Investing Like the Ultra Rich feat. Paul Karger

Hello, future billionaires. Welcome back to the Invest Like a Billionaire podcast. We've got a really fun episode today. I interviewed a gentleman named Paul Karger. He's the founder of TwinFocus, which is an advisory firm for ultra-high net worth clients. So he manages over $7 billion of assets with about 40 families. So he is working with the ultra-high net worth, you know, the $100 million to $1 billion net worth families. And he breaks down, you know, how they look at allocation, how they manage liquidity, how they balance out risk and reward and return. And really kind of brings it down to a level of folks that, you know, like us are not quite at the $100 million level yet, right? And how we can apply some of these tactics and strategies and approaches that the ultra-wealthy are using in our own portfolio. So you don't want to miss this episode. He also gives a lot of insights into the current market and where he's seen opportunities. And I think you're really going to enjoy this episode. So tune in and listen to the whole thing. This is the Invest Like a Billionaire podcast where we uncover the alternative investments and strategies that billionaires use to grow wealth. The tools and tactics you'll learn from this podcast will make you a better investor and help you build legacy wealth. Join us as we dive into the world of alternative investments, uncover strategies of the ultra-wealthy, discuss economics, and interview successful investors. Looking for passive investments done for you? With Aspen Funds, we help accredited investors that are looking for higher yields and diversification from the stock market. As a passive investor, we do all the work for you, making sure your money is working hard for you in alternative investments. In fact, our team invests alongside you in every deal, so our interests are aligned. We focus on macro-driven alternative investments so your portfolio is best positioned for this economic environment. Get started and download your free economic report today. Welcome back to the Invest Like a Billionaire podcast. I am your host, Ben Fraser, and today we're joined by Paul Carter and very excited to have this conversation with Paul. He's the founder of Twin Focus, which is an advisory for ultra-high net worth families and really excited to bring him on. He's a CFA charterholder and has really been working in this space for many decades and brings a real breadth of experience to his clients and Really kind of really excited to dive into, you know, the nuances of what you do because it's really into our thesis of this podcast, which is, you know, investing like the ultra-wealthy. And what we've seen through a lot of the research is the ultra-wealthy investors, you know, a lot of the clients that you serve are investing differently than maybe a lot of just retail investors that are, you know, 60/40 stock bonds, mostly ETFs. And, you know, all retirement accounts. And so, you know, Paul, give us a little bit of background on kind of how you came into the space that you're in and give us a little preview of the types of clients and families that you work with.

Sure, Ben. Great to be here. Thanks for having me. Great. Great to be with you again. So as you, as you mentioned, I started a firm about 17 years ago called Twin Focus. I was previously an investment advisor working with high net worth clients at UBS. I started my career in the late '90s at a firm called PaineWebber, which is kind of a classic old American brokerage firm that was subsequently acquired by UBS. And the reason I'm giving you some background is, you know, I cut my teeth working with, you know, high net worth affluent families. And it wasn't really until I launched TwinFocus kind of later in my career that I had the opportunity to work with much wealthier clients. I myself did not grow up with extreme wealth. I grew up kind of in a lower middle-class family and environment. And so I didn't have the experience of, you know, having kind of firsthand experiences with family wealth. But certainly over the last couple of decades, I've gotten very close to the families I work with and I've seen all sorts of shapes and sizes of situations and issues and problems and help these clients think through those issues and problems and You know, many of these issues and challenges touch the balance sheet. And, you know, at TwinFocus, we take a real kind of total balance sheet approach where we're helping our clients think truly across their global balance sheet, not just about specific portfolios or specific investments, which frankly, we think is the most important when you're dealing with ultra-high net worth families and even, you know, affluent families, because day-to-day decisions impact your balance sheet and your balance sheet impacts day-to-day decisions. So they really need to be thought of, you know, hand in hand. I think, you know, getting right to the chase here, I think that, you know, the major difference with the ultra-net worth, you know, the $100 million-plus type families is because of their significant asset base, they can take on typically significantly more illiquidity and hopefully be paid for that illiquidity. And in the same vein, they can think truly long-term. And you know, so I think of, you know, when you're relating it back to families that may have less money, a lot of the same principles apply. You just need to size down decisions. And you know, as we say to the wealthy families that we work with all the time when we're making, you know, investment decisions, you know, we don't really want to fall in love with any particular investment. And we want to ensure that everything is well-sized in their life. So it's meaningful enough where if it works out, it works out and it's a meaningful contributor to performance and, you know, your net worth. But if it doesn't work out, it's not going to change your lifestyle and you're not going to be on the park bench. So those are the things that we keep in mind from a macro perspective.

