The Growth Opportunities Private Markets Have That Traditional Investors Are Missing Out On with Raphael Hanna – Ep 113

When you think about investing for retirement, stocks, bonds, mutual funds, and ETFs probably come to mind first. But those public markets are only one part of the investment landscape. Private equity, private credit, real estate, infrastructure, and venture capital offer another universe of investment opportunities that many investors may know very little about.

In this episode, SHP Financial co-founder Matthew Peck is joined by Raphael Hanna to break down the differences between public and private markets and explain why private investments have become increasingly accessible to individual investors. They discuss the different types of private investments, how they can potentially add another layer of diversification to a portfolio, and some of the important tradeoffs investors need to understand.

Ultimately, having more investment options doesn’t mean every option belongs in your portfolio. Matthew and Raphael explain why factors like liquidity, fees, risk tolerance, income needs, and time horizon should all be considered before investing in private markets and why every investment decision should start with your broader financial plan.

In this podcast interview, you’ll learn:

• The key differences between investing in public and private markets.
• How private equity differs from venture capital, private credit, and private real estate.
• Why more and more companies are staying private for longer durations.
• How private investments can provide another source of portfolio diversification.
• What investors should understand about fees, liquidity, and holding periods.
• Why your time horizon and risk tolerance matter when considering private investments.

Resources

• Dow Jones
• S&P 500
• Mo Salah
• Apple
• Fidelity
• Schwab
• BlackRock
• Chick-fil-A
• MARS
• First Trust
• StepStone Group
• The Carlyle Group
• Apollo Global Management
• Anthropic
• ChatGPT
• OpenAI

Inspiring Quotes

• “Something’s going to be up and something’s going to be down. But since everything is going to be well built together and kind of non-correlated, you can work your way or expect to have that 5% to 10% expectation return over time.” – Matthew Peck

• “Some years the public markets might do better, some years private equity might do a little bit better. So, you’re really kind of balancing the scales in that regard within a pocket of your portfolio that you otherwise might not have.” – Raphael Hanna

• “If you’re not invested in the private markets, you’re not getting access to some pretty blue-chip companies.” – Raphael Hanna

• “In order to build a truly diversified portfolio, one that can withstand a number of different situations and can provide non-correlated, which is kind of zigs when everything zags, it really does behoove you to take a look at the private markets.” – Matthew Peck

• “It’s just knowing what the tools in the toolkit are at the end of the day.” – Raphael Hanna

[INTERVIEW]

Matthew Peck: Welcome, everyone, to another edition of SHP Financial’s Retirement Roadmap podcast. I’m your host today, Matthew Peck. Most folks are familiar with the public markets, whether it’s Dow Jones or the S&P 500. And in fact, there’s close to $320 trillion in the public markets with stocks, bonds, mutual funds, and everything you watch in any ticker on Yahoo Finance or Bloomberg or wherever it is that you get your updates. But then there’s close to $30 trillion in something called the private markets. And what are those? Well, most people would say private equity, but there’s private equity, there’s private credit, there’s venture capital, there’s infrastructure, there’s real estate. There’s a whole universe there that has been growing over the years for various reasons, which we’ll get into today.

And also, we just feel like people need to understand what their options are, because how can you build a diversified portfolio if 20% of the overall marketplace isn’t represented in your portfolio? So, long story short, these are things that you need to understand, that we hope our listeners need to understand, and obviously our clients, that we’d like to walk them through as they come on board. So, we couldn’t think of anyone better to bring on besides Raphael Hanna, the man, the myth, the legend. He’s a recurring guest, of course.

Raphael Hanna: Yeah.

Matthew Peck: Now, we do have a separate podcast where we talk about Premier League soccer and Liverpool.

Raphael Hanna: We do, yes.

Matthew Peck: But we’re not going to have that today.

Raphael Hanna: Mo Salah, right?

Matthew Peck: Yeah. Absolutely.

Raphael Hanna: Yes. Mo, Mo, Mo.

Matthew Peck: So, we’ll have to do that some other time. But, in fact, all joking aside, we do want to bring you on to talk about public markets. So, obviously, welcome back.

Raphael Hanna: Yeah. Thank you for having me.

Matthew Peck: Welcome back to the show, to say the least, obviously.

Raphael Hanna: Appreciate it. Thank you.

Matthew Peck: What do you think of the new getup?

Raphael Hanna: I love it.

Matthew Peck: Do you feel good?

Raphael Hanna: Yeah, it feels good. I think it’s a much improved setup from last time. So, I love it.

Matthew Peck: Yeah. Hopefully, it’ll be more conversational. And I think the seats are a little bit more comfortable.

Raphael Hanna: Very comfy. Yeah. We’re investing in the space. It’s good.

Matthew Peck: Exactly. All right. So, just walk us through the basics, you know? What are public versus private markets? And where do you begin the conversation with your clients?

Raphael Hanna: Yeah, it’s a good question. So, I think first and foremost, when you think about the difference between public and private markets, you just need to understand, one, everyone knows public markets as you open up your Fidelity account, you can buy Apple, Google, the biggest companies in the world at your fingertips, and you have that access to buy those companies at a very low cost with, again, the daily liquidity that exists. But with private markets, it’s a little bit different, because again, there’s not necessarily a New York Stock Exchange. There’s not a NASDAQ exchange where these companies transact in, right? So, in that vein, you’re looking at companies that interact and trade with each other privately.

