LAWRENCE CALCANO: It gets to the comment I was making around the number of, if you will, growth companies that are available in the private markets relative to the public markets, whether it's takeout's, mergers, etc., or frankly, one of the big issues is also just a longer life, the life cycles as private companies. Typically, companies would go public at a much earlier stage. Now, they're staying private a lot longer. As a result, for people that are looking to buy that growth, you don't always get in the public markets.

VINCENT CATALANO: Over the past several decades, alternative investments, such as private equity and hedge funds, have been gaining a greater share of assets under management for many institutional investors, with the results to justify the move. We thought it was a good idea to explore this topic with someone who's been actively involved in this area. Lawrence Calcano was Chief Executive Officer of iCapital Network. Lawrence was a partner with Goldman Sachs, where he spent 17 years most recently serving as the co-head of the Global Technology Banking Group of the Investment Banking Division. I am really pleased to have Lawrence here today to discuss this really interesting field. Lawrence, welcome.

LAWRENCE CALCANO: Thank you very much.

VINCENT CATALANO: iCapital Network, tell us a little bit about it first, and why it exists, what's the value proposition etc.? Then we'll get into some of the particulars.

LAWRENCE CALCANO: Sure. Initially, we looked at this space and we saw the alternative investment space. It was really just the purview of institutional investors, high net worth advisors and their clients didn't really have systematic access to these assets. If you look at the returns in the institutional space, some of their bogey-- to achieve their bogeys, it's dependent on their ability to invest wisely in alternative assets. We assume the same would also be true with individuals who had long term saving goals, etc. We sought to build iCapital to be able to make this asset class accessible to them, which means sourcing funds, doing the due diligence on funds, institutions have large teams of people that actually do the work.

Individual advisors may not have access to that. Providing the diligence, which is so critical, providing all the operational support, because these are more intensive assets to invest in from a paperwork standpoint, on ongoing operational standpoint, and then also providing the reporting so on an ongoing basis, people would really understand how they were doing the asset class. Lot of education, a lot of process around it. We worked really hard to build this out so individual investors, advisors and their clients would have access to this asset class.

VINCENT CATALANO: Now, you mentioned about the performance, and I mentioned the performance-related issue briefly in the intro, the data backs it up yet. Also, there's another dynamic here, particularly with private equity, where you're not dealing with mark to market. A lot of institutional investors or individual investors that have publicly traded issues. There's a mark the market element that's there all the time. I've always found that fascinating, is that something that registers a little bit higher in the decision making process of going into alternative investments, like private equity?

LAWRENCE CALCANO: Yes. Well, to start, the performance piece is a big driver about why people want to be in the asset class, to be able to really grow their retirement egg, if you will, to levels where they needed to be, so performance is very critical. In terms of the mark, these assets are long lived assets. It's not like a public portfolio where literally every day, you have a new mark, minute by minute, you have a market of Fang stocks. These tend to be reported on a quarterly basis. Then they get marked over time when you actually get the money back.

One of the really important things about the asset class, which we think is an important element of the success of the asset class, but may be uncomfortable for certain people is the relative illiquidity. When people invest in private equity, then the manager of the private equity would go and invest the money in companies, they may improve those companies, they should improve the companies and the best managers drive the bulk of their return by what they do to the companies while they own them, in terms of increasing market share, adding new products, making acquisitions, all the things that go into improving the fundamental operations, revenue and earnings of the company, that takes time. It's during that illiquid period where a lot of the value of the alpha gets created. As a result, it's not like a stock or a bond where you can buy and get in and out of every day and see the market.

VINCENT CATALANO: Right, and that's why you need to have very good work done in the beginning with the due diligence, the structure of the deal has got to be a good structure for the deal for the investor and for the operators of the business, of course, exit strategy has got to be pretty clear. In that regard, not an easy thing to do.

LAWRENCE CALCANO: Well, it's really hard to do as an individual in particular, because there's so many moving pieces as you point out, and that's why when we think about this asset class, we're very focused on finding the best managers. Who are the firms that have a track record for delivering that alpha? When I say that, there's a lot of ways you can make money. Some people make money by trying to borrow a lot to make the purchase, i.e. leverage, but the truth of the matter is that's a commodity generator of returns, it's not really going to generate alpha in the way that changing the underlying improvement of the business. The underlying performance of the business, as I said earlier, does and so we look for managers with a track record of really changing the trajectory of their companies and then as a result, having their limited partners have nice returns.

VINCENT CATALANO: Sure. The analytical process going in, what role does it iCapital play in looking at this deal or that deal, this manager or that manager, what's that evaluation screening process? I would imagine is reasonably rigorous.

