Private markets were once the exclusive playground of institutions and ultra-high-net-worth investors. That's changing. Where's the puck potentially going? It's possible we look up one day and realize private markets aren't a third asset class — they're just equity and credit accessed differently. We cover the case for private markets, the education hill that needs to be climbed, how to talk to clients about fees, and why implementation is the real bottleneck. With Apollo Managing Director and Cross-Asset Client Portfolio Manager Lucy Xin.
(Stay tuned for additional important disclosure information at the end of this episode.)
Daniel Noonan: Apollo is one of the world's largest alternative asset managers, overseeing more than $1 trillion in assets under management across private equity, private credit, and other alternative investments. The firm sits at the intersection of some of today's largest themes, providing capital to support the AI build-out, serving the needs of people's retirements, and giving investors access to a broader range of opportunities as public markets increasingly become correlated. We're getting into why alternatives no longer are the exclusive playground of high-net-worth clients, the case for private markets and ways advisors get it wrong, what it takes to manage alternatives in model portfolios at scale, and why financial advisors should expect to hear more from Apollo going forward.
I'm Danny Noonan, and this is Simple But Not Easy. A podcast for financial advisors from Morningstar's Wealth Group. Live from Morningstar Investment Conference and Navy Pier in Chicago. We're fortunate to be joined by one of Apollo's leaders, Lucy Xin. Lucy is a managing director and cross-asset client portfolio manager, responsible for top-down asset allocation across public and private markets within Apollo's global wealth management group. Previously, she was head of Total Portfolio Solutions at Goldman Sachs Asset Management, focused on delivering public-private model portfolios to independent advisors.
Lucy, welcome.
Lucy Xin: Thanks for having me here. It's a pleasure.
Noonan: So just behind Simple But Not Easy, one of my favorite podcasts is called Business Breakdowns. They analyze companies and determine what makes them successful. Last year they had a great episode on Apollo. The title of it was Connoisseurs of Complexity. The title was paying respect to Apollo's rich history of being able to look at different parts of the capital stack and provide unique sources of return with their ability to underwrite. My goal today is to unpack some of that complexity. And I want to focus on who Apollo is and how private markets fit inside a traditional balanced portfolio. I think that's a good place to start with Apollo itself. Many advisors know the name. To me it's a brand name, but others may be less familiar. How would you describe Apollo to someone who hasn't worked with you before?
Xin: Well, I joined Apollo not that long ago, so I've actually gotten this question from former clients, advisors, and of course friends and family who aren't as familiar with what we do or what I do. So put simply, as you said, Danny, Apollo is one of the largest alternative asset managers in the world.
We were founded in 1990, and today we manage about $1 trillion in assets for institutions, for advisors, for clients, and we do that across private credit, private equity, private real assets. It sounds simple, right? Sounds like a lot of other firms. But We have a reputation for innovating and where that shows up today is in really three primary ways. Origination, flexibility, and alignment.
And I'll walk through each of those in turn. So with origination, when I talk about origination, Apollo is not just waiting for deals to show up. We have our own origination and deal sourcing platforms, which means we have capabilities to uncover a broad and recurring set of opportunities directly across markets, industries, sectors, and asset types. So we have direct access, we can be more selective, and we have a deeper pipeline of opportunities than a manager who's just picking from the same deals that everyone else is missing.
Flexibility. We provide capital to leading companies around the world. We don't rely on what's been done before. We believe that we are most valuable to our clients and partners when we step in where markets are more complex or when traditional financing isn't available.
And then lastly, alignment. We invest alongside our clients. Again, something not everybody knows. We do that because we have a balance sheet. You've probably heard about our insurance platform, Athene. This means we have skin in the game, and we're investing alongside you, our clients. We are not just talking our book, we buy our own book. Our CEO, Marc Rowan often says we can't guarantee outcomes, but we can always guarantee that it's a shared outcome, good or bad.
Noonan: In terms of alignment, I've made this joke on this podcast a few times already, but I'll make it again. We've always said the compound interest. They say it's the eighth wonder of the world, and with some recent guests, we talk about alignment as being the ninth wonder of the world, so it's good to hear it from Apollo as well. That's a reoccurring theme on this show.
Xin: I can't wait to hear what the 10th wonder of the world.
Noonan: We're still looking for that one. Most of Apollo's history has been working with large institutions. If you think about working with Yale Endowment, it's a lot different than working with an advisor that's managing, $250 million to $500 million. How has Apollo shifted its approach working with advisors?
