Private Markets 360° | Episode 25: Boring AI: Discovering Hidden Opportunities in Private Investing

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Jocelyn Lewis:
Welcome to Private Markets 360°, where we delve deep into the world of private markets and bring you insights from industry leaders. Today, we have the pleasure of welcoming Jacob Miller, cofounder and chief solutions officer at Opto Investments. With a distinguished career that began at Bridgewater Associates, Jacob has cultivated a wealth of experience in the investment landscape. At Opto, Jacob has been pivotal in working with RIAs and family offices to develop customized investment solutions across private markets. Opto's unique approach emphasizes a deep understanding of its clients' needs, moving beyond a traditional menu business to create bespoke strategies that really align with clients' investment goals. Jacob brings insights into the current macroeconomic trends, deal flow management, and the evolving landscape of private equity and AI. We're excited to explore his thoughts on the future of private markets and how investors can navigate these complex waters. Jacob, welcome to the show.

Jocelyn Lewis:
We're delighted to have you join us today. How are you?

Jacob Miller:
I'm doing great. Excited to be chatting today. Lots to discuss.

Chris Sparenberg:
We certainly do have a lot of great ground to cover and some pretty diverse topics, but it'd be great, Jacob, to just start off with a walk through of your career journey from Bridgewater to cofounding Opco and how your experience along the way has shaped your thought on investing.

Jacob Miller:
Yeah. So to rerun all the way, I got passionate about investing at a pretty young age. I grew up in San Francisco, you know, sort of came into Cognizant during the .com boom and bust, saw our next door neighbor go from driving a beat up old Honda to a Ferrari back to a beat up old Honda. It was a span of about two years and thought, you know, that game looks pretty interesting. I should figure out how to play it better than he did. You know, my dad set me up with a a very small portfolio when I was eight or nine, and I've really not looked back. By the time I got to college, I was running strategies and bonds and commodities for friends and family and was writing about that and got pretty lucky that some of the investment folks at Bridgewater, were reading that writing. So I got invited to come there first as an intern, return, spent, you know, the first four years of my career as an investor.

Jacob Miller:
I mean, I really couldn't imagine a better training, really just digging deep into the true logical linkages that that tie the economy together, how players operate, how they come together to set prices, and how those prices can evolve versus expectations. By the time I, you know, was a few years in there, was primarily looking at our risky credit book and so emerging market debt and high yield fixed income. And especially on the high yield side, noticed something both interesting and frustrating, which was that we could get credit conditions right, you know, predict really well what was likely to happen in terms of demand for borrowing supply, how those players meet. But the strategy wasn't working that because so much of the marginal buyer and seller activity, the really important transactions that were fueling growth was moving to the private credit side and saw that story repeated on the equity book. It's always been true in real estate. And so got really interested in how how you could apply a fundamental and quantitative understanding to really level up how these spaces operate as data and availability has grown. On a personal side, it got a lot less hard to pull, you know, ninety to a hundred hour weeks to put on what I knew was not the best trade. Not to say I was always putting on the best trade before that, but once you know you're not, at least for me, this is all about how do you be the best at what you do.

Jacob Miller:
And once I knew I really couldn't do that, you know, at a hundred billion dollar fund levered 10 times, so on average, The writing was on the wall, and so Locke picked the golden handcuffs there with these sort of vague notions of how do you apply a systematic understanding in this sort of fundamental framework to improving and evolving the private market space. From there, it was really just right place, right time, one of those lucky very lucky accidents. I was driving back to San Francisco. I grew up from New York, and somewhere in the middle of Iowa, a guy I'd overlapped with for, you know, nine months or so, Bridgewater called me and said, I really think you should be my boss. This guy, Joe Lonsdale. He, you know, cofounded Palantir, founded this from Adipar. He's thinking a lot about the private market and alternative investment space. And, you know, I was pretty clear, so I thought, why not? And, you know, the one unfortunate part was Joe wanted to go on a run the next Wednesday.