I love that. I think— I mean, there's so much nuggets there that I'm really excited to dive into that you just said there. And one of the first things that kind of strikes me, as you mentioned, a total balance sheet approach. Right. And I think I've talked about this a little bit on prior podcast episodes, but as I've kind of talked with, you know, some of these kind of families and clients as well and have studied what do the ultra-wealthy do, they, they adopt what I would call a balance sheet mindset versus just an income statement mindset. Right. I think so many times, you know, as we're focused maybe on our careers or our businesses, we're focused on how do I maximize the income that I'm generating. Right. But generally by doing that, you are maximizing your tax liability. You're maybe not thinking long term. You're not leveraging the other assets that you use and you're not having this holistic approach of, you know, like you said, building for the long term. So break down what you're saying. We want to look at the whole balance sheet. You know, talk to me about what does that mean from not only a practical standpoint, but even a mindset standpoint of how are they thinking differently, right? If you're thinking with leveraging your balance sheet, how is that different than maybe, you know, okay, I'm just going to try and get a higher return on this investment or I'm going to try and maximize my, my earned income in this calendar year.

Yeah, that's a, that's a great point. You know, I think it's often, you know, people say it's kind of the difference between saving and building wealth. You know, I think about my own position of, you know, grinding it out and building a big businesses become big over time. You know, in the beginning, you know, it's hand-to-hand combat and you're trying to get client by client and you know, you're trying to earn money. But slowly, slowly over time as you build a business, for example, and while you may be increasing your income, you're also building the value of that business. So, you know, inherently you're building your own net worth through actually building real value. You know, with high net worth families, most of the folks that we work with generated the wealth themselves. We have a handful of clients that are legacy wealth families. However, the majority of the families we work with are what we call G1 wealth. So we work with a lot of entrepreneurs, CEOs that built their wealth in concentrated ways. We work with a whole bunch of kind of private equity executives, hedge fund executives, money managers that build their wealth over time and so on. And, you know, the difference between obviously thinking balance sheet versus, versus income statement is these families have created a large balance sheet and that large balance sheet gives them the freedom, flexibility to do interesting things. But it also, it also comes with responsibility. You know, it also needs to be managed prudently, properly. Managing it is not only managing assets, it's also thinking about things like taxes, thinking about things responsibly, like, you know, where does this money go when I pass? I mean, it can go one of three places. It can go to heirs or inheritance, it could go to charity or it can go to Uncle Sam. So, you know, you need to think through planning around the balance sheet because, you know, between Uncle Sam and between dilution across kids, you know, balance sheets can shrink over time, you know, as it gets passed down from generation to generation, especially if future generations are not focused on expanding the balance sheet or, you know, being productive with those assets.

Right.

So, so, you know, again, the whole balance sheet approach, it's, you know, part of it is thinking through what types of assets you own. You know, $100 million family wouldn't be well-served to go buy $90 million of personal residences. You know, in fact, they probably couldn't afford $90 million of personal residences with $100 million balance sheet because those properties have ongoing opportunity costs and ongoing operating costs. And, you know, if you've got $20 million tied up in a home in some Caribbean island, it's going to cost you money. And it's also money that's not productive because usually, usually primary homes or residential properties, they usually don't appreciate, certainly not like, you know, not like maybe investment properties. So it's helping clients think through not just allocating their assets across stocks and bonds and mutual funds and alternatives, but also what they're doing with their funds day to day. Whether it's investing with personal businesses, concentrated wealth within a personal business, or maybe it's a— it's an executive that has a concentrated wealth position in the stock of the company that he runs. We're also helping these clients manage liquidity, which is a big one. I say all the time to our families, you know, don't focus on beating the S&P or beating some benchmark. Optimize for sleeping at night. The market's going to return what the market's going to return. You know, you don't overthink it. We can talk about how we allocate capital across public markets versus private, but, you know, you don't overthink it. And, you know, in many areas of your balance sheet, you should just be willing to take what the market's giving you. Today you can get 5% north of 5% short-term treasuries. Take what the market's giving you. You know, that's, that's, you know, we can have a wider conversation around fixed income today, but It's really helping these clients manage liquidity and think about their balance sheets from that perspective because, you know, I've seen many mistakes where people first come into money and then they think, you know, I'm going to go out and buy a bunch of individual homes. You know, you can only be at one at a time. I promise you, if you rent a fancy home in the Caribbean or something, you rent it, I promise you they'll treat you like you're the owner when you show up. You don't need to own it, you know, if you're only going to spend 2 or 3 or 4 weeks a year there. The other mistake I see people make when they first come into money is overcommitting to illiquid investments. You've got to, you've got to manage that as well, right? Because the world doesn't always operate like you think it's going to operate. You may not get liquidity when you hope you're going to get liquidity. So you need to ensure that you can continue to operate your life while you're waiting for those illiquid investments to become liquid again. Yeah.