So, there becomes what we call something, we call it a liquidity premium, where they don’t trade every day, right? They trade over 3, 5, 7 10-year hold periods, where now you’re holding these companies for a longer period of time. So, private equity is in the business of taking capital from investors, pension funds, endowments, and then deploying that to different businesses in the private marketplace, right? So, what they’ll do is they’ll create these pool vehicles where they’ll take that capital from all these different investors, whether it’s high-net-worth folks at wealth management firms like us, pension funds, endowments, and then they’ll say, “Okay, well, we really like AI, so we’re going to go target AI,” or, “We like aerospace and defense companies, so we’re going to go invest in these private businesses.”

And then, again, they will take that capital, invest in those businesses, but because there’s not, like I said, a public marketplace where these companies trade daily, there’s a higher hold period for them. And I think at a surface level, when you think about the difference, that’s kind of like the starting point of public versus private.

Matthew Peck: Yeah. No, absolutely. I mean, yeah, because think about it. It’s like all these companies… So, a client will call you up, and they’ll say, “Hey, I walked by an Apple Watch the other day or an Apple Store the other day. Oh my gosh, I saw people coming in and coming out of that store on a… It was jam-packed,” and I’m like, “My gosh, obviously people know about Apple, of course.” But they’re like, “Wow, I really want to own stock in this company, because they’re running a great shop,” and you can tell they’re profitable and they’re being successful.

Raphael Hanna: Correct, yes.

Matthew Peck: So, okay, anyone that sees that type of store or Apple as an example can go on to Fidelity or Schwab or whatever custodian that they use and buy shares of Apple.

Raphael Hanna: Sure.

Matthew Peck: All right, the next day they’re walking around, they’re kind of hungry, all right? And they’re saying, “All right. Well, there’s Chick-fil-A right there,” and “Oh my gosh, love the Chick-fil-A sauce. I think this is a great business model, as well.” And then they call you up, and they’ll say, “Hey, Raph, I would love to buy some Chick-fil-A sauce.” And then you have to tell them what?

Raphael Hanna: You basically tell them, “You can’t buy it.” Unless you go into the private equity world, and I think that’s a really good example. And I’ll use my dad, for example. My dad owns a laundromat, right? You can’t go into your Fidelity app and buy my dad’s laundromat. Can’t do it. But again, private businesses, they have their own private marketplace. It has to go through this private equity world where you then say, okay, if laundromats is something you’re interested in buying, well, there’s private equity firms that invest in that space. And then you take that capital, and you deploy it.

Matthew Peck: And that’s what I was going to say, because even before we get into how it gets built and funded and all the money that’s moving around there, I just really wanted to share more with our listeners, I mean, that’s kind of how as simple as it is.

Raphael Hanna: It’s really that simple. Yeah.

Matthew Peck: Right next to a walk out of the mall, or you walk out of an Apple Store, and you say, “Okay, I can’t wait to buy Apple stock because it’s such a good company.” That’s fine. You can do it. It’s public, fully accessible. You’re in, and you’re out. And then you see a Chick-fil-A or a laundromat or any of those other companies that you’re seeing that you drive by, any of those businesses. Think of all the businesses. Just think about what happens when you just drive to your work yourself. You might be working for a private company. Most folks do. Most of them. So, now it’s like all of that industry, and that’s why I used that number before. I mean, trillions and trillions of dollars are part of all of these private companies that are out there.

And yes, how do any of these private companies buy or sell, or how do they exit the original owners? Or how do people say, “Hey, I would like to…” Now, the original owner doesn’t want to sell, but they want to scale, right? They want to get bigger, and they want to buy other warehouses or factories or whatever else that they’re doing. Or other laundromats, right? So, it’s like, okay, so how do they do it? And they go to, not all the time, but they go to the private marketplace to raise capital and to buy other companies or whatever that may be. And really that’s where I like to start when it comes to the difference between the public markets and the private markets.

Raphael Hanna: Totally. Absolutely.

Matthew Peck: Okay? But you were saying, too, there’s a number of different versions of it. I mean, you have like venture capital. This is all in the private space. Again, you have venture capital, then you have private equity, real estate, etcetera. But walk us through kind of like private equity versus venture capital, and just some of the differences that are there in the world itself.

Raphael Hanna: Sure. The easiest way that I think about venture capital versus private equity, I’ll start with venture capital, is early-stage venture capital, I’ll use the example as you have two guys at MIT that they get their MBA, and they’re thinking about how can they target a business or come up with a product or a service that’s going to attack something in the marketplace. And it’s really a simple early-stage venture. It’s as simple as an idea or even just a product without any revenue or customer base or anything of that such, right? So, that’s really early-stage VC, where if you look at it on a risk profile, that is the most aggressive form of private investments that you’re going to undertake, where you’re literally just investing in sometimes it’s just an idea, maybe it’s just a product, and there’s really nothing. It’s really just a skeleton base.