Jacob Miller:
I had not run-in a very long time. We're not on video, but more of a power lifter body type. And so spent the next couple days practicing running, talking, and trying not to dry heave. But luckily, that that meeting went well. Made it through the run. Run turned into lunch, turned into four or five hours of the whiteboard. You know, what Joe had been noticing as chairman of Adepar was just how rare it was, even in large sophisticated groups, let alone, you know, this broader RIA and fiduciary community to have a really robust and efficient access point to private markets, and one that participated in what he saw as the most exciting spaces, the things that his family office was doing and the investors he trusted most. And, you know, as we got together and thought about this, it became clear why that was, which is that this industry sort of grew up over the last ten years solving for access and solving for access on the side of the GPs.

Jacob Miller:
And so most firms in the space, you know, conceptually really look like a broker or a placement agent, and they're paid some commission by the largest fund managers to raise, you know, what they see as retail capital into the largest funds, and that creates a number of adverse consequences. One, the best funds don't have to pay to raise capital. They tend to be really diligent about how large their fund size is and are oversubscribed. And so why would I pay two to 5% to raise capital if I'm actually having to turn investors away already? And then because of how you're incentivized, you really just focus on the largest funds. And again, maybe ten years ago, access was the problem. That's not the case today. And the largest funds are gonna end up looking something like private market beta. Now there might be space for beta in a portfolio, but you shouldn't certainly shouldn't pay two and twenty for it.

Jacob Miller:
And so we thought by bringing the best technologists from Palantir, from Adipar, from our network, and to approach this problem on the same side as our clients. So we're, we are our fiduciary ourselves. We are aligned with our clients. We are buyers on behalf of not sellers too. That would allow us to both source and create better investments, but also build better technology. If you are incentivized to sell it, say, given mega cap REIT product, you're never gonna build a portfolio construction engine that doesn't recommend that. But that might not be the right investment for all clients. And so by not buttering the bread on both sides and getting incentivized to pay, you know, to to sell funds to people, we could really build better, unconflicted, and opinionated technology where it was really just about how do you drive the best outcomes at scale.

Jocelyn Lewis:
So many insights in that whole response that you gave. I mean, I I love the fact that you started investing young and kind of have that passion for it and continue to do that today. I love just the what you've kind of noticed about the markets and taken that into your career today. And I do think it's very interesting as more and more of the retail space is getting into private markets, all the different ways that's happening, all the different fee structures. And, you know, I'm always curious about how those fee structures are really ending up incentivizing what is being recommended. And I think there's huge opportunity, like you mentioned, to kind of have an unbiased from a fee perspective, which is really good kind of technology that is able to help with that portfolio construction, like you mentioned, based on that desired outcome, which we know can be different from investor to investor. So, Jacob, sharing that whole journey.

Jacob Miller:
Yeah. And we even go a step further in terms of how we've structured our business model. You know, Joe and I are both obsessed with alignment. Mhmm. You know, basically, I'm a walking econ one zero one textbook from that perspective. But, yeah, how do you really turn that on its head? What we saw an opportunity to do was use technology to get ongoing fees and costs as low as possible, but partner in the upside. And so we charge a really low technology or management fee, depends on the structure, that really just keeps the lights on. We're not actually trying to really have any profit margin on that.

Jacob Miller:
But then we have a 5% carried interest on the back end of these funds that is, you know, set relative to the goal for these clients and has a pretty high hurdle so that in the normal course of business, people are not paying high fees for access. They're only paying if we do what we set out to do and get people into, you know, ideally top quartile funds across private markets. Now I've been on both sides of this. It is very frustrating when your manager is charging you a few percent plus expenses and performance is lagging. It is a lot less frustrating if you are being returned, you know, three to five times your money, and there's a small 5% consideration. And what that does is it really makes us, you know, really diligently aligned with the client outcome and focused on delivering the best of private markets to portfolios relative to what people need.

Jocelyn Lewis:
Yeah. I completely agree. When I started out in investing too, it was alignment was key. So many different aspects. So I I really think that that that's great that you guys are focusing there and then expanding from that point. So now that we have explored your experience and approach, let's shift our focus to the broader context in which these investments are made. So the macroeconomic landscape plays a crucial role in shaping investment strategies. And to kick off the discussion, we'd like to get your thoughts on the global macroeconomic outlook.

Jocelyn Lewis:
Would you help us understand the current landscape by addressing really two key questions? First, what are the most significant macroeconomic trends impacting markets today? And second, how should investors navigate these changes?

