The Emergence of Private Equity, Private Credit & Alternatives with BlackRock’s Jon Diorio – Ep 092

For many investors approaching or navigating retirement, the world of private markets can feel intimidating. Over the past 30 years, the number of public companies in the capital markets has declined by 30% while private markets have grown at the same rate. This means failing to understand the rapidly growing asset class of private markets and alternatives could mean missing opportunities for diversification, income, and potential returns in retirement.

In this episode, we’re welcoming Jon Diorio, Head of Alternatives for BlackRock’s U.S. wealth management business. Jon shares valuable insights into the massive shift in capital markets and explains why private equity, private credit, and other alternative investments are becoming increasingly relevant for everyday investors—not just institutions.

In this conversation, Jon breaks down the trends driving private market growth, the different types of alternative investments investors should have on their radar, how new product structures have improved accessibility, and what today’s retirees should know before considering alternatives and private markets in their portfolios.

In this podcast interview, you’ll learn:

• Why private companies now outnumber public companies and what that means for diversification.
• How private credit has surged as banks retreat from lending.
• The benefits and tradeoffs of new “evergreen” and semi-liquid fund structures.
• Why due diligence, liquidity awareness, and manager selection matter in alternatives.
• How BlackRock’s HDMA framework (Hedge, Diversify, Modify, Amplify) helps identify the right type of alternative investment for your goals.
• What investors should know before adding private equity or private credit to their retirement plan.

Inspiring Quotes

• “The public markets are shrinking and the private markets are growing.” – Jon Diorio

• “If you’re an investor and you’re looking to get opportunities in the entire US market, and you’re only investing in public markets, you’re missing a lot of these companies.” – Jon Diorio

• “Private markets have grown as capital markets have expanded, and I think as those capital markets have expanded, it’s allowed companies to stay private longer.” – Jon Diorio

• “I think it’s really important when anybody is thinking about investing in private markets, making sure that you do your diligence, making sure that you understand your time horizon, that you have a longer time horizon because there is a liquidity risk, and then you’re getting in with the right manager that’s doing the proper due diligence.” – Jon Diorio

Interview Resources

• BlackRock
• BlackRock on LinkedIn | Facebook | Instagram | YouTube | X/Twitter
• Jonathan Diorio on LinkedIn
• Deutsche Bank
• Amazon
• Mars
• Chick-fil-A
• Russell 2000
• Yahoo Finance
• Bloomberg News
• CNBC

[INTERVIEW]

Matthew Peck: Welcome, everyone, to another edition of SHP Financial’s Retirement Roadmap Podcast. I’ll be your host today, Matthew Peck. Today, we’ll be talking about private markets, talking about words that you probably have heard or bumped into, and I’m sure that you probably have questions about words like private equity, private credit, private real estate, infrastructure. And I feel like, in my opinion, that we’re hearing more and more about them, and there’s got to be reasons why. There have to be some reasons as to why the private markets and private equity, and private credit are becoming more and more like buzzwords, almost. And people are bumping into it more and more.

So, we thought, “You know what? Let’s do a podcast on this, right? Let’s make sure that all the listeners at SHP Financial and all of our clients have the right information to understand what are the private markets, this big universe.” And we’ll certainly start at the very basics because we have to find out what the heck we’re talking about in the first place before we can ever make an educated decision about whether or not to invest there. Let’s find out what the landscape is. Today, to help us walk through that landscape is Jon Diorio. He’s Head of the Alternatives from BlackRock’s wealth management business in the United States. And, Jon, thank you so much for your time, and thank you for joining the podcast.

Jon Diorio: Thanks, Matt. Thanks so much for having me.

Matthew Peck: So, Jon, even before I get into the private markets, I love to understand people’s history, like, how did you get into private markets in the first place? How long have you been at BlackRock? I mean, take us through your own journey.

Jon Diorio: Yeah. So, again, thanks for having me. I’ve been in the industry going back to 2002. I started my career at Deutsche Bank, where I spent about a decade, and I’ve been at BlackRock since 2011. And it’s been a really exciting time at BlackRock, really have seen what we call the wealth market, the retail market in the United States, really expand. And so, we’ve seen many clients start using many different investments, and as different investments kind of have come through, one of the things I found a lot of interest in a couple of years ago was alternatives. And what alternatives are is they’re just exactly what they sound like they are. They’re an alternative to traditional markets.

