S4E39 – Kim Flynn – Alternative Investing

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Key Timecodes

• (00:36) – Show intro and background history
• (01:32) – Deeper into her background history and investment philosophy
• (02:38) – How alternative investments can be a good solution to individual investors
• (05:38) – Understanding her business strategies
• (07:14) – Deeper into her business model
• (11:53) – Deeper into her B2C strategies
• (13:01) – How is the process to get involved with her business model
• (16:14) – A key takeaway from the guest
• (18:29) – What is the worst advice he ever received
• (19:11) – What is the best advice he ever received
• (20:16) – Guest contacts

Transcription

[00:00:00.300] – Show Intro

Hey, this is Sean Tapper, the host of Payback Time, an approachable and transparent podcast on building businesses, increasing wealth, and achieving financial freedom. I’d like to bring on guests to hear authentic stories while giving you actionable takeaways you can use today. Let’s go.

[00:00:17.610] – Guest Intro

Are you looking to invest in private companies? A great way to get started in the private market would be through alternative investing. In this next episode, my guest talks about what companies they invest in, what returns you can expect, and how quickly you can get started. Please welcome Kim Flynn.

[00:00:36.450] – Sean

Kim, welcome to the show.

[00:00:37.890] – Kimberly

Thank you.

[00:00:39.010] – Sean

Good to have you here. So why don’t you kick us off and tell us about your background?

[00:00:43.290] – Kimberly

Sure. I’ve spent my career focused on finance and product innovation. I worked at Morgan Stanley, just out of college, out of Notre Dame. I’m a Chicago person, and I worked at Nuveen Investments, which is a leader in the municipal bond market, but they’re also a leader in something called a closed-end fund. Closed-end funds are listed on the New York Stock Exchange. Spent a lot of time developing both traditional and alternative investments. Then I left Nuveen in 2016 to do something a little bit more entrepreneurial and founded an asset management business. And that platform is called XA Investments. Xa Investments is focused on alternative investments. And we’re part of an investment bank called XMS Capital. Model, which is headquartered here in Chicago.

[00:01:32.580] – Sean

Cool. Yeah. Thanks for the background. So let’s dive into the specific assets our listeners can get involved with. I know one that jumped out at me was farmland, but why don’t you give us a list of everything investors can invest in?

[00:01:45.510] – Kimberly

Absolutely. I mean, a few years ago, liquid alternatives in the form of mutual funds and ETFs started to make some of these different diversifying assets available. So you have things like managed futures or commodity futures, and then that’s on the more liquid side of the spectrum. With alternatives or private market assets, you’re talking about less liquid or illiquid things. Farmland is a good example of a real asset product that can provide some income and some inflation protection. But at my firm, we focus on that entire spectrum of diversifying alternative assets. And we spend a lot of time working with asset managers, helping them launch new products Because there’s a lot of interest among individual investors to find points of access to investments that are not just stocks and bonds.

[00:02:38.660] – Sean

Got you. Okay. And then you’re focused on alternative assets. So do you have a minimum investment size? And then is it limited to accredited investors?

[00:02:49.210] – Kimberly

There’s been a lot of innovation making these types of alternative products that are offered in the market much, much more accessible. So at lower minimums, you can find investments that have $2,500 investment minimums. Some products are broadly suitable without any restrictions, particularly in the private credit space. I think a rule of thumb is that the SEC doesn’t want individual investors to pay performance fees, and they might not be aware of that. With a lot of private funds, there are performance fees to inline performance with the manager and investor. But in a lot of the retail products, you don’t tend to see performance fees. If you do, the suitability threshold would be accredited investor. Accredited investor standard is actually fairly doable. It’s fairly low. There are a range of products available for the average investor on up to accredited qualified clients or qualified purchasers. The innovation that I referred to is really trying to broaden out who can buy these types of products because so many of us need the risk-return diversifying benefits of private market assets in our retirement portfolios. These assets have long been part of pension fund portfolios, but they often aren’t part of individual investor portfolios.

[00:04:14.680] – Sean

Got you. So you guys are charging more of like a assets under management fee?

