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Matt Brown and Lee Beck in Conversation at Milken Institute

Matt Brown: Hi, my name is Matt Brown. I’m the Founder and CEO of CAIS, and I’m joined by Lee Beck, Managing Partner of Kudu Investments. Lee, thanks so much.
Lee Beck: Thank you.
Matt Brown: Quite an exciting couple days here at Milken.
Lee Beck: Amazing.
Matt Brown: Learning a lot, and getting exposed to a lot. I know when I come here after being so focused in one area of my day to day work, coming here and hearing all the ideas from so many great participants across the world, and their takes from technology to healthcare to education, it just allows me to kind of take a bit of a holiday and think differently. What are some of the early observations that you’ve seen and takeaways from this great conference?
Lee Beck: Well, thanks again for the invite.
Matt Brown: Yeah.
Lee Beck: Great conference. Seeing the global lead is the [inaudible 00:01:06] that is here is an understatement in my view, and feel fortunate to be here with so many of them. But some of the observations I’ve made, you look at Christine [inaudible 00:01:15], to start off the conference yesterday talking about how productivity matters. It’s the key element that she’s trying to measure growth in the global market.But, she’s … there’s this mysterious gap in terms of inflation. She can’t understand why it’s not there. The question of the Philips curve, is it real? Is it gone? That was an interesting sight, but her viewpoint at 40% of the world’s debt, sovereign debt, is in distressed state, but has a majority of the population. But technology’s weaving into all of these aspects of her conversations and some of the others, and the technology keeping inflation down, which was some of the discussion that took place with Christine, allowing interest rates to stay low, allowing costs of capital and price of goods to stay low. It’s benefiting this concept of how do we broaden out participation across the global markets in terms of population and prosperity? The theme of this conference. If we go from Christine [inaudible 00:02:11] to Justin Bateman, one of my favorite actors-
Matt Brown: Yeah, of course.
Lee Beck: Talking about Ozarks. A show that if you haven’t seen on Netflix, you have to.
Matt Brown: I’ve seen all the … I’m current.
Lee Beck: I’m not.
Matt Brown: I wish they’d come out with the next one.
Lee Beck: I’m not. I need to catch up.
Matt Brown: Yeah.
Lee Beck: But I thought it was interesting, his perspective as an actor and a director, and the influence that Netflix is having, again this technology theme. We talked about technology maybe inhibiting inflation from Christine’s perspective, but in Jason talking about how he now can put out a show like Ozarks, and the consumer can consume whenever they like, no pun intended, in whatever medium they have. It has some black spots to it, or some dark spots to it, where he would say, “I don’t know how many people are actually watching the show.” Netflix can’t give him that information, but they can tell him what medium it’s on screen, or what time of the day, at evening, so he can acutely create the best environment for the show to operate in, it’s appealing to the consumer. So the consumer’s getting more demand.
Matt Brown: I think that’s spot on, and I think that that theme of being able to curate your experience, and the fact that technology is allowing you to curate your experience more and more in everything. One of the big takeaways that I’ve seen, or heard in the last couple days, had the pleasure of speaking with some great technologists, Sean Parker, Eric Schmidt, Mike Milken himself, of course. We had a conversation around the role of predictive technology. The ability and the efficiency that predictive technology can actually bring to the community at large. One thing they were very clear on saying is that no matter where we go with artificial intelligence, big data, predictive technology, the human being, the human element, is still going to be critical in the process. The role may change and shift, maybe it’s more about analyzing the data, but always making sure that we’re not thinking about it as automating ourselves out of a role, automating ourselves out of a function.
Lee Beck: What’s interesting, especially in your role, now I’ll contrast it to [inaudible 00:04:19] yesterday spoke a little bit about these investments of the Vision Fund, 100 billion dollar fund, 80 portfolios … companies in the portfolio now, they’ve made investments on. But to your point, they talked about how the middle man is being pushed out, and these cost-efficiencies are great for the businesses, where they’re connecting the consumer directly to the products.