So, a lot of people know BlackRock for our ETFs, where you can buy a stock or a bond and a diversified ETF. And alternatives are things like private equity or hedge funds, or private credit that provide an alternative return stream to clients. And the benefit of that is it can add some diversification to the portfolio, or it may be able to even add better risk-adjusted returns as well. And so, I became very interested in that, Matt, and I have still been very involved in our public markets business, but as you mentioned, have been doing a lot more with private markets over the last couple of years. And now I’m running our private markets to wealth efforts here at BlackRock.

Matthew Peck: So, Jon, so then did you start to see the trends of why? And I’d love to have your opinion as to why we’re hearing about it so much. When you were kind of heading in this direction and really became interested in it, did you know at that time that, “Wow, this is really going to start to explode,” or was it, no, interest drove you there, and then you ended up being the right place, right time?

Jon Diorio: I think it’s been really interesting. I think there were a couple of key trends that I was interested in. It was really all about the clients that hopefully we’re talking about of yours. The first thing that I was really drawn to was I was seeing that markets were changing pretty dramatically. And I think the first reason that you’re hearing more about private markets and alternatives is that opportunity set. So, the economy is growing, and as the economy is growing, clients want access to that entire opportunity set. A lot of that is in public markets, but a lot of it is also in private markets, right? If you think about everything that’s happening in the world, building out of data centers, ports, power grids, that’s all infrastructure. That is something in the private markets.

We’re also seeing companies stay private longer. So, just like companies’ IPO and are publicly available, there are a lot of private companies that are out there as well. So, number one, there’s this broader opportunity set that I think a lot of clients, as they’re trying to meet their financial goals, want access to. I think the second thing that’s really important is, in the past, private markets historically have only been targeted to large institutions or only the wealthiest. And what’s happening now is there’s more ability to get access to this. There’s been a lot of product innovation. That’s what I really kind of get a lot of excitement about is like, how can we innovate better structures, and how can we bring more efficient structures to clients to get access to that?

And so, I would say those two things, the broader opportunity set and the access to more efficient structures, those are two trends that I think have really increased the adoption of private markets and have a lot more people asking about them.

Matthew Peck: Well, let’s certainly take one at a time. Let’s start with the opportunity set, or specifically, the thought and the reasons why. Why are companies staying private longer? Let’s just stay on that for a little bit.

Jon Diorio: Yeah. So, I think there are a couple of reasons. So, number one is, what we’re seeing is that there is now more capital in this private markets ecosystem. So, if a company can fund itself in the private markets, it can stay private for longer. So, the example that we always use on that is, if you go back and you look at somebody like an Amazon, they needed capital, so they went public sooner, because they wanted to grow, right? We all know the story about Amazon, where they invested so much back in the business, and they were trying to grow, grow, grow. Today, the Amazons of the world, they can get a lot of that capital in the private markets, so they’re not forced to go public.

And so, what that is doing is it’s making companies stay private for longer. In fact, it’s actually been pretty interesting. We have some data going back to basically the 1990s, so it’s a decent amount of data. And over that period of time, the number of public companies has actually shrunk. It’s declined by about 30% and the number of private companies has actually increased by about the same, by about 30%. So, you have the public markets are shrinking and the private markets are growing. And so, interestingly, about 80% of the companies, a little bit over 80% actually, with revenues over $100 million. We have to qualify it. So, these are kind of companies that are making a decent amount of money, $100 million of revenues, about 80% of those companies are private right now. Only about 20% are public.

So, if you’re an investor and you’re looking to get opportunity to the entire US market, and you’re only investing in public markets, you’re missing a lot of these companies. And so, I think that’s why you’re seeing a lot of interest in it, not necessarily because it’s done well, we can get into the returns and things like that, but more so it’s around the opportunity set and having access to all of that.

Matthew Peck: And the idea of, like, more capital, do you think that’s because easy lending and interest rates have been lower, that capital has kind of flowed into the private space? Or is it more of I’m curious if that’s like a secular trend and maybe based on just the money supply, or is it more like, no, no, money’s been flowing in because of the other trends? Maybe I’m asking the chicken and the egg type of conversation, but I’m just curious if one drove the other, or if it was no, no, strictly the opportunity sets here, so then the capital flowed in afterwards.