LAWRENCE CALCANO: It's rigorous, and it's ongoing. In the way these funds operate, they're not in the market all the time. Funds may raise money one year and then invested over the next three to five years, and then not raise money again until year four or five. You have to track what's going on in the market. You have to track who's in the market, who's going to be coming to market. Then once you can develop those maps with different asset classes, because when we say private equity, it's buyouts which people are familiar with, it's growth equity, it's venture capital, it's credit, it's real estate. It's distressed. It's a variety of different strategies.

We're tracking those markets. We're comparing all the time the performance, how people are doing over their first fund, their second fund, their third fund, and you really get a sense of how a manager is going to perform by looking at their track record over long periods of time. Then there are so many details that you have to look at to really get it right. I'll give you one good example.

These firms are partnerships. They're made up of a bunch of individuals. Well, it might be that one individual was a star performer and investor in fund one, but they move on to a different firm in fund too. When you look at the track record of fund one, it may not be the same team available for fund two. You have to really dig in deep, understand who the participants are, do you get the benefit of the team that generated their prior track record, and lots of little details like that, that go into that whole diligence process.

VINCENT CATALANO: When you are making the decisions, which one should be on the platform? Is there any evaluation done from what investors would call a sector analysis level? In other words, well, healthcare, isn't it-- we don't think we should be putting this on a platform, that doesn't factor into the equation, does it?

LAWRENCE CALCANO: We're always looking at the different strategies and when those strategies might be more timely or less timely. While these are long term funds, as I said earlier, and you're going to experience the ownership of that fund through probably several different market cycles, we are looking for different strategies at different periods of time. If you think there's a likelihood of a correction in the next year or two down the road, you might look more actively at distressed funds. If you think you're going to be in a long term growth period, you might look at more growth oriented funds. Again, having said that, you've got to understand these are long term assets and so we're looking for strategies that are going to go and work over a longer period of time.

VINCENT CATALANO: Right, but you don't make that call by saying that, okay, we believe that this area, it's almost like an investment decision being made for the investor, rather than saying, this is quality. These managers, these operators of the business, they fit the parameters. They are longer term. We're offering it out there. There's the platform, meeting the of criteria. You're not making that decision before the fact. I guess that's what I'm trying to say.

LAWRENCE CALCANO: Yeah, we sure try to build the portfolio of available funds, so that somebody can build a really comprehensive and diversified portfolio. One of the really important things about these asset classes, you can't put it in place overnight. People want to change their equity in fixed income allocation, that 60/40 decision we're all used to. Well, you could change that pretty fast by buying and selling ETFs. If you want to add alternatives to the portfolio, you can actually just do it, you have to build to whatever your target allocation is over time. In that context, you need to have the availability of different strategies over that time period, so you can be sure to build diversification into your portfolio. Our platform make sure that you have choice of strategy to be able to build that diverse portfolio.

VINCENT CATALANO: I'm wondering what comes to mind about the institutional investor strategy of a completion strategy, meaning I have an exposure in healthcare, my exposure, my individual issues is x. It's less than what I want my total today. Now, what I'm going to do is I'm going to do a wrap around with an ETF. I'm going to complete my exposure with the ETF. I'm wondering, do you ever hear any investors say to you, I'm going to fulfill my completion strategy in healthcare with an investment that's a private equity investment than healthcare? Just a general question.

LAWRENCE CALCANO: Yeah, no, I think I think today people tend to think of alternatives almost as a separate asset class. I think over time, people will look at their equity portfolio as a function of the equities they own that are publicly traded and the equities they own that are private. I think that's a big driver for a lot of folks. Right now, if you're trying to buy growth, for example, in the public markets, well, there's a handful of companies that are growing very quickly. Typically, what happens is everybody jumps into that trade, the hood of the Apples, the Googles, the stocks that people are most focused on.

In private equity, there's 150,000 companies that you can choose from. There are 4000 public companies. There's a massive number of growth companies not available in the public market that are available in the private markets. You really, if you want to buy growth for example, you need to think about the private market. Which is why I say your equity strategy should be made up of those companies that are public and those companies that are private and the same can be said of your credit strategy, as well.

VINCENT CATALANO: I'm reading a New York Times expose article for a month ago, roughly. In this article, it's about opportunity zones. I noticed that in one of the categories, that is something where I can invest in through my capital in opportunity zones, what brought about the decision if you recall in that regard, because opportunity zones are relatively resented in 2017 Tax Act and all that. How did you guys decide, hey, plug in some opportunity zones here as an investment choice?

LAWRENCE CALCANO: Well, a lot of our clients were asking for those.

VINCENT CATALANO: They were?

LAWRENCE CALCANO: Yes, absolutely. They were asking and they got a lot of press as you know. A lot of clients were saying, can you bring us some opportunity zone own funds? The big thing with opportunity zone funds is first and foremost, they're real estate funds. There's a number of people that were bringing opportunity zone funds that may or may not have had a long track record in investing in real estate. We were very focused on finding people that have great track records in real estate investing. Then looking at their opportunity zone offerings as a way to be sure to my earlier point, that the people investing the money had really sound track records to be able to deliver the return to clients.