Matt Brown: Right.
Lee Beck: This democratization’s occurring, and they find that’s going to be an advantage for them at an appropriate level, they’re investing in disruptors. Now when I was listening to that, I thought of your firm, you know, democratizing alternative investments, and how you’re bringing the individual to a much needed aspect of the investment portfolio, alternative investments, private equity, [inaudible 00:05:03] and other. You’re democratizing … you’re actually creating shared prosperity, in terms of the business model you’re creating. I think … I’d love for you to elaborate on how that model that you’re building relates to what [inaudible 00:05:15] is trying to do globally in a very different context. But what Netflix is doing, what Christine’s worried about with inflation and the consumer having control, what do you think about that? How’s it feel where you are?
Matt Brown: I appreciate that lead in. You know, when we were … Early on, thinking about what business model we wanted to adopt, and what area we wanted to go, some of the stats that we were looking at for the wealth management industry, this is even before we decided to build an alternatives platform, was that wealth management, which is a 20 plus trillion dollar market in America, meaning money managed by a financial advisor, has an average allocation to alternatives below 10%, closer to 5%.
Lee Beck: From what I understand, you’re actually being kind.
Matt Brown: And I’m being kind. Then when you actually separate out wirehouse wealth management, the top big firms that control half the market, with independent wealth management, which is the boutique business, the thousands of firms, which coincidentally actually manage the same amount of money, but there’s just thousands of them. The number is closer to 1% in the independent channel.
Lee Beck: Why do you think that is? Because that’s a … If you look at any institutional allocators, from an OCIO, to some of the largest pensions and endowments, their average exposure to alternative investments is 15%, 20%, 25%. There’s a number-
Matt Brown: It’s closer to 30% now, 35%-
Lee Beck: So why is it only-
Matt Brown: When you include real estate. You know, there’s a lot of reasons for it, and that’s actually the problem that we want to go out and try and solve. Which is, we identified that there’s an underallocation, we know that the clients, the high net worth individuals who are being advised by those financial advisors, needed access to all those tools to be able to properly have a fair shot at managing their portfolio, just like the big institutions. So why aren’t they utilizing the best tools in the tool box? Why are they not looking at private equity, venture, real estate, credit, and [inaudible 00:07:12] strategies? It really zeroed in on four areas, and we’re solving all four right now in order to get the usage of these types of products higher. The first area, believe it or not, it’s just simple access. If you can believe it, knowing where to go, who to call, and seeing maybe a consolidated menu, or being able to afford to buy into these funds, just the access alone is a huge barrier. So at CAIS what we did, is we built a financial technology platform that allows the financial advisor to log in, and begin to just see funds and opportunities that they can actually evaluate, a centralized location. Just by presenting it in a consolidated way, has moved the needle fairly dramatically. You know, you read about big firms like Blackstone in the Wall Street Journal, and you read about other firms, but the financial advisor’s sitting in Texas, or sitting in the Midwest, or in California, wherever. Who do you really call? And how do you get that access? So, we solved the access part, and technology, of course, playing a big role. But if I really had to zero in on what’s going to move the needle here-
Lee Beck: Yeah, because technology can’t be the only factor. It’s a tool-
Matt Brown: It’s a tool.
Lee Beck: It got you here, but what really would matter?
Matt Brown: But I’ll just talk about the barrier first, and I’ll talk about the solution. If I look at the real barrier of why those allocation rates are so low, right now, financial advisors in the independent wealth channel don’t have the resources for due diligence, or the resources for education. As a fiduciary, if you’re trying to put money to work on behalf of your client, if you’re trying to evaluate investments, and you don’t have the resources to be able to do due diligence on funds, or alternatively, learn about these products or trends, or strategies, it’s very hard to feel comfortable putting money to work. So, with the incorporation of artificial intelligence in our platform and machine learning, we’re actually revolutionizing education in the alternative space. In 2019, we are going to be rolling out the first artificial intelligence learning platform for independent wealth advisors in alternative investments.