Jacob Miller:
Yeah. So I think we are at a true inflection point. And what's interesting is that we should have a really clear time stamp on the forces that sort of that played a dominant role backward looking, and it looks like those forces are set to reverse. And so if we pull the clock back and go back to the early eighties, so roughly forty years ago, interest rates were very high. This was, you know, just after the vocal tightening. Globalization was at a relatively low level, was starting to increase, but was still relatively low. And our economy was still heavily geared towards relatively low margin activities in manufacturing and other sort of high input cost areas. Over the last forty years, interest rates have, with some ups and downs fallen, but by and large, the most recent peak was lower than the previous peak, and the most recent low was lower than the previous low.

Jacob Miller:
That has obviously started turning around starting in 2019 and into this most recent tightening. We're still not back anywhere near local levels, but we you've gone from this massive tailwind falling interest rates to at least it being a neutral, and it seems more likely than not to be a negative than a positive. And that has a myriad of effects. One, obviously, lower borrowing costs, spur borrowing, which spur spending. That's through the mortgage mechanism, that through business borrowing, consumer borrowing, and it's also through a lower cost of of debt service. And so you can refinance existing debt and have more of the income either as a corporation or an individual spend. Globalization was a major role too, both in terms of obviously outsourcing to cheaper areas of production, which really picked up steam in the nineties into the early two thousands. It actually peaked in the late twenty tens just before COVID, but was still at a relatively high level.

Jacob Miller:
And, you know, that also had a large impact on the role that foreign sales have to play for US equities. We've gone from less than 20% to over 41% of sales coming from overseas for roughly s and p 500 companies and even more of the sales growth that that Delta, which ends up, you know, driving a lot of equity performance. Look, everyone in America owns an iPhone, basically. That's not true of India. And so Apple counting on new markets being a major source of of revenue growth. With the current, you know, tariff volatility, and there's a lot still unknown there. But seems very unlikely that an increased globalization will be a tailwind, and if anything, it seems likely to reverse course and be a pretty significant headwind. And then you have a change in the sector composition of our economy going from low margin manufacturing and and durables to largely a technology and service based economy.

Jacob Miller:
I mean, definitely an equity sector tilt there, which has increased margins and increased, you know, measured productivity based on how those sectors tend to work. And so you can explain a lot of the sort of amazing performance of the last forty years in risk assets through the lens of these three factors. And we look set to have all three go to at least neutral, if not pretty significantly negative. I did a equity decomposition. Because you can go through, you know, the margins, the sales growth, the impact of, you know, the cost of debt service, also the discounting of cash flows due to interest rates. Over half of equity returns can be explained by the shift in these three forces, which seems unlikely to repeat. And so, you know, I look out at that economy and I see a, a risky period for risk assets, where we are quite unlikely to see the same returns from sort of holding a, a balanced beta portfolio on a forward looking basis than we have on a backward looking basis with upward pressure on margins, downward pressure at least on foreign sales, if not second order on domestic sales as well, and an interest rate environment with a lot less room to cut and a lot of potential room to hike if inflation turns out stickier than possible than that than expected. And so I'm a student of history.

Jacob Miller:
This is why I think it's important to really zoom out at important times like this, where it feels like a lot is changing and really question what feels like things you can take for granted. Almost everyone who's active in markets today has only been active during that forty year period where those forces have been pretty significant and pretty constant tailwinds? What does it mean to be in an environment where those go away or even reverse course? And then how do you navigate it? I think you have a couple this is maybe why economics is called the dismal science, but you have a couple options, some of which do not feel particularly good. You can accept lower returns. You know, if maybe beta returns half of what you've got on an backward looking basis, perhaps cash rates are a little bit higher, but that's not gonna make up the Gulf. You can take more risk to move out the risk curve or use leverage to get back to where you think you need to be or what your expected return is. But in an environment of increased uncertainty, I sort of I'm not a golfer, but I think of it like putting on a Ridge where, you know, maybe there's a straight path to the hole, but there's two hills on either side that could send the ball careening in couple directions. Just taking more risk blindly does not increase your probability of success and can deeply increase the risk that you are way off of where you need to be. And then, you know, we see it as you have one more palatable option, which is how do I take better risk and how do I add diversifying alpha to portfolios? And so, you know, that's a lot of where why we focus on private markets.