And then as you kind of go down the road, like I said, that was early stage VC. Then you get into like regular VC, and now you’re looking at maybe more mature businesses. They’ve taken that idea, they’ve taken that product, and they’ve built a business around it. Still not profitable yet, right? Still not driving billions of dollars of revenue like all these big public companies, but they’re on their way. And you continue down the train tracks from, like I said, early-stage VC to call it mid-stage VC. And then you eventually, as those businesses evolve and mature, they eventually develop into what we call private equity, right?

And then when you get into private equity, now you’re talking about businesses that have recurring revenue, multiple business models, right? Wide moats to their businesses. Now they’re pretty established companies, right, to the point where, like you said, they’re now looking at expansion, maybe through internal acquisitions of their own business, flushing out other business products that they want to roll out because now they have the muscle, the revenue, and maybe profitability that follows to really juice up their business. So, like I said, in regards to venture, that is the most aggressive and call it high-risk form of private investing that you’ll undertake. And then as those businesses mature and morph and evolve and become eventually more profitable, then they become under the private equity umbrella. And then, yeah, so.

Matthew Peck: Well, what I was going to say, too, I mean, what’s great about that, is that… And we’ll talk about access a lot. But before we get to access, what’s great about that is that when people… It’s similar to the public markets where if you enter, and if it’s in, obviously, in your best interests, and we’ll talk about that a lot because, obviously, there are hazards in the private markets and there’s risk in the private markets as you were saying, too, specifically on the VC and angel investing side of things. But the point I was trying to make was that there’s, just as there’s variation in the public markets where you can buy a growth company that’s not very profitable that is supposed to do really, really well, or you could buy a blue-chip company, like Walmart, that has an established model.

Very, very similar in the private markets. Again, you can buy VCs that it’s just kind of a wing and a prayer. And might be a home run or a grand slam, or you might lose all your money. And then there’s more established private equity firms that do have profits and whatnot, and now you know what you’re investing in and a little bit lower risk, but lower reward, as well. So, my main point, though, Raph, is just that you have that variation as well in there. So, that’s really kind of on the equity side of it. But there’s also a bunch of other areas in the private markets themselves, such as real estate, infrastructure. There’s debt in that spot, too, what’s called private credit. So, same as you have all those different areas in the public markets of bonds and high-yield bonds and real estate and whatnot, you’re having that in the privates as well.

So, I mean, how often do you go into those different or when clients come in and ask you like, “Hey, Raph, I’ve heard about this,” are they aware of some of the other areas like private real estate and infrastructure or whatnot? Or is that more on the advisor to say, “Hey, there’s actually a lot to choose from here”?

Raphael Hanna: Yeah, I would say more oftentimes than not it’s a no, that they don’t know. And the way that we look at allocating to any number one of those things just kind of comes back to their financial plan, right? So, at the end of the day, today we’re talking about private equity and public markets, but a lot of what we do kind of comes back to the retirement roadmap that we always talk about and the financial plan. So, things like private credit or private real estate, which are more like, call it, income-driven vehicles, would fit more within the income sleeve of a portfolio. So, if a client’s looking for income specifically, we’ll look at things potentially like private credit, private real estate to, again, achieve maybe a higher than normal dividend yield as part of the bond or bond equivalent sleeve of a portfolio.

Specifically, back to the private equity side, obviously, there are different forms that it undertakes, like we just talked about, but that would particularly play into the growth sleeve of a portfolio for a client. And that’s really at the genesis of it, like how we think about the allocation part of it. And then from there, I’ll just stick with the private equity investment for a minute. We’ll look at the client’s equity allocation, the stock allocation, and say, “Okay. Well, if they’re 70% in stocks, how much of that should we allocate into private equity if it’s something, one, where their situation allows for it,” right? Because, again, we’ll get into this whole concept of access in a second. But, one, does it fit their risk profile? Can the plan take it? And three, are we looking for diversified ways of getting that return? So, I mean, I don’t know if you want to talk about the access part of it or…

Matthew Peck: Well, no. I was actually going to go back to, because I do want to talk about sort of portfolio construction and asset allocation in a bit because I think that, just, and I was going to get off, I was going to on a little bit of a tangent or get on my soapbox about how the advisors like us, or at least for, or our type of RIA and the shop that we build, building diversified portfolios and well-allocated portfolios doesn’t mean that we’re going to be getting 30% per year or anything like that. But it does smooth out the ride, right? And so, when you have well-built portfolios that are allocated into private markets just as much as public markets, you just have a nice stable, steady ride. And again, no guarantees or anything along those lines, but that’s the goal.

The goal is to get you the 5% to 10% per year because something’s going to be up and something’s going to be down. But since everything is going to be well built together and kind of non-correlated, you can work your way or expect to have that 5% to 10% expectation return over time, right? And I think that’s why in the private markets, a lot of endowments and a lot of high net worth were the original kind of drivers of this money or drivers of this marketplace, because that’s what we were looking for. You know, these pensions and these endowments were just looking for slow and steady capital appreciation, solid numbers, and whatnot. And I think that’s what it does when you take advantage of all the marketplace.

Raphael Hanna: Exactly. Totally.

Matthew Peck: And so, I mean, really I ask all of our listeners, it’s like how can you be truly invested if 20% of the marketplace, you don’t have any exposure to whatsoever?

Raphael Hanna: Exactly. And to hit on the point that you made, I think the low correlation piece of this is very important.