Xin: Five years ago, we started the wealth business from a blank sheet of paper. We consistently heard from clients and hear today that they want to work with fewer partners, like a more select group of trusted partners who are committed to them and willing to co-create. So we approach the wealth channel with the mindset that we're not solely in the product manufacturing business. We are in the solutions business. And I know everybody says that. So what I mean by solutions is that advisors have three primary objectives. They want to scale. They want to access competitive products that you know appeals to all client ties, but especially ultra-high net worth. And they want to reduce operational implementation friction, because that's what ultimately affects their bottom line and their margins. So we focus on providing solutions to all three of those challenges, because if we do it well, the end client has a better investment outcome.
And the advisor gets time back in their day, and that's the thing that no one can replicate, right? So I think when we think about the wealth channel at Apollo, we know that it takes a lot to serve this market well. Every client conversation should be a portfolio conversation because again, individuals and advisors aren't just looking for yet another product or fund. They're looking for income. They're looking for retirement readiness.
They're looking for a path to long-term wealth creation, generational wealth. So how we spend a lot of time on developing, I think, a leading platform of Evergreen and you know, products and solutions and access points a 100%. We can manufacture, I think, the best private markets exposures in the world. But if an advisor can't actually put it in a portfolio, they can't size it, if they can't rebalance it, if they can't explain it, then it's just sitting on a shelf. So again, it's the wealth channel at Apollo is realizing that investing isn't the only bottleneck that advisors face. Implementation is also critical to solve, and that needs a solution.
Noonan: Yeah, we're going to get into more detail on that later in the conversation. But before we go any further, I want to set the table on private markets broadly. If you look at the newspaper, I think SpaceX would be the most recent example. People associate that with private markets. We've probably got two more big AIs or two more leading IPOs with the AI companies Anthropic and OpenAI sometime between now and December. But private markets are much larger than just the venture capital side. And I want to kind of apply some numbers to that. So doing my own rough math, if you add up all the global public equities in the world, it shakes out to about $130 trillion. If you do the same for all global fixed income, it's about $145 trillion.
And if you look at private markets, depending on how you measure it, it's about $20 trillion. So anytime somebody lays out a set of numbers as I've just done, it can lack context. So my question is really an invitation to filibuster. Can you provide some context around those numbers?
Xin: I absolutely can, and you shouldn't tempt me with filibustering because we could go for hours. So maybe just to set the scene or stage around some of those numbers. So for an incredibly long time, I think all our listeners probably know this, like access to alternatives meant you have to be ultra-high net worth or an institution. And that has really truly changed in the past call it five years. You no longer have to have 10 million in liquid assets to invest in private markets and to throw some more numbers into the mix. Institutions are typically somewhere around like 20% allocated to privates.
Family offices can be at 40% to 50%. And those two client types have been seeing the benefits and the excess returns for decades. So in contrast, individuals who represent more than 50% of global assets under management, so that's $150 trillion just sloshing around and sloshing is the technical term. But those individuals are massively under allocated to alternatives on a relative basis at less than 5%. On average 3%, and then probably higher if you're a little bit higher net worth. So we expect that 5% number to increase over time and to look more like institutional and family office allocations. That's probably like $10 trillion in money in motion over the next 10 years, call it.
So you also asked, what did those numbers miss? And I just added to the pile of numbers. But I think what the numbers miss or overlook is that there's a bit of a category error here. There's a mistake in how the numbers get lined up, like $130 trillion in public, 145 in fixed income and $20 trillion in private markets. It feels like private markets are spoken about as the third or fourth thing you allocate to next to stocks and bonds. But the industry is really being evolving towards not separating liquid from illiquid. Two reasons why. Private equity or private credit is, it's equity, it's credit. If it's equity, you own a piece of a company. If it's private credit, it's fixed income, you're lending money and you're getting compensated for it. It's just whether you access it publicly or privately.
The second reason is that the opportunities to invest in a company or lend money are moving away from the public arena into the private arena. Public markets are shrinking. A stat that is commonly recited is that there were 8,000 public companies in 1996, and there's only 4,000 today. And 87% of companies, so basically 90% of companies with more than 100 million in revenue, so you know, really solid sustainable companies, are private. And maybe that balance will flow back to public over time. But right now the pendulum has really swung into private. So the bottom line here is that the notion that public is safe and private is risky, I think is really becoming outdated. Public assets can be both safe and risky, just like private assets can. And, even public credit, like people talk about it as being liquid, but it's really not.