Jacob Miller:
From a diversification perspective, you are talking about generally different slices of the economy. You know, how will trade wars impact lower middle market versus the large cap equity sector? Well, lower middle market is much more domestically focused. If we have to rebuild manufacturing here, it's likely that the company is building and operating those factories, doing logistics, and, you know, transportation between them are largely in the middle market sector, not the large cap sector, and so could actually be a slight tailwind there. And then, you know, due to the illiquid nature of these investments, you don't have the same sort of autocorrelation from all investors pulling and and, you know, buying, you know, broad level investor behavior. And so it can be a very diversifying sleeve, even if you don't think you have access to, real uncorrelated alpha opportunities. But then we do see it as a place where the opportunity to outperform is much greater. I have a very simple framework for what drives market outperformance. You really only can outperform one of four ways.

Jacob Miller:
You can have unique access. You can have unique information. You can have unique insight, or you can get extraordinarily lucky. The first two are illegal and public markets. That's insider trading. You know, do not pass code, not click $200, go straight to jail. But that's a lifeblood of private markets, and that's not, you know, nefarious backroom dealing. It's as simple as if I'm the best investor in health care venture capital and the next all star team spins out, you've got, you know, the right research scientist, someone who's built, you know, repeat founder in the space who knows how to get this done.

Jacob Miller:
They've got early clients who got early traction. Who are they gonna reach out to first? They're gonna reach out to the firm which conveys the best vote of confidence if they win that capital, and that's generally the best investors there. Those investors already have more information on the space from prior investments. They have potential, you know, customers, partners, acquisition targets in their portfolio as well. And so you see a lot more serial correlation and stickiness of alpha in private markets due to information and access being such key drivers. And so with that broader macroeconomic picture, we're really urging investors, you know, with us or or outside of Opto to think about how they can add more wind conditions to the portfolio. You know, rising tide lifts all boats. If the tide doesn't continue to rise, where does your portfolio sit? What risks do you have, and how can we mitigate those risks?

Chris Sparenberg:
And I think that plays right into the next theme we wanted to discover with you, and that's the process at Opto for managing deal flow, for taking all of that into how you're tailoring portfolios for clients, and this concept you have of boring AI, which I think is gonna be really interesting to to pull apart here.

Jacob Miller:
When we say boring AI, what we mean is look. There's a lot of areas in AI that are, if not frothy, definitely have a lot of pretty extreme expectations baked in, and that's a lot of the consumer facing applications. That's a lot of the ideas around how, you know, basic parts of the workforce can be replaced. You know, it is likely we see a pretty seismic shift, but that's more likely to play out over fifteen years than over five or certainly over the next few quarters. Where we get actually most excited is some of the really practical applications in legacy industry. And so, you know, healthcare billing, for example, which is just hospital systems going back and forth with insurers on, you know, which codes are we using? What discounts did we negotiate on those codes? Can we use this code? It's $280,000,000,000 a year of expense, which is essentially just deadweight loss. There's no value from that. It's just that we have a very inefficient way of working between those parties.

Jacob Miller:
If you can set up AI agents who sit on both sides, and we've already seen this in a couple systems and some early pilots, you can reduce that cost by 80 to 90%. And that means people getting treatment faster. That means health care costs going down and more time spent on actual patient care. Similarly in logistics, if you can go from trucks that are half full and three weeks of lot time to on demand delivery and full trucks based on better transparency and sort of AI inventory management, you could significantly reduce transportation costs in the order of, you know, 15 to to 25%, which in a very low margin area is highly impactful. And, you know, you can keep going through examples of this in construction and permitting, in legal services, anywhere where you have these repeat tasks that are basically following a script. And right now we have humans following that script, and it's not a particularly efficient way to do things and has, you know, time lost in communication. And you can tally those up across our economy, and the impact is pretty significant. Now who is the benefit gonna accrue to? There might be a bit of benefit that accrues to some of the major players in public markets that people might think of, the NVIDIA's, Microsoft's, you know, cloud hosting services, etcetera.