Jon Diorio: I think it’s just more about markets opening up, right? I think our view is the capital markets have expanded, and technology helps with that, right? And so, as you’ve been able to get people more and more connected, I think that the ability for private markets to grow because information can flow a little bit differently. So, private markets have grown as capital markets have expanded, and I think as those capital markets have expanded, it’s allowed companies to stay private longer.

Matthew Peck: Interesting. Okay. And there were two things that I want to share, and 10 people asked me, Jon. They say, okay, about private markets and whatnot. There are two companies I always go to because everyone’s heard of. I say, “Okay, have you ever heard of Mars bars or Mars, right?” And so, they make all the pet food, and they do this, and obviously, they make candy and confectionery. It’s like, yeah, that’s a private company. Or Chick-fil-A, I mean, if you go to Chick-fil-A, you drive right by, that’s a private company. So, I mean, you can sort of look at all of these companies that a lot of us have heard of that are massive companies that are private.

And if you want any access to them whatsoever, yeah, you have to start to look in this new category or discover and really dig deeper to find out availability of there and accessibility. The other one I’m curious about, one you comment on and just the impact of it, was that number of years ago, building portfolios for clients, right, Jon? I’m like, “You know what, I’m going to invest in and I want to make sure that we have a good allocation into small caps.” Because small-cap, these small, capitalized companies, they’re the underdogs, they’re the up-and-comers, they’re the guys that are going to disrupt the industry. Then you dig a little deeper, like I was saying, and you’re like, “Oh, half the companies in the public markets, they don’t make profits.”

Like, they’re actually money losers in these Russell 2000s and some of the other small-cap indexes. And it’s like, “Wait a second, I don’t want to own those. I want to own the companies that are actually profitable, not the companies that are unprofitable.” So, I’m curious about those types of not say trends, but like, how do you respond, or what the impact is there?

Jon Diorio: So, I think when investing in private markets, I think one of the things that can enhance the return is what we kind of call the illiquidity premium, because you don’t have availability to sell these on a daily basis like you do on the stock market. And so, these companies, by taking a long-term approach, they can tend to grow. That said whether a company is public or private, they may be a good company or a bad company, right? And so, I think specifically in private markets, you want to make sure you’re doing a deep amount of diligence, because there is not that ability to sell if you make a mistake in public markets. And this is probably back to your point, Matt, of like, “Why am I hearing about this? And why do sometimes clients not invest in private markets?”

Well, there’s not as much transparency. A lot of times, there’s some opaqueness. And again, we call that the illiquidity premium, you don’t have liquidity, and the complexity premium, right? You have to be able to navigate through these. And that’s one of the reasons, actually, you can get a higher return if you choose the right private companies. And so, I think it’s really important when anybody listening to this is thinking about investing in private markets, making sure that you do your diligence, making sure that you understand your time horizon, that you have a longer time horizon because there is a liquidity risk, and then you’re getting in with the right manager that’s doing the proper due diligence. All of those things are really, really critical in the selection process of investing in the private markets.

Matthew Peck: Well, let’s pick that up a little bit. I mean, you mentioned, so are we looking for track records? When you say about, in the terms that we use, is, obviously, you’re aware of them, Jon, but just for all of our listeners, like manager selection, right? So, you want to find the right manager in that space that understands the landscape and has been there before and has a good track record is kind of like some general principles. Well, what advice do you have to give for folks when it comes to manager selection? Is it the, again, track records? I mean, how does an everyday investor start that process?

Jon Diorio: Yeah, I have two parts to it. I think the first part is folks like yourself. Obviously, we want to come in and we want to work with the clients to make sure they understand exactly what they’re doing in the private market. So, I think the first thing, from a BlackRock standpoint, that’s important to us is education, Matt. So, we want to make sure clients understand what are these vehicles doing if you’re buying an investment in the private markets, that you understand the liquidity of that investment and the underlying investment. So, I think part one is that structure. So, I talked about, in the beginning of this, there’s been a lot of innovation. There’s a lot of different ways to invest in the private markets.

