Income Investing Strategies For High Net Worth Investors, An Alts Expo Panel

Shana Sissel, Kelly Winget, and Nelson Chu join moderator Andy Hagans for a panel at Alts Expo discussing the myriad of income investing strategies available to HNW investors in the current environment.

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Episode Highlights

  • Why private credit and income investing in general has seen such a surge in interest in recent months.
  • Asset classes that have historically generated strong income while also preserving capital.
  • Discussion of risks and opportunities associated with all things crypto in the current environment.
  • Review of portfolio construction strategies that result in actual diversification benefits.
  • Comparison of opportunities in public markets compared to private markets.
  • Opinions on whether bonds still constitute a good investment.
  • The importance of considering triple net returns when evaluating investment options.


About The Alternative Investment Podcast

The Alternative Investment Podcast is a leading voice in the alternatives industry, covering private equity, venture capital, and real estate. Host Andy Hagans interviews asset managers, family offices, and industry thought leaders, as they discuss the most effective strategies to grow generational wealth.

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Show Transcript

Andy: Thanks, Jimmy. Well, I always say income, it’s like your blue blazer. It never goes out of style, right? That’s what we’re talking about today, income investing strategies for high-net-worth investors. I have three true experts with me here today on this panel. I’m really excited. I’m gonna introduce everybody first, and then we can dive in. First up is Nelson Chu, founder and CEO at Percent. Nelson, I have to say, I love the Percent platform, the demo, you know, that you gave us earlier. The technology I just think is amazing, and I wish every other asset manager would take notes of how much you’ve invested in technology and usability. But I know also this topic, income investing, obviously very near and dear to your heart. Welcome to the panel today.

Nelson: Thanks so much for having me. Great to be here.

Andy: Next up is Shana Sissel, who’s founder and CEO at Banríon Capital Management. Shana, you were on my podcast earlier this year, and I know that you are very passionate about alternatives, and obviously income investing, a big part of alternatives. Welcome to the panel today. You’re on mute, Shana.

Shana: Thank you so much for having me. Yes, now I…

Andy: No problem. It pretty much happens probably 5 or 10 times every show, and including myself. Last but not least, Kelly Ann Winget, founder and CEO at Alternative Wealth Partners. Kelly, I know you come from the world of family offices, now at Alternative Wealth Partners. You guys have a huge focus on not only income, but tax-efficient income, which is my favorite kind of income. Welcome to the panel today.

Kelly: Oh, yeah. Thank you for having me.

Andy: And before we dive into the questions, I know we’re a few minutes behind, but I wanna make sure we have a full 40 minutes for the panel, because we got some great topics today. I think the email that Jimmy just sent out said this is our most-anticipated panel of the day. I think that’s true. I have to say, you know, private credit, income investing, these are words I’ve always heard, but I haven’t heard them as much as I have in the last 12 months. This is very timely. But before we continue, just wanna mention, if you have any questions for myself, for our panelists, please use that Q&A functionality in your Zoom toolbar. Yada, yada, I’m not gonna tell you how Zoom works. If you don’t know by now, I can’t help you. Nelson, I wanna start with you though. Earlier, in our first panel, we talked about capital preservation, which is another phrase that in the past six to nine months I’ve heard probably more than I ever have in my life. But again, the income space, the private credit space, has really heated up. Why is there such a focus on income investing, especially from ultra-wealthy investors and high-net-worth investors?

Nelson: Yeah, it’s a great question. And I think it comes down to the fact of where we are in the market cycle, right? We’ve had effectively a 10-year boom run, where you kind of could throw darts at anything and it’ll probably go up in the grand scheme of things. And now you’re in a situation where that’s definitely not the case. Certainly a lot of market volatility out there, a lot of uncertainty happening in the coming months ahead. We’re definitely not out of the woods yet. You’re seeing what’s going on today. There is no shortage of regional banks that are in trouble, and this is not the end of it, right? So, there’s a lot more shoes to drop. So, in that instance, investors, especially ultra-high-net-worth ones, are looking for places that are a little bit more uncorrelated, a little bit more recession-resilient. And you break down the different asset classes available to investors, you can obviously look at public equities, which is gonna be a direct, I think, reaction to the Fed, in real time, whenever the meeting happens, right? And that’s gonna be, effectively, very volatile for the next few months of the year, going into 2024.