Jacob Miller:
And if they can figure out the business model, perhaps some to the model layer of AI, the the Grox and OpenAI's of the world. But a lot of this is about who's actually using it on the front end. And so these very practical and very, quote, unquote, boring applications in legacy spaces. And this gets us really excited on the private market side because largely we're talking about businesses that are supported in the lower middle market space. And, you know, how did you look like a genius in private equity from 2010 to 2020? Well, borrowing costs were basically zero and markets went up. So you bought anything on leverage that cost you almost nothing. It went up and you looked really smart. That is not the case anymore.

Jacob Miller:
Borrowing costs are quite high and markets are somewhat turbulent. But if as a private equity manager, say with a focus on logistics, if you can acquire companies, insert, you know, agent layer tools and increase margins by 10 to 15%, you know, at a modest leverage two or three to one, you're talking about really exceptional top quartile returns. So really looking at the space in the economy that are most underserved by the last couple technology waves, where AI has potential to play much larger role and that a lot of market participants overlook because it's not sort of the very glitzy side of how AI might be used, but is probably gonna be the most important over the next five years.

Jocelyn Lewis:
So it sounds a lot like pattern recognition, taking an existing process, understanding what are those patterns, and then saying, how can we do this better with boring AI, so to speak?

Jacob Miller:
Yeah. And looking for those I mean, there's a couple criteria. You wanna have very repeatable processes. Mhmm. You wanna have pretty rich data ecosystems. And, you know, in terms of the the marginal impact, looking for spaces that have largely been sort of stuck in productivity ruts and behind the adoption curve in previous waves. And, you know, we've identified a number of those spaces and are are very interested to see how this rolls out.

Jocelyn Lewis:
So building on that, let's talk about another critical step in the investment process, which is fund selection, due diligence, benchmarking. What do you use for benchmarking? And can you describe your process for fund selection and diligence? And also interested what role AI is playing in this aspect of your work.

Jacob Miller:
Yeah. I see it as a pretty deep kinda human machine symbiosis there. I don't think AI tools are gonna come for the, call it, the last 30% of the diligence process anytime soon. We think it's really important to do the site visit, to see people in person, to dig really deep and ask questions that might not come up otherwise. But the screening step in terms of how many deals can you see, how much knowledge can you have about the overall space and how things are moving is a really great place to apply modern database systems and artificial intelligence. And so, you know, we see across our clients, you know, family offices, we can have some, you know, more institutional investors. This is still largely done in terms of people communicate via PDF. PDFs are terrible way to send numeric information.

Jacob Miller:
Why would I take a photo of the number and send you the photo versus just sending you the number? And then tracking in Excel and other tools that are really not built purpose built for an allocator to build their understanding of the world and create a data moat. And so we built tools that can pull in, you know, whatever materials you have in a manager, a two pager, a PPM, an LPA, a deck, account statements, and start to build a really context rich profile that then you can auto benchmark based, you know, overall on asset class, based on sub asset class, strategy, manager type, a lot richer experience than just saying, you know, hey, I'm top of core time in venture. What does that mean? What did your actual peer group look like? And, you know, you can look at who are your co investors? How did they do relative to you? Were they slightly better at selection? And then thinking about what that does over time to your understanding of the world as you continue to build out that dataset and you see more and more documents. You know, we've preloaded the system with data on tens of thousands of funds, but if I've seen, call it, you know, 200 PPMs over the last year, the ability to then come in, and this is actually something that technology is much better than people, really benchmark the terms. Like, hey, the managers in this space, these fees are off market, or this way that the fund manager and the GP are compensated per deal is not investor friendly. And so that pattern recognition across really dense legal documents and being able to turn that into human scale information that is really actionable helps you get from that, you know, hopefully as broad and net as possible, you know, thousands and thousands of deals a year down to the few hundred that you really wanna go deeper on and add the human touch. And so we, from a sourcing perspective, we still think network is of the utmost importance. And so a lot of our sourcing comes from our investors and backers.

Jacob Miller:
And so that's, you know, firms like the government investment corporation of Singapore, you know, they see thousands of managers a year and we're able to go to them and say, you know, what's the best thing you've done in the last three months in this sector and and largely get access. You know, a number of the top family offices in the country are on our cap table, and And we really wanna know where the best allocator is actually putting money to work today. And from that, plus, obviously we get a lot of inbounds and then there's just funds you hear about in market. Build that set of, you know, 5,000, seven thousand deals. Quickly screen as many as possible to build a view of the world, and to allow you to decide on the few hundred that you really apply your human resources to go a step further with.