Lee Beck: So, you kind of … you’re the Netflix of the alternative investment space. You’re democratizing, giving consumers choice, bringing it at a reasonable cost point, bringing investments that really never were available to them before, right to a simple menu. What about the process … I’ve always heard though that the process, I have it myself to my own relationships, the process of completing the forms, completing the work, all of the work of … all the impediments or hurdles of … this sounds great, it should be an investment I take on, it’s bringing me a level of prosperity, if you will, that I should have included in my portfolio, it’s going to drive results, but it’s cumbersome. How do you solve those problems?
Matt Brown: Yeah. You know, it’s often times the first question people ask. They kind of skip over the-
Lee Beck: It’s a pain point we all remember.
Matt Brown: Do I want the fund? Do I know how to evaluate it? But, we quickly get to, “Well, even after I do all that work, how do I even buy it? And is that process a barrier in and of itself?”
Lee Beck: How do I look at its statements? How do I know what’s going on over time?
Matt Brown: We had to tackle that head on, and in many of the things we did, we pioneered a lot of the plumbing and piping for alternative investments to live seamlessly in an ecosystem. When you go buy a mutual fund, do you worry about how to buy it? Do you worry about the fact that it’s going to show up on your statement?
Lee Beck: No, not at all.
Matt Brown: No, of course not. But believe it or not, 30 years ago, or 40 years ago, you would’ve had to. Mutual funds are actually bought with paper documents in the old days, just like where alternative investments are today. We are streamlining that process, we’ve made the entire end-to-end workflow from filling out the subscription form, to executing the order, to connecting the reporting to your centralized location, seamless and electronic. We’ve effectively digitized the process. Now, that’s great, but then what’s the next level? What’s beyond that? Well, we’re not-
Lee Beck: Give us a little bit more weaving that vision of looking out three to five years, which everyone has been asked here, especially in the role of A CEO. Everyone wants to hear the vision of where this is going. So you’ve done a lot of work here, you’ve democratized, you created that Netflix of alternative investments, in terms of connectivity to clients. What happens from here? That list of vision.
Matt Brown: So, I always start in the same place when I get asked this question, which is, you know, what’s the end game? Or what’s the future vision? I deeply believe that it’s all about the customer or the client. If you focus on the best for the customer, or best for the end client, and allow your business to drive in that direction, you’ll always end up on the right side. So, what is in the best interest of the end investor, or the fiduciary financial advisor that’s tasked with the responsibility to be the guardian of your capital? Is to be able to have tools that are effective to protect your client’s capital in a down market, and prosper in good markets. So, when I look out three, five, 10 years, yes, we will automate all this archaic workflow, for sure. We will bring better due diligence frameworks for safer investing, absolutely. We will have a smarter consumer through artificial intelligence and learning. But, ultimately, what we’ll have is we will have advisors who are using alternative investments for the right reasons to protect and grow client wealth long-term at a much higher percentage rate than 1%.
Lee Beck: If there was one thing from the conference that stuck out in your head, related to all that we’ve been speaking about, democratization, prosperity, the change, in terms of investment considerations for clients, the focus on the end investor, the privileges we have in this technology era of innovation. Any of these stick out in your mind from all the other conversations and speakers you’ve heard? That really made you pause a little bit and think differently.
Matt Brown: Yeah, so, I think that there’s a variety … I mean, I think the answer is just about every single person I’ve heard speak at this conference has given me pause to wonder about the future.
Lee Beck: Yes, my notebook just keeps scribbling and scribbling.
Matt Brown: I just keep having more and more notes, I’m like, “Wow.” It says the best idea, and then it keeps having more added to the list.
Lee Beck: Yeah.