Matthew Peck: Right.

Raphael Hanna: Right?

Matthew Peck: Absolutely.

Raphael Hanna: So, I always use the word asymmetric risk, right? So, if you’re, call it, let’s say 80% of your equity allocation is in public markets, and then 20% of it’s in private. Well, now you’re diversifying your return, but you’re also getting, like you said, low-correlated exposure in the growth sleeve of your portfolio, which is really important because like you said, some years the public markets might do better, some years private equity might do a little bit better. So, you’re really kind of balancing the scales in that regard within a pocket of your portfolio that you otherwise might not have. Because like you said, right now I think there’s what? 3,000 public companies. Twenty years ago, there was 10,000 public companies.

Matthew Peck: Right.

Raphael Hanna: Right? So, the basket has shrunk, and a lot of these companies have stayed private for longer for a number of reasons. Might be regulatory reasons, might be capital reasons, right? They’ve stayed private for longer, and if you’re not invested in the private markets, you’re not getting access to some pretty blue-chip companies, as we’ve come to find out, like obviously, SpaceX has been in the news. A lot of these AI companies are soon to go public. Some aerospace and defense companies that are very profitable businesses, they’ve stayed private. So, how can we think about getting not a significant exposure, right? Because again, we’ll talk about the risks. But how can we diversify the portfolio a little bit and get low-correlated returns for a client is important.

Matthew Peck: Yeah, because that was the question I was going to ask is, how come clients are asking you more for this? I mean, like, is it just because it’s in the news, or I think there are those historical trends that you were talking about.

Raphael Hanna: Yeah, yeah. I think, to begin, I believe a lot of what’s been in the news in the last six months has driven a lot of the questions that we’ve received. Obviously, with AI, it’s kind of taken a world of its own, and seeing OpenAI, Anthropic, these companies that are soon to go public over the next six to 12 months, it’s drummed up a lot of interest because clients are like, “Hey, I can’t buy this on Fidelity. You guys can’t trade this every day. How can we get exposure to this?” So, that kind of has introduced this conversation of private equity. And really the biggest things that we try to keep in mind for clients is, one, when you go into the private markets, there might be a little bit of a higher fee to get into these funds because you can’t transact it every day.

You have to go through people like us, who will give clients exposure through a BlackRock fund or First Trust, some of these institutional partners who are making those investments, and we can drive some of that to the client through that exposure.

Matthew Peck: And actually, that’s the thing, Raph, I wanted to pause there and say, okay, I want to talk about access. I want to talk about liquidity. Yeah, I want to talk about how clients access it, but let’s just recap for a second. So, here we are. We have the private and the public markets, right? And public markets, most folks are aware of, as we mentioned, buy and sell any time. And then you have the private markets, which is a significant slug of the world, right? I mean, the laundromats of the world, the Chick-fil-As of the world, the Mars bars of the world, all the ones that are out there. So, in order to build a truly diversified portfolio, one that can withstand a number of different situations and can provide non-correlated, which is kind of zigs when everything zags, it really does behoove you to take a look at the private markets, since that you want to build that perfect portfolio, if you will.

Again, nothing is perfect. We’re well aware of that, but these are the reasons why advisors need to be aware of the difference and make their clients aware, to provide them those options, to say, “Hey, we can build a portfolio for you just using the public markets, or what if we broke off 10%, 15%, 5%, or whatnot, and put it into the private markets?” Okay. So, now the client says, “Okay, great. I’m open to it. Let’s talk about it. I understand that, okay, maybe I’m going to do the more traditional private equity versus a VC fund because it’s a little bit less risky in the traditional private equity side of it, or maybe I just want the private real estate because I’m looking for a bond equivalent, or infrastructure, or all of those.

And a quick little plug for infrastructure, I mean, I just think that with all of the build-out that’s happening, whether it’s with the data centers or the desalination plants or the bridges and then all of the work that’s being done there, necessarily so. That’s another area that’s like, okay, slow and steady returns. Nothing beats that, especially if you’re approaching or already retired. So, I’ll walk that back for a little bit. So, here we are. So, we have all the different options. Client says, “You know what, Raph? I’m interested in the different spaces and building or adding it to my portfolio,” yada, yada, yada. Okay. So, now, all right, but then he’s going to say, “All right. Well, Raph, tell me about the fees. Tell me about how do I access this. How do I get out of this? How do I track performance?” I mean, now let’s look under the hood and just talk just really more nuts and bolts as to what it looks like on a day-to-day basis.

Raphael Hanna: Sure. So, let’s just start with fees, right? So, when it comes to the fee model, I’ll just compare it to public markets for a second. Every client, or most clients, should know that ETFs and mutual funds have what’s called an expense ratio, which to own that public ETF that trades daily, you might be paying anywhere from 0.03% up to, call it, 0.2% in what’s called like an annual expense fee. Compare that to the private markets, right? Where, again, we talk about maybe access to these private companies is a little bit tougher, but you can still do it through us, where we have partners like BlackRock and First Trust. People like BlackRock and First Trust to invest in those particular private equity funds.