[00:04:18.730] – Kimberly

So mostly financial advisors who are managing client assets are typically charging a managed fee, a percentage per year. And my firm, we don’t actually manage client assets directly. The role that we occupy in the market is creating new innovative products to bring to market so that investors, financial advisors can- Use them. Select one of… Yeah, exactly. Use one of the products. Most of the asset managers in the space like us do charge flat management fees. I’ll give you a range of fees just to give you a sense. The fees are higher than ETFs or mutual funds. Most of these products, the fee rates will vary from 1% on the low end, upwards of 2%. Now, some of them do charge incentive fees, so you have to take a look at that. Whether or not it’s worth it, that’s your judgment. But you do see higher price point. As you would expect, some of these private fund managers who are managing primarily institutional money, some of them are charging those institutions 2 and 20. So one of the other innovations, which is great for investors, is the price points have come down with DOL and a lot of changes in our industry, there’s definitely a lot of fee pressure, price pressure.

[00:05:37.830] – Sean

And then for investors wanting to get involved, what are some of the advantages of working with you guys?

[00:05:45.210] – Kimberly

Sure. I mean, we think that a lot of individual US investors are overallocated to primarily large cap US companies. That concentrates client portfolios and the driver driver of return is coming from one set of risk. Equity tends to be somewhat volatile. A lot of these alternative assets basically have equity-like returns with much lower volatility, much lower risk. That’s obviously the goal. Some of our clients are income investors, and so they’re saying, Well, I’m looking for a higher overall portfolio yield. How do I achieve that? They might be willing to take on more risk to achieve a higher yield. So a lot of the private credit products in the marketplace have current yields north of 8% upwards into the teens. And so you’re not going to be able to find that yield if you’re investing simply in treasuries or the Barclays Act, you’re moving further out on the risk spectrum. But that’s what clients, that’s the option that you have. And so investors who are looking at some of these products might substitute a traditional fixed income exposure, like a high yield allocation for direct lending or for asset-backed securities. So these are substitutions that people are thinking about, but clearly, there are trade offs involved.

[00:07:13.080] – Sean

Sure. Now, with What your clients would be investing in, is it a mix between public and private companies? Is it all public companies? What is the allocation percentage?

[00:07:25.180] – Kimberly

Just giving an example, direct lending, like we talked about, that can be a mix of public and private companies. As we look at the banking sector today, banks are less likely to make loans. And so private investors have stepped in to that gap in the marketplace. And so it is a mix of public and private companies that are securing their financing in a different means. And that’s really something that’s been changing just in the last three or four years. That’s private credit as one example. Another example might be private equity, which is basically even late-stage private equity. Those are all private companies, and US private companies have been staying private for longer. As we know, you have many entrepreneurs that follow you. If companies are staying private for longer, these types of alternative products are going to open the door to that opportunity. There’s a lot of wealth creation happening in the private company phase of the market. They’re waiting longer to go public. And so this is a way to capture that part of the growth cycle. Sure.

[00:08:39.350] – Sean

You mentioned yields earlier or annual returns of about 8%.

[00:08:44.340] – Kimberly

Yeah, I think it starts there for, partly because with interest rate increases over the last 18 months, now the risk-free rate is much higher than it used to be. And so these alternative credit products with more risk, they have to offer a higher yield. Starting in the 8s, moving into the teens, just relative, because you can pick up incremental yield relative to lower risk products like the Barclays Ag.

[00:09:14.480] – Sean

Right on. Do you have anything that’s, I wouldn’t say high risk, but maybe very high risk that can yield some bigger returns? We’re talking like mid to upper teens, maybe even 20 %.

[00:09:26.910] – Kimberly

Sure. So in the product market that I work in, there are an increasing number of private equity and venture capital funds. And so they are talking about high teens, low double digit type returns. The expected returns have to be higher because of the liquidity risk that you’re taking. These are long-duration type assets. If you’re investing in private equity, you need to have an investment horizon of 5, 10 years or longer. Same would be true for something like farmland or real estate. And so the returns have to induce investment. Right now, we’ve seen a revaluation of companies and investments, particularly in private equity and venture capital in the last 12 months. I think there’s actually it’s seemingly, if the correction on valuation has happened, it’s an interesting point to look at these much higher returning. Now, this isn’t current yield, it’s not income. You have to wait and be patient to to earn that return over the investment horizon, which can be 10 to 15 years.