Chris Sparenberg:
It's a really interesting way of taking all of these parts of the investment selection process that have historically been, you know, done through spreadsheets or done through conversation and try to systematize them and then leverage networks and that personal piece that you're talking about to enrich that. And then obviously leave that space for I mean, that's the decision making, which is gonna largely be a personal process for for some time. So really interesting to hear you break that down end to end. As we look ahead to the next five to ten years, we'd love to hear you just kind of openly muse with us on your conviction around the performance of different asset classes, what trends we expect to see in private equity. Just kinda taking a really broad view, what do you see coming down the pike?

Jacob Miller:
Yeah. So one area we're a little worried about is the large side of private credit. There's obviously a massive amount of money flowing into, you know, the the mega BDCs over the last few years, billions and billions of dollars a quarter, and that creates some issues. If you have a investment team of even, you know, 30 to 50 people, there's only so many deals you can do per quarter. And, you know, if you're only one of these semi liquid structures, you have to put that money to you raise to work pretty quickly. And this creates a lot of competition for deals among those large managers. And for loan sizes, call it, you know, 200,000,000, 250 million and above, we've seen a real degradation in terms away from the investor. That's much lighter covenants.

Jacob Miller:
That's lower spreads. That's, you know, very little collateral coverage, if any. And, you know, I don't see it as a blow up risk, but I do see it as actually worse risk return than even the high yield market right now. But that's been one of the most popular places in private markets, for the wealth community. And so we're watching that pretty closely, especially as impact from tariffs and higher costs flow through a lot of the companies that they're lending to, which had pretty low sales margins and pretty high debt levels. And really the only players with enough balance sheet to refinance are the players already lending to them. And so we see some outsized risk there and are largely advising folks against participation in the the large loan size area right now and are, you know, expecting some some troubled waters ahead there. You know, in private equity, again, I think those firms that can figure out how to intelligently embrace artificial intelligence and do that practically and hire the right people at the, you know, at the private equity GP level who can filter the wheat from the chaff in terms of what's possible and which players are real versus which are smoke and mirrors are gonna have really, really awesome opportunities over the next few vintages to just pick up some really low hanging fruit in terms of improving legacy processes with this new technology.

Jacob Miller:
You know, the last productivity wave we saw was in the early two thousands in manufacturing automation wave, and that did tick US potential growth up above 4% for about four or five quarters. I actually think this impact could be larger. It might take a little bit more time. I think the adoption curve will be slower, but, you know, I've sort of built out full bear base case. I think our base case is around that four to 4.5%. But if we look at some of the most nonproductive sectors, health care, real estate, logistics, the real impact that models can have there could push potential growth back up above 6%, which would be transformative for The US economy. And we think that benefit would largely accrue to really operationally focus private equity managers and the firms that they work with. You know, venture capital is always, it really stands apart.

Jacob Miller:
Early stage is so idiosyncratic. It really is about founder networks. It's a bit about picking the right trends, but it's so much about finding the right teams and identifying spaces that are the least crowded. And we do see opportunity there. You know, there's obviously really crowded parts of AI, but there are less crowded parts in the deep tech side, and that's, you know, database management, developer toolkits. Yeah. I think all the things that had to be built for the cloud wave to support non on prem developments. A lot of those basic tool kits for building AI applications, I think, were still to identify winners even if we know that the GPTs and XAIs of the world are like they've dominate the model layer.

Jacob Miller:
So we're pretty bullish on the right sort of really deep tech expertise in the early stage. There's still some pain to work through in late stage. So many companies overraised at high valuations in 2020, 2021 and raised so much money that they haven't actually had to come to that realization point and either raise a down round or something more extreme. That is starting to trickle out and is likely to pick up in the next six months. And so we think that'll be it's it's a double edged sword. There'll be opportunity actually for perhaps growth equity managers to get really low valuations on deals that need pretty acute in injections of capital, but also might be a bit of pain for sort of traditional late stage venture growth equity managers just sort of betting on a a rising market. And we're starting to see a little bit more IPI activity, but I think market volatility will likely dampen that through at least q three. And then, you know, real estate, we are starting to see green shoots.

