And welcome everybody to another Smart Money Circle show.
I'm Adam Sarhan. With me today is Kurt Nye, who's
the CFA. He's the Group Head of
Alternative Investments and Managing Director at Mai Capital
with approximately 17 billion in assets under management.
Kurt, thank you so much for taking the time and welcome to
the Smart Money Circle. Thank you, Adam.
Thank you for having me. So it was like to begin.
Kurt, can you tell us a little about your story and how you got
to where you are today, please? Sure so.
Yeah, maybe starting with the company and then I'll weave in
my my personal story. Mai has a really interesting
history. So we're actually going to hit
our 50th anniversary this December.
Thank you. And it was originally
established as part of IMG, the sports agency.
And our first client was Arnold Palmer.
That was true through 2004, when the agency side of the business
and media side of the business split from the wealth management
side of the business. And then in 2007, it was
acquired by our current managing partner, Rick Buenicorp.
That's where I come in. So I I actually interned with
Mai in 2007 shortly after Rick purchased the firm.
I left for a few years and then came back in in 2011 to help
build out our alternative investments practice.
OK, got it. I love that.
So next question, tell us a little about your investment
strategy please. Sure.
Our, our investment strategy is, is really a goals based
strategy. And so when we look at the
investable universe, we break it into six asset classes.
So I would think like like most people we have cash equities,
fixed income, but then we really break alternatives into three
separate buckets. We have income low volatility
alternatives which are used as complements or replacements for
traditional fixed income. We have growth alternatives
where you're you're really investing to try to beat the
returns available in public markets and that would include
asset classes like private equity and venture capital.
And then we have real asset alternatives and and these are
asset classes that confer a degree of protection from
inflation. So think about things like
operating real estate where you can push along rental increases
in inflationary times or things like infrastructure which may
have contractual CPI based escalators.
Or maybe able to pass along increases just based on their
monopolistic characteristics. Oh, nice.
So for you as an alternative manager, are you?
What are your correlations? I'm assuming it's not the S&P
500. What are some benchmarks that
you look for? And then do you look for
uncorrelated assets or how exactly do you set up
portfolios? All all of the above our our
focus is on understanding the economic drivers of the
investment and the associated risks.
And and so maybe diving into a couple examples would would give
you a feel for our, our philosophy.
So in the income low volatility alternatives bucket, one of the
areas that we've been in in like since 2011 has been triple net
lease real estate. And and I'll tie this back to
the the risk conversation in a minute, but in a triple net
lease that means the tenants responsible for the taxes, the
insurance and the maintenance, the rent check you collect every
month. It is basically your net
operating income and we we found a group that specializes in 12
net lease real estate with investment grade tenants on long
term leases. And and so for us the way we
view that from a risk perspective is that it's really
becomes a credit risk play on the credit health of the tenant
and in fact you can underwrite it to the building being
worthless at the end of the lease and still achieve single
digit net IRR. That's not a real estate
investment. Or said another way, most real
estate investments we look at, if you assume the building's
worthless, things have gone very, very wrong, Right?
Yeah, right. And so when we look at that and
you asked about how we think about the risks and the value
and why you'd want to go into an alternative, we started off and
we looked at. OK.
Well, for the same credit risk, what can we achieve if we're
investing in the bonds of the same same issuer?
And is there a positive spread to be gained by accessing this
credit risk through the triple net real estate?
Then we looked at, OK, are there any public market ways of
accessing the same asset class all else equal, we'd prefer to
go into a liquid strategy in the public markets, right.
It's it's easier. You're not a liquid.
But when we looked at the public markets and there are some large
triple net reads, you ended up with a couple of things.
You had valuations that they were much higher than private
markets and that's not always true, but it was in this case.
And then you also had the credit quality of the portfolio wasn't
100% focused on investment grades.
So it it, it just wasn't the an apples to apples comparison.
So then we looked at. When we had the public markets
we looked at then, are we being compensated for the additional
risks of going the private route?
Are we being compensated for being a liquid?
Are we being compensated for the fee structure?
Does the structure of the private investment do a good job
of aligning incentives and we're able to kind of check all those
boxes and eventually make it to where we're comfortable making
an allocation for our clients, understood.
So that makes that makes sense. So let's talk about risk a
little bit deeper. How do you manage risk?
I know you do mostly private investments.
And what are some mistakes do you see people make with respect
to risk management, please? Sure.
So maybe the first thing about risk that we think about is we
want to make sure that we can understand the thesis of the
investment. We really want to dig in on the
economic drivers. We don't think we can get our
arms around a particular investment.
We'll we'll just pass on it. You know, the investable
universe is large enough that that we don't, our philosophy is
we don't need to try to hit every good opportunity, we just
want to avoid the blow UPS as as much as we possibly can, right?
Right. And so that becomes kind of
paramount first understanding the thesis, make sure it also
fits with MA is view of the world.
You know, if the rest of our investment committee is going in
One Direction, the alternative scheme doesn't want to bring an
idea that contradicts that. And so that's number one.
