, you can make rapid, aggressive investment to get those things accomplished without having the risk of public market earnings being a sort of the public stock price being damaged because your earnings are coming in below expectation and the smoothing effect. So, I sort of see the private market is still a real, an opportunity to actually take a leadership role in a lot of the transformation because it can really be effective.

Gerry Baker: (32:46)
Virginie, you talked a little bit about this, and Suzanne just made this very good point, too, that to some extent the pressure is coming from a kind of almost a self-regulatory or from the investors, to some extent themselves, we've seen these in the last couple of years, whether it's BlackRock and requiring certain ESG obligations on the part of its farm, on the part of its managers, on the part of its partners, companies like Goldman requiring certain composition of boards, gender, and racial composition of boards.

Gerry Baker: (33:26)
I'm wondering, to be cynical for a moment, is this kind of window dressing? Is it public posturing? Is it public relations in order to sort of forestall broader political intervention? Or is it something that is genuine and are private investors responding to it in a positive and favorable way?

Virginie Morgon: (33:45)
I mean, if I may I'll answer from the private market standpoint, and I'll go into-

Gerry Baker: (33:50)
However you like, from whichever perspective-

Virginie Morgon: (33:52)
... BlackRock and Goldman Sachs are announcing. I believe with the size and the power of our industry, we can make, and Suzanne mentioned, significant changes, because we're still quite small, but extremely agile and extremely powerful in terms of resources.

Virginie Morgon: (34:12)
So you think of a GP, like it's a thousand people. We are 350 people in my company, but we invest in more than 500 company worldwide. We have impact on the life of thousand and thousand of employees and people and families. So we have the power because we have the resources and the talent. So if you have the conviction, and if on top of this, there's an awakening. The clients, you will be amazed, Gerry, there's no due diligence today of any of our clients which doesn't start with ESG. It's completely the other way around.

Virginie Morgon: (34:51)
Of course, you need performance, you need return, you need financial performance because that's what you're here for. But it's not enough. You need financial performance for the long-term responsibility and have some impact through the companies through which you invest. So it's not about at all greenwashing.

Virginie Morgon: (35:12)
And if anyone in the industry is just trying to play cues, you are uncovered in half an hour because you can't talk about climate neutrality if you don't have expertise because it's extremely technical. Everything is valued and measured and published, and you go from step one to step two, you need expertise, and-

Gerry Baker: (35:40)
Excuse me. But can I be a little bit cynical for a moment and at least, say, I'll play the role of the cynical journalist and say, to some extent hasn't that been easier to execute in a climate of extraordinary financial success? I mean, with this low interest rate environment, the extraordinary bull market that we've seen, which some measures been going on for 30 years. So it's kind of easier with that rising tide to meet these specific objectives, whether it be environmental, social, governmental, or diversity, equity and inclusion. But if we hit some turbulence, if we go through another 2006, 2007, or we hit God forbid another bear market of the 1970s, are people going to cling to those goals?

Virginie Morgon: (36:31)
No, because you have to have another conviction, Gerry, because it's about a better performance. You have a better financial performance if you incorporate in the way you accelerate the transformation of your company, you are getting a better financial performance by taking care of diversity. Because if you are convinced that being diverse brings better decision-making and better efficiency, then you're back to step one, you are delivering a better financial performance. Wherever you are in the cycle, you better take those diversity and climate objective into your own transformation in your company.

Virginie Morgon: (37:12)
Now you're going to pay per tons of gas, CO2, it's 60 Euro per ton. It was 10 four years ago. So this is real money. So if you're convinced that this is real money, it's not about having a great momentum of high growth that you are then spending some time and some resources on diversity and climate. This is a must. This is embedded into your objective of being, providing better returns.

Gerry Baker: (37:40)
Tom, you're-

Thomas Lee: (37:41)
Much of our money is coming from the biggest pension funds and the sovereign wealth funds in the world. Okay? As in say, CalSTRS, CalP per as many, many others. They demand it. They want it. They require it. So it's been a good kickstart for us and we have gone with it. And ESG is important to us. So I can't tell you how something good starts, but it started this way and now we're all with it.

Thomas Lee: (38:13)
But back to your initial question was whether under the Democratic administration we see more regulation than under Republican. I can't say that really. I am sure there will be some, but returns are going to be the main driver. Because we're private and because we're asking the LPs to lock up for five to 10 years and they can't just sell our fund shares in one minute on the stock exchange. That's why we must give that high rate of return. So anyway.

Gerry Baker: (38:49)
Peter, just quickly on these new horizons of ESG and impact that [crosstalk 00:38:54]

Peter Gleysteen: (38:54)
It's critically important, and the point's been made several times. Tom was just making that you would want any company that you're investing, whether you're a creditor or an equity investor to employ best practices, do what's best for the business, protect all shareholders, all stakeholders, and be better.

Peter Gleysteen: (39:13)
The controversy though is, especially with the focus on ESG, are we talking about something that can move the needle 10% or 1%? So I'd say it's right now closer to 1%. So there's more awareness of it than substantive achievement, but it's all pointing in the right direction and it's necessary. And government needs to set kind of the guard rails, but the solutions are going to come from the private sector. And we're going to invest in that.

