Christopher Schelling on Growing Your Wealth with Alternative Investments – EP 63

January 6, 2022

Interview with Christopher Schelling

Christopher Schelling on Growing Your Wealth with Alternative Investments

Here’s something to consider. The wealthiest people in the world don’t waste their time investing in the stock market. The majority of their net worth is allocated to alternative investments—and on today’s episode, you’ll learn why.

I’m speaking with Christopher Schelling, the Director of Private Investments for Caprock. As an institutional investor, Chris has invested roughly $5 billion and met with over 3,000 managers across private equity, private real estate, real assets, private credit, natural resources, hedge funds, liquid alternatives, crypto, and more.

He is currently a contributing columnist for Institutional Investor, has written over 60 articles on investing, and is the author of Better than Alpha: Three Steps to Capturing Excess Returns in a Changing World.

Chris was named one of Money Management Intelligence’s 2012 Rising Stars of Public Funds, a Rising Star of Hedge Funds by Institutional Investor in 2014, received the Institutional Investor Intelligence Award for Absolute Return Strategies in 2016, and was named a Top 30 Private Equity Investor by Trusted Insight in 2018.

He has over 20 years of experience in the investment industry, nearly all focused on alternative investments—which is the main topic of today’s conversation.

In this episode, Chris brings a wealth of knowledge and teaches you all about the benefits of alternative investments. We talk about the problems with institutional investing, the risk and reward of private credit funds, investing in private companies pre-IPO, cryptocurrency, and so much more!

Featured on This Episode: Christopher Schelling

✅ What he does: Christopher Schelling is an author, an educator, and the director of private investments for Caprock. With degrees in psychology, business, and finance, Chris is an expert at incorporating insights from behavioral finance into investment decision making. As an institutional investor, Chris has allocated roughly $5 billion and met with more than 3,500 managers across hedge funds, real assets, private credit, and private equity.

💬 Words of wisdom: In private markets, you manage the downside, and because you don’t have realized risk, you get better returns. So, let’s take, for example, private credit, senior secured lending to middle-market businesses. You generally are higher in the cap stack, right? You have better collateral, you have better cash flow coverage than you do in a similar corporate debt structure that’s publicly traded. And for the privilege of that, you’re getting a higher coupon and you might even get warrants if you’re in the mezzanine. Not only that, but you have covenants that give you tighter protection than the public securities. So, it should be considered lower risk and higher return.

🔎 Where to find Christopher Schelling: LinkedIn | Medium | Institutional Investor | Email

Key Takeaways with Christopher Schelling

What exactly are alternative investments?
The problem with institutional investing—and why the richest people in the world allocate half their net-worth to alternatives.
The highly collateralized nature of private credit funds—and how it enables investors to win whether the deal goes good or bad.
Investing strategies that minimize risk and maximize returns.
Become a better investor by understanding behavioral biases.
One of the biggest benefits to diversification.
Reaping the rewards of investing in private companies pre-IPO.
The asymmetric returns of investing in private equity funds.
Is Cryptocurrency worth investing in—and if so, what % of your net-worth should you allocate?

Christopher Schelling | Why Smart Investors Love Private Credit Funds

Episode Highlights

What are alternative investments?

“[Alternative Investments] are probably best defined by what it’s not, and it’s just simply everything other than traditional stocks and bonds. So, it could include private equity, private real estate, other private real assets, natural resources, private credit, even things like hedge funds, liquid alternatives. Crypto is something too that would also fall under this bucket. So, the cool thing about alternatives is that you’re not really constrained to anything, and you can find interesting and niche pockets of cool returns for our clients, superior returns hopefully for our clients.” – Christopher Schelling

Know what deals to turn down

“Increase the probability that you’re going to find the better deals. If you’re a wealth management firm and you see four or five private credit funds, the chances of you picking a top-quartile private credit fund are pretty low, frankly. But if you see a thousand private credit funds and you pick 10 of them, you have a much higher probability. I mean, it’s just like wild large numbers of actually seeing the better deals. Now, not only do you have a chance of seeing the better deals, but you’ve now formed a process to evaluate the characteristics across a much broader sample set. So, part of diligence is literally just a learning process. I call that smart habits. And as you continue to develop more and more data points, you’re going to make better decisions. You see lots of funds and you go, “Oh, they did it this way and they were really good. They did it this way and they were really good.” And then they don’t do it that way and they’re not so good. So, the things that matter really become apparent by just iteration, iteration, iteration. I looked at 3,500 managers and said no 3,400 times.” – Christopher Schelling

Why smart investors love private credit

You’re preaching to the choir on the arguments for private markets and why I think they have outperformed and will continue to do so. I mean, if you look at private credit, we can look at private credit, private equity, but neither of them have the amount of capital supplied to them that the public markets do. So, you can find things where it is lower risk and higher return. I think that’s actually a key in private markets is you manage the downside, and because you don’t have realized risk, you get better returns. So, let’s take, for example, private credit, like you just said, senior secured lending to middle-market businesses. You generally are higher in the cap stack, right? You have better collateral, you have better cashflow coverage than you do in a similar corporate debt structure that’s publicly traded. And for the privilege of that, you’re getting a higher coupon and you might even get warrants if you’re in the mezzanine. And not only that, but you have covenants that give you tighter protection than the public securities. So, it should be considered lower risk and higher return.

Remove behavioral biases

“And that’s really all that is happening in any marketplace, right? It’s people making buy-and-sell decisions. And the idea of this like homo economicus, where they’re perfectly rational agents that make economically sound decisions. It’s just not true. We make emotive decisions based upon a bunch of heuristics and biases and all these things that are pretty well known. They’re not necessarily completely irrational but it’s not also perfectly rational. So, there’s a lot of research that shows the more you trade, the worse you do. The average trader underperforms the average mutual fund and the average mutual fund underperforms the index. So, it’s like, well, then why does anybody try to really be super active? I think part of the benefit of private equity and a disciplined approach to pacing over vintage cycles is that you completely take that subjectivity out of it. Like, I don’t think timing cycles is even the way to do it. Like, just figure out how much you want to put to work in PE, divide that by four years or three years, and then just go put it to work in a disciplined kind of approach. And then you have the option to continue to redeploy. In public markets, it’s very, very difficult to tactically deploy. Now, there are systematic ways that you can manage those decisions again and remove those behavioral biases. And we actually have a strategy that does that as well, because that is the value inherent in it. It’s looking at factors and characteristics and statistics, momentum, and taking the emotion out of it.” – Christopher Shcelling