You have venture and private equity, which has seen significant markdowns in recent months because of the fact that they’re being comped to public equity markets. The later stage you are, the more likelihood it is that you’re gonna be kind of measured against what the multiples are on that front. And so you’ve seen venture investments, especially Series C, Series D, face major markdowns on that side. The other alternative is on the public market fixed-income side. And that historically has been a situation where they were thriving in low-rate environments. They kept going, raising money, things like that, and now these rates are so high and the duration is so long, these are 30-year maturities, a lot of these companies who need debt aren’t coming out to market right now. They’re just gonna wait it out. And so you’ve seen new issuance volume on the public debt side drop by magnitudes, year over year, from 2022 and 2021 into 2023. So, you’re in a situation now where private credit and private debt is probably the most attractive asset class right now, and you’re hearing that from the likes of Blackstone, Apollo, Ares, KKR. They’re adding more into the private debt portfolio because it is uncorrelated, because it is providing additional alpha in an environment that is very, very unpredictable, and it will continue to remain so for the coming quarters.

Andy: Yeah, absolutely. That’s interesting, you know, your point, private credit being the hottest thing out there right now. I mean, we have several people presenting here today, Nelson, including you earlier. So, I mean, I agree. I would broaden it out, really, to all forms of income investing. You know, my thing is, to our panel earlier, and I got to pick the panel topics, right? So that’s a fun job, but capital preservation during periods of economic uncertainty, always first and foremost in people’s minds. But I wanna get paid to wait, right? I just don’t wanna wait and be sitting on dry powder and losing 7% a year, or Kelly might say losing 11% a year, you know, depending on what we call inflation. But Shana, I wanna turn to you next. Are you…this focus on income investing, I’m hearing it from retail high-net-worths, and I think we’re seeing it also from family offices. How about advisors? Are they more focused on income investing in this season?

Shana: Yes. I believe, absolutely. And it’s interesting because I think the high-net-worth and ultra-high-net-worth, one of the reasons that there’s a focus on income, I’m not sure it’s necessarily new. I just think now they’re looking for different ways to do it. Whereas before, it was fairly simple to build some sort of fixed income ladder. But, you know, in recent years, in recent months, with interest rates rising, they saw major drawdowns in those types of portfolios. So they’re looking for ways to generate income to pay their regular expenses. That’s generally what I see. And when advisors start talking about income for some of those higher-net-worth individuals, they’re talking about it as they wanna put a specific amount of money that’s gonna generate a specific income, and that’s gonna pay their general lifestyle, like their mortgage, their car payment, or those types of things, so then they can take the rest of their assets and put them in sort of that opportunity to have higher excess returns, and they’re also very willing to, you know, not have general liquidity of the whole portfolio.

What I think is happening now with advisors is with the advent and the growth in interval options. So, you’re getting the opportunity to participate through interval funds. And some of the private credit markets that were not normally accessible for advisors and their clients in the past is creating, you know, continued and increased demand. And I’m starting to see from alternative asset managers a desire to bring interval-type product to the market, so that they can expand the number of people that can be part of their investor base. And I think that’s a really interesting opportunity. I think it’s also worth noting, while private credit can be really interesting, there’s other income-producing options in the space. I had somebody ask me recently about commercial real estate, and I kind of stepped back and said, “Okay, it depends on where we’re talking here,” because there is an income component to that. And while I’m not big on office space or, you know, the traditional commercial real estate, I think there’s a true opportunity in some of the triple net lease, some of the logistics-related warehousing spaces, where you have that steady sense of income but you also have the diversifying component of the real estate aspect of those businesses.

So, there’s a number of different ways. And what I’m seeing from advisors is the desire to look at ways to produce a certain target amount of income for clients, so that they can feel like they can have that stability to pay their, you know, ability, their lifestyle, kind of things, the things they need to do to live, so that they can take advantage of markets. As we’re seeing this stress, this is actually a great opportunity to invest and have potential for future excess returns. We see this time and time again. So, being able to do that, I think, allows them to take that short-term risk that there could be some volatility in the market, but the future potential’s good, and they know they have the income there to kind of take care of the bills.

Andy: Yeah, I love it. And that goes back to our keynote this morning, Sean talking about building up that passive income. And, man, I think that’s, like, everybody’s dream, right? You know, whether you’re high-net-worth, ultra-high net worth, or even just getting started. I feel like that’s a shared dream, right? Living off of passive income. So that’s what we’re talking about. Kelly, I want to turn to you. Really the same question, but I’m gonna phrase it a little differently. One theme I’ve picked up talking with you, you know, your background with family offices, some of your projects in energy, is really building generational wealth, you know, thinking long-term…if I can use a baseball analogy, swinging at fat pitches. How does income fit into that? You know, to building generational wealth? Is it a core part of the strategy, or is it more something that folks are focused on right now, you know, to sort of get paid while they wait?