[00:10:35.490] – Sean

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[00:11:29.330] – Sean

You need to look past the math and look at the business. And if you can find a strong stock with a high 4M score, that should give you the confidence to move forward and buy that stock. Now, looking at Apple, you can see to have an 80 out of 100. If you can get above 80, that’s actually really good. Now, don’t take my word for it. I always say, go to TrustVile and see what our customers have to say, where we have a 4.9 out of 5. And if you’re interested, you can sign up for Tykr for free. And then you mentioned you guys are more on the product creation side. So the money that’s being managed, Let’s say a customer came in, wanted to invest $50,000 or $100,000. Who is managing that money?

[00:12:07.190] – Kimberly

Sure. So at my firm, we hire best-in-class investment sub advisors who have long track records managing in their area of expertise. And so that is a good partnership for the products that we create. There are a lot of alternative investment managers who’ve been institutionally focused and know nothing about the high networth or the individual investor marketplace. They don’t know how to serve those customers. So we can be a really good partner for institutional alternative firms that want to sub advise. And that just simply means that they run the money, they manage the investment portfolio. We do the education, we do the marketing, we do the product design. The advisor-subadvisor relationship is one in the mutual fund space that brings you the best of the of the advisor and the subadvisor.

[00:13:02.110] – Sean

Got you. Okay. Then what does the process look like if somebody wants to get involved?

[00:13:07.650] – Kimberly

In terms of investors? Yeah. Yes. I think that education is really the gateway here to getting involved with a variety of alternatives. As I mentioned, you can dip your toe into the alternatives water by evaluating a number of thematic or liquid alternatives that start to provide people exposure to managed futures. Now we have several different crypto ETFs that are launching. There’s a lot of alternative investment vehicles that are readily available in the wraper that you’re most comfortable That could be a mutual fund, it could be an ETF, other types of products. It used to be that you’d have to buy a private fund if you wanted to get private equity. Now there are SEC-registered products, technically structured as closed-end funds. It’s a little bit of a misnomer because these products are actually sold in a manner, a continuous offering. But many of them are available through advisors. Because of the education, I think there tends to be a higher threshold in terms of how investors get comfortable. But there’s now 200 SEC-registered, what they’re called interval funds. This is really the gateway to private market assets, and they’re becoming much more accessible now than they were even 18 months ago.

[00:14:34.820] – Sean

Got you. If somebody wanted to get involved, what timeline would that look like to get educated, make the right introductions within your firm, and then start investing?

[00:14:46.470] – Kimberly

Sure. I think that some investors, depending on their acumen and their comfort, I would say that proper diligence might take a week because there’s a lot of literature that’s available to you. Now, whether or not you have the time to set aside to do that, you can also talk with your tax advisor or your financial advisor if you want insights, too. But there’s a lot of resources Think about the leading alternative asset managers in the US. So the likes of Blackstone, KKR, Apollo, they all have dedicated sections of their websites that they are calling Alt’s Education or their alt university. And so there’s a lot of material and information, just a matter of how much of that you want to digest before you’re comfortable making that first investment. But I do think that alternative investments have been relegated in the past to a small, maybe 5 or 10 % portion of someone’s portfolio. But with education, people would get more comfortable and might see using these types of products as a substitute for some of the stocks and bond positions that they may be looking to replace.

[00:16:03.990] – Sean

Exactly. Another option, like another arrow in the quiver, if you will. They have another tool they can use to build their wealth or protect it at the same time.

[00:16:13.300] – Kimberly

That’s right.

[00:16:14.150] – Sean

Cool. All right. And before we jump into the rapid fire round, what is one key takeaway you can give my audience?