So, I think understanding what kind of investment vehicle that you’re getting into is important. We can talk a little about that because there are different ways to get it. There’s what we kind of call drawdown funds that typically are only available for qualified purchasers, and these are private funds that have capital calls. And some of the newer products that are out there, we kind of call semi-liquid evergreen. So, I think you want to first evaluate, well, what is my profile? And what kind of product do I want to be in? And then I think the second part is what you’re talking about, which is you want to actually investigate how the product is investing. What is the philosophy? What is the process?

Our view is you want to have somebody that has a repeatable, durable process that can deliver investment returns, and obviously do that with what you called manager selection, or due diligence on that. So, I think it’s a two-step approach to understanding the wrapper. We call it a wrapper, but it’s kind of a fund structure, and then understanding the investment process. So, I think we very much would agree with you on that.

Matthew Peck: And then just to kind of pick that up, I mean, but there’s a number of different styles, right? So, if we’re talking about the private markets, there’s private equity, there’s private credit, and then each will have different structures and wrappers. And I’ll definitely want to come back to that, just to kind of give our listeners an idea of just some basic concepts on what these wrappers are and kind of how they work. But there’s also, again, there’s private markets. It’s such a wide and broad term, equity versus credit versus infrastructure versus real estate. I guess, where do you begin to say, all right, how do we start to filter these down? And what are the differences between?

I mean, I know there are differences, obviously, in the actual what it’s invested in, but I guess, what are some of the different goals that these things, that these styles have? And then, kind of, how do you navigate or help navigate people through them?

Jon Diorio: Yeah. So, one of the things that we’ve done in some of our educational materials at BlackRock is we came out with a framework that we call HDMA, those four letters. And what the HDMA stands for is hedge, diversify, modify, and amplify. So, those are kind of four outcomes that a potential investor would want when thinking about the alternative markets. And hedge, that tends to mean that they want something that is completely uncorrelated or maybe even negatively correlated with the equity or credit markets. So, a lot of times, that tends to be a hedge fund or a different type of alternative strategy, that when the market goes up, you’re going to go down. And that might not be a great feeling, but when the market goes down and you go up, that can actually be a positive thing.

And so, that is probably a very small piece of the portfolio, but there are a lot of clients out there that want these hedges, right? Because if you use it in very small pieces, it can provide really good portfolio optimization, right, can make your portfolio better. The second bucket is diversify. This is going to be a much broader bucket for most clients, and this just helps you diversify it. And again, this is what, again, what we call low correlation strategies, that will basically give you the ability to make returns, but not be dependent upon equity or credit markets, right? And so, again, these are different types of alternative or liquid alternative strategies or hedge fund strategies. They might go long and short. And so, they can give you some exposure, and they’re going to hopefully give you a return regardless of that market environment. So, that’s diversify.

The third bucket is modify. You may have seen these. These are products we have like on our ETF lineup, things like buffered ETFs, things like option strategies that can provide higher income to clients. So, these are modifiers. They can take an equity strategy, and they modify the return stream by maybe giving you more income, by writing options, or potentially using options to do things like give you downside protection. Those are buffered ETFs. And then the last piece of it, we call amplify. And are you trying to amplify your return, or are you trying to amplify your yield? So, if you’re trying to amplify your return, that’s where things like private equity may make sense. Or if you’re trying to get a higher income stream, that’s where something like private credit might make sense.

So, depending upon what you’re trying to do in that portfolio, we try to walk through with the client. What are the goals? Some of them might want all four of those things. Some of them might only want to diversify and amplify, which are kind of what I would argue are kind of where private markets and alternative strategies can come most in. Or some of them might just want to modify the return stream because of their current market views. So, there’s a lot of different things to unpack there, and that’s why I think anytime you talk about alternatives and private markets, you really got to go through, I think, what is the outcome that you’re trying to get before you start looking at it.

Because I think a lot of clients sometimes they hear, “Hey, there’s a 10% yield in this product. That’s attractive,” but they’re not really sure what the outcome they want is. So, I think really doing outcome-based and scenario-based planning is really important before you even get into thinking about the underlying investments.