Kelly: I don’t think income really has a lot to do with generating generational wealth, but kind of piggyback off what they were talking about, income… The need and want for income comes kind of traditionally at this age for most people. And we saw, in the older generations, you had pensions and really healthy retirement plans, so income was expected from those vehicles. In the Gen X generation, there’s a shift from that. The retirement plans aren’t as healthy, so they’re trying to find income opportunities from different investment vehicles. And then you get into the millennials and the Gen Zs, who, the Gen Zs have no plan, but the millennials are…you know, no offense, but…

Andy: No, crypto’s a plan, Kelly. Come on.

Kelly: Yeah, crypto’s a plan. But the millennials are kind of seeing, you know, the experiences of their grandparents and then the experiences of their parents, and then trying to balance what that looks like. Do I create income from my business or do I create income, future income from my retirement and my corporate job? When we’re looking at assets, you know, we’re not necessarily focused on income. It’s a bonus. But when we’re structuring deals, it really is about how do we preserve our base, and then multiply that over the next 10, 15 years through these investment strategies to create generational wealth? If income comes with that, great. We reinvest that income into more powerful investment vehicles. It’s a blend of both. And I think that we see a big increase in income…or, people looking for income opportunities, because a majority of the wealth is sitting in that 55 to 65-year-old age range, and they need income because they’re no longer working, or they’ve sold their businesses. So, it’s just, I think, inherently what happens with this group of people at this age.

Andy: Understood. Well, I don’t know if I speak for the group, but I wanna have my cake and eat it too. You know, I wanna preserve capital, I want some income, but I’d also love to grow generational wealth. Well, on that note, on income, back to income specifically, Shana, in your experience, you know, as an advisor, working with other advisors, and even just in your research, what are the best asset classes that historically are proven to generate income while also doing a good job at capital preservation?

Shana: I mentioned real estate, and I think there’s certain areas in the real estate market that’s true. And, you know, Kelly kind of jokingly, and you kind of jokingly said crypto when you were talking about Gen Z. The blockchain has actually resulted in some really interesting income-producing opportunities. I once, recently, in the last year, had looked at a product that was using blockchain to accelerate mortgage origination in the conforming space, which was offering very attractive yields, with daily liquidity and relatively low risk, using sort of the whole idea of warehouse lines of credits that those mortgage providers usually access through the banks. And with the banking system having some unrest, this is a new and different, but using the blockchain to kind of accelerate that and provide better yields. So, we can laugh about crypto, but that application of the chain, and on-chain type of investments, is providing some really interesting income opportunities which actually have relative stability and a lot more liquidity than, you know, traditionally when you looked at the traditional ways you would get income outside of credit was real estate, some industrial, or land.

And so, you know, there’s opportunities there that I think are really interesting from that perspective. But then you have to worry about the tax implications, and so there’s limitations on what would work in that sense. So, there’s always things to consider, but, you know, as far as advisors’ concern, I’d love to say they are looking to alternatives more for income, but they’re still gaining comfort there. And so that’s why I referenced those interval funds that are becoming more common, where we have a lot of managers who had traditionally only had, you know, private accredited investor hurdle funds, with limited liquidity, doing a similar limited liquidity, but making it more vastly available to the everyday investor through those interval funds.

Those have become very interesting, because they’ve been able to kind of harness some of the alternative ways to generate income for investors in a way that’s more accessible. And I think advisors have really started to be attracted to that idea. The major concern, obviously, is having that vast understanding, as we saw with BREIT on the liquidity of these things, and the fact that you may not be able to get your money out when you want, and most interval funds do have a cap on how much you can redeem at any time. So, there’s some education involved, but they’re certainly looking for other ways. Because, as Nelson mentioned, you know, the equity markets, even the dividend-producing equity markets, they actually haven’t performed great. Dividend yield hasn’t necessarily been the strongest factor in the last two years. And then, as you look at the fixed-income markets, there’s a lot of volatility there, and there’s the potential for having some substantial downside even from here, even if you think the Fed is gonna, you know, hold rates where they are, you’re probably not gonna get a lot of total return there other than the income. So the question becomes, you know, what are your other options? And that’s kind of what we’re seeing in the advisor space.

Andy: Yeah. What are your options? I think that’s really the question. And, you know, to your point, in some of these public liquid markets, it’s hard to get income that even matches the inflation rate, let alone exceeds it with any real return. Well, Nelson, I’ll turn to you next, and I’ll say it’s okay to talk your book here, right? That we’re all fans of private credit. Do you think private credit is the best way to produce substantial income while also preserving capital?