[00:16:22.860] – Kimberly

Well, I think that when it comes to investing in alternative investments, depending on what your experience experience has been, if you’re a real estate investor, there are real estate debt products, there’s real estate private equity products. So pick your point of entry based on your own personal experience. Maybe your family has owned farmland in Kansas and you have some sense of familiarity there. There are a lot of ways to buy diverse portfolios of farmland or small pieces of farmland. So I think that it’s helpful to use your own personal experience as a guidepost to entering the world of alternatives. But it is worth it to explore because US investors are so heavily concentrated, and we want to see people have strong returns with lower risks, just like endowments have done for years. But the way to achieve that is through adding a number of these types of diversifying elements.

[00:17:25.290] – Sean

Cool. All right, let’s jump into the rapid fire round. This is the part episode where we get to find out who Kim really is. If you can try to answer each question in about 15 seconds or less. You ready?

[00:17:38.350] – Kimberly

Ready.

[00:17:39.100] – Sean

All right. What is your favorite podcast?

[00:17:41.500] – Kimberly

A friend of mine, Elana Margolis, works at Eisner Ampner, and she has a podcast called Engaging Alternatives. It’s terrific. I’ve been on. I’ve talked about farmland investing with her. Check it out.

[00:17:52.660] – Sean

Nice. Good recommendation. All right. What is a recent book you read and would recommend?

[00:17:58.210] – Kimberly

Sure. I had the chance to meet Mary Beard. Mary is an author that wrote SPQR. She’s got a new book out about the Roman Emperor. I think that if you’ve ever traveled to Rome or passionate about that type of history, her books are terrific.

[00:18:14.170] – Sean

That’s awesome. All right, the movie question, what is your favorite movie?

[00:18:18.870] – Kimberly

Favorite is probably Goonies because I’m a child of the ’80s. More current might be Oppenheimer.

[00:18:27.310] – Sean

Nice. Good choices. All right, more serious questions here. What is the worst advice you ever received?

[00:18:34.880] – Kimberly

I think I was a teenager in the ’90s, and I think the advice was be diverse in terms of your or eclectic in terms of the mix of your skill sets and your activities and your clubs and whatnot. I feel like that stretches a person thin. So I played violin, I did everything. But I think now the advice is a little bit different. I think it’s go deeper and develop your expertise in one area, and that’s another way to stand out. So I think that’s a little bit of a better piece of advice.

[00:19:09.490] – Sean

Specialize. Yes, that’s good. All right. And what is the best advice you ever received?

[00:19:15.520] – Kimberly

Read everything you can. That’s what I asked my first boss at Nuveen when I was trying to figure out how to go up the learning curve. But he’s right. In reflection, so many of us don’t take the time to do Good advice.

[00:19:32.230] – Sean

All right, time machine question. If you could go back in time to give your younger self advice, what age would you visit and what would you say?

[00:19:39.470] – Kimberly

Well, I’d go back to my 20s, and I would travel, and I would probably do more risky things I suppose, in my 20s. I’ve got a son who’s 16, and he’s about to be 20. I just really think that while we’re young and have good knees, it makes sense to ski hard and travel where you may. That’s the best advice for- Love it.

[00:20:03.030] – Sean

I live that way personally. I see people, they get to 65, 70. That’s when they retire and try to travel. And try is the key word. They can’t really travel like they were hoping. That’s right. Do it now. All right. And where can the audience reach you?

[00:20:20.750] – Kimberly

Sure. Xainvestments. Com, or you can email me at kflyn@xainvestments. Com. Look forward to hearing from you.

[00:20:29.170] – Sean

Awesome. Well, thank Thank you so much for your time, Kim. Thank you. Hey, I’d like to say thank you for checking out this podcast.

[00:20:36.720] – Sean

I know there’s a lot of other podcasts out there you could be listening to, so thanks for spending some time with me. And if you have a moment, please head over to Apple Podcasts and leave a five-star review. The more reviews we get, especially five-star reviews, the higher this podcast will rank in Apple. So thanks for doing that. And remember, this show is for entertainment purposes only. If you heard any stocks mentioned on this podcast, please do not buy or sell those stocks based solely on what you hear. All right, thanks for your time. We’ll see you.