Invest in a diversified basket of private funds

“You want to go to private markets. The best way to do that is through funds, right? It’s very difficult to leapfrog and go direct and build a network overnight that it’s taking you years of kind of honing and refining. And you’ve got a great network now but nobody who’s moving from 60-40 can expect to go direct to that. Funds allow you to do that. And then there are ways over time to get closer to the assets and co-investing. But what specialists of funds can do for you is they can diversify across the number of companies, too. So, if you don’t have the ability to do $500,000 checks in 10 different companies, you can’t even do it direct. So, some of our clients will maybe make a $500,000 commitment total to private equity. Well, we will give them access to a diversified basket of funds. If you think about the risk, like some of the stats out there on this, the average private equity transaction, 35% probability of returning less than cost. Now, that mixes in venture growth and buyout. You hit the venture starts. They’re a lot more tail risk in them but on average rate. That’s a 35% risk of loss. So, one out of every three deals can go bad. Now, if you do 10 in a fund, what’s the chance of the fund losing principal? Well, it’s about one out of every eight funds lose. So, you get the power of diversification. And now, you build a portfolio of funds, it’s actually less than 99% or higher than 99% probability of a positive return. So, if you find a portfolio of five, six, ten funds, there is very, very little risk to your capital in that strategy.” – Christopher Schelling

Christopher Schelling Tweetables

“It’s not about the deals you say YES to, it’s about all the deals you say NO to.” - Chris Schelling Click To Tweet “For me, it’s not about how big of a return I can get, it’s about protecting myself from losing money.” - Justin Donald Click To Tweet

Resources

Christopher Schelling website
Christopher Schelling on LinkedIn | Medium | Institutional Investor | Email
Better than Alpha: Three Steps to Capturing Excess Returns in a Changing World
Institutional Investor Articles by Christopher Schelling
Tiger 21
Naval Ravikant
Mike Dillard

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Read the Full Transcript with Christopher Schelling

Justin Donald: All right, Chris, I’m so excited to have you on the show. We’ve been waiting a little while to get this done and, man, I’m thrilled about just the resume you have, your expertise, and what you’re going to be able to share with our audience. Thank you for being here.

Chris Schelling: Well, thank you for having me. I’m excited to be here finally. I know we’ve had a couple of little hiccups in coordinating and thanks for being flexible.

Justin Donald: Yeah. This is awesome. And so, you know, it’s really fun. The way that we met is through a mutual friend. And so, I’m part of TIGER 21 as I’ve talked about before and I think it’s just a great investment group. And one of the members in the group, one of the newer members, his name is Russ Norwood, and Russ is a founding partner and CEO of Venturi Private Wealth. And he basically was raving about you and the things that you’re doing, Chris, the expertise you have, what you’re bringing to the firm in partnering up. He had so many positive things to say. He basically gave all these accolades of you, and I was like, “Holy cow, I cannot wait to meet this guy.” And then you came and presented to our Tiger group and just shared some due diligence practices and I was blown away because due diligence can really be boring or just time-consuming. It can be like needy and so ultra-detailed.

Chris Schelling: Check the box.

Justin Donald: Yes. And you made it fun and interesting and took a different spin on it. And to this day, I will say it’s the best one-hour session I have ever heard on due diligence and specifically with alternative investing.

Chris Schelling: Well, that is really high praise and setting the bar really high here again on this podcast, Justin. No pressure.

Justin Donald: No pressure at all. So, you specialize in private investments, in alternative investments. Many people will call it alts.

Chris Schelling: That’s right.

Justin Donald: And so, I’d love for you to kind of give a summary of what that is and when you think of alts, what you would include in that, and then I’d love to dig into your background and how you got where you are.

Chris Schelling: Yeah. I mean, maybe I’ll start with kind of how I met Russ because we’ve actually known each other for about three years at this point. And I met him in my prior role, where I was the Director of Private Equity at Texas Municipal Retirement System, $36 billion or State Pension headquartered here in Austin, Texas. And I was building their private equity portfolio. One of our investments was in a fund that owned wealth management firms like Venturi and I started to get to know the sector a little bit and wanted to kind of interact with some of the people here in town that I thought were doing a good job. So, I reached out to Russ and we connected over coffee and was really impressed like immediately by his grasp, not just of the wealth management sector, but of alternatives and private assets and how to do that the right way. So, we kept in touch. And earlier this year, he reached out and said, “You know, we need some help. We’re now reaching $2 billion in assets. And it was a perfect fit for what I could do.” So, I was super excited to get the opportunity to join as the Director of Alternatives. So, what does that really mean? What does that really mean? That’s everything that’s not stocks and bonds, really. So, we can dive into tons of different stuff.

Justin Donald: Chris, let me pause you.

Chris Schelling: Yeah.

Justin Donald: What ended up happening is my phone went off. I didn’t put it on silent. So, I want to have you redo that. Let me just clap from my podcast to get this, and then we’ll just have you start again how you met Russ. So, I apologize for that. It may be fine and we may keep it, and then we’ll just segue into alternatives.

Chris Schelling: Sure. So, tell me where you want me to start with.

Justin Donald: So, we’ll just have you start with how you met Russ I think is where we last…

Chris Schelling: Got it. So, actually, how I met Russ is an interesting story. We’ve known each other for about three years. I was the Director of Private Equity at Texas Municipal, which is a $35 billion pension system headquartered here in Austin, Texas. One of our investments was in a private equity fund that owned equity in wealth management firms like Venturi. And I started to get to know the sector and some of the demographic changes that were occurring and the opportunities there and I wanted to reach out to some of the people in town. Got coffee with Russ and was really blown away by what he was building and his grasp, not just of wealth management as a business, but really his knowledge of alternatives and private assets and their thought process around really doing that in a differentiated way. So, it really excited me. You know, fast forward to earlier this year, we reconnected. The firm has continued to grow and Russ said, “We’re almost 2 billion. We need somebody full-time,” and I was really excited to join. So, now I’ve been here 10 months and we’re making a lot of progress and building out Alts.

Justin Donald: And when you think of alternative investments, and by the way, that’s incredible, I love what you’ve done and it’s cool because you previously managed over $2 billion of assets while you were at Texas Municipal, as I understand it. So, now you’re moving over to what I would call a much better gig, a much better opportunity on the private side here and you’re able to manage a huge book the same size, if not bigger, but with the opportunity to really scale. And so, I think that’s cool. I’d love to know how you specifically define Alts and alternative investing.

Chris Schelling: Yeah. I mean, it’s probably best defined by what it’s not, and it’s just simply everything other than traditional stocks and bonds. So, it could include private equity, private real estate, other private real assets, natural resources, private credit, even things like hedge funds, liquid alternatives. Crypto is something too that would also fall under this bucket. So, the cool thing about alternatives is that you’re not really constrained to anything, and you can find interesting and niche pockets of cool returns for our clients, superior returns hopefully for our clients. I actually think the transition from public pensions to wealth management on the Alt side is pretty seamless. Prior to TMRS, I was actually at Kentucky Retirement Systems, another big state plan. I ran a hedge fund portfolio there. That was a billion-and-a-half. I ran a real assets book that was a billion-and-a-half and then at TMRS, our team committed about $2.8 billion to private equity. And mixed in between all of that is private credit so I’ve really kind of sat across some of the main verticals and thinking about where we should allocate client assets. It’s exciting to be out of an institutional framework, and we don’t need to fill pie slices because our clients don’t care do I have 15 pie slices that are all different colored and it looks really pretty in my asset allocation. They want capital appreciation, right, long-term growth. They want income. They want inflation hedging. They want diversification. We can just go get that now and we’re not really constrained, but we’ve got some of the institutional knowledge from that background and it’s much easier to scale down market, in my opinion. So, we’re able to be nimble, access opportunities that maybe we couldn’t have done when we had to invest $100 million. I have a friend who did the exact same transition. He came from Wall Street to a firm in Atlanta. This is how he puts it, Justin, “On Wall Street, there’s a thousand of me that could cut a $100 million check. In Atlanta, there’s five of me that can cut a $5 million check with that same experience.” And I’m like, “That’s the thesis.”