Nelson: Yeah, I think… So, I’ll go into that in a second, but I want to actually at least highlight the crypto and the blockchain side of things as well that Shana was mentioning. So, not many people know this, but we actually started off as a crypto company. We thought that there would be an opportunity to, this was back in 2017, 2018, where there was an opportunity to kind of tokenize securities on the private credit side, and be able to create more liquidity and all that stuff that you’d come to expect, right? And I think, unfortunately, cryptocurrency has become synonymous with Ponzi in some respects, especially the ones that are very yielding. They just have attributes that are just not meant to sustain any sort of run, or it’s gonna get rug-pulled by the founder or something like that. And so it’s created a situation where building trust in that environment is actually very, very difficult. And so I think for anyone listening in, it’s almost like buyer beware in that instance, and do your research on that, because the likelihood of being a scam versus not is higher than most, right? Just in general.

Andy: Yeah, Nelson. I mean, and I’ll point…I’m not a crypto hater, right? I own some Bitcoin. So, I just wanna be clear on that. Just, like, even some of these larger, more stable things that I thought were more stable, like BlockFi even got into trouble. So I think you’re exactly right. We’re just in that period of rebuilding trust, and that probably takes some time.

Shana: And I do wanna point out, I agree completely with Nelson. I’m talking about implications of blockchain and on-chain types of things.

Andy: Got it.

Shana: Which is completely different. I actually talked to a potential client for us earlier today, who does something really interesting on-chain, and it’s not really crypto-related, but I was very clear with them, like, you can’t really use the word crypto if you wanna gain any traction in this space. But I do think the application of the chain, the blockchain, doing things and using the blockchain, to accelerate or expedite certain things that can help generate more yield and have better liquidity, is a positive. But to Nelson’s point, the actual cryptocurrency aspect of it is, like, persona non grata right now.

Nelson: Yeah. Just, I think, be careful is kind of the name of the game, especially in this environment where there’s more opportunities than ever, and easier to set up something that feels and looks real. Right? So, just be very, very careful on that front. On the private credit side, you know, I’ll talk my own book a little bit, but also be, I think, objectively rational in how I explain this. But essentially, you know, private credit is something that I think, as an investor, you’d be remiss to not have in your portfolio. Do I recommend 100% allocation of private credit? Most definitely not. By virtue of the fact that it is actually not as liquid as other things that are out there, right? You could definitely buy, you know, a public bond instrument that is way more liquid than private debt can ever be. You’ll get much lower yield than private debt’s offering, but at the very least, it is something that is an alternative. So, the ability to supplement whatever you have in your existing portfolio with private credit, I feel and we feel, is going to be very influential and important going forward as you start to kind of think through how to diversify in general market volatility…market-volatile conditions.

Private credit itself is also a bit more floating-rate, right? So, because the fact that these durations are a lot shorter, they’re getting real-time reactions to the Fed and to the macro economy in real time. Just as an example, like, we look at small business lending. That’s a very common asset class in private credit. And so they’ve had just a rough go of it the last few years, right? Back in pre-COVID times, you know, there was…the average APY you would be able to get as an investor was about 10% to 11%, investing in a basket of small business lending…loans. Once COVID hit, I mean, the question posed to everybody on the panel and on the call is, would you invest in a small business lender in April 2020, when all the businesses were shut down? I think the answer is “probably not,” realistically. And so investors wanted to get paid a lot more for the risk they were taking.

So, the yield spiked from 10% to 11% to 18% in, like, nine months, because that was what it would take to get investors interested in that opportunity. And then once PPP loans hit, and then businesses opened back up again and cash flows come through, the rates settled at around 15%, right? So, interesting enough, in our market, as we were seeing it, there was still a heightened sense of uncertainty from investors, that they wanted to get paid a premium for, even investing in small business lending, in, like, peak hype cycle of 2021. And then now the Fed raised rates again, then they’re feeling a lot…the rates are going back up as a result of just the natural spread that investors want against the risk-free rate. So, private credit gives you that real-time update and real-time reaction, from a rate standpoint, to be compensated for the risk that you’re taking, which is just a good thing to have in this environment relative to the other instruments that may be out there that are more like either fixed-rate or consistent than what you’re seeing in other places.