If something happens, if there's a shock to the system, public credit is no longer liquid either. Kind of the last thing I'll say here is, maybe I'll try out an analogy. And you can tell me if you hate it. In sort of a lot of just like discussion and navel gazing around public private, you know, like versus one versus the other, it really makes me think of cable versus streaming. So cable was all we had for a long time, and in case you can't tell, you know, I grew up in Australia, so if any Aussie listeners, I grew up in ABC and Channel 10 for The Simpsons. So, it was kind of you get what you get and you don't get upset. Then suddenly you have Netflix, you have Hulu, you have HBO Max, you have all this great content or maybe investment opportunities or opportunities to invest your time watching something. And then there was like big tension between over the air and then streaming.
Public versus private, there's a role for both, there's a role for cable and there's a role for streaming. Some of us probably watch the Knicks versus Spurs live and some of us probably like streamed it. And if we characterize streaming as private markets, the challenge today is how do I create a common framework and language around all those streaming platforms? We all struggle with like where do I go to this platform to in to watch this show or this movie? So a common framework, for movies, TV shows, for BDCs and interval funds and ETFs, one place, one portfolio, who's going to help me do that? I really think that if we can put more, if we can help people do less of the work to put it all together and have someone just serve it up to advice more easily, that's when we'll see more and more adoption and uptake of privates.
Noonan: I love that analogy, and one of the things Morningstar really wants to do is define the language of private markets, so I might have to steal your analogy and make it my own at some point. But specific to that point, our Investor Perspective Survey just came out last week, and one of the interesting findings I had was that only 16% of the investors described themselves as very familiar with semi-liquid fund structures. Interval funds will be the predominant vehicle that investors are utilizing to get alternatives exposure. I'd like to kind of set the foundation there before we get into anything else. What is an interval fund?
Xin: So I'm going to do something terrible and not answer your question right off the bat. I'm going to say that I assume part of your efforts to develop the language of private markets is, maybe the launch of your public private select series that Kunal announced in his keynote yesterday, and in which I have to say thus sorry listeners, Apollo is a partner. Those models have…
Noonan: No, we're lucky to have you.
Xin: Those models have Apollo interval funds in them, surprise, surprise. So, just working backwards, because you said the word, dominant or predominant. I think interval funds are a key vehicle for accessing privates because and here's a data point that came from Morningstar, which is that interval fund AUM has more than quadrupled in the past five years from $20 billion to more than $90 billion. It didn't quadruple because advisors suddenly discovered alternatives. It quadrupled because interval funds are the easiest thing to buy. It tells you something really important, which is that demand wasn't really the problem. It was implementation and access. So what are interval funds and why they're so easy to work with? Now I will answer your question, Danny. Thank you for your patience.
An interval fund is a 40 Act registered vehicles. So that means you get five things. A ticker, low minimums as low as $2,500, a 1099 form instead of a K1, no subdoc, and no accreditation requirement. So the end result means that individuals, your clients, can buy in continuously at NAV at a transparent price, the same way they would buy a mutual fund. Now, how is it not like a mutual fund? The exit. You can only cash out of the interval fund at set windows or intervals, typically once a quarter and for a capped amount, usually around 5% of the fund shares. So daily in, capped out. That cap isn't a flaw, it's a feature. And why is it not a flaw?
Well, picture your classic private equity drawdown vehicle. You commit capital, and then you get your money back over the course of seven to ten years. So getting back some of your money every quarter is a pretty cool feature. The reason it's still a quarterly window is because that's what lets the fund, i.e. your investment, hold a private asset and strike a stable price or a NAV without being forced to dump holdings at a fire sale price, just because a couple other investors want it out. So the structure that daily in, quarterly out is what protects the clients who stay in and stay invested for the long term.
Noonan: So in theory it's never been easier to implement alternatives. But most advisors, they've spent their entire careers in the world of stocks and bonds. So it's going to be foreign to them. There's a period of education. But if I'm an advisor, why should I be putting my clients into private markets? What's the benefit?
Xin: Well, don't you want all those amazing streaming opportunities? My partner and I are in the middle of rewatching Lord of the Rings movies. A better trilogy has never been made, except for me The Godfather, but, we're not here to debate that. So why would an advisor put privates into portfolios? Well, I mentioned how the opportunity set has migrated from public arena into private. So in practice, what that means is three things. Private markets can improve the investment outcome because you have an expanded, more diversified opportunity set that you couldn't get in the public markets. And now concentration isn't all bad, because we hear a lot about that, in public markets, because if you invest in the S&P 500 today, you're basically making a bet on the magnificent seven. That's a basket of seven stocks.
Noonan: Add the semiconductors get to 10.
Xin: And right, the semiconductors maybe the tenth wonder of the world. Whereas, if you're investing in an Evergreen fund or one of Apollo's vehicles, right, you're getting access to companies before they go public. I feel like, looking Danny, you're looking at me with intensity. You're probably looking for an example of it.