Justin Donald: Yeah. And that right there is what makes you stand apart. And I think it’s just great having the institutional knowledge. I mean, you’ve run with the big boys, you’ve transacted on a large scale, not just a huge volume of money, not just billions of dollars, but single transactions that are nine figures, 10 figures. And so, I think it’s really great to have that background, that perspective and then come over here on the private side and to be able to offer that and to be able to say, “Hey, what is best? It’s not this old, antiquated, archaic system of the way that we used to do it, traditional stock market investing and 60-40 portfolio and this percentage of whatever asset class.” You know, there’s value in some of that. I don’t mean to belittle it all but the way that people invest today like we have, the times have changed. And for people that are just in the public markets, just in the stock market are just missing a huge opportunity. I mean, I personally believe every person should have at least a portion of their portfolio in Alts, at least a portion, if not a large percentage. And what you’ll find is that the majority of the wealthiest people, at least in the U.S., probably in the world, at least in the U.S., have over half of their net worth in real estate and private equity.

Chris Schelling: That’s exactly right.

Justin Donald: Yeah. I’m curious to get your thoughts on that.

Chris Schelling: No. I mean, I think that’s the big transition that’s coming. If you think about institutional investing, whether it’s pensions or endowments and foundations, I mean, they are incredibly sophisticated people like having spent a decade in that space. It’s not perhaps the same as it was in the 80s or maybe even earlier where people kind of viewed it as being sleepy and not super sophisticated. It’s very sophisticated, but they all allocated to Alts at this point. Pensions, on average, have 35% of their portfolio, and endowments are closer to that 50% mark that you just referenced. Well, it’s trillions and trillions of dollars. They’ve made that shift, though, from the traditional 60-40. And so, there’s topping up incrementally. But in the individual space where there’s $30 trillion worth of assets, which, oh, by the way, it’s growing at twice the rate of the institutional assets are, so it’s bigger growing twice the rate, it’s not yet really penetrated. The ultra-high net worth people, many of whom who sit on the board of those endowments, they look like those endowments. If you look at the big institutional family offices where there are billion, $2 billion, they have teams of people that look very similar. They’re probably a little closer to the assets, but they’re doing the same things, really. And they’re 50%, 60% alternatives. When you transition to more of the high net worth market segment, 10 to 25 is pretty common. And then there’s mass affluent who could still do some things, they have virtually nothing. So, the SEC has got a big push now to kind of make it more accessible, which is a good thing, but I think it really needs to be done the right way, and that’s exactly my point earlier. Having that background of having done it, viewed thousands of products, allocated billions of dollars. One of the takeaways that’s never really talked about is just how you become inured to the dollar numbers. I mean, you don’t want somebody managing millions for you that’s wowed by millions. You know, like I have wired $299 million and one wire transaction like, yeah, you’re nervous when you do that the first time but when you just start working with money at scale, professionally as a fiduciary, it’s just a job. You become a professional at it. And I think that that is something that’s important, too.

Justin Donald: Yeah. There’s no doubt about that. And I just love your perspective here, and I love this whole idea where I think most of the world thinks that wealthy people have all their money in the stock market. And you’ve got the people that are board members of these endowments, people that have a family office and they’re following this strategy that the endowments are following, that the family offices are following. They’re not doing what Wall Street does. They’re not investing a 60:40 split or however you want to allocate it or part of it on fixed income, however you slice it up. Most of these individuals are investing in private equity, they’re investing in real estate, and there’s a lot. And the reason for is because there’s less fluctuation. There’s a lot more control. There’s less risk if done correctly, if you do proper due diligence and there’s a lot more upside because you’re not retail. You’re wholesale. So, you’re cutting out the middleman here, which I talk a lot about in my book is really cut out the fat. And this is one great way of cutting out the fat. And part of the reason I’m so excited to spend some time with here today is because we’re kind of forecasting or foreshadowing what is to come because you’re speaking to our mastermind here in a couple of weeks. You know, all the lifestyle investor members about due diligence and about how to make sure that you are investing in a way that is protected and can outperform the stock market. And I remember hearing you say something at one point which really resonated because it’s something that I feel that I’ve done, and it’s this. It’s not about the deals that you say yes to. It’s about all the deals that you say no to because you’re going to say no to a whole lot more deals than you say yes to. And I’d love to hear your thoughts on that.

Chris Schelling: Yeah. I think that’s a huge part of it. When you have to build an institutional funnel to do a billion dollars a year or $500 million a year, and you have a relatively lean staff, you’ve got to create this assembly line and lots of inputs into it, right? Increase the probability that you’re going to find the better deals. If you’re a wealth management firm and you see four or five private credit funds, the chances of you picking a top-quartile private credit fund are pretty low, frankly. But if you see a thousand private credit funds and you pick 10 of them, you have a much higher probability. I mean, it’s just like wild large numbers of actually seeing the better deals. Now, not only do you have a chance of seeing the better deals, but you’ve now formed a process to evaluate the characteristics across a much broader sample set. So, part of diligence is literally just a learning process. I call that smart habits. And as you continue to develop more and more data points, you’re going to make better decisions. You see lots of funds and you go, “Oh, they did it this way and they were really good. They did it this way and they were really good.” And then they don’t do it that way and they’re not so good. So, the things that matter really become apparent by just iteration, iteration, iteration. The numbers I say is looked at 3,500 managers and said no 3,400 times.

Justin Donald: That’s powerful. Yeah. That really resonates. And for those that are unaware of what a private credit fund is, it’s basically a debt fund. But what is nice about it is you’re often in a lot of the deals that we like to do in our group. You’re in a senior secured position. It’s highly collateralized and you don’t really get this exposure the same way or at least anywhere close to the same returns on the public side. So, you do this on the private side, you highly collateralized so that if a worst-case scenario happens, you end up better than if everything just went to play, according to the terms. And so, a lot of sophisticated investors really love private credit funds. And so, I would imagine, Chris, this is probably why you have invested in a lot of these. You have clients do this, you’ve done it yourself because of the risk-return. There’s not a whole lot of risk and there’s a whole lot of ability to get consistent returns even on the mezzanine debt or a junior debt position where you can get a higher return but you’re still pretty protected, just not as protected as senior debt. But I’d love to hear you talk about some of that.