I mean, I love what you're saying and there's so much there to dive into. But at a broader level, it's really having a plan, right? Understanding where are you at in kind of the wealth accumulation versus wealth preservation spectrum and what's the best strategy to suit those goals, right? Because to your point, if you're trying to maximize for sleep at night, maybe you don't need to go and chase 25% IRRs on, you know, risky development projects. You know, you can be happy with some more fixed income, lower risk products if your goal is just preservation. And what I've seen, you know, in, in, you know, with the clients we work with and in other discussions with people like you is that a lot of families, a lot of wealth is created through concentration of risk. Right. So they're starting a business and they're growing a business and the wealth is created through the sale of that business or whether it continues to operate as a going concern. But then wealth is preserved through Diversification, right?

It's only free lunch. The only free lunch in finance, diversification. Yep.

Yeah. Is that a common thing that you see with your clients as well? That kind of path from concentration to diversification and what's kind of your thoughts there?

Absolutely. I mean, typically wealth is created in concentration. You know, you had, and you could take those concentrated bets when you have nothing 'cause you got, you don't have much to lose. But you know, at some point, at some point you need to think about diversifying away from that concentration. And you're exactly right. It's, you know, it's, maintaining diversification across a number of different types of risk exposures and ensuring, you know, that those risk exposures are not completely correlated. You don't realize that until some type of, you know, correlation breakdown, as we call it in technical terms, or some type of market meltdown where you see that, you know, a lot of things are correlated to liquidity. So, you know, sometimes, you know, those hedges you have in place don't really provide you much protection when, you know, the doodoo's hitting the fan. So, right, you really got to, you know, my partner often says the best hedge is time. I think the other thing is, you know, for the families that we work with, you know, it's really hard to find products that can perfectly hedge every type of risk. You know, another great hedge is, is just cash, you know, and cash enables you to be, you know, a liquidity provider when others are takers.

So, yeah, let's shift focus a little bit kind of to the allocation. Kind of standpoint. But before we get there, I'd love to hear your perspective on liquidity because, you know, where we operate is mostly in the private markets. And, you know, the biggest knock on private markets is illiquidity, right? But sometimes, and hopefully, you know, the right deals, that illiquidity provides a premium on, you know, the market return because you're willing to potentially hold for longer or you're not, you know, succumbing to, you know, market you know, ebbs and flows based on sentiment and you can execute a business plan. But the downside is, to your point, things don't always go according to plan. In fact, you know, that's probably a guarantee, right? And being able to manage different contingencies and maybe things take longer than expected. And so, you know, what's kind of your thought and approach to liquidity, you know, and how you structure that through cash, like you mentioned, your lines of credit, and do you have kind of a, benchmark or framework to help process, like, here's a good level that you should have based on, you know, your portfolio, or is it really very subjective?