Noonan: And I need to back a little more.
Xin: Yeah. It's okay. Like I'll give you an example. Like in one of our direct lending strategies, we provided financing to a company that rents out GPUs. What is a GPU? A GPU is a graphics processing unit. They are, simply put, specialized electronics that process massive amounts of data. This company works directly with xAI, an AI company founded by Elon Musk in 2023. So are we investing directly in AI? I mean, yes, but also we're looking for opportunities in sectors adjacent to AI. And we're doing it in places that public markets weren't going to be able to give you access to. So I think that's maybe a strong example of how we operate in the AI space. It's really about how do we, in that example, combine our credit investing discipline with a generational theme like AI and look for opportunities in those adjacent sectors that clients couldn't have gotten on their own.
So going back to an earlier comment around institutions being, 50% in alternatives and individuals are less than 5%. I don't take it as a given, and no one should, that those two numbers should be the same. We're not saying like institutions are 50, so therefore individuals should be 50. But I think there's a giant gap between the two that could be narrower. And hearing about themes like AI and how Apollo is investing in those spaces, I think helps advisors better understand the case for why those two numbers should be closer together than they are.
Noonan: Yeah, you made a strong case, and one of the things I did to prepare for this episode, I listened to Apollo's recent earnings call, and one of the points that Apollo CEO Marc Rowan made that I thought was really interesting was that everyone knows at this point about the concentration inside of public equity markets, as you've alluded to. It's been on the front page for years at this point. But one of things I think people are less familiar with, and this is the point that Marc Rowan made, was that in years past, the 10 largest issuers in public fixed income markets have been the big banks. Going forward, as you've seen some of the headlines with NVIDIA and the big hyperscalers adding CapEx and funding it mostly through debt, going forward, it's not going to be that long where the biggest issuers in public debt markets are going to be the hyperscalers. So you're going to have the same concentration issue that you do in the equity markets as you have in fixed income markets. I think that's one reason as well that alternatives, private alternatives particularly, might make more sense going forward.
Xin: Exactly. Like you said, the opportunity set has migrated into different parts of the market, private being one of them. Just to make sure I don't leave any listeners hanging, just real quick, the two other reasons why you might want to consider adding private markets to put client portfolios is it broadens your client base. Maybe you're an advisor who wants to go upstream, you need access to competitive product. You should maybe look at alternatives And then the third and last reason, because I want to be mindful of time, is that you look, it can make you more competitive. You want to stand out from the crowd. So it can be a good sort of recruiting asset gathering tool.
Noonan: Well, the people also like owning sports teams, which there's some publicly traded stocks. I know the Knicks are actually a public trade stock, which is an interesting to read about as they just won the title. We have to talk about the big elephant room fees. You know, fees are going to be a big consideration for advisors. Alternatives usually aren't cheap and higher fees, they elicit a higher level of scrutiny, especially from advisors' clients. How do advisors get comfortable with the higher fees and communicate their role in the portfolio to clients.
Xin: Well, three thoughts. We all know alternatives are more expensive, and that should get a higher level of scrutiny. I completely agree. That's appropriate because you don't eat gross returns, you eat net returns.
Noonan: So Mark is smiling hearing you say that.
Xin: Okay, glad to hear that. I'd say like my first point is that it's key to reframe the conversation away from just fees in isolation and towards value. So the question isn't is this more expensive than an ETF? The right question is what is the client getting for that added cost and does it improve the portfolio net of fees? It's non-negotiable that you have to see whether the manager is improving the net of fee performance for the investor, because if you're not doing that, it's game over, like privates will just be a fad. Alternatives should be positioned as the tool that helps the client achieve the outcome they want. I mentioned retirement readiness earlier.
So if you know what the client is standing for what they care about, then you can say, look, this product is going to help you achieve that goal. So it's less about the sticker price and more about the value. I'd also say that advisors should think about not presenting alternatives as a free lunch. Again, these strategies come with trade-offs. I talked about how longer time horizons, less liquidity can be one of those things. So the bar should absolutely be higher.
And then lastly, you know if the client is really anchored to an ETF like their VOO, their SPY and they're paying free basis points, I'd suggest orienting them back to the fact that those are public markets. The point you made Danny around like those are becoming increasingly concentrated. Everybody has access it's not special or different and there's absolutely nothing wrong with that. There's a role for public center portfolio. But it's increasingly a really narrow part of the manager, narrow part of the market. So just to recap, right, it's about value. It's not just about the price. It's about making sure that clients understand what they're getting for that value and the associated trade-offs and then making sure they understand the point around like the opportunities in public markets are kind of shrinking over time.