Historically, what they’ve done they used to charge what’s called the 2 and 20 model, right? So, 2 and 20. The 2% is a 2% annual fee, and the 20% is usually on the profits in excess of a certain percentage, right? So, regardless historically of what the market had done or what the fund returned, they would charge 2% regardless, and then they would charge another 20% in good years when they’ve returned maybe in excess of 10%, for example. In 2026 today, that industry has become pretty compressed. So, what you’ve seen recently over the last five, six years since COVID is that these private equity funds, they’ve gotten rid of the performance fee and they’ve reduced the annual fees. Okay?

Matthew Peck: Okay. So, of the 2 and 20, a lot of the 20%, the performance fees…

Raphael Hanna: Is pretty much gone at this point.

Matthew Peck: …is pretty much gone. And then the 2% annual fee, it sounds like there’s been some fee compression or some reduction there.

Raphael Hanna: Exactly. Correct. And I think a lot of that has to do with technology, right? Research some of these things on the back end for them gets a little bit cheaper, so then they’re able to communicate a cheaper cost to the end client, which has been great for most of our clients because historically, 2 and 20 sounds pretty expensive, and shies people away. So, now when we’ve seen that fee compression specifically in private equity, it’s still not cheap compared to the public markets, but the cost to enter the game has become a little bit more attractive than it has been for the last 20 years.

Matthew Peck: Well, and I think that’s also happening, so normally has there been fee compression and it’s a little bit more accessible, or you’re not really paying through the nose as much as it used to be. Also, minimums have come down a little bit too. Because minimums come in many different shapes and sizes, right? Some of them, I think initially people think like, “Oh, I got to put $500,000 in or a million dollars in.” Well, that’s still the case. There are some funds out there that require $500, a million as a minimum. But on the other funds, they’ve come down to like $2,500.

Raphael Hanna: Yep, as low as that. And I think that’s another reason why we’ve started to look at it a little bit more closely, because the barrier to entry has come down pretty significantly. As you mentioned, for example, Fidelity has a venture fund, right? Fidelity’s requirements for that are like $250,000. But for maybe like a more blue-chip private equity fund, those minimums are anywhere from now $1,000 to $2,500. So, allocating to the space has become a little bit easier for folks who are looking for a little bit more growth in the growth sleeve of a portfolio, which has been very good because if you look at performance for private equity, obviously past performance don’t guarantee future results, as we always say, but it’s been pretty, pretty strong relative to public markets.

Matthew Peck: But we also need to know too, because I do want to talk a little bit about how some of the access is, the fact that more folks are able to get in is sort of a double-edged sword. Because sometimes if there’s a lot of money going into one particular area, it might end up driving up prices or it might, but they might be going, I mean, the fund manager, right? Let’s say the StepStone or BlackRock or all the other private equity managers, the Carlyles and the Apollos, they might be a little bit more loosey-goosey with the money if money’s flowing in.

Raphael Hanna: Correct.

Matthew Peck: Right? So, there are some that argue that say, “Ooh, maybe the minimums coming down have not been a good thing.” However, even if you do have those minimums, let’s also walk the listeners through the original AI. Because everyone knows about AI now, artificial intelligence, but there’s also an AI in the private marketplace, isn’t there?

Raphael Hanna: There is. So, I think in regards to the AI in the private marketplace, what you have to keep in mind is the growth component of it.

Matthew Peck: I’m not sure if you got my dad joke. I was talking about an accredited investor.

Raphael Hanna: Oh, I kind of missed that one. I missed that one.

Matthew Peck: All right, it’s okay. No, let’s roll with it. Okay, right. We keep on rolling. The producer’s looking at me. So, saying, “Yep, roll with it. It’s good. Keep on going. Keep on going.” Okay, keep on going. Now tell us, because we’re talking about access now, we’re…

Raphael Hanna: Man, I’m trying to keep up with you. So, yeah.

Matthew Peck: So, let’s talk about what an accredited investor is. Because even if you have the money, even if you have $500 million or whatever, or that you want to do this and you got $50,000 or $100,000 or whatever, there are other requirements that you need to meet.

Raphael Hanna: Correct. So, usually so like I said at the beginning, historically private equity used to target pension funds and endowments, because those are large institutions that will write them a big check to then go and invest in whatever companies they want. They would also look at accredited investors, individuals with, call it, deep pockets. And usually, those accredited investor requirements are usually anyone that making north of $500,000, and they have to have at least 1 million to 2 million liquid in assets to qualify for an investment into private equity or private credit. So, that’s historically what the accredited investor requirement was and still is. But now with the lower minimums, that barrier to entry has maybe come down a little bit, although there’s still some relative stringent requirements, I would say.

Matthew Peck: Yeah, because I think what they’re trying to do, Raph, there is because there is liquidity. So, yes, you might have greater access nowadays, right? And, yes, the minimums have come down a little bit on buying into some of these funds. And as I said, obviously, we wouldn’t be doing a podcast if we didn’t think it would be something to explore for people’s portfolio with their advisor. So, it’s good to know that fees have come down. It’s good to know that access has expanded. However, there’s still liquidity on the back end, right? And so, the accredited investor part of it is that they wanted to make sure that the regulators still want to make sure that the people that are buying into the private markets do have a certain amount of money in their back pockets because liquidity can be a concern.