I think it's very subjective. It's really on a case-by-case situation. I mean, you know, from a real kind of, you know, kind of dumbed-down retail perspective, I think it makes sense to have, you know, a year's worth of your operating expenses in the bank. However, when you're dealing with, you know, high net worth or ultra high net worth families and their balance sheets, it's different, right? It's also, you know, it's also highly predicated on the environment. You know, 3 or 4 years ago where you were getting no return, everybody was leaning in, trying to be fully invested and using credit lines and levering up because that was cheap. And it was a, it was a borrower's environment and it wasn't a lender's environment. Well, that's all changed. You know, the last— over these last few years of rates has gone up. They've caused a repricing of kind of risk across the board. Everything from real estate to private equity to growth and so on. And now all of a sudden there's an opportunity cost, you know, you know, from a real estate perspective, you know, why would you be investing in a 5-cap deal when you can get 5%? I mean, you can get north of 4% today on a 10-year and the 20-year is at 4.5%, right? There's a 20-year auction today. So, you know, there's a, there's much more opportunity cost for where rates are today. But it is dependent on, you know, what a family's kind of fact pattern is. You know, do they have an operating business? You know, what are their commitments to privates and stuff they can't access? Are they going to need to continue to fund those privates or that business or those real estate projects? So it's, you know, it changes. You know, you were making a, you made a great comment earlier about developing a plan. Absolutely. You got to have a plan, right? Mike Tyson says, "Everyone's got a plan until they get punched in the face." But you got to have a plan. And frankly, you have to have advisors and, you know, no more than, you know, God forbid you go out and get diagnosed with cancer. You're not going to go to medical school, right? You're going to try to learn everything as possible about that type of cancer and what you should be doing and how you should be living. But you're not going to med school and you're going to still rely upon doctors to help chart your course. It's the same way from, you know, a wealth perspective. You know, I sound like I'm preaching my own book here, which, which I am, but I truly believe, you know, you've got to hire advisors. I've got advisors, you know, I've got advisors internally and externally in my business. And, you know, they help solve for your blind spots and they more importantly, they help take the emotion out of the decision-making process, which is critical. You know, sometimes you just, you lose the objectivity when you're, when you're in the weeds yourself trying to make decisions. It's helpful to have, you know, advisor or advisors that can help make those decisions with you.

Now, I think, I think it's very wise counsel. I mean, it's, you know, there's wisdom in having other perspectives, you know, speak into what you're doing. And we all have the blind spots and we don't know what we don't know. And especially right now, as markets are kind of fundamentally changing, right, and risk profiles are fundamentally changing, they're changing very, very quickly. I mean, the, the interest rates have increased in, you know, the fastest that we've seen in recent history. And so it's hard to digest what's happening, right? And so speaking with people that have had experience through cycles, have had broader macro perspectives, right? And I think it's very, very wise. Talk a little bit. I mean, before we get into more specifics, just you made some really, really interesting points just on risk, right? And the risk-free rate is the highest it's been in many decades, right? So it's, it's changing a lot of appetite for different types of investments. And, you know, in your mind, what are some areas that maybe don't make as much sense anymore? And then what are some areas that maybe do make more sense kind of as things have shifted and are shifting, you know, and then kind of layer into that, you know, you've mentioned, you know, sitting on a lot of cash and, you know, a couple of years ago everyone was chasing yield and now you're kind of— you're the provider of the liquidity. Maybe you can get that yield, but we also have higher inflation than we've had in a long time, right? Inflation erodes the purchasing power of our dollar over time. And I'd love to hear your perspective on, you know, where do you think that goes? And if that is higher for longer, how does that impact kind of a capital allocation plan to, you know, maintain purchasing power?

Great questions. So I actually do believe that the Fed is going to stay higher for longer. I think they've been saying it from the very beginning. The market didn't want to listen earlier in the year. Right. You know, now the market's kind of in tune with that and you're actually seeing the 10-year and the 30-year creep up. So I do think we stay higher for longer because I think the Fed is really resolute about stamping out inflation. They just don't want to get caught behind the inflation ball like happened in the '70s and early '80s. Yeah. And they're willing to risk growth and, you know, economic disruption for that. And so as a result, I think that— I think it makes sense for your really conservative portions of your balance sheet to move out on the yield curve today. I think you should kind of extend duration here. I think, you know, long-term bonds north of 4% is pretty interesting. I absolutely hear you about inflation. And I think over the next 10 years, I think we're in a higher inflationary environment. So, you know, maybe we're, you know, I think you got more volatility around inflation, but I think you're probably like at a 3% type inflation when the Fed is targeting 2%. So, you know, absolutely, you need to take into account when you're buying, you know, long-dated fixed income to ensure you're outpacing your inflation bargain. You're not dealing with eroding purchasing power. But I think that the environment is just starting to get interesting. It's going to take time for the world to come to grips with these higher rates. There's certainly some asset classes that adjust pretty quickly.