Chris Schelling: Yeah. I mean, I think you hit the nail right on the head. I mean, you’re preaching to the choir on the arguments for private markets and why I think they have outperformed and will continue to do so. I mean, if you look at private credit, we can look at private credit, private equity, but neither of them have the amount of capital supplied to them that the public markets do. So, you can find things where it is lower risk and higher return. I think that’s actually a key in private markets is you manage the downside, and because you don’t have realized risk, you get better returns. So, let’s take, for example, private credit, like you just said, senior secured lending to middle-market businesses. You generally are higher in the cap stock, right? You have better collateral, you have better cashflow coverage than you do in a similar corporate debt structure that’s publicly traded. And for the privilege of that, you’re getting a higher coupon and you might even get warrants if you’re in the mezzanine. So, you have what looks like. And not only that, but you have covenants that give you tighter protection than the public securities. So, it should be considered in a lot of ways, right? It should be considered lower risk and higher return. Now that’s because there’s just not as much capital going after that. And when you have a capital vacuum, you have better risk-return trade-off. Just think a couple of interesting statistics. If you look I think 2005, broadly syndicated bank debt, so this is quasi-public private but it’s loans that look very similar to the truly private. These are things that the big banks originate and then sell. Mutual funds often hold them. They’re kind of considered public debt. There were lots of transactions, okay, that were below $300 million. 40% of the market traded below $300 million syndicates. Today, 8%, only 8% so that means the banks have moved way upmarket. It’s just as profitable to do a billion-dollar syndication as it at $100 million. You’re just not going to do $100 million. They’ve left this area for private credit funds to come in, and if you find pockets like that, you can get similar superior risk-adjusted returns.

Justin Donald: Yeah. I just love that. I love the opportunity there. I feel like this is a world that most people don’t even know exists, like it doesn’t even cross their mind that they can have greater protection, greater risk protection, and a greater return. I mean, you’re literally winning on both ends of the spectrum and that’s powerful. And by the way, we could talk about the same thing and private equity and not even be in a debt position but figuring out mechanics and terms where you can structure a deal and you still have these protections in place. And it’s very common. You mentioned it before, like on the mass side. And by the way, you don’t even have to be mass side to get warrants and equity kickers. It’s more common but you don’t have to. You can negotiate anything. That’s the beauty of the private side. You’re negotiating one-on-one with the person or the group that wants your money. And so, you can structure it however you want. And we do this all the time in our group in the Lifestyle Investor Mastermind and my private clients do it and I’ve been doing this for years. And I know you see it like you’ve been doing this for years.

Chris Schelling: Yeah. I think it’s still a nascent asset class. There are pockets of private credit that have probably gotten a little bit more overheated but there is nowhere near as much capital in there as there is private equity. I mean, private equity is raising 800 billion a year. Private credit is probably a trillion dollars total. So, there’s a long runway here. And the other thing is institutions, they have allocations but very few people have dedicated asset classes called private credit. There are consultants out there with a few exceptions that cover it like they cover hedge funds, like they cover private equity. So, that’ll happen. More capital come in and the returns will be compressed. But right now, in lower middle market, growth equity businesses or software businesses, SAS businesses, you can be in a senior position. You can get equity kickers or penny warrants in the business, and you can have a 15% coupon. Now, why would a business do that? Well, because maybe they’re growing 50% year-over-year and the owners or sponsors do not want to dilute themselves down with 50%, 60%, 70% equity cost of capital. And they just need some quick capital to expand production or build a sales team or whatever. So, a lot of these growth businesses are willing to do that. That’s a great do, right? Senior secured, maybe very low LTV and you get equity upside with it, why wouldn’t you do that?

Justin Donald: Yeah. And this is the world that most people don’t know exists, and it’s just so powerful when you learn it, when you can get involved in it, when you can find a group, a community that teaches this. And this is why I take so much pride and feel so good about the education that we’re able to provide because there’s really no one else teaching this at the level that most people are at, you know, at a non-institutional level with just an individual investor and so I think that’s powerful. And I love just there are so many things you said. I mean, I literally just did a deal with penny warrants and I love structuring deals that are ultra-protected because again, for me, it’s not about how big can I get a return. It’s about how can I protect myself from losing money, right? I don’t have to get the biggest return. If I’m not losing money, then I’m going to win by default. Right? So, it’s not about let me structure this and get the highest return possible. I would like to get a good return, but as long as I don’t lose money, I’m going to keep getting it back to be able to redeploy and over the life of investing, that is a powerful thing. In fact, it’s kind of the equivalent of dollar-cost averaging in the stock market. You know, you talk about in the stock market, every month or every week you’re putting in X amount of dollars and then over a period of time you’re coming in at a low price, a medium price, a high price. And so, you’re kind of averaging it out for a more risk adjusted return. You know, and a lot of people…

Chris Schelling: That’s exactly right.

Justin Donald: Yeah. A lot of people say that’s the way to go. In fact, I think some of the newer studies are maybe showing that that may not be necessarily the way to go, but there’s data on both sides. So, it’s a popular way, a popular school of education. You can do that in private equity by investing in a company and scheduling your returns to come back in a certain way where you’re refunded after a period of time and you recycle those dollars into another investment. And it doesn’t mean that you have to exit the whole investment. You can just structure it so your initial capital in gets returned and then you’re reinvesting in another asset, maybe another asset class, a totally different sector. And I’d love to hear your thoughts because I know that you’ve got to think this way in your portfolios in the way that you manage.

Chris Schelling: Yeah. No. It’s a big issue and there are people out there that are critical of that fact of private equity, that capital keeps coming back. And so, the capital isn’t at work all the time, which means that returns might not be as high as they would if you could just put your capital and leave it there to compound. But that’s just it’s the same thing as a laddered bond portfolio, right? There’s maturities. You have to recycle it. There is reinvestment risk. So, we’re educating our clients about this idea of kind of pacing, putting your capital to work, figuring out when it comes back, putting more capital to work. And it’s like a capital budgeting, a cash flow budgeting. One thing, one benefit that does provide you, and you can kind of think of it as like dollar cost averaging but it allows you to average into the economy across an economic cycle. Think of private equity has the same fundamental risks as public equity. You’re owning corporations and they have economic cycle risk. Now, they don’t price down the same way but they still have the same impacts on revenue and bottom line. So, the worst performing private equity vintages of all time were 1999 and 2007, which means if you put all your money to work in those one year, you had a big drawdown and it took you time to earn your way out of it. But if you had just paste in or just staged in two three years behind that, you would have had the best vintages of all time. So, we don’t think we can be perfect macroeconomic forecasters by any means. And there is areas of the market today that are quite expensive where there’s quite a bit of leverage at play. And so, I don’t think it’s imprudent at all to consider a pacing model. In fact, it’s the way most institutions do it. How much do you want to deploy this year, next year, next year? You kind of have a four or five-year plan and you put your money to work. Now, I think if it is a treadmill, right, you just have to constantly have money going out and coming back if you’re managing it at scale. So, that’s the way and you mentioned you can reinvest in other asset classes. There is a real option to getting your capital back out quickly. It’s not a negative thing, right? You’re de-risking your capital. It’s actually a good thing. And as soon as you kind of realize that, then you start to view that reinvestment as not a risk. It’s the option.