I mean, we talked about how with public markets like Apple, you can buy Apple on Monday, you can exit Apple on Tuesday, where if we’re entering the private marketplace, whether it’s equity, VC, private credit, real estate, infrastructure, there are liquidity concerns about being able to pull the money out. And so, you want to make sure that you have plenty in reserves, hence why the regulators want you to have a million, two million bucks before you can even enter these things. So, what are liquidity concerns, or what are the concerns there? What options are there? For once you buy in, when does that money come back out?

Raphael Hanna: Good question. So, usually on the venture side of things, call it, the lock-up period, if you will, I’ll just use that phrase, is anywhere from 7 to 10 years, especially on venture, because it’s early stage. Like I said, it’s higher on the risk profile relative to more foundational blue-chip private equity. Specifically in private equity, it could be anywhere from one year to five years for private equity. Obviously, with the low cost, the ease to get in, one of the things now that they are trying to incorporate is the exit, right? Because like we said, private equity could be one to five, venture’s seven to 10-year hold. But with some of these more, we’ll call them evergreen funds, they have shorter liquidity commitments, where if you’re in today, if you want to be out maybe in six months, depending on how many people are redeeming their portion of it, you may be able to get out fully in six months.

Again, that wasn’t the case five years ago because there wasn’t this basket of what I’ll call evergreen funds that give you the low cost, the low barrier to entry, and maybe a quicker liquidity option. But to answer your question, regularly speaking, you’ll see venture go seven to 10 years, and then private equity is usually one to three to five years.

Matthew Peck: Well, and I think that’s something that all of the investors need to ask, right? It’s like, is this a drawdown fund where my money’s locked up and I don’t see it, and then eventually I get the money back over, hopefully, anywhere from, call it, three to ten years, depending on the style. Or is it an evergreen fund that money is constantly going in and going out? However, there might be only quarterly redemptions, and if everyone’s trying to pull their money out at once, like you were saying, Raph, which there has been concerns in the private credit spot over the past couple of years, you might not be able to get all your money back out because the fund managers might just say, “Nope, we have hit our redemption limit. Talk to me next quarter.”

So, you need to know that, going into any of these types of investments, that, yes, again, accessibility is greater, but liquidity, you need to be aware, eyes open before you invest in it. And the last one before I talk about kind of questions that investors should ask themselves, right? If you’re 45 to 65, is this for me? Because I kind of want to tee that up for you. The other interesting thing with the private market spot in difference is the pricing, what’s called price discovery, right? The price of Apple, I’ll keep on using that example, well, it’s what the marketplace says it’s on Monday versus what it’s on Tuesday, what it’s on Wednesday. You know exactly what that is on a daily basis, right? But the private marketplace works almost like real estate, right? Where you can go onto Zillow. Let me use the real estate example. You can go onto Zillow and just say, “Oh, I wonder how much my house is worth right now.”

Raphael Hanna: Yep. The Zestimate.

Matthew Peck: It’s the Zestimate. But it’s an idea. It’s a best guess, right? Because until you actually put your house on the marketplace and someone else buys that house from you, that price is not set until that one moment, which might be once every 10 years. And even that process, it’s only set once in 90 days, call it from the P&S to the close. Private markets work very, very similar to that, where you kind of have an idea of what the value is, but you really don’t. And it’s almost like, what, on a monthly or quarterly basis, or what have you seen?

Raphael Hanna: Yeah. So, it varies fund to fund. So, like you said, it could be monthly. It could be quarterly. The one thing to note about private equity specifically that’s actually interesting, if you look at it how many times have you guys seen in the news this company announces a Series B or a C or a D? When those companies go for their next raise into the marketplace, what they’ll end up doing because they’re giving up a piece of the company for private equity investors to come in and invest in a piece of it, what they end up doing at that point is they will value the business, right? They’ll revalue the business at that next series funding. So, the private equity company that may be already invested in said business will look at that company’s next series round and what they’re valued at and say, “Okay, based off of what we invested in that business, this is where we expect the valuation to be at this point.”

Now, the only real way to absorb or lock in that intrinsic value is if that private equity company or the private equity fund sells that company to someone else, right, because they’ve now realized a valuation of that. And then, two, or it goes public, right? Because like you said, at that point, when that private equity fund takes that company public, now it’s priced daily. The market now assigns what the value of that business is going to be. So, to kind of go back to how it’s priced.

Matthew Peck: Has there been any recent companies going public that made any noise recently?

Raphael Hanna: SpaceX maybe.

Matthew Peck: Okay, yeah.

Raphael Hanna: Maybe you’ve heard of SpaceX.

Matthew Peck: Yeah. But that’s a great example.

Raphael Hanna: Great example.

Matthew Peck: Walk us through SpaceX and why does that matter, right? Why does suddenly… I’m not going to say, why does it matter, but that’s a great example. Walk our listeners through that because it’s a great example of how a private company now becomes public, and there’s a lot of different consequences to that.

Raphael Hanna: Correct. And so, the first one that you have to think about is the capital that’s tied up in the business, right? So, when a company’s private, the underlying equity of the business is not as easily transactable. So, for example, the employees of SpaceX for 10, 15 years, were given private shares of that business, right? They didn’t have liquidity, right? Because they didn’t sell the company to another private equity firm. They didn’t sell and/or the company didn’t go public yet. So, when they did go public, it created this wave of wealth, but it was all tied up in the stock up until it went public.