Sure.

You know, in real estate, as you and I both know, because we both are in that space to some degree, you know, there's a lot of stuff that just doesn't make sense today. It made a lot of sense when you're building to a 5 or 6 and you were financing at 3 or 4. And you were getting rent growth at 15 or 20% a year. Well, a lot of that's been turned.

Those were all great, great numbers in the right direction, but not happening now. Yeah, I think I saw a stat the other day that so far this year we've, we've had about 20% of the transaction volume of like the past 5-year average has transacted this year. So we're seeing about a fifth of deals happening across all real estate sectors. So it's just deals aren't penciling, right? And sellers don't want to sell the— it spreads too big. No one can.

Yeah, it's all the things that we know. I mean, interest rates have gone up, which, which is a big, big challenge, right? Because, you know, again, it doesn't make sense to finance stuff at 8 to 10% when you're building to a 6. Because interest rates have gone up and the banks can't borrow as much, your LTVs have gone— low-to-value— have gone down. They're gone up. They're requiring, they're requiring more equity. And so to get that equity, it's either you get the sponsor developer to put in more equity, have to write a bigger check, or they go out to the market and get this pref equity, right? Which is expensive, 13, 14, 15%. And so that hurts the returns of projects. I don't think it's going to be like this forever. I mean, I think at some point you get some adjustment. You made the mention of a wide bid-ask spread. At some point, you know, people come to reality and You know, the challenge with real estate is it's not like the equity market prices every second. People pull properties off the market and hold on, you know, I mean, on the resi side, for example, you know, and I'm in the market looking every day, you've got, you know, on the resi side, you know, you've got— there's a lot of interesting supply coming on and it's only really coming on if people have to sell because you got to remember the past 5, 6, 7 years, you finance that residential property in the 2s or the low 3s. Why would you sell and have to go buy something in the 60s?

Oh yeah. So I think I saw a stat as well, like the amount of mortgages that have a sub-4% interest rate, I think is over 70% or close to 70% of all mortgages are under 4%. So it's just no one wants to sell, right? I'm just going to live with what I've got because it's twice as much to go. Yeah, free money.

And in this environment, it feels like free money.

Yeah, absolutely. Yeah, it's an interesting dynamic, especially in that side of it where, you know, we already have housing shortages and now we're just taking way more supply off the table. And it's, it's, it's really interesting. Let's shift a little bit to private versus public allocations. I'd love to hear, do you have, you know, kind of portfolio data across all your clients, I think you manage north of $3 to $4 billion. Is that right? Or maybe more than that?

Yeah, we have portfolios, $7 or so billion for about 40-something families.

Okay, perfect. And so do you see any kind of similarities across the portfolios? You know, are there any kind of rules of thumb that you're seeing at that level of wealth or—

Yeah. So I think that, you know, back to the whole liquidity discussion, I mean, you really need to manage liquidity when you're entering this private investment world. As I say to clients, and they don't realize, like sometimes when you sign those fund LP documents and you think, oh, this is going to be a great investment, I mean, you're literally like getting married. Like that thing is going to be on your balance sheet and you're going to be getting a K-1 maybe for 15 years. I've still got funds that clients invested in 15, 20 years ago that they're— we're still doing tax reporting on. Back to the point about that juice has to be worth the squeeze, right? You have to pay an accountant to do— you got to handle capital calls and all the administration around those investments, you know, every year.

And these are probably more private equity versus real estate or are they or real estate?