Matthew Peck: Interesting. Yeah, and I’ll kind of come back to that framework, that HDMA framework, a little bit, and then I’ll kind of almost like, not a lightning round, but to say, okay, where would this fall in, or where would that fall in? But it popped into my mind, especially as you talk about like hedges and whatnot, I mean, would you consider commodities like gold and oil and rare earths and all that? Obviously, that’s sort of in the news, too. I mean, would you consider that an alternative or not really? I mean, commodities are just another entity all to itself.

Jon Diorio: People have different nomenclature. I think when we view something like gold, it’s a good way to diversify the portfolio. It’s a real asset. So, some people might think gold has been around for a very, very long period of time. Maybe it’s not an alternative to them. For some clients, it is alternative because it’s not a traditional stock or bond. So, it’s a little bit of the tricky thing, Matt, which is the industry doesn’t have a firm definition for alternatives. So, I think that’s, again, why education is so important, because alternatives mean different things to different people. And so, I think you have to really go over what is the client trying to get, and what is the outcome that you want. And then we can kind of work with you to try to make sure that we try to help best position to deliver on that outcome. Obviously, there’s no outcome that’s certain, but you can try to increase the probability of meeting that outcome.

Matthew Peck: Yeah. No, absolutely. And, yeah, just sort of popped in my mind. I’m like, I wonder if that falls in, but he said different categories, or sometimes people will classify things differently. And that’s the part that really fascinates me about this entire place, whether it’s private markets, alternatives, et cetera, is just all the different formats that it comes in. I mean, I’m going to talk a little bit about the wrapper because I want to make sure we sort of cover that. Then I also want to kind of come back and even just do a little basic on what exactly is private credit, what exactly is private equity, just so people know the exact terms. But back to just a general statement, I mean, it’s fascinating, and all the different alternatives that are there and all the different directions that you can go in.

So, I love the idea of HDMA, which is, okay, what’s the ultimate goal? And then we can start to break down this universe, because it’s like this massive universe that some things might fall into, some things might not fall into, depending on who you’re talking to, and it’s so enormous now. I mean, I love what you were saying, too, at the beginning about how private companies are up or private equity and private companies are up 30% and the public markets down 30%. I mean, that’s huge. I mean, that’s a huge shift that’s happening across the economy and across the space to invest and where to invest. And if our listeners and our people aren’t aware and are not getting on board with that, at least to understand what it is and the impact that it has, then they’re missing out.

I mean, one of the biggest reasons, and Jon, obviously, you’re part of this, it’s like we certainly want to make sure that all of our clients are aware of where the equity markets, or where the capital markets are going, right, not where they were, but where they’re going, so that they don’t miss out on any opportunities, or at least to make a choice as to whether or not they want to be part of it. So, again, just wanted to make that statement as I appreciate that. All right. Let me go back to the different wrappers, because you mentioned things like evergreen and illiquidity. I mean, yeah, how liquid are these depending on the wrapper? So, talk a little bit about that, because I think that also has changed. I imagine people think like, “Oh, if I’m doing private equity, I’m locked up for 7 to 10 years,” that’s sometimes the case, but not always the case.

Jon Diorio: Yeah. So, you started off our conversation around why we are hearing more about this. And so, if we go back a decade or so, what was available to the typical wealth client was, for the most part, what we would call a private drawdown fund. And what a private drawdown fund is, is a typical private equity, or a private credit, or private infrastructure fund. So, we’re not going to talk about specific asset classes yet. We’re just kind of talking about the structure, which you’d be able to access this in. And the reason that it wasn’t as popular with the masses is it wasn’t available to them. And the reason for that is a couple of things. One, it had suitability requirements. So, to get into a private fund, you have to be a qualified purchaser, so you had to have a $5 million net worth. And you could argue there’s a lot of people that might meet that requirement.

The second thing, though, is there was higher minimum. So, even if you did meet that requirement, you might have to put $250,000 in, and so maybe that was too large of an investment for you. The third thing was you had to go ahead and allocate in what we call a drawdown style, meaning that you had to continually put money into that product as it drew capital. And so, for some clients, we call those capital calls. That may have been not the easiest process to go through. And then lastly, these private vehicles they deliver a tax form called the K-1, which is not your normal 1099 that you get on some of the investment products that are typically out there, like ETFs and mutual funds.