Andy: Yeah, totally. And from my standpoint, just speaking as an individual investor, private credit feels more to me like a true market, you know, buyers and sellers agreeing on the price of something, which I don’t always see that in the public markets, where it feels more like the Fed is deciding on the price of something. And I’m gonna stipulate, before I move on to Kelly, I’ll stipulate, Nelson, I agree that I think private credit deserves a place in probably most high-net-worth portfolios, maybe all. But Kelly, one thing I love about your company, Alternative Wealth Partners, I think it’s in the name, is that, you know, you all look at alternative investments, alternative ways of building wealth, alternative sources of income. What are some of the other proven asset classes that you would look to to provide income beyond private credit?

Kelly: So, one of the things that we do is we create blended portfolios of these assets. So, we’re diversified across basically everything. You know, our strategy is diversification. And that’s beyond just, oh, I’m in these different types of stocks, or I’m in real estate, and also commercial real estate, and also mobile homes. It’s, you have to be diversified in real estate, in energy, in stocks, in bonds, and across all asset classes. That’s diversification. So, when we build our portfolios, we’re really focused on, you know, how much exposure do we have in each asset, and then is that balance based on what’s going on in the world? And so, you know, we’re heavily invested in energy. Obviously, I’m five generations in oil and gas, so it’s just inherently what I like. It definitely hedges when there’s a lot of crazy volatility in the public markets. I was one of those people heavily invested in oil and gas in April 2020, when it went negative $40. So, you know, I’m really enjoying my 350% upside, but we’re also diversified in the real estate space, in the fact that we’re investing in both the businesses and the real estate we’re developing.

This gives investors kind of the upside as controlling how much appreciation we can see in that real estate because we’re directly involved in how profitable the business is inside of it. And then structuring all of those inside of, you know, tax-efficient vehicles, separating oil and gas from the other assets, so that we can take full advantage of the tax deductions in oil and gas, and then also in real estate, putting some of that portfolio in an Opportunity Zone that helps that tax wrapper piece of what we do. I think this is a really incredible time for people to get involved in alternatives, even though it’s been around since the beginning of time. And whether investors have had it in their portfolio or not, kind of, just, people looking for options outside of the stock market, we’ve gotten a lot more spotlight than we have in the last 10 or 15 years, but…where I’ve been. So, it’s kind of nice to see investors start poking around and feeling a little bit more confident spreading their money outside of, you know, traditional financial products.

Andy: Yeah, I agree. That’s a good point. Alternatives have been around since the beginning of time, right? I mean, we can probably go back to the Bronze Age. I think alternatives have been around longer than publicly-traded stocks. On that note, and I think maybe everyone has alluded to this already, but this is my instinct as an investor, and I think this is proven out. You know, I guess it depends on the market, right? So, with REITs, for instance, you know, in some sectors of the real estate market, I might say, “Hey, there’s a discount in the publicly-traded market.” But certainly, with fixed income versus private credit, or some of these alternative sources of income, you know, I think you should compare the publicly-traded markets with the private markets. You’re never gonna get totally apples to apples, and then say, are there better opportunities in the private markets or public markets right now?

Shana, let’s start with you. I know you work with, you’ve mentioned interval funds. You’ve mentioned a lot of liquid-type products. I know advisors like liquid products. Do you think there are better opportunities for income in private markets, or public markets, or does it depend?

Shana: So, I love how you frame that, because one of the things that I spend a lot of time educating advisors on is how to frame the alternative universe, because, for so long it’s just been everything outside of the public, equity, and fixed income markets is alternatives, and they are their own thing. But I’ve tried to frame it as no, like, credit is credit, equity is equity. Private and public should be actually compared to each other. Exactly what you were saying. And when you think about your allocation to credit, your allocation to fixed income should include both private and public credit, and the same thing in equity. And then when you start thinking about alternatives, you start thinking about, like, truly things outside of that space, whether it be physical real estate, because I don’t consider REITs alternative. They trade on equity exchanges. They have equity beta. Or, there are all kinds of things that fall outside of private credit, of credit and equity, that do actually fall in that alternative bucket. You know, physical assets, land, infrastructure, things of that nature. So, you know, when we kind of look at it, we look at it from that. So when I look at credit and income, that is in that fixed-income part, and I’m gonna look at both private and public markets, and I always tell advisors that if your clients can invest in the private markets, the accessibility and the types of options you have, to Kelly’s point, where you gotta diversify in each part, right, are so much broader, right? And I had somebody say recently, the way you look at private markets is by standard deviation, and I kind of laughed, because they’re artificially low standard deviation because they don’t have daily pricing.

Andy: Yeah, like, who knew BREIT and all these private REITs are just outperforming public REITs by 30%? Yeah. It’s insane.