All the above. All the above. Private funds, you know, private credit funds, real estate funds. We have a direct real estate investment business, but we also invest in third-party funds, especially that are super complementary to what we're doing internally. We don't do a lot of the really hairy stuff. We do kind of right down the middle with Fairway type deals on the real estate side. So we will invest with managers that are playing in, you know, more esoteric spaces or doing hairier things looking for higher returns. But you know, the way we go about managing our private exposure with our families is every year when we come into the beginning of the year, we're looking at the total balance sheet and we have a budget that we can allocate throughout the year into illiquid investments. And we manage that budget. And you know, when we present our families with a new and interesting illiquid investment opportunity, we tell them kind of where this fits into the portfolio and where this fits into the budget. Again, you know, where we're charting out, here's how we think the capital's going to be called down over time. Here's how we think we could see, you know, some liquidity over time. So that's most important because I think, you know, back to my earlier comment, you know, I see sometimes new wealth comes in and says, oh, I got to own private equity, I got to own venture. And then, you know, within a year or two, they've gone and spent their whole nut on private equity and venture. They're fully allocated. You not only want diversification across sectors and deals and managers, you also want vintage diversification. You know, the money that went to work in 2001, probably not going to be a great vintage. You know, the money going to work in, you know, '23, '24, pretty interesting. You know, deals, deal pricing has come way in, you know, in both in real estate, you know, we're starting to see some adjustments there, but also in the private equity side and the venture side. So you really want that diversification. Every family's different in terms of kind of what kind of allocations we have, you know, I have a family that has a huge cash flow business, a big commodity business, and as a result, the majority of their portfolio is illiquid. But they can take that illiquidity risk where they think they're going to be rewarded because they've got cash flow and cash flow is not a concern for them. I have other families that, you know, are really bound at 10%, you know, for super illiquid investments. So it's really on a case-by-case. The other thing, back to the whole total balance sheet approach, is you really got to look at what else is going on in that family's life. Do they have a big illiquid concentrated stock position? Do they have a big concentrated business? Oh yes, it's going to be sold someday. Well, as I always say, everything takes more money, more time than you think. And you know, you got to balance that. So it's, you know, again, we have families that have, you know, little private exposure and all the way up to, you know, 70, 80% of their balance sheets. The other thing that from a vintage diversification standpoint, is every vintage brings different themes. You know, I mean, I think on the growth equity side, I think, you know, longevity is an interesting thing right now. Obviously, I look at NVIDIA, everybody's talking about AI, you know, but that AI is real and it's impacting everybody's businesses, including my own.

If you can explain a little more what vintage means for those that maybe are less familiar with private equity and that concept.

Sure. Just like wine, it's the vintage, it's the 2010, 2011, 2012. It's the 2020, 2021 vintage. Typically private funds straddle, you know, kind of 1 or 2 years in terms of them launching a fund, raising a fund, and kind of closing on that fund. And typically managers are coming to market every kind of 2 to 4 years. They may have not had full realization on their prior portfolio depending on where they are in the, in the cap stack and in the kind of the life cycle of these businesses or real estate. But Diversification is highly predicated— I'm sorry, diversification returns are highly predicated in the private world on vintage because, you know, you figure if the money's going to work in a certain year, you're probably having exits in a certain year. And on the private equity side, maybe those exits are M&A transactions, maybe those exits are IPO. The IPO market has not been great the last 18 months or so. And so there hasn't been a lot of exits versus 2021 was a huge year for exits in the IPO market. So, you know, it may take some time. I mean, for example, you know, the truth is the last like 10 years, all of this free money, zero interest rate money, it forced money in a lot of crazy, crazy areas because there was no opportunity cost. So people were willing to go out on the risk curve looking for return and throwing money all over the place because it was free. You know, they were borrowing and levering portfolios. They were getting, they didn't think about it. Whereas, and so, you know, a lot of stuff got funded over the last decade that frankly should have never gotten funded. Tech, biotech, you know, deals were getting done at 100 times sales. Like, you know, that was like dot-com craziness, you know, 25 years ago. So it's going to take time for the world to work out those excesses. And I mean, you read articles every day in The Wall Street Journal, Bloomberg, that private equity firms are tossing the keys to portfolio companies to the banks. It's happening on the real estate side as well. There will be opportunities, but It's going to take time. You know, this— we're, we're, we're, we're definitely later in the credit cycle rather than earlier. And it's going to hit different sectors, different sectors of the market, different sectors of the economy differently. But it's going to create opportunities. You know, clearly the big opportunity that everyone's talking about right now in real estate is office, you know, downtown office. I don't know how much of an opportunity— I mean, that stuff probably needs to trade at 10 cents on the dollar because as you know, I mean, taking a downtown New York or San Francisco office building and turning it into resi is It's almost impossible. Like, you got to dig out the middle, right? Because you think about these big open floor plates, uh, you know, where everybody's working on one floor and you don't have a lot of windows in the middle. You got to kind of dig out the window and build atriums, and you can't— you can't have internal bedrooms that have no windows, you know, in housing. So there's some big challenges, but there will definitely be some big opportunities.