Justin Donald: Yeah. And so, I look at that, you know, it’s funny because at an institutional level that is probably negative because your money is not working for you. At my level, at an investor level, that’s a brilliant thing to do because you’re de-risking the deal. You’re getting all your money out of the deal but it’s still working for you and then you’re redeploying. In my book, I call it, basically, it’s the way that you’re getting money to travel and compound, right? It’s just so powerful when you can get the same dollars to work in multiple deals at the same time and you compound your returns. It’s a powerful thing.

Chris Schelling: It’s very powerful.

Justin Donald: Yeah. And let’s talk about this from the standpoint of basically what happens with behavioral finance because I think what kicks into play here is, you know, we’ve talked about private equities and really just there are a lot more fixed right there. From the standpoint of you’re not going to see the fluctuations like you do in public markets, right? It’s not fickle like someone decides to tweet something and then all of a sudden the company’s worth a quarter less than what it was a little bit ago or a quarter or half. It’s crazy to me like how much that fluctuates. But because of that, what ends up happening, people have a lot of exposure in public markets that don’t have the discipline to just be in it for the long haul, which most people don’t. It’s very hard emotionally to not make moves and make decisions with a market crash, a market peak, whatever happens. And so, what ends up taking place is you have people that are making decisions to sell when they should hold and when they should actually buy and then to buy when they should be selling.

Chris Schelling: That’s right. That’s exactly what happens. So, it’s interesting. My undergrad was in and actually I knew of a guy too, so I just noticed that you’re an alumni. So, my undergrad was like psychology and I wanted nothing to do with finance or economics. My dad was an accountant. I’m like that is so boring. It wasn’t until I got my MBA, where my professor was a former banker but also a Ph.D. in economics and an MBA, just brilliant guy, and he made it so real about how it’s people. And that’s really all that is happening in any marketplace, right? It’s people making buy-and-sell decisions. And the idea of this like homo economicus, where they’re perfectly rational agents that make economically sound decisions. It’s just not true. We make emotive decisions based upon a bunch of heuristics and biases and all these things that are pretty well known. They’re not necessarily completely irrational but it’s not also perfectly rational. So, there’s a lot of research that shows the more you trade, the worse you do. The average trader underperforms the average mutual fund and the average mutual fund underperforms the index. So, it’s like, well, then why does anybody try to really be super active? I think part of the benefit of private equity and a disciplined approach to pacing over vintage cycles is that you completely take that subjectivity out of it. Like, I don’t think timing cycles is even the way to do it. Like, just figure out how much you want to put to work in PE, divide that by four years or three years, and then just go put it to work in a disciplined kind of approach. And then you have the option to continue to redeploy. In public markets, it’s very, very difficult to tactically deploy. Now, there are systematic ways that you can manage those decisions again and remove those behavioral biases. And we actually have a strategy that does that as well, because that is the value inherent in it. It’s looking at factors and characteristics and statistics, momentum, and taking the emotion out of it.

Justin Donald: Yeah. And it’s interesting because earlier I talked about the velocity of money. I talk about this a lot in my book and the value of taking the same dollars, investing it multiple times, really enhancing your returns, but protecting it, reducing the risk because you’re taking money off the table every time and you’re playing with house money. And so, let’s flip-flop that because the other alternative is what most people do and they are getting in at the wrong time in the stock market. They’re getting out. They’re letting emotions take over, even though they probably think that they’re not. Or maybe they recognize it but the fear is just too great and the market’s collapsing and so they’re selling when they shouldn’t sell. But the opposite is happening right now, and this is fascinating because sometimes people say to me, “Yeah, Justin, but my stock portfolio has doubled.” Right? And it’s funny. To me, I think there is a time and a place for the stock market. I’m not negative stock market. I’m just don’t put all your eggs in one basket type of a person, and most people put all their eggs into that basket and via qualified funds and qualified plans, rather. And so, the whole reason that the stock market is pumping is because the Fed is printing money. That’s why. And at some point, that’s not going to happen. Yeah. Maybe the short-term reality is that people’s portfolios are going to the moon but it’s taking away from longer-term what could be happening, right? You’re trading today for tomorrow and it looks really good right now, but it’s not going to serve you long run, right?

Chris Schelling: That’s right.

Justin Donald: I’d love to get your thoughts are on that.

Chris Schelling: So, I kind of think we have so overreaction and under reaction. Those are very well-known behavioral phenomena. That’s what happens. That’s how you get booms and busts. I think we have seen a ton of interest from retail investors moving into the stock market that have not has had as large allocation in stocks that they’ve had for a long time. I think the number is a trillion dollars of new flows into equity mutual funds for 2021, which is more than like the last 10 years combined. That obviously can’t persist forever. Now, it doesn’t mean it’s going to roll over and people are all going to pull their money out but if that’s what’s been driving the gains, what you may have seen is we pulled forward returns. So, you get 30% one year, right? And then you don’t get much for a few years. A lot of like market technicians or traders will say the market can be correct in level or in time. So, we might not see a correction in level but it just might not do anything for quite a while. Now, again, that’s almost impossible to time. Nobody individually can do it, and even the best systems can’t do it perfectly, right? So, they will adapt and adjust but they won’t pick peaks and they won’t pick bottoms. We do recommend like a long-term strategic allocation, and personally, I have a big chunk of my 401(k) assets in equities because over the long run, we expect them to outperform. But we have a tactical component that draws down when it should. And then we do think private markets are where you can get more consistent, repeatable, reliable drivers of returns, and importantly, they don’t move the same. Now, part of that is just that they’re appraisal-based assets but there’s a behavioral component to looking at your portfolio and being comfortable that while these things are at least holding up and that can help you avoid making decisions elsewhere in the portfolio. So, that’s one of the benefits of diversification. Have some private credit, some real estate, some private equity, and then some public markets, and the whole thing shouldn’t zig and zag at the same time.

Justin Donald: Totally. And I know you’re a big fan of health care and technology, which I am too. I think those need to be a component of everyone’s portfolio because we’re only going to need more health care. It’s only going to become more prevalent and same with technology. You could try and stop it, and it’s just going to continue to evolve. So, you get into the right projects and it can be just incredible.

Chris Schelling: Yeah. We have an overweight at TMRS of about 40% in software specifically, and that was fairly large, but it’s worked out very well. And I think here’s the reality. Software, right? The software is eating the world. That’s been kind of the story for a long time. Well, it is true. The risk is not software as a sector, right? What happens if the software market corrects? “Oh, we’re going to see a drawdown in software.” That doesn’t happen. What happens is the end markets get hit. So, you have diversification in your software portfolio and you’ve got energy and markets as client, financial services end markets client, consumer business services. You’re basically the economy again. You’re just an application layer on top of that. So, we believe the same thing like we have an overweight to software now. It’s not cheap. And so, you do have to be aware of that. But end market diversification held up really well over the last year-and-a-half through the COVID cycle. I think that’s the key to have in your portfolio today.