So, now there’s called lock-up periods for SpaceX, where some of these employees will have to wait anywhere between 3 to 12 months to get out. But it’s a really good example of what happens with capital when it goes from private to public, because you don’t have liquidity, and then you wake up one day, and then there’s liquidity, right? So, it just kind of goes to show. And then kind of to hit on probably what you wanted me to hit on, which is when SpaceX goes public, they now open the floodgates to more investors and capital to fuel their business for that next 10 years of growth that they hope to undertake.

Matthew Peck: Yeah. And I think too, in general, I mean, an IPO is such a great inflection point for this entire conversation, specifically in the private equity and the venture capital space of it, because here’s the IPO, right? And everyone hears about this company’s going to IPO, or that company’s going to IPO or what happens. And as you said, it’s this huge shift from sort of public, from the private markets into public markets and vice versa. You know, hear me out. So, if you own SpaceX in one of your private equity funds, or if you were a worker there like you were saying, Raph, you’re pumped, you know? Because now you’re getting money back out. Now, if you had that drawdown fund, now money is coming back out to you, because you’ve gone from a private equity to a public aspect of it.

So, all the private holders are really pumped at this point in time. And usually at a profit. Not all the time, but usually at a profit. On the flip side, public markets are pretty happy too, because now, hey, people that did not get into SpaceX, as an example, originally, now they have the opportunity to do it. And since the public markets are roughly about four to five times bigger, that’s a lot more capital, which is why companies like Anthropic and ChatGPT or OpenAI are looking into them, at least as of this recording. So, it’s this really massive inflection point that happens at that stage. And I think it’s going to happen more. I mean, they talk about things like unicorns. You know, unicorn is a company that has $1 billion valued at.

But there are crazy terms like decacorn, which is five times, or 50 billion. I mean, there’s a lot of private companies that are out there, because you had said towards the beginning that they stay private because it’s less regulation, and they don’t have to put up with quarterly results.

Raphael Hanna: Yeah, shareholders.

Matthew Peck: Shareholders or even sort of hostile takeovers and all of those different things. And as you were saying earlier, Raph, it’s like the number of companies that were public are a whole lot less, I mean, than there are today. I mean, the Wilshire 5000 is now only 3,500. And there are all these reasons. Again, regulations. There’s more money in the private market spot like we were talking about earlier, so why if I don’t need to raise capital and there’s plenty of spot or plenty of money there. So, there’s plenty of secular reasons why the private markets are going to continue to grow. And then even they’re talking about putting in options within 401(k)s.

Raphael Hanna: Potentially, yeah.

Matthew Peck: But have you heard that?

Raphael Hanna: Yeah. So, that’s still kind of being mulled over, just again, because of all the, the pros and the cons that we talked about today. So, that’s still percolating in the background. But I think, to the point that you mentioned earlier, if you look at what happened since 2008, a lot of the banks, their lending requirements became a lot tighter. So, what happens to capital? Private equity companies come in, and they almost replace what the banks would loan out to businesses, right?

Matthew Peck: Right.

Raphael Hanna: So, that’s one way to look at it. And then also, too, just another statistic that we were talking about before we taped was I think 80% of the companies that generate over $100 million or more in revenue are privately held businesses now. So, there are some really quality businesses in the private marketplace. Obviously, bigger pool. So, our job for clients is to do that due diligence and say, “Okay, well, which funds do we want to be allocated to for all the pros and the cons that we discussed?” And then based off of clients’ risk tolerance and need and all these things, we then try to figure out, like a puzzle, how that will fit into the portfolio and address their broader retirement planning or investment needs.

Matthew Peck: Right. Which is where I kind of want to end because, to kind of summarize the entire cast here, it’s like the entire pod, it’s like on one hand, we have now we have a non-correlated asset that has good historical performance, that are able is to, whether it’s infrastructure or real estate or private equity or private credit, really kind of complements and allows for true portfolio construction, which is all obviously very, very positive. On the negative side, the no-free-lunch side, obviously, there are fees you need to be aware of. There are accessibility or you have to be an accredited investor. Liquidity is a concern or a factor to be aware of. Pricing, like what it’s actually worth, sometimes can be a little cloudy, too.

So, plenty of positives, plenty of negatives. That’s just the way of the world, right? So, as a client, what questions should they ask themselves? Is it right for me? What does it actually means for investors? And how would you pose it to them?

Raphael Hanna: Yeah. I think at least the question that we get offhand are, what’s the fees? What are the lockups? Specifically, what are they invested in, right? That’s obviously a huge question, because it’s a fund at the end of the day. It acts at a very high level, no different than an ETF in terms of it’s a basket of companies that they’re investing in. So, we really try to take that due diligence approach with the fund companies that we’re working with.

Matthew Peck: But you were also saying, like due diligence-wise, I’m curious about planning-wise, right? So, how do you work it into a plan? Well, what questions should the advisor and/or the client be asking themselves? Like, is it right for me? Because you mentioned a little bit earlier about risk tolerance and their overall financial plan. So, what are the questions, planning-wise, that you would ask like, is it time horizon? Do you see what I mean? Like, how would you work it into a plan? I mean, what type of conversations would you have with the client about that, and what would their concerns be?