Yeah, talk a little bit about where does your perspective on what does the next 18 to 24 months look like? You know, obviously this is all conjecture and, you know, you don't know, it's crystal ball. But you take into account everything that you shared and even just, you know, with the risk-free rate going where it is now and there, you know, there's no more free money, you know, at least there might not be for a little while. How does that change risk appetite? How does that change the types of deals getting done? And maybe what's the consequences throughout the market, the ripple effect through the markets over the next kind of, you know, 24 to 36 months, go 2 to 3 years out, where do you kind of see things playing out?

Yeah, I think it's going to be kind of a tale of two cities. I think that— or a tale of 10 cities. I think you're going to have lots of different things going on in different places. You know, from the equity market perspective, I think you're going to continue to see a lot of volatility. Equity markets are really focused on rates and where inflation comes in. That said, and while equity markets have run up quite a bit this year, it hasn't been broad. It hasn't been broad growth. You've had the majority of the growth in the equity markets across like 7 or 8 names and they've led, right? The Nvidias, the Facebooks of the world have led. And you know, it kind of, you don't have a real sense of what's going on if you're just looking at the headline number on the S&P. So when you strip out those names, many of those companies are kind of flat to down on the year. So I think that, you know, I think that you could be surprised on the upside on the equity markets. That said, very, you know, paradoxically and interestingly is in the private equity world, you know, the last like 5, 6 years pre-pandemic, people were so afraid of equity market valuations. And so all high net worth, ultra net worth, they were all hiding out in private equity. Great. So you had this big dearth of capital in private equity in 2020, 2021. The truth is, you know, the pandemic hit, a lot of these PE managers were sitting on their hands and then the rate, you know, the rate cycle changed and you had rates, you know, go up higher than you've seen in a couple of decades, very quickly, rapidly, more rapidly than you've ever seen. And it changed their underwriting on private equity. And like I said, you're seeing articles today about private equity funds literally tossing the keys to the bank because they can't finance these. They finance— we finance their business deals, real estate. In a much lower rate environment. And so, you know, also interestingly enough, a lot of the private equity managers just aren't doing deals today. They can't do them. They don't know where the world is going. So they're unwilling to place bets from that perspective. They're waiting for this fat pitch and they're also highly dependent on debt. And, you know, the debt doesn't make, you know, it doesn't make sense because now you're looking at kind of mid-teens to finance deals.

So yeah, I mean, a lot of these funds are doing continuation funds where they're basically just selling all the assets in their last fund to their new fund at a higher valuation so they can collect higher fees and, you know, realize some of the carry of the new valuations. But the IPO markets aren't going to realize that for them. So it's, it's an interesting world. It's kind of keeping the same deals going at higher valuations. Right. It's really interesting.

Yeah. But I think, I think there is going to be opportunity. I mean, this is no secret. Everybody's talking about private credit. Private credit. You know, the banks have been kind of forced out, as we all know. Uncle Sam has become the biggest competitor with the banks and savings. You know, everybody's pulling money out, buying Treasuries in their Fidelity Vanguard accounts and they're not keeping it at banks. And so bank lending is down significantly. And, you know, you've seen like First Republic and so on and so forth bought by the JPMorgans of the world. They're, they're just not lending like they used to and it's just much more expensive. And so there are going to be a lot of interesting opportunities in credit and probably in distressed areas of the market. And I mentioned higher for longer with the Fed. You know, the longer rates stay higher, the more painful it's going to be. For many of these companies and, you know, asset owners that finance their assets at lower levels. And they're going to have to take, you know, you know, when you're, when your debt's rolling off and you're building, you're going to have to take what the market's giving you. You're going to have to pay up and you're going to eat, you know, you're going to take it in the short term in terms of what your NOI looks like, right? And your yield looks like you have to give it up.