Shana: I think that you have to kind of point out that, like, it’s going to reduce your volatility in terms of your experience, but the underlying assets are equally as volatile. You just get the benefit of not having to mark to markets on a daily basis. So, you know, these are things you have to consider. So, I do encourage advisors to talk to their clients as much as possible about, you know, diversifying outside of the public markets, in the traditional spaces where they allocate equity and fixed income. And in particular, to Nelson’s point, the opportunity set in the alternative space of what you can invest in to generate income, you know, it could be anything from, like, what he was talking about, small business lending, but there’s also opportunities to get access to higher up in the capital structure that you can’t get in the public markets, right? Through, like, mezzanine financing and bridge stuff, asset-based, where you’re physically backed by some sort of asset. It might be chairs and computers, but it’s assets, that you have, you know, a little more security there, and those are just not available in the public markets. You really do have to go to the private markets to do that. So there’s a benefit to doing that. The problem is that lack of liquidity, and you have to get your client comfortable there.

So, I always find that the best way to introduce them is with things that they can actually connect with tangibly. You know, Peter Lynch always said, “Buy what you know.” So, finding ways to find income-producing private credit-type products that can actually be tangible to the client, so that liquidity doesn’t become, like, the biggest thing, is a big part. But one caveat, and I think BREIT really is an important part of this, and, you know, kind of has hijacked the story a little bit as far as advisors getting into this private market space, is, you know, understanding the framework and the liquidity constraints. I think the problem is BREIT was heavily marketed to the advisor market through a lot of advisor-driven access platforms, so the vast majority of the investors in BREIT were advisors who don’t understand, or didn’t understand coming in, this concept of liquidity. So, as an advisor and when I work with advisors, one of the first things I talk about is that. And you really have to frame that and have your return expectations, and understand, and make sure your client understands that they might not have access to this.

Andy: Shana, can I get any traction… I think we mentioned this on a podcast we did. Can I get any traction with my pregnancy metaphor? You’re liquid, you’re illiquid. You’re pregnant, or you’re not pregnant. I hear, “I’m half liquid. I’m a little bit liquid.” I’m like, “No. You’re illiquid.”

Shana: No. You’re either fully liquid or you’re not, and you gotta make sure there’s some comfort there. But I think you’d be surprised to hear that the average person is actually comfortable with some illiquidity. It’s just how much that matters.

Andy: Absolutely. Well, Nelson, I’m gonna tee you up with a softball pitch here, but it’s a sincere one. Okay? And disclosure, I do own bond funds. I have some…of course, I own fixed income, but I still own bonds. But, just in general, aren’t bonds just a terrible deal? I mean, right now they could just…Feels like they have been for a while. When you compare them to private credit, the spread just, it doesn’t seem intuitive to me. It seems almost unreasonable. You know, I’m not counseling everyone to just sell all their bond funds, but I feel like, you know, that you’re probably sitting in the very best asset class for me to ask this question. You know, the opportunity in the publicly-traded equivalent to private credit, you know, should investors be tactically allocating more than they typically would to private credit?

Nelson: Probably you should just join our team at this point. But no, I think the reality is, I think you’re right, in that spread and that delta has never been as wide as it is now, I think, just based on how things are performing. And so, from our perspective, this is kind of general recommendation as well, and to piggyback what everyone’s saying, you should be looking at opportunities, platforms, and assets that at least give you the optionality or at least the visibility into underlying asset performance, so you can actually see how it’s actually doing and whether liquidity is possible and how it should be priced at. That’s critically important. And so, when we went and set down this path, we saw that in traditional private credit, the lockups, while they’re not 30 years, they’re still, like, 5, 10 years. That’s actually pretty lengthy for an average retail investor. And so we set out to create a product that was pretty unique, in the sense that you could do 9-month products or 12-month products with, like, call options built in, where there’s actually liquidity within 1 month or 2 months or 3 months, right? And that is inherently liquid in the structure, and not necessarily physically liquid from a tradability standpoint. We thought that was something that was very important for investors, so we built that into it.