Once we've identified A thesis that that we like, we want to
find what we believe is the best possible organization to execute
on that thesis. We're big believers that you you
want to allocate to the the right team and that people
really, really matter on the execution side.
What does that mean for us? That means we're going to look
for groups that have had sustained track record of
success over multiple market cycles.
I think an interesting example. And and very different today
than if we were having this conversation a couple years ago
is in the venture capital space, right you you've seen a huge DE
rating of multiples and what you've seen is a lot of mark to
market performance fade away and and some of it that hasn't faded
away might might fade away and maybe future investor updates.
And so we don't put a lot of emphasis or give a lot of weight
to an unrealized track record. We want to invest.
We will like that multiple market cycles of experience
because when you're doing a private long term investment, if
the odds are pretty high that there's going to be a recession
at some point during your holding period.
I I don't know if the next recession is going to be in in
three months or in three years. But if we're making an
investment that's going to last for the next 10 years, odds are
at some point there's going to be some kind of economic
challenge, right. So we're big believers in the
team. What we'll do once we've
identified the thesis and the team as much as we possibly can,
is try to bring expertise in from our professional networks.
Sometimes we've honestly had clients who are executives in
certain areas be able to help us out and we'll try to validate
what we've understood in the thesis and the team.
We recognize that it's a big world out there.
It's it's impossible for us to know everything.
And so we'll try to bring that expertise to help us make sure
we don't have any blind spots. And then we'll look at the
structure, you know private investing for better or worse,
each opportunity can be structured a little bit
differently and and specifically in the structure you're going to
see different economic arrangements with sponsors.
Sometimes they do a very good job.
We think of aligning incentives for instance we're not against a
market rate performance fee or or better.
You know, we're going to try to negotiate for better.
But what we don't like to see is a compensation structure where
even if the investment sponsor delivers mediocre results for
our clients, they're paid very handsomely.
We think that's a just a poor alignment of of incentives.
The other thing that we like to do when we're going through the
the legal documents is we like to see protections for our
investors, you know, I think in in the liquid markets if you
decide you don't like a stock tomorrow.
You sell it right, pretty straightforward.
On the on the private investment side, it's it's not it's much
more of a a marriage versus dating and you're in it for the
long term and you want to make sure that you're protecting your
investors along the way. So what is, what are ways of
doing that? We like to see discretion within
a box where the investment criteria are really laid out for
the investment sponsor if we're investing with them for a
particular set of skills or expertise.
We don't want to hear about how they went another direction at
at our next update, especially because we're not making an
investment in isolation, we're making it in the context of an
overall asset allocation framework with very targeted
risk exposures in mind. So that's those are our three
big areas, the thesis, the team and the structure and and we
emphasize those during our our diligence process.
Got it. And that makes perfect sense.
So with respect to exiting when something's wrong, let's say the
thesis is busted. I had somebody on the show tell
me that literally that line before and with with
alternatives and it's not liquid stock you can sell it or futures
or currencies, something along those lines, it's liquid but in
your world it's not liquid. So assuming things don't work
and I love what you said earlier about avoid the big blow UPS, I
mean that's almost the name of the game, right?
If you could do that, then the upside will take care of itself.
How do you know when A when you're wrong thesis is busted,
and then B how do you make sure that that risk is manageable?
Is it a position size initially with the allocation going into
it so even if it does go to zero, you're not totally wiped
out? Or are there other things that
you do along the way to be like, hey, we made a mistake here, we
need to exit? How do you know when you're
wrong? And then how do you exit in
illiquid situation? Yeah, it's a great question.
Ultimately, you know when you're wrong, when the investment
doesn't, doesn't work out and doesn't hit the kind of return
objectives that you originally set out.
We spend a lot of time on the front end because that's that's
really once you've made your allocation you're you're in
right. So on the front end we want to
go understand those those risk drivers, those economic drivers.
And then what we do when we're thinking about making an
allocation to any alternative is we work very closely with our
our CIO to figure out a maximum allocation size and we're going
to vary that allocation size depending on our perceived risk
of the. Alternative investment.
So in something that's more concentrated we're going to set
a a very small Max allocation size and something that's more
diversified we're going to go a little bit larger.
So I think that's why we spend so much time because if you if
you messed up on on that understanding of risk that's
where I think you get into trouble.
You know if we're, if we're talking about a high risk, high
return type investment and you can speak clearly to the.
Return potential but also the risks and it it goes down I
people I think generally people understand that like we're
taking risks we're we're trying to hit those higher returns if
that doesn't work out no one wants that but it it can happen
right. I I think the issue comes in if
you have a misalignment of understanding where you think
something and you present it as. I think this is lower risk.
And then it ends up actually you misunderstood it and it ends up
being higher risk. And I think one of the
challenges in in private investing as it relates to risk
is that when you think about comparing stuff to public
markets, you're you have a few really hard challenges.
So first the the data available in in private investing it is
much, much more sparse, right. You don't have these huge.
Manicure databases of data. There's no crisp database on on
the private investment side, there are data providers.
We use them. They're not perfect.