Justin Donald: Yeah. And by the way, the great thing to do is to figure out how do you get into this early enough where it can really pay off? And so, it’s not that I don’t like the public markets. We have two investments and a third one coming soon that IPO’d. We got in on the private side. They went public. And as a mastermind, we are reaping the rewards of them going public. I mean, that’s a powerful thing. It’s an exciting thing. Everyone makes a lot of money when that happens. So, I like the fact that they can truly get to creating their greatest efficiencies by going public. It’s a small percentage of companies that actually do that. So, you have way more private companies than you have public companies. And if you pick the right ones and you do it in a risk-adjusted way. You do it once. You’re not throwing it at chance. You’re not just guessing a number on the roulette wheel. You’re saying, “Hey, this company actually is beyond proof of concept because it works. They have customers. They make money. They’re profitable. Let’s invest now.” And so, it’s finding a time where the idea works. The product, the service, whatever it is, it works. And then you know that they’re looking to raise money, institutional money. They’re looking to, in time, go public and this is where it can be really beautiful because once you’re in the public markets, a lot of the value is gone. You know, there are so many more companies that are private with so much more opportunity to expand. And so, I feel like they’re buying a better deal.

Chris Schelling: That’s the dirty secret. Yeah.

Justin Donald: It’s better value investing.

Chris Schelling: That’s the dirty secret. That’s what a lot of retail investors don’t realize. That’s what people just don’t want to openly talk about is the IPOs today are the exits. It’s not growth capital for everyone to participate in a business. I mean, it still probably have some growth and those businesses might have a lot more growth in some of the mega-caps. But looking at what the mega-caps have done in growth tech, maybe they don’t. The reality is, is that most private investors in software, they want to have an exit to another fund. They want to have an exit to a strategic or they’re going to have an IPO. And at that point, they’re telling you in that sort of S-curve life cycle that the easy money has been made. Now, 20 years ago, that maybe wasn’t the case. IPOs were a lot smaller. The same thing is happening everywhere, right? IPOs were a lot smaller, you had a lot more of them, and there was a lot more growth post-IPO. Today, you have like a third of the number of IPO. This year has been an anomaly but on average, the last decade you’ve had like a third the same number of IPOs as you did in the 90s. And the average IPO is like five times the size as it was. And it’s 12 years old instead of four years old and it’s raised a lot more money in the private markets. And so, I mean, people like you, you use that as the opportunity to take your chips off the table, realize a life-changing gain and you’re out of the business. I think if retail realized that’s really what’s happening, they would not have as much appetite for IPO. I think it’s also kind of what’s going on with SPACs as retail think SPACs are public-private equity, right? I can go get the same things. And it’s not. It’s kind of the exit.

Justin Donald: It is because you’re beyond the stages where they raised all the money to get there. So, a SPAC is a faster way to go public. You know, could it be a greater return? It’s often less costly, certainly less time to go public. The timeframe that it takes to go to IPO is dramatically longer than to do a SPAC. But you are raising so much money to get to the SPAC stage that even when you get in and you’re investing there, you’re at retail levels. And by the way, you can still make money. It can still pump things. So, I’m not saying you can’t but you can lose money. The difference is when you figure out where a company is and how they’re growing and who are the firms that are interested in investing more. Who’s already invested? Are these big names? What type of due diligence have they done? Are they doing more than you could ever do anyway? And you’re just following along? And most people just don’t have access to it, and that’s the beauty of relationships. And working in this category that I work and where I meet people and I invest is I get the follow on and I have people that come to me and say, “Hey, we want to give you first dibs,” or, “We got this allocation before I take it to anyone else, you and your mastermind want it.” And so, that right there is the beauty of the private side.

Chris Schelling: Yeah. It’s just less competitive now. Everything is still more competitive than it was 20 years. That’s the inevitability of capital markets but it’s not as competitive. And the sweet spot for me is those founder-led enterprises. They’ve had family and friends around. They maybe have one tiny little institutional round but they have not yet really raised institutional capital, but they’re probably already close to EBITDA positive, maybe EBITDA positive. They’ve got substantial top line. And guess what? The unit economics are proven. There’s no technology risk. There’s no end market risk. The unit economics are proven. And if you can look at those and go, “Okay. Where’s that tipping point where you scale and those unit economics dropped to the bottom line?” It’s beautiful. It’s not an exaggeration to stay like, I see businesses all the time that are 20%, 30%, 40%, 50% top-line growth. And once they get to EBITDA positive, they’re 20%, 30%, 40% EBITDA margins and they’re 95% free cash flow conversion on those EBITDA margins. Why would you ever sell that business? I mean, those are great businesses and they exist in the private sector.

Justin Donald: That’s right. And so, we talked about like angel investing, investing in seed rounds. That’s super high risk, alright? The odds of that turning out are not good. You’re throwing your money away 99% of the time, even greater than that. Greater than 99% of the time you’re throwing your money away. And so, you get into like a growth stage company that has a proven track record. So, now you’re decreasing your risk but there’s still a lot of risk, right? I mean, you’ve got to know some things. You’ve got to know people that know how to evaluate this. Now, one of the things that you’ve done a great job with is funds. So, instead of just investing in a one-off company, you’ve got a collection of companies. You’ve got a collection of investments. Maybe it’s not specifically a company. Maybe it can be on the credit side but it could be on the equity side. So, let’s just take a fund. You’re de-risking now because now you have a bunch of investments. You can have some go bad and you only need one or two that go well to more than cover an incredible gain and the overall fund. So, why funds? Why do you like funds? Obviously, the risk makes sense, the reward makes sense, but I’d love to hear it from you.

Chris Schelling: Yeah. I think it’s the natural evolution too. You come from all public markets. You want to go to private markets. The best way to do that is through funds, right? It’s very difficult to leapfrog and go direct and build a network overnight that it’s taking you years of kind of honing and refining. And you’ve got a great network now but nobody who’s moving from 60-40 can expect to go direct to that. Funds allow you to do that. And then there are ways over time to get closer to the assets and co-investing. But what specialists of funds can do for you is they can diversify across the number of companies, too. So, if you don’t have the ability to do $500,000 checks in 10 different companies, you can’t even do it direct. So, some of our clients will maybe make a $500,000 commitment total to private equity. Well, we will give them access to a diversified basket of funds. If you think about the risk, like some of the stats out there on this, the average private equity transaction, 35% probability of returning less than cost. Now, that mixes in venture growth and buyout. You hit the venture starts. They’re a lot more tail risk in them but on average rate. That’s a 35% risk of loss. So, one out of every three deals can go bad. Now, if you do 10 in a fund, what’s the chance of the fund losing principal? Well, it’s about one out of every eight funds lose. So, you get the power of diversification. And now, you build a portfolio of funds, it’s actually less than 99% or higher than 99% probability of a positive return. So, if you find a portfolio of five, six, ten funds, there is very, very little risk to your capital in that strategy.