And then, when Kelly was talking, like, diversification, you know, we have the opportunity… I don’t recommend anyone just invest, like, all their money into a single deal in private credit that’s backed by some sort of computers and chairs or whatever, right? That’s generally still pretty risky in the grand scheme of things. But the ability to get diversified exposure through a basket of products, or, like, we have what’s called a blended note that gets you, like, 10, 15 borrowers within a single note. That’s helpful, right? So, the ability to get optionality, and find platforms that give you that optionality, is critically important when you’re making investment decisions, to be able to just better understand how you’re getting into it and also protect yourself in the downside. Because private markets are still risky, at the end of the day. There is no doubt about that, right? So, you have to kind of understand that going into it, but you can do best practices that are applicable elsewhere in terms of diversification, in terms of research, in terms of, like, monitoring performance, to help protect yourself against that situation. So, I agree. Public bond, public fixed income is not that great right now in the grand scheme of things. I think private market fixed income is fantastic, but just be mindful that there’s always things that you wanna make sure you understand before you go into it.

If you go in with eyes wide open, you’ll see so much opportunity there that you would not be able to get anywhere else, across the capital stack, as Shana was mentioning. So, there is a lot here to get invested into, and you’ll be able to outperform a lot of the players. On the, even, like, private credit, though, there is levels, right? So, for example, Apollo, Blackstone, with all these different credit funds that they’re offering, they’re barely beating inflation at this point, because the funds are so large. Like, they literally have to invest in things that are so large, that perform so stably, that they can’t really get alpha at this point. So you’re seeing a lot of family offices go down-market, and trying to find opportunities. It’s difficult to go down-market. You have to evaluate managers who don’t have a lot of history. You have to evaluate borrowers who don’t have the performance you’d expect, but the alpha is there. So, being able to find platforms that kind of get you that exposure in a meaningful way, but in a controlled fashion, is pretty important. And I think, you know, the one time I will talk my own book today is that we do offer that, but again, you should actually take a look and do the research yourself, and I think you’ll like what you see, at the very least.

Andy: Yeah, you know, it’s interesting that you talked about, even in the private credit space, some of these really big players, they have these funds that get so big that they’re barely beating inflation. That leads me to my last question of the day, maybe the most important one. I mean, I’m always focused on triple net returns, right? I’m not talking about triple net leases, triple net returns. Returns net of inflation, net of fees, net of taxes. And if a bond fund is yielding 6%, and it’s in a taxable account, and the expense ratio is 50 basis points or 100 basis points, while taxes are gonna eat 200 basis points, and then, by the time I add in inflation, like, we’re far negative, right? We’re not even preserving capital. So, it’s just, to me, a high-net-worth investor has to really build in that triple net mindset into the way they’re, you know, evaluating investments. So, Kelly, turning to you, I mean, obviously you have this family history in energy, oil, and gas. Obviously a lot of tax-advantaged investing going on in those market segments. You mentioned Opportunity Zones, stacked tax incentives. I believe you might be wired this way as well, where you’re viewing everything through that lens. How can investors really protect against paying excessive fees and taxes, and really maxing out those triple net returns?

Kelly: Well, speaking from somebody who’s had to do their own taxes since they were 15 because both my parents were accountants and CPAs… Most people are learning how to change a tire on their car. I had to do taxes. Everything that we do is tax-efficient, and I think that it’s the most important part of your kind of financial decision-making team before anybody else, is getting yourself a tax strategist, or a really good CPA, who can get creative, and has a background in the investment space. Not just somebody that can prepare and file your taxes, but somebody that actually understands the tax code, or at least a portion of the tax code that relates to you and the type of things that you invest in. So, if you like real estate, find a CPA or tax strategist that understands the tax benefits that exist in real estate investing. If you wanna get into energy, there’s people that specialize in that. And there’s a lot of different tax strategies you can take when you’re starting to look at where do you put pieces of your portfolio. In the alternative space, I think that the, you know, recommended exposure is somewhere between 10% and 25% of your portfolio should be in alternatives, depending on where you are in the risk world. But, you know, for most people, writing a million-dollar check into an alternative asset needs to be spread out among a couple different things, and at least half of those things need to be tax-efficient.

But before you start investing in things that can have these high multiple returns that alternatives have, either high interest on things that you’re loaning money out to, or these high equity multiples when you’re invested in growth-stage private equity or venture capital, when you could have a 10X to 100X return on your investment, you need to get yourself prepared structure-wise before you start funding these deals. So, if you could do a Roth conversion, doing Roth conversions, you know, putting yourself in some sort of tax-free vehicle, like Opportunity Zones, investing in tax deductions, like through oil and gas and real estate, you just wanna set yourself up correctly, structure-wise, before you start making those allocations, I think, is the best way to kind of tackle that problem headfirst.