And then when you're thinking about the statistics on on
private investing, you always need to take them, I think with
a grain of salt. So I I've seen for instance
some. What I think are egregiously
high reported sharp ratios. OK, I see what you're saying.
Driven by kind of like super low volatility numbers and if you're
not having a true mark to market process underlying the
investment then I think you need to approach those with a a very
high degree of of skepticism. You know if you if you see a
sharp ratio that that exceeds the medallion fund, right then
then like. Take a step back and say that
that probably doesn't doesn't actually exist.
Maybe these numbers are off and that kind of those statistics I
think sometimes are used from a a marketing perspective and I
think that's where people can get in into trouble.
Yeah, that makes sense. Yeah, because it's misleading
and they're they're looking at the wrong thing so to speak.
But yeah, that's a really good point.
OK, beautiful. So basically for the risk is
initially going into it, you're going to to determine how
aggressive quote UN quote you should be or how much risk you
should take. And then when you're in it,
you're in it. And then if you need to exit you
can find the best ways to exit but you you're protected biggest
initially you size it accordingly.
So even if it doesn't work out, you're not going to get
annihilated or have those big blow UPS in the portfolio
because the size itself is small or is appropriate going into it.
That that's right. And we also try to view these
asset classes. As as asset classes and you know
I I mentioned before but I I can't predict the economic
cycle, right. And I would think most people
would also admit the same same thing.
And so we look at it as you want to invest across economic
cycles, which means investing in different vintages or years the
investments start because what you find when you look at the
private investing world is there are certain vintages that are
the best performing you know. Those finishes tend to coincide
with times where it's difficult to to allocate capital, where it
feels uncomfortable to allocate capital intuitively, right, like
the buy lows kind of idea. But we want to make sure that
when we're speaking to our clients about private markets
investing that they're taking that systematic approach when it
feels easiest to make a private allocation exactly like it's
probably the exact time where you should be more a little more
cautious. Right.
And I think that the conversation we're having right
now, the timing is, is really interesting because you've
actually seen a lot of capital pull back out out of private
markets. And when we talk to sponsors
across different asset classes, they're seeing opportunities now
that that they haven't really seen since the GFC days, right?
No, makes perfect sense. Beautiful shift the conversation
a little bit. Curt, let's talk about some
timeless lessons you've learned along the way that you'd like to
share with the audience, please. Sure.
So I I would say that the first lesson I've learned is you never
stop learning. So I I've, I've done a lot of
formal training whether it's going going the NBA route at the
University of Chicago, which was a wonderful experience or going
through the CFA program which is also a wonderful experience.
But but things one, one of the great things about our industry
is that the opportunity set is always changing.
And because of that the risk set is always changing.
So that that's something that gets me excited and and kind of
charged up to go into work every day and and kind of tackle that.
But you, you never stop learning.
You know you're always the risk sets changing and everything.
How about timeless mistakes? Timeless mistakes.
Oh jeez. So in terms of mistakes, I would
say. Actually, more like no matter
how good your thesis is, no matter how much work you've
done, there's always, there's always some chance that that
things go wrong, right? We we spend and it's really
frustrating. So we spend an inordinate amount
of time trying to go through the thesis, understand it.
Sorry, Kurt. Kurt, it really is frustrating.
I I feel you're 1000% sorry. Go ahead.
So, so I think the humility to know that no matter how much.
Effort you've put in. No matter how much time you've
put in things can still go wrong.
And to make sure that your allocation sizing reflects that
fact. It is kind of the lesson from
mistakes and some of you know, I can think of like my my personal
experience of of really just researching, digging in and then
something comes out of the left field and and you're like, Oh my
gosh, 100 percent, 100%. That is so incredibly powerful.
The humility side of it, understanding you're going to be
wrong, planning for those inevitabilities and then making
sure when you are wrong you're wrong as small as possible.
I think is is really, really just magic.
OK. Next question for you Kurt, What
is the best piece of advice you'd like to share with the
audience or give your 20 year old self?
So my best piece of advice I would share with the audience is
that when you're making an investment and I I would say
this is true whether it's a public investment or private
investment. Make sure you're comfortable
with understanding how it how it works.
I I've seen cases where someone's come to us with
pre-existing pre-existing investment portfolio and you ask
them well how did how did this investment end up in there how
did that one end up in there They're like well my my friend
was doing it or I kind of felt pressure to do it.
I didn't really fully understand it.
And and and that's not, that's not ideal, right?
You you're going to care the most about your own.
Portfolio. You want to have trusted
advisors. You need to understand how your
investments work. And there are enough good
investments out there where you'll be able to do that that
you don't need to stretch out outside of your comfort zone.
Got it? Got it.
That makes perfect sense. Well, beautiful.
Kurt, thank you so much for coming on the show.
What is the best way for people to learn more about Mai Capital
or get in touch with you? Or where would you like people
to go? Yeah.
So our website is www.mai.capital.
No.com we are able to grab a dot dot capital domain and then my
e-mail address, if anyone wants to reach out is KNYE at Mai dot
capital. Beautiful.
Well, Kurt, thank you so much and hopefully we'll have you on
again soon. Awesome.
Thank you, Adam.