More recently, the industry has gone into these, what we’re calling semi-liquid evergreen products. And so, what the semi-liquid evergreen product has done is it’s made these investments more accessible. And what it’s doing is, instead of having to go into a drawdown product, many of these products have the ability to subscribe on a monthly basis. Many of these clients, many of these products have lower suitability, so they might have an accredited investor standard, or even lower. So, an accredited investor standard is $1 million net worth. There’s lower standards. There’s also lower minimums. So, the minimum size that you actually have to invest is typically smaller. It’s not that large amount, and typically their tax reporting is 1099.

So, I think what you’ve seen happen, Matt, is that you can now get access to these private markets, but you can get it into a little bit of an easier-to-use structure, and that structure, from a liquidity standpoint, does have limited liquidity. So, the last part of it was, to your point, when you went into that private fund, you might be locked up for a long period of time. And so, a client might not understand how they might need that capital. So, they were very hesitant to do that. These other products, they should be only used by long-term investors, but they do have limited liquidity. Typically, for many of them, they offer 5% tender offers, so you can get a limited amount out per quarter, 5% per quarter.

So, they’re still only very limited, but they’re not locked up for that 5, 7, 10-year period, as you mentioned. So, there’s been some enhancements to how clients can get access to these products over the years, and I think that’s why a lot of people are hearing more about them.

Matthew Peck: Was that sort of like a capital innovation like ETFs were, where mutual funds were around since 1920s, and then here comes exchange-traded funds, which was, in my opinion, a better way, a better wrapper for a fund and for diversification? And was the creation of the evergreen funds sort of just another byproduct of that type of figuring out a better way of creating access? Or was this something that was created years ago and then someone dusted it off to say, “Hey, wait a second, this structure, this evergreen model, even though it does have liquidity issues, I guess nothing’s perfect, long-term investor, absolutely correct”? But I’m just curious if that’s an innovation, or was that more someone just realized, “Wait a second, this could work”?

Jon Diorio: Yeah, I think it’s probably a little bit of both. I think, on one hand, capital markets have evolved. So, an interesting example that I like to give is some of your clients may own publicly traded bank loans, right? These are ETFs and mutual funds. They now settle daily. Twenty years ago, the bank loan market wasn’t very liquid, and a lot of people actually bought it in an interval structure, right? Semi-liquid, evergreen. Over time, the capital markets have developed, and now many in the industry can provide bank loans in a mutual fund or an ETF wrapper. You can buy that. So, to answer your question, one that wrapper has been around bank loans specifically have evolved, right? And so, I think it just actually shows you how markets can evolve. So, that’s why I like the example.

To your point, though, if you think about it, now you have new illiquid assets that we’re talking about, things like private credit, direct lending assets, or private equity. And so, to your point, the industry is now using that semi-liquid, evergreen wrapper for these assets as well. So, it’s been around, but I think there’s been some pretty interesting innovation around how clients now have access to these structures to better match what they’re looking for.

Matthew Peck: Yeah. No, absolutely. I mean, obviously, even myself learning about it when I first heard this is as far as I’ll go, like the interval funds. I’m like, “Well, what are those?” Right? I mean, even myself, being in the industry for long enough to seeing some of those, whether they were pure innovations or whether they just finally started to make it to the wealth managers like myself, who I’m not dealing with institutions. See, I’m not dealing with endowments or anything like that. We’re talking about sort of individual families and what they’ve been able to save and work for throughout their life. But let me actually, it might be kind of dumb questions, but if you don’t mind, Jon, like just tell us what exactly is private equity, right?

I mean, if a client says, “Okay. Well, I’m into this interval fund,” and I’m going to ask you about private credit too. So, if you want to go private credit first, that’s cool, and then go back into private equity. So, I’m going to ask the same exact question about both. So, if I invest whatever amount of money into a private equity fund, am I owning one company? I mean, am I owning a bunch of companies? I mean, I guess, am I owning a fund of companies? I mean, I guess, like, well, in general, I know they come in many different shapes and sizes and colors, and tastes and all that stuff. But what exactly is private equity, or what should a person expect when it comes to what they’re actually holding in an investment?