Love it. Well, this kind of, kind of round out the conversation here. So for someone to say maybe not in the $100 million net worth, you know, camp, maybe they're, you know, sub-20s, you know, they've, they've got some, a decent balance sheet to work with, but not quite maybe quote unquote family office size where they can go hire full-time resources and others. You know, what's kind of your recommendation for people in that, you know, kind of, you know, $5 to $20 million net worth range of, you know, how, how can they take some of these principles and strategies and approaches of a family office and, kind of use that at maybe a smaller scale?

Great question. You know, I'm going to tell you the same thing I do my ultra-high-net-worth families and clients, you know, on the liquid side, on, you know, the equity side and the fixed income side. Don't overthink it. You know, really don't overthink it. You don't have to overthink it with special managed accounts and this and that. Keep it simple. Like there's so much other stuff that can go wrong in your portfolio and in your life. I keep it simple. I mean, we use a lot of these tax strategies which are great, the Parametrics, Imperials of the world for equity exposure. And again, you take what the market's going to give you and you, you figure out what your— what kind of equity exposure you can live with, whether it's 25% or 45%, and you live with that and you rebalance. And the same thing is true on the fixed income side. You know, I think that, you know, fixed income is an area where you don't want to be taking lots of risk. You want it— you want to know the money's there when things are going wrong. and it can really serve as a balance in your portfolio. And so, you know, think about municipal bonds, which makes sense for high net worth families in the $5 to $15 or $20 million range. Think about going a little bit further out on the, on the, on the duration curve where you, on the yield curve where you can, where you can withstand that duration and where you may not necessarily need the money all tomorrow. And then on the alternative side, think about what you can live with being completely illiquid. Before you think about what kind of investments you want to make, think about how much illiquidity you can take. And you know, if you're at your limit, I wouldn't recommend going out further because you see some crazy sexy investment that you have to make. You know, I say all the time, you know, focus on the things you can control. What you can really control is sizing. And you know, as I said earlier in our conversation, you want to make sure it's sufficient enough where if it works, it makes sense for you. But if it's not so big that it, it will blow up your life. And, you know, once you, once you've decided what portion of your balance sheet makes sense to put to work illiquid, I would do the same thing that we do for our ultra-high-net-worth families. I would think about budgeting, putting that money to work over the next few years. You know, in this current environment, you're getting yield. You can get 5% on the, on the 1-year. So you can, you're kind of being paid to wait. You know, 2 or 3 years ago, we'd have clients that would show up, prospective clients that would show up and have a big liquidity event. The money was burning a hole in their pocket. I just made $100 million, but I need $2 million a year to live. I'm not getting that. How do I get that? And we'd have to go through this whole, you know, education about, you know, returns aren't linear and you gotta be thoughtful and measured in putting money to work. Well, here that conversation's a hell of a lot easier because you can hide out in treasuries. You know, you don't need to get the money, doesn't have to burn a hole in your pocket, but really think about where it makes sense to allocate capital and then look for some diversification. You know, look for some growth. Look for some AI, some longevity, some climate funds or whatever, you know, tickles your fancy. But also look at the private credit, look at some of these areas and think about how you can get diversification. The other thing is, you know, while we're not typically not huge fund of funds investors, there are some merits to getting diversification within a trade. You know, you go invest in one particular manager, one particular deal, and it doesn't work out for you. Are you really getting exposure to the private credit space? By picking one manager that's playing in one niche area. You know, again, I think you really got to think about how, you know, if this goes wrong, how it impacts your life and what the probability of things going wrong. Obviously, when you have more diversification, there's just less probability things really go wrong for you.

Yeah, makes sense. Well, Paul, this has been really, really insightful. I appreciate you coming on and sharing all your knowledge. What's the best way for folks to learn more about your firm and what you do, if it kind of is interesting to them?

Thanks, Ben. You can go right to our website. It's www.twinfocus.com and there's all kinds of interesting tidbits or some case studies on there and there's a button to contact us if you want to contact us. Appreciate the opportunity.

Yeah. And just so people understand how you work with kind of a higher echelon of net worth, you have kind of minimum requirements for people that they want to work with you. We typically—

yeah, we typically start working with families in the $50 to $100 range and we go all the way up into the billions. Awesome. All right.

Well, thanks so much, Paul. Appreciate it. And really fun having you on. We'll have you back on soon and chat more as things kind of evolve.

Thanks, man.