VINCENT CATALANO: Now, you do have other categories that investors can go into. One of them that-- well, let's deal with a more traditional one, private credit. We have private equity and you referenced private credit before or credit within that. How does that differ from private equity as a general category?

LAWRENCE CALCANO: Well, it's a different investment. You're investing credit investments and so people, and there's different flavors. One of the big areas is direct mid-market lending. That's grown dramatically over the last few years. That's where people are providing credit funds who're providing credit to businesses, small and medium sized businesses, so they can finance their company with debt.

Those funds tend to be shorter, the investment periods are two to three years, versus three to five years. The return on those investments tends to also be shorter and they tend to be fixed income oriented, with perhaps a little bit of an equity kicker depending upon the credit in addition. The expected returns to those strategies are much lower, high single digits, low double digits, versus private equities, which is mid-teens to low 20s.

VINCENT CATALANO: Your website has a quite a bit of educational information on it. It's something that is a key element in terms of people getting into this particular space, how important is education? Do you believe for investors that have a passing knowledge--

LAWRENCE CALCANO: It's hugely important. If you don't understand what you're investing in, you probably should not be investing in it. We start with advisors, because advisors are in a role to educate their investors. We have a big commitment to that. First, it starts with educating the advisor, and then we help the advisor educate the clients, it's a B2B business. We think it's very important that people understand the landscape of alternatives, and then they understand the individual strategies.

It's probably something that I don't see us ever not being focused on, because it's an ongoing thing. There's lots of different advisors, some of them are very sophisticated, have had a lot of experience with adults and others much less experience and therefore before they want to put their clients in to an investment, they understand it, so it's a core backbone of what we do at the firm.

VINCENT CATALANO: How do you educate an advisor? I'm an advisor. I come to iCapital, am I picking up the phone? Am I sending an email? Am I talking to somebody? Is this person walking me through? I can look at the website, then see this great information that's there. Now, I want to go a little bit further, I want to get a little bit deeper.

LAWRENCE CALCANO: It's everything from what we publish to the conversations we have with individuals on a regular basis. If you're an advisor, and you're looking at the funds we have on our platform, you might call up and speak to someone in our diligence team, whether it's private equity oriented or hedge oriented. It might be a broad conversation around the space and what opportunities exist. It could be a very specific conversation around the attributes of a given fund. It's, again, very high level or very focused and we have those conversations all the time. We travel, we visit advisors, and we think that if the market is educated, the success that the market will have generally with these products is going to be much higher.

VINCENT CATALANO: That speaks for itself. Two areas that I'd like to explore a little bit here. One deals with something having to do with the SEC regulations and the comment period that I believe recently closed. What is that all about?

LAWRENCE CALCANO: The SEC is evaluating whether or not to expand the pool of people that are permitted to invest in these investments. There are a lot of regulations that govern the types of investments given individuals can invest in and it's really governed by their wealth. They're qualified clients that have in excess of $5 billion, they're qualified purchasers. They're qualified clients and they are accredited investors. The SEC is considering either broadening the definition of those categories, and also permitting folks to invest in a broader array of products.

Again, I think really critically, education is got to be a big part of whatever the SEC decides to do if they broaden the amount of investment somebody can make, either by permitting people to invest in things that they're currently not permitted the to invest in, or just including more people in the pie, almost by definition, the newer people are going to need to be educated and the SEC has to, as part of their regulation, I think ensure that there's some educational framework that exists for advisors and clients to successfully and responsibly invest in this asset class.

VINCENT CATALANO: Last area to touch on deals with the public markets. One of the things that I think many investors may not recognize is that quite a bit of money is going into private markets, we're seeing shrinkage of public markets. Stock buybacks, etc. There are a number of dynamics that are at work here. In addition to the performance, the longer time horizons, the less short term trading element of it, that thing. Talk a bit about the shrinking public markets and impact upon or, actually, it's the feedback loop between private and public markets.

LAWRENCE CALCANO: Yeah. It gets to the comment I was making around the number of, if you will, growth companies that are available in the private markets relative to the public markets, whether it's takeout's, mergers, etc., or frankly, one of the big issues is also just the longer life, the life cycles as private companies. Typically, companies would go public at a much earlier stage. Now, they're staying private a lot longer. As a result, for people that are looking to buy that growth, you don't always get in the public markets.

You've seen this with some of the most recent IPOs, the last private round they did is above where they go public, or where they trade as a public company. A lot of that value creation is in the private stage. To really get access to that growth, you've got to have access to the private markets. Again, there's a temptation that I think a lot of people have to try to find those companies invest directly in those companies. I guess that's okay if you are