Gerry Baker: (39:44)
We just have a few minutes left. So I'm going to just give each member of the panel, just a simple question about what expectations they have for the way in which things may change. And Suzanne, I know you've been in the way in which you, the changing practices and trends in your business, and I know you said to me beforehand that very interested in the extent to which you've been working directly with LPs, more direct involvement by them, growth and working with emerging managers. Tell us what your priorities are for the next year or two.

Suzanne Streeter: (40:21)
Sure. We're just trying to seek the highest performing opportunity set, and what we at Partners Capital experienced and I think we hope too it will persist is venture capital. Companies are staying private for longer. And so there's just much more opportunity to benefit from the growth in that market. And I think that should be sustainable for a period of time. So venture capital is one.

Suzanne Streeter: (40:51)
Second is direct investing with our partners. So this is something that's been going on for many, many years. Many LPs are really interested in co-investing with their private equity partners. It's hard to execute and we've got a team that does it. So that's an area that we're leaning into at Partners Capital.

Suzanne Streeter: (41:09)
And the third is emerging managers. This is where we see a higher startup opportunity set, people who have been in the industry for a long time, trained at great story firms that want to go out on their own and really are looking for deals that are probably below the radar, off the run, smaller, there's more inefficiency, more opportunity for value add. And so that's an area where we're spending a tremendous amount of time and that's on a global basis. And those three areas have been quite creative to our performance over the last six years.

Gerry Baker: (41:44)
Tom, I'll ask you kind of what's your eye, what bulls do you have your eye, particularly what do you have your eye on in the next couple of years, either in terms of the way you work or in terms of opportunities? Just a sense of what your priorities are.

Thomas Lee: (41:56)
Well, first of all, just on a personal basis, we are so looking forward to getting back into the office, and we are-

Gerry Baker: (42:03)
Amen. Amen.

Thomas Lee: (42:04)
Amen.

Gerry Baker: (42:05)
We're not there yet.

Thomas Lee: (42:06)
And also, I must say we look forward to being able to spend time in person with the corporate management. While that seems like a very simple answer, it's something that we haven't been able to really do.

Thomas Lee: (42:21)
Certainly, we are working with managements of the companies that we invest in, in terms of helping them grow. Okay? We happen to be a firm that doesn't try to run the companies that we invest in, but we assist. And that's in many, many areas in terms of corporate strategy, development, and in terms of deal flow. So it's as if we've been on the outside of our portfolio, looking in, and we are so anxious to get back to business though. Basically it's a very simple, yes.

Gerry Baker: (42:59)
To something like normal. Peter, just quickly your priorities.

Peter Gleysteen: (43:04)
Certainly, our principal focus looking ahead is making sure that what we can offer and what we deliver to our investors aligns directly with what they're seeking and what their needs are, specifically their goals. And we're focused on getting better at doing that. Now, we're a credit investor. So what people want in credit investing is safety, stability, and an attractive cash income stream.

Peter Gleysteen: (43:29)
Now, the good news is with private credit, all the raw materials that do that are readily available, and our job is to do the best possible job that we can delivering that, and taking it to an even better and even better level.

Gerry Baker: (43:46)
Virginie, I'm going to give you the last word. As you look forward to the next, getting back to ... Well, you're obviously traveling again, which is a good thing. More human interaction. But, as you look at the next couple of years, what are the things that you're most focused?

Suzanne Streeter: (43:59)
I vote in favor of human interaction, for sure. We've been certainly very efficient in the last 18 months, but we need interaction to be creative and innovative. I'm fed up of working alone from my office.

Suzanne Streeter: (44:14)
Listen, venture and growth, I would echo Suzanne, in Europe something big is happening. So I'm glad that we at Eurazeo but other players as well, are there to support those great stories of leadership emerging, strong businesses in growth and venture in Europe. So that's something to watch I would say in the next five to 10 years.

Suzanne Streeter: (44:42)
I would say I'm a deep believer in making bridges and connection. Politically speaking, we're going backwards. So hopefully, as a private market player, we can strengthen those bridges. And I am representing very old and strong player in Europe. We are willing to develop our own strengths in Europe, in Germany, in Italy, in the UK, but also be present in the US and also be present in China, because the more you invest in small to midsize companies, the more they need a player who has connection across the globe to help them fast track their development. And I think that's quite a special alchemy of supporting midsize companies, but at the same time, being yourself, more of a global player with a good understanding of the US and of China, if you are a European player.

Suzanne Streeter: (45:42)
And then maybe the final words will be about women. And I would like to bring more women to our industry. It's not just about women. It's about more diversity, because that's what we need in order to be better at what we do. We need to be more diverse, more gender balanced. And there's still a lot to go, still a lot to work on even since from 2021. So I make that wish.

Gerry Baker: (46:08)
Thank you. Very good note on which to end the session. Ladies and gentlemen, thank you very much indeed for being here, for listening. I want to ask you, if I may, to join me in thanking our terrific panel for sharing their time and their insights this afternoon. So please, thank you very much.

Suzanne Streeter: (46:25)
Thanks.