Justin Donald: Yeah. That’s the beauty. So, that right there is your genius shining, Chris, and I love this whole idea of like, “Hey, how do I game the system? Like, how do I increase my odds so that the likelihood of me losing money is slim to none? But I’ve got a great opportunity to make money.” And it’s a lot easier when you can collateralize something. But when you can’t collateralize something and you’re investing in equity and you’re investing through a fund, this is how you do it. You layer the funds on top of each other. So, in the public markets, you’re going to de-risk by investing in an index where you’re getting a collection and you’re going to invest in multiple indexes, but there’s still going to be a tremendous amount of volatility. You invest in the private side, you’re layering funds. These funds are a collection of investments, and this collection of investments can be across various different asset classes in various different industries, and you can really find a way to hedge your investments doing so. And, like you said, a 99% success rate, a little bit higher than 99%, which to me, that sounds really good. Most people look at this as a risky way to invest. This is actually a much less risky way than investing in the stock market especially over the long run.

Chris Schelling: I completely think that that’s the accurate way to look at it. A private equity company is a risky transaction. A fund can be a risky transaction A properly diversified portfolio of funds and then maybe a couple of co-investments, that portfolio doesn’t necessarily mean it’s riskier than public equities. I would say it’s comparable. It’s just less liquid. That’s the real risk. Your money is going to be locked up for 10 years. You made a point that I do want to reiterate because I think it’s super important. You got your software specialist, you got your health care specialists. By investing in a couple of funds, you can take advantage of people that are really specialists in certain sectors. And again, having met 1,500 buyout funds in my career, when you find the few that are like, “Wow. That is a team of incredibly smart people working incredibly hard. They’ve got an unbelievable network. They prosecute deals really fast and aggressively. They can price them smarter because they know the appropriate metrics.” It’s much tougher to analyze a fintech balance, a balance statement than it is maybe a different sector. So, you get those types of specialized skill sets, you’re going to get better outcomes. I mean, having seen them, I don’t want to be the one to compete with them. So, that’s part of it, too, is the manager selection element of trying to actually find the best and building a team of them.

Justin Donald: Yeah. And this goes along the same thought process for me. I know if I am angel investing and I’m investing in a seed round, the beginning stages, a first investment in a company or precede, you know, you’re very early on. It’s super high risk. But the returns are magical, right? So, when it hits, it’s great. But most people don’t hit. They lose. I mean, you even have your best of the best, like a Naval Ravikant who basically says if you have gotten one angel investment, then you’re actually a good angel investor because most people get zero. And if you have two, you’re great. You know, so the odds are just so stacked against you. But why not look at that as a fund? So, a lot of people say, “Hey, you need to have at least 50 to really be at scale to present yourself an opportunity to get a return there that will offset the losses.” But I want to take it to a whole another level because I found a fund that does this and it’s institutional type of play where they invest in 600 to 1,000 seed rounds and you have the opportunity to offset the losses. You can take the losses and then you still get the gains and then there are other tax advantages to this. And that, to me, is like the way of gaming this thing. You can still get the upside but you have a protected way of doing it and that’s just on angel investing. What happens when you do that in growth and what happens when you do that in in private equity that is where it is strong, where it is positive, where it is cash flow. You know, where like an actual PE firm would want to buy a company because the company is just spitting off cash, right? So, it’s no longer risky. So, this is the way to do it.

Chris Schelling: I think some of the most interesting things happening in angel seed and early-stage VC are some of these index type providers, are some of these like data analytics firms that are trying to just build a massive, diversified portfolio and then the power from those platforms, and there’s quite a few that are getting this right is that they sit on top of each other, so they do the angel or the seed. They do the series A, they do the Series B, and they try to have ball control for as long as they possibly can. What they’re building while they do that is an incredible information advantage because they’re actually seeing what business models are working, what are growing, what are not. And by the time they get to the Series A, they’re so far ahead of anybody else that hasn’t looked at that business specifically, that they can just leverage that information asymmetry. So, there’s multiple different and in TMRS we invested in a platform that was similar to that. There’s multiple different ways to cut it. Is it just spray and pray like index? Is it using data analytics? But I think that is the wave, right? That is the wave of the future.

Justin Donald: Yeah. And let’s talk about another wave of the future, cryptocurrencies. This has got to fall under the category of alts, right? And that is when I say alts, we’re not talking about altcoins, necessarily. We’re talking about alternative investing. So, alts, just in the sense where cryptocurrency would fall under alts or alternative investing. I want to know your thoughts on this because, hey, this could be massive. It might be a total flop. I mean, I have my own opinions where I think that most, I mean, probably most of the projects aren’t going to do anything, but you’re going to have some. They have already shown their foundational just genius and brilliance where there’s no doubt they’re going to be around. There’s no doubt that some of these projects where you’re decentralizing, you have blockchain, where basically everything is out in the open, out in the public. You’ve got ledgers that are, first of all, you got code that’s open-source but you’ve got ledgers that everyone can see. It’s not controlled by one company specifically for, you know, in terms of defi. So, I’d love to know your thoughts on this, too.

Chris Schelling: Yeah. No, I think it’s a real change that’s happening. I admit that I don’t understand a lot of it, and I think, frankly, a lot of people don’t. They just don’t admit it. So, then there’s how do you approach it, right? We’ve got kind of our view and that’s evolving for our clients. I’ve personally just dabbled in some coins. I owned four or five of them just kind of follow some of the things that are happening. I think the coins you should, absent a couple of larger ones that are pretty well established at this point, I think you should kind of view them as lottery tickets. They could be zeros or they could be 1,000 X kind of returners. And if you size them like that, it totally makes sense in a portfolio. So, we’re doing some work on like a 0.5% allocation, a 1% allocation, and we have at least an access point for our clients that want to participate. We’re not recommending it to be clear, but we think like if you want to, it makes sense. You’re going to kind of manage it yourself. Here’s a way to do it in a safe way. But we’re continuing to do more research on kind of like the sizing and how they fit in the portfolio. We have like one client who’s made a ton of money in it and has a ton of money in it. It’s like you might want to diversify away from that. On that kind of more picks and shovels, which is where a lot of people have been focusing, I think there’s plenty of people that have made a ton of money and there’s plenty of more money to be made. The adoption curve for this stuff is the one thing I question. As we talked about software eating the world fast as a business model like that has all come to pass really in the last six, seven, eight years. But it was priced-in in 1999. So, in a lot of technology, what I’ve seen is that the most fervent supporters are not wrong. They’re just off on the timing of their adoption curve. You know, self-driving cars, is that going to be here next year? I don’t think so. It’s going to be down the road. So, the whole defi kind of push, there are very big banks that are not going to be changing anytime soon. So, I think it could be more like a 10-year sort of adoption curve. And then you’ve got things that are priced to perform like over the next three years. So, picking and choosing where to put money to work is going to be important if you’re doing it in the private markets. But no, I think it’s real and it’s coming.