Raphael Hanna: Yeah, good question. So, time horizon would be the biggest one, right? Because of the liquidity piece of all of this, where if we’re looking at a client and let’s say they have sizable Social Security between individual and their spouse. They have a huge pension. Their expenses are more than going to be covered by the income that they’re generating from a pension and Social. And let’s say in this example that they’re more growth-tilted. Well, then we’ll look at their stock sleeve, their public stock sleeve, and figure out, okay, well, should we be allocating a sliver of it to private equity, and what’s the time horizon for that? Same thing with the bond equivalent side of things. You mentioned private real estate, infrastructure, private credit.

Are we looking to generate income, or is there going to be a need for the basis of the funds that we’re using over the next one to five years? And if the answer is yes, there’s going to be a need for those funds, well then we may skew away for maybe these more, I’ll just use the word, illiquid-style investments. And then we pivot from there. So, I think time horizon’s the biggest one, but also, again, if it’s private equity, understanding the risk tolerance truly, because I think clients, when they hear risk tolerance, they think they have an idea, but then it’s really on the advisor to kind of ask those specific questions about the risk tolerance to make sure that the advisor and the client are both aligned on that.

And then separately, too, for income, what’s the objective there and the time horizon? So, that’s the framework that we use, and then we just kind of work with the client to figure out, does it make sense and making sure that they’re fully educated. And if you educate them and we say it doesn’t make sense, then it was a good informative session on it, and then we revisit something else that may make sense for them.

Matthew Peck: Yeah. Which is great, Raph. I mean, think of it this way, like here we are, guys and gals, talking about private markets versus public markets and unicorns and decacorns and IPOs and everything else. But it’s like anything else with investing, right? It’s like, okay, you have to ask those basic questions between you and your advisor, which is, okay, when am I going to need this money? How am I going to get stressed out if it drops 10%, 15%, or not really? Do I need income from it? What are the goals, right? And so, whether it’s public or private, as the client and as the listener, you’re still asking yourself and the advisor those types of questions, okay? Then once you answer those questions, and then if still appropriate, then you start to explore, okay, what do I want to do the public markets that have accessibility and maybe lower fees and daily pricing?

Or should I look at and incorporate the private markets, the SpaceXs of the world before they go public, right, the private infrastructure projects that are out there and some of the dividends and yield and income that you can generate from that. And obviously, as you were saying, Raph, that’s now on the advisor and the investment committee and the teams that they rely on to do the due diligence to find the best particular private market spot. But at the end of the day, it kind of builds on what you were saying, Raph, which is like these are the conversations we want to have.

Raphael Hanna: Always.

Matthew Peck: And these are the information that we want to provide to our listeners and to our clients. On a very basic level, you got to ask, “Okay, is it right for me? What’s my risk tolerance income?” And those are still universal no matter what happens. But now it’s like, okay, let’s take a look now at this particular tool. And then maybe our next pod we’ll take a look at that particular tool.

Raphael Hanna: It’s just knowing what the tools in the toolkit are at the end of the day.

Matthew Peck: Yeah. And what are the options?

Raphael Hanna: What are the options?

Matthew Peck: Yeah. And I think one thing I’m very, very, very proud of here at SHP Financial is that we look at all of the different options. A goal of mine, Raph, was never have a client say, “Well, I didn’t know SHP did that.”

Raphael Hanna: You say that all the time, yeah.

Matthew Peck: It’s like heck yeah. Heck yeah, we do that, and we do it very, very well, I might add, in regards to the scrutiny and finding the best performing at least recently and whatnot. Again, no guarantees, of course. But I certainly hope that all of our listeners enjoyed today’s session and a little bit of a dive into this world, and then seeing and asking yourself and your advisor whether or not this is something you want to look into more. Obviously, to each their own. Everything has to fit their unique situations. But we always would love to geek out about this type of stuff because it’s always fascinating to us about how the markets move and what options and new tools in the toolbox are constantly being, innovative, made more accessible, fee compression, all. It’s constantly changing.

Raphael Hanna: Always.

Matthew Peck: Right.. Which just makes for a fascinating study in this field. So, thank you all for listening. Raph, thanks for coming on.

Raphael Hanna: Thank you, Matt.

Matthew Peck: Any final notes or any final words?

Raphael Hanna: No, I appreciate it. I’m going to have to work on the dad jokes with you, off-air.

Matthew Peck: Yeah, absolutely. You’re not alone. I’ve got plenty of people that look at me side eye or just like, “What are you…?” That’s another lifelong pursuit.

Raphael Hanna: We’ve been working together for a while, but I still got to pick up on it a little bit.

Matthew Peck: Yeah. A lifelong pursuit is understanding the markets and following them and I’ll do that until the day I die. And yeah, making bad or good dad jokes is also a lifetime pursuit.

Raphael Hanna: Keeps it light.

Matthew Peck: It does, absolutely. It’s the work we love.

Raphael Hanna: Thanks, Matt. Appreciate it.

Matthew Peck: Absolutely, Ralph. Thanks for joining again.

Raphael Hanna: Thank you.

Matthew Peck: And thank you all for our listeners. Be well, and we’ll talk to you soon.

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