Jacob Miller:
That's been sort of persona non grata since COVID, and there was some overbuilding in 2019 into COVID that we're still working through. But there's areas of multifamily outside of tier one, even tier two cities where you're starting to see a, you know, real recovery in cap rates, and we're not quite at margin of safety levels yet, but getting to the point where if you have the right sort of unfair advantage in that market, there are some pretty interesting opportunities. And in the real estate debt side actually being pretty interesting right now, with a lot of regional banks stepping out of that market, opening opportunity for people with really deep expertise and underwriting abilities to provide real estate debt, you know, both in commercial and industrial.

Jocelyn Lewis:
Something else that we'd like to explore too is thinking about how investors really like liquidity. And so private markets are adjusting to meet that requirement and open up access for the retail investor. But as they start investing in private markets or get access to it, what's the trade off?

Jacob Miller:
Look. There's no way to fundamentally make something that is illiquid liquid without trade offs. And for some investors, you know, at the accredited level, that trade off might be totally worth it. The need for liquidity is present by deciding to buy a house or do something else with the limited amount of capital. I wouldn't wanna be in a ten year lockup, but it comes with trade offs. And you so you have to have a relatively large cash balance in those funds, That's a drag on returns, and you're also paying someone management fees and performance fees to hold cash for you. And then there's the risk of of what your counterparties do. And so we've seen this with a number of the large REITs, s rate, etcetera, having to put up gates and stop redemptions because everyone heads for the exit at the same time.

Jacob Miller:
Well, you get rid of the cash first, then you sell the most saleable security second, and you're left with the stuff that would be a pretty significant markdown. And so you're forced to put up gates. And so, you know, we urge people to recognize that even if something is billed as semi liquid, it tends to be liquid when you don't need it and not liquid when you do. For investors, you know, with 2 plus, million in net worth, we also urge people to really think, what is your illiquidity budget? Is there some portion of this that you really don't need to touch for five, seven, or ten years? If there is, probably the best access point you can get to private markets is gonna be in a diversified vintage approach. And so finding drawdown managers, working with, you know, the RIA to build a custom exposure, so, you know, your diversified growth fund or diversified income fund, and building into that almost like a muni bond ladder, allocating, you know, each year so you get to the target for your portfolio that you need to and then being able to essentially wind down by just not reinvesting if that is what's needed, but then you're exposed to a lot less risk. The dollars are in the ground. You have a full business cycle. The idea is to play out and to mature.

Jacob Miller:
You don't have counterparty risk. And, generally, when you look through all the fees and expenses, it's a much better deal for investors as well. There's a lot of expenses associated with running these semi liquid structures. That said, we are working with a handful of clients to, again, sort of change the game and and put the power back in the investor side to build custom tender or interval funds, and you get a lot of benefits by putting the power in the fiduciary's hands. You can almost think about it like a glide path where you can look across your client base and say, this many people in the 40 to 50 group, this many people 50 to sixty, sixty plus. How much liquidity does each group need? How can I map out how to most efficiently run this fund to minimize that cash drag? And you can work on costs as well because this isn't just a revenue center know, maximizing management fee for a mega cap firm. You can really lean into efficiency and building something uniquely well suited to the wealth community. And so we are not allergic to these structure, but we don't think there are many options in market that are really built with the best outcome for the investor in mind.

Jacob Miller:
And we think starting with a goals oriented conversation about where are my clients in terms of their liquidity needs and what's the right tool for that job and not just defaulting to the most liquid tool will likely lead to better outcomes.

Chris Sparenberg:
Thank you for tuning in to this episode of Private Markets 360°. We hope you enjoyed our enlightening conversation with Jacob Miller, cofounder and chief solutions officer at Opto Investments. Jacob's extensive background in investment management and his innovative approach to creating customized solutions have provided us with invaluable insights into the current landscape of private markets. From exploring macroeconomic trends to discussing the intricacies of deal flow management, Jacob has highlighted essential strategies for investors navigating the complexities of today's investment environment. His perspective on the evolving role of AI in private equity offers a glimpse into the future of investing. If you enjoyed this episode, please subscribe to Private Markets 360°. Join us next time as we continue to explore the world of private markets and bring you more insights from industry leaders. Until then, keep thinking critically and exploring the opportunities that lie ahead in private markets.