Jon Diorio: Yeah, it’s a great question. So, we talked about these companies are staying private longer. So, what these funds are doing is they are typically doing one of two things. They are typically accessing direct investments. So, that could be a direct investment into the company, or what we call a co-investment, right, where you kind of co-invest alongside other investors into that company. So, you would own a stake, a private stake, in that company. So, that’s one example of what might be in these funds. The other thing is to get more diversification. There are funds out there that are already doing this. And so, you might hear the term secondaries.

And what a secondary investment is because private equity is fairly illiquid, when people want to go ahead and actually get liquidity, they might actually offer that liquidity to somebody else. So, you’re actually now creating this ecosystem, right? So, somebody might say, “Do you want a private equity secondaries investment?” And what that is, is one buyer basically providing liquidity just to a seller, and that’s a secondary investment. So, typically, what we see is these funds offer either a co-investment or direct access into the company, or you might be able to buy a secondary portfolio or secondary access to a company itself. And so, those are the two most prominent ways that people are getting access to private equity today.

Matthew Peck: And I’ve heard, too, even before we move on to the private credit piece in just sort of letting people know what that is on a high level, I’ve also heard specifically on the secondaries, and that’s what made me think about it, is that you have a lot of tech companies that are private, that pay their employees in stock, in sort of private company stock of private equity. Because, again, it’s a private equity, it’s a private company, so it’s private stock, or private sort of shares in, again, in this non-publicly traded company. And then some of these private equity firms, and correct me if I’m wrong, will actually provide liquidity to some of the employees that are looking to also cash out. Does that happen? Is that as big as I can imagine it is? Or is that just sort of a small little piece of the puzzle here?

Jon Diorio: That’s definitely happening. I mean, obviously, you have to look at the liquidity of it and how big the company is. So, for some of the what we call mega unicorns, there’s a market for that. Obviously, for some of the smaller private companies, that’s not going to be as robust. So, as you said, it always depends. But, yes, there’s an ecosystem for employees or early investors in these companies to get liquidity. There’s also an ecosystem for all of this private equity money that was raised in funds by institutions and others as they’re looking to go ahead and get liquidity or get diversification. That’s also a pool of capital as well.

Matthew Peck: It’s interesting. Again, this is where you start to scratch the surface, and it can go deeper and deeper. But also, again, I just want to point out that that’s why there’s the capital there, and that’s why that you’re hearing more and more about it, because all of these companies all stay in private, have plenty of funds, don’t need to raise the capital, but there’s going to be still a marketplace, so you’re going to have buyers and sellers and people stepping in one liquidity at different times. So, it’s just great seeing or being aware of, we all know of the public markets. You can turn on Yahoo Finance any day, or Bloomberg News or CNBC, and you can see how the public shares are trading hands. It’s good to understand how the private shares are potentially changing hands at different levels.

Okay. So, I know we only have for a little bit longer but now take me through private credit. So, what is private credit? I mean, I can vaguely understand it like, okay, it’s credit. Someone’s lending and someone’s paying interest, and I’m paying you back. But aren’t banks doing that? I mean, I guess so, if you don’t mind, illuminate us on what private credit is on a high level.

Jon Diorio: You summed it up pretty good, Matt.

Matthew Peck: Oh, okay. All right. Well, Jon, thank you so much for your time. Well, thank you for joining us. No.

Jon Diorio: The interesting thing, though, I would say on the last piece, is that what we’ve seen is that banks are retreating from these credit markets. So, one of the interesting stats that we have is, if you go back, call it into the mid-90s, the exact date I have here in some of the statistics that the team ran was 1994, at that point, if you looked at the credit markets, and I’m looking specifically at the below investment grade leverage loan market, about 75%, 72% to be exact, of the financing was being done by banks, and about 25% was being done by what we call non-banks. So, private credit, if you fast forward to the beginning of the 2000s, that number was about 50/50.

Post-financial crisis, where obviously the banks were becoming more regulated, they were more worried about their balance sheet, you really saw that number from banks decline. So, you ask, are the banks doing that? And recently, post-GFC, post the global financial crisis, the number of non-banks now is all the way up to 86%. So, banks are doing about 15% of that private financing, and that kind of below investment grade loan market, and about 86% is being done by non-bank. So, as banks have moved away, a lot of that has gone to the private market. And so, that is why you see the private markets expanding.