Noonan: And when you think about blending the worlds together privates and publics, I think scale is probably the operative word that's the first one that comes to mind for me. If I just want solutions that can be implemented across all of their client accounts rather than just a few when we talk about that scaling alternatives I think model portfolios have done that on the public side. Are we talking about model portfolios as well when we are bringing in privates?
Xin: Yes, but that's a catch because when most people say model portfolios, they still mean public markets only. ETFs, mutual funds, single stocks, that's already a problem that's being solved. So I absolutely think that model portfolios that include privates or rather at some point we'll just say models like because we won't have to distinguish between do they have alts or not. So the challenges that come about when you introduce private markets into public portfolios is product availability which we've kind of talked about already.
The second is the investment framework how do you build the model and the third is technology and how to trade and rebalance. So I keep sort of banging on about implementation and technology because I really think a lot of advisors today face a capacity crisis. You know the demands of the advisory model of fee-based business means advisors are spending less than 60% of their time on revenue generating activity with clients, with prospects, doing relationship management. So that's only compounded when you've got an end client right that's like well tell me about the portfolio, tell me how it's tailored to me, tell me that you know me and my needs. So, bringing all together if the model portfolio isn't solving for again the right product set the right investment framework to combine or integrate privates into publics and the technology of how to implement the model portfolio then the partner isn't doing that job.
Noonan: Technology is probably the final hurdle how do you actually rebalance a portfolio that includes both liquid and illiquid structures inside of it.
Xin: Danny I think you know me at this point I never give a straight answer. I give like a multipart answer. So present state and future state. Today I think the industry has chosen the path of least resistance. And if you're in the middle of a capacity crisis as I said, right, you're going to do the lowest effort, highest impact thing. So that's an interval fund, as I said, no sub doc you can buy in daily that's a 1099, not a K1, et cetera. So a lot of technology platforms out there, you know some of them are at this conference, have rolled out today live the ability to buy model portfolios or portfolios writ large that have interval funds in them and rebalance them. So what happens is the tech knows the liquidity windows. It says rebalance the portfolio by drawing from the public assets in the portfolio. Do it pro rata and top up the interval fund. Or vice versa when the client wants to take some money out or the technology submits a redemption request. And then it reinvests the proceeds against the target weights when the money comes back.
It's not that complicated intellectually but it does take time to build correctly which is why you know we heard nothing from the technology firms for a little while and then suddenly they all came out with like something you know a similar feature it took them time to build it correctly. Future state products with a subdoc. Interval funds, as I said, don't have a subdoc. The industry for better or worse has accepted the subdoc as a fixture and has built entire ecosystems around making it more tolerable. But I frankly feel that subdocs are the fax machine of alternatives.
And yes I am old enough to have sent and received a fax. So we shouldn't take it as a given that process leaves like subdocs are worth scaling. We need to have the willpower to ask collectively is this something we should be doing at all. So I talked about present state and future state we're spending a lot of time thinking through like what are the right future state processes and how can we innovate whether it's distributed ledger, omnibus accounts but those are some things that I think about manifesting in the near future to make it easier to rebalance and trade portfolios that have private markets in them.
Noonan: That makes good sense technology can be hard for everyone I was trying to print my notes out this morning at the Morningstar headquarters and I forgot my employee ID card so I was unable to print. So technology it's a work in progress for all of us. I'm going to jump to the final question. And for this one I'm going to ask you to pull out the crystal ball alternatives continue to move from a niche allocation for most to potentially a core portfolio building block. When do we ditch the word alternative and just call them investments
Xin: I think we ditch the word alternatives and call them investments when we've truly solved implementation. That's the day when this stops being a special category. How will we know when that day has arrived I'd say one there's going to be a generation of advisors who have never known a world when alternatives weren't just there but they were in every model that they were putting together. For them it won't be alternatives. It would just be how investing works. Two is all those industry reports that show the average advisor allocation is sub 5% I think it'll be 15% so it'll be 3x. And then three, I was on a panel last week in MMI and it was about operational bottlenecks. I think those panels will go away. They will recede into the background because no one will be thinking about how why is it so difficult.
Noonan: Awesome. I think we'll reach a point where equity is just equity and credit is just credit. That's a good place to wrap another episode of Simple But Not Easy in the history books. We're grateful to Lucy for spending time with us here at Navy Pier. Before we depart, please consider leaving a review on Apple or Spotify to help others find us. Until next time, thanks for listening.
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