Justin Donald: Yeah. I’ve got a friend that has his own family office, single-family office has done very well. I want to be careful not to give identities away or anything but this individual has been able to create just by himself without any other help or funds or anything over a billion dollars in net worth just on his own, let alone the fact that he’s got many other successful family members. So, anyway, this individual who has his own family office hired a crypto expert or a crypto analyst whose sole job for the family office is to invest a portion of their assets into crypto. And I do think that that is a smart play, and it doesn’t have to be a huge percentage. It could just be, you know, I mean, I would say you probably want at least half a percent or 1% of your net worth in it just to see. And again, I’m not advising. I’m not giving any recommendations. But to me, it’s like, why not at least have some exposure? Because if you catch the upside, you’re probably not going to miss that small of amount of money. But if you catch the upside and get in on a good project, it could be life-changing wealth. And so, you might as well take your shot, right?

Chris Schelling: That’s that. I mean, like I said, we’re looking at some of the scenarios. What’s 0.5 do in just the traditional 60-40? What’s 1% do? 2%, 3%? Well, 0.5 doesn’t move the ball at all but it increases the return, kind of same thing with 1%, maybe a little bit more fall. But to your point, you don’t feel it at 1% if it craters. 2% and 3% of your portfolio is where the volatility in crypto actually starts to overwhelm your asset allocation. So, for a wealth management approach, right? Not kind of purely speculative component of your portfolio for purely wealth management, very, very small allocation is what I would be thinking about.

Justin Donald: Yeah. You know, it’s interesting. We had Mike Dillard do a special session for our mastermind yesterday, and he just walked through all these different alts and kind of the who’s who, some of their strategies, philosophies, what he’s done to really capitalize, and grow his net worth utilizing cryptocurrency. And then we got into NFTs, and it’s just amazing the strategies he’s been able to put in place that have really performed well over a long period of time. And so, it’s nice seeing that it’s been around long enough that you can have a strategy. It’s not just like, “Hey, let’s hope and pray that it works out.” Well, a lot of these people making money, they have a strategy that works, and they just keep implementing it, and it’s a variation of the stock market. The crypto market is a variation of the stock market. It still trends very similarly to the stock market.

Chris Schelling: But there’s quite a bit of active management now, too, in that space. There’s relative value. There’s absolute return strategies that are far less correlated to bitcoin up and down than what you would experience if you just owned a bunch of crypto securities. So, I think there are interesting things to do there as well, and that becomes more of a kind of an absolute return strategy or kind of a hedge fund, if you will. There’s basis trades, there’s security, financing, and lending-type things that you can do in the space. And so, we continue to do some work on it. And I sort of personally got a little bit of money in it. I think there is a ton more to be done here.

Justin Donald: Yeah. You know, I feel like we’re just scratching the surface on all this stuff that we could talk about, Chris. I mean, I have so many more rabbit holes I want to go down with you and so many more ideas, thoughts, questions. We don’t have the time. But one thing I do want to point out is you have over 60 articles on investing that you’ve written and published. You were an adjunct professor at the University of Kentucky. You taught a course so you got to create, which is Intro to Alternatives. That’s just so cool. And then you wrote a book that is fantastic. I’ve got your book Better than Alpha. And you know, in investing terms, your alpha is what you’re trying to get. The return profile that is over what most people are going to get, maybe over what an index is going to provide you. And so, I’d love to just hear some of your thoughts on this because this is a foreshadowing. Our mastermind is going to get a whole lot more of you here in a couple of weeks, and I’m thrilled about it. We’re going to get into the meat and potatoes of due diligence and I feel like this is such a great warm up session, but I’d love a little bit more insight on that.

Chris Schelling: Well, I’m looking forward to it and I will save the meat and potatoes. I would just give a little bit of a taste right now. So, I taught that class on alternatives. I connected with a few people at University of Kentucky that actually had done a ton of research into hedge funds, very sharp professors and we were just chatting. He said, “You should come teach a class with like a download on alternatives for seniors.” But after that class, which I really enjoyed, I figured I should do something with some of that content and I started writing for Institutional Investor. So, kind of have a monthly or quasi-monthly column there, The Dynamic Allocator. And I saw themes coming through, a lot of stuff on alternative investing, a lot of stuff on building smart investment processes, a lot of stuff on behavioral finance and how to kind of control your emotions to make better decisions. And that was the genesis for Better than Alpha. How did you better and build processes in public markets, hedge funds, and private markets that can help you outperform in the long run?

Justin Donald: Yeah. That’s awesome. I can’t wait to really dig into the details on due diligence. What I’ve seen from you already, it’s so impressive because you’ve built a system, you’ve built a protocol, you’ve built a process and you just follow that process and then you have rules. And I think it’s really important that every investor or every person who invest, you don’t even have to be an investor, especially if you’re an investor. But that you come up with your own investment statement that are your rules for how you invest and why you’re going to invest that way you make decisions the same way, regardless of the stress or tension that may happen in the economic situation or season of that time.

Chris Schelling: That’s exactly right. So, you got policy, you got strategy, and you’ve got tactics. And in order to do that was better, those are the three steps. You have to have smart governance, you have to have smart thinking, and you have to have smart habits.

Justin Donald: Yeah. I mean, there is so much more stuff. We’ll have to get into this later. I mean, I wanted to get into the matrix of investing levers. I wanted to get into the way you use personality profiles to build your team around you. A lot of this will get into the mastermind, and I’m thrilled about it. But where can our audience find out more about you? And by the way, you’re in the throes right now of closing a big fund. I want to give you a chance to share that too.

Chris Schelling: Sure. Yeah. Venturi is closing a fund today for our clients. It’s been a successful close so far. We’re really excited about rolling it out and it’s a private equity strategy that not surprisingly implements a lot of the stuff that we discussed today. So, looking forward to hitting the ground running with that January 1 and we’ll probably have a couple more closes for it down the road, but off to a great start, for sure.

Justin Donald: That’s awesome. Well, I’m just so thrilled for the time that we’ve had. How can people, our audience learn more about you?

Chris Schelling: Sure. So, they can find me on the Dynamic Allocator column for Institutional Investor. Venturi Private Wealth, I had a website where I post some of my thoughts as a blog content and my contact info is available there. It’s VenturiWealthManagement.com and my LinkedIn we can make available. I also have some content that I’d be willing to share too for your clients or for your listeners if they’d like to learn more about the dangerous democratization of alternatives.

Justin Donald: I love it. Thank you so much for your willingness to share, to share your resources, to share your expertise, your passion, just all these cool things that you’ve learned, and the way that you’ve been able to set yourself and your clients up for success. And I’d like to end the show the way I end every show which is asking you a question, what is the one step that you can take today to move towards financial freedom and living a life on your terms that you truly desire, not a life by default, but a life by design? Thanks so much and we’ll catch you next week.

Chris Schelling: Thanks, Justin.

[END]

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