Matt Brown: I think I want to go back to some of the predictive technologies that are being developed right now. We have used technology and artificial intelligence to predict future events. But when you predict future events, what you’re really doing is you are putting plans or have the ability to put plans in place in advance of an event.So you’re, often times, saving yourself a lot of headache, heartache, to be in the middle of a problem, as opposed to preventing it. I’ll give you an example. Wouldn’t we all rather know that we could have cancer, as opposed to finding out we have stage four cancer? Wouldn’t you rather know that a famine in Africa is on the way due to measuring food supply, as opposed to finding yourself in the midst of a famine? Wouldn’t you rather have a early warning on hurricane before the flooding and devastation of New Orleans? So, what’s sticking out here, what [inaudible 00:14:40] of the future of at this conference, the predictive ability, where technology plays a role in that. It’s not only, obviously, great for its own right, but the savings and human savings is enormous. So that has to be probably at the top of the list right now of the most exciting trends that I’ve seen today and yesterday.
Lee Beck: Yeah, well, as I said, this is an exciting place, this is an exciting time. There was a comment made by … actually, I think it was [inaudible 00:15:13], talked about there was never a time he saw greater innovation taking place around the world, shared innovation. Truly unique, your company’s doing the same thing. No, I find this conference talking about the theory of shared prosperity, how can we consider this broadly? If there was one thing you could do to give advice to share prosperity broadly across the corporate America or global landscape, what would it be?
Matt Brown: You know, it’s a big one. I almost put the question back at you, and see if you could help me answer it too, because I have a lot of thoughts on that.
Lee Beck: You know what? I’m challenged by the balance here, because we can talk about this technology, the innovation, shared prosperity, but many of the discussions you’ve heard, also talk about I would say the reduction or the elimination of the middle person. What does that do from a labor market? You know, what do we do from a broad capital [inaudible 00:16:14] structure around the world? How is it going to displace many of these roles that we talk about becoming inefficient, and we can outsource them to technology? I’m challenged with the answer. How do we broader prosperity effectively, efficiently? But also talk about all this innovation and technology’s going to take away many of those roles that people had.
Matt Brown: Right.
Lee Beck: This balance is something I don’t have an answer for.
Matt Brown: Yeah, so the human cost, I think is where you’re going to zero … potentially one area that you’re zeroing in. We think a lot about the human cost of technology innovation, you think about … just take your marketplace platforms that are democratizing anything, right?
Lee Beck: Yes.
Matt Brown: Talk about the fact that, you know, we are transforming how people attend sporting events, for example. You’re no longer going to walk in with a paper ticket, you’re going to walk in with maybe an eye scan, and they’re going to know who you are, and they’re going to know your shirt size, and they’re going to bring you that shirt. You can be able to follow your player on your phone that you’ve already programmed as your favorite player, and watch playback on just that player. So that technology personalization, but at what cost is the big question, and that is the evolving question. I think we are possibly, naively, still kind of hanging on to the fact that there’s not going to be a human cost to this, that we can reposition jobs. But the reality is, if you’re repositioning, that just means you’re temporarily doing something different, and you’re not going to be hiring that set anymore in the future.
Lee Beck: Fair point.
Matt Brown: So that is actually a reduction. But, you know, you look at the history of society, you look at the history of the United States, every single time we are tasked with a next step up, we’ve been better for it.
Lee Beck: I’ll close with this one statement, which I was really surprised, I heard it the other day from the VC panel, that today there’s over 4.5 billion individuals with a smartphone. With $100 by the end of today, we could create our own website. Imagine the world they were living in today where you could reach, theoretically, 4.5 billion people after $100 investment in a website, immediately. Now, whether they search you out, find you, or other, it’s a further discussion. But there’s never been a time to actually democratize or position yourself as a firm there is today. With that said, it’s been really interesting to watch you grow and the business model evolve over time. So, continued luck and success.
Matt Brown: Thanks, Lee, and thanks for the support.
Lee Beck: Absolutely
Matt Brown: Yeah. Enjoyed it.
Lee Beck: Thank you.
Matt Brown: Thank you.