Andy: Yeah, no, I like that. And, you know, thinking of some forms of income might be higher income. You know, from the investor point of view, like, private credit, it’s gonna be higher income. Well, if there’s not a tax-advantaged way to invest in that at the product level, maybe there is at my level, where I’m using my IRA to invest in private credit, and then, you know, other forms of investments with lower income, those are in my taxable accounts. Shana, I’ll give you the final word here. Obviously, you’re working with a lot of advisors. Hopefully, they’re keeping tax planning and triple net returns, you know, front of mind when they’re investing on behalf of their clients. Are there any, you know, tips and tricks, especially as it relates to income, that high-net-worths should be thinking about?

Shana: Well, you touched on one of the main ones, is it’s looking at what account you put the investments in. So, one of the things all advisors should be doing is not looking at what the allocations are within, like, a single account structure, but, like, across the assets, and then, you know, putting into the taxable accounts things that are tax-efficient, to take advantage of that, and then the things that aren’t tax-efficient going into the non-taxable accounts. And so, that’s a big component of it. Obviously, there’s a number of different things you have to consider. I think one of the interesting things Nelson brought up was, like, going down, away from, like, the big names like Blackstone and Apollo and things of that nature.

I think doing that actually gives you the opportunity to find things that might be more tax-efficient, because there’s a greater focus on that by the underlying asset manager, because they’re trying to differentiate themselves. And so, there’s a real opportunity there. The other thing I’ll mention, which isn’t really tax-related, but I think it’s an important component on that same note is, you know, at Banríon we work with both advisors and asset managers who are looking to just have better traction in that advisor distribution channel. And one of the things we really talk about is, like, accessibility. So, the other benefit to going down away from those big names, especially for the advisors in the space, is that you get more handholding, more personalization, and more individual support and access than you would by investing in a Blackstone. Yes, it’s easier to sell a Blackstone or a Carlyle or an Apollo to a client.

Andy: I don’t want Blackstone. Forget Blackstone. Give me the other stuff, Shana.

Shana: But it’s easier sometimes because it’s a name. But I actually think the better experience, on every level, happens when you go down more, because they’re much more likely to service and access, become a big component. And in the same manner, a lot of those firms are willing to do more customized solutions to help you be more tax-efficient. So they’re more likely to work with you as a partner and create solutions that work for you, your client, and their tax situation. So, that is really a key thing that people have to consider, is that, you know, working with partners that want to work with advisors, because I would argue, and I don’t know if any of my fellow panelists would agree, but there are a number of asset managers that don’t wanna deal with the advisor market. They think it’s too high-maintenance. See. They think it’s too high-maintenance. So you want to find partners that care. And they exist, and that’s, I think, just as important a component of this discussion as any of the other things. But when you do find that, they’re able to work with you on things like targeting certain income amounts, getting a better comfort level with the underlying, and having better tax efficiencies, because there’s many opportunities. You know, Kelly being in the energy space, I made a lot of money on MLPs back in, like, 2010, and you have royalty trusts, where they’re like tollways. So there’s an income component to that, and it can be a really interesting mix.

And, in many ways, the structure of those things can be quite tax-efficient. And people don’t actually make those connections. Not all of them, but there are some that actually do think about that. But they have some complexities, so it’s important to involve an advisor, and, to Kelly’s point, get a tax professional that understands it, because there are complexities there that are very specific to that investment. And you could end up in trouble because you just don’t have a tax professional that understands those idiosyncrasies. So, if you are going to play in the space, finding the right accountant and tax person is equally as important. But a lot of advisors actually are starting to build those relationships so that there can be a component of a holistic approach even if they don’t internally work for the firm.

Andy: Absolutely. Shana, I love it. Let’s not leave free money on the table, right? It’s, 100 basis points extra that I earn in return because of tax planning is just as valuable as 100 basis points of any other form of alpha, right? And I know…I totally agree. I take your point with these more boutique asset managers. When I use the term boutique, for me, it’s a compliment, because it typically does mean more creativity, more willingness to work with you one-on-one. A lot of times, more transparency. You can talk to Kelly Winget. You know, you can talk to Nelson. You know, asset managers who are accessible, who actually wanna talk with their investors, versus setting up six layers so that they never, ever have to talk to you in any way, shape, or form.

Well, I know we’re running out of time, but tremendous insights here. I wanna thank all of our expert panelists, Shana Sissel, Kelly Winget, and Nelson Chu. And Jimmy, I’m gonna turn it back to you for our final few presentations here.

Jimmy: Well, thank you, Andy, and thanks to all of our panelists. I’m gonna gently escort you off the stage right now. Thanks so much, Kelly, Nelson, and Shana.

Jimmy Atkinson
Jimmy Atkinson

Jimmy is co-founder and co-CEO at WealthChannel.