The second point is they’re actually interconnected. So, we’ve talked about the private equity markets expanding. When the private equity markets expand many times, to stay private, you need to do more financing in the market, right? And so, as private market equity expands, private credit expands along with it. So, they’re actually connected to each other as well. So, there are two reasons that private credit are expanding. One, the banks are retrenching. And two, as the private equity market grows, the private credit market’s going to grow along with it. So, that’s really what’s happening in the private credit markets.

Matthew Peck: Interesting. So, it’s like a feedback loop that’s happening as one kind of fuels the other, and it just continues on, I guess, for the foreseeable future, right? I mean, like, do you see any of these trends slowing or reversing at all, in your opinion?

Jon Diorio: We do not. I mean, obviously, you always have to take into account the market environment. It’s been a positive market environment. But as far as it goes to especially from clients going into it, from a retail standpoint, the one thing that we haven’t talked about is a lot of clients that are on the wealth side are under-allocated to it. When we look at the typical wealth market right now, there’s probably almost about $50 trillion in the US wealth market when we look at it. Private markets, probably, right now, from a wealth standpoint, are only about $2 trillion to $3 trillion. So, that means the typical client has 5% to 6% and that’s an average. And we all know averages can be misleading, because somebody might own 20% or 30%, which means somebody, a lot of people, own zero still.

And so, our view is the typical client is learning about it through, hopefully, podcasts like this. They’re becoming more interested, and the typical wealth client is still doing their due diligence. They’re becoming more interested, but they’re still under-allocated for the most part. And so, our view is, as long as returns have been there, which they have been, the private markets have been outperforming the public markets, especially when you take into account the risk, and as long as clients can still benefit from the outcomes that we talked about, getting a higher return or wedding more income, and it makes sense for them from a liquidity profile, we think these markets are going to continue to grow.

Matthew Peck: Yeah, that’s great. I personally see it. I mean, if it’s been the idea of the public markets, these equities being declining by 30% and the private, as we stated earlier, growing by 30% and with all the capital that’s there. I mean, if you’re a private company, why would you go public if you didn’t have to, if you didn’t have to do sometimes with that over scrutiny and all the different regulatory filings that they have, so forth and so on. So, I personally, obviously, share that. And I think that’s why we certainly wanted to kick this off and have you part on the podcast to really bring, you know, shine a light onto what is growing and should continue to grow, and people just need to get educated.

And this is just, as we said, I mean, this is just scratching the surface. I mean, we could have easily gone deeper into each one of these portfolio construction behind them. What’s typical allocation? I mean, there’s all these other questions that obviously we’d love to have you back on. Really loved the HDMA, though, the idea of looking at, okay, do we want to hedge? Do we want to diversify? Do we want to modify? Do we want to amplify? And sort of almost approaching each investment with that type of thought and process, I thought that was a great tip for people that are just learning about this.

My guest again today was Jon Diorio, the Head of the Alternatives for BlackRock’s wealth management business. Really appreciate it, Jon. And, yeah, any final pearls of wisdom? Because I would say, by the way, after this podcast, you might get like autographs. You might get stopped in the street. I know you’re down in New York, and there’s a lot of celebrities down there, but after this podcast, buddy, it’s stratospheric. But just didn’t know if you had any last-minute words at all for our audience.

Jon Diorio: No, I appreciate you taking the time, Matt. It was great to speak with you, and I think we hit on a lot of the high points. I mean, I think as investors think about meeting their financial goals and trying to get better returns or higher income, especially in things like retirement, trying to get every bit of return with minimizing the risk is important. And so, obviously, there’s a lot of diligence and a lot of education that goes into it. But we really appreciate the time today, and I look forward to all the follow-ups with you.

Matthew Peck: Absolutely, Jon. Again, thank you so much for joining us, and thanks for kind of continuing the crusade of providing good information for all of our advisors and all of our clients. Because we always joke around. We say, “Look, I can’t guarantee you’re going to make the right decision, but I can guarantee you’re going to make a well-informed decision.” And thank you for being part of that. So, thanks for listening for all of our audience. Stay tuned for our next episode, and I wouldn’t be surprised if Jon is back soon. So, thanks again, and have a great day.

Jon Diorio: Take care.

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