What Exactly is Private Equity?

Episode Transcript

Speaker 1 (00:02):
Thirteen ten Wi b A and ask the experts with
Wisconsin capital management online whizcap dot com. That's wi scap
dot com. Great website to learn more about Wisconsin capital management.
Also a fantastic opportunity if you have questions or you'd
like to start a conversation, no pressure, no obligation if
you head on over to whizcap dot com. That's wi

(00:25):
scap dot com. Little chat bubble there and you can
start a conversation right from the website. Again, that's wizcap
dot com. That's wiscap dot com. A couple of weeks ago,
Nathan brought up a really interesting point about annuities and
how sometimes you know they're sold. Is this magic solution
that can create more problems other than they fix. So
today we're going to actually dive into something a little

(00:46):
bit new that's been popping up quite a bit in
the financial world, and it's private equity entering into retirement plans.
And Nate, let's start off kind of square one. What
exactly is private equity and how is that different from say,
like obviously public equity.

Speaker 2 (01:04):
Yeah, exactly what we're seeing is that a lot of
financial advisors are kind of piling into private equity and
others so called alternative investments. So my dad are both
kind of leery of this trend, so we wanted to
bring it up on the show with you. So it's
you know, not incommon for some of these private wel
clients now when we see their statements, and I'll be

(01:26):
you know, up to forty percent in these so called
alternative investments, and that includes private equity, and just a
level set here private equity, and how we got.

Speaker 1 (01:37):
Here is.

Speaker 2 (01:39):
A good basis is always the stock market crash of
nineteen twenty nine that started the Great Depression. So in
the nineteen thirties, Congress stepped up and said, you know
enough people need transparency in their investments, and they created
the sec the Securities Exchange Commission in nineteen thirty four.

(02:00):
And essentially there are rules that you know, just a
sum up that kind of required companies to disclose their financials.
It banned insider trading, It required suitability standards, right, so
you couldn't pick risky investments for people that couldn't handle
the risk. And the last major point was that it
kind of limited which investment could bypass.

Speaker 3 (02:21):
These kind of new public rules that they made.

Speaker 2 (02:23):
So this is the start of the private equity So
these are the investments that bypass these public rules. So
the whole point was that you wanted to protect everyday
investors and if you were a sophisticated investor, you can
invest in private equity.

Speaker 1 (02:38):
Sounds like a pretty you know, solid foundation. I guess
I didn't realize that some of these things and some
of these principles and rules dated back so far to
the early thirties, of course, following what happened in the
late twenties. So we talked this morning with Tom and
Nathan Plumb of Wisconsin Capital Management. Tom Plum is a
chartered financial analyst. Nathan is a Certified Trust Financial Advisor

(03:00):
with an executive MBA. And Tom, as we talk about
this protection, does that sometimes prevent average folks from accessing
some of these investment that big pensions or universities may
be using.

Speaker 4 (03:14):
Well, that's the story that people hear, but it's only
half the truth, you know. The poster child was called
the Yale model, David Sweedtz's famous strategy where endowments loaded
up on private equity, venture capital, hedge funds, timber real estate,
things like that, and it looked brilliant on the surface,

(03:35):
and it really did work for quite a while. But
the reality also you have to hear when Yale and
other endowment funds needed cash, especially during stress markets, they
had to sell these private positions at fifteen to twenty
five percent discounts. That's because these investments were never marked

(03:57):
to market. They were marked to a form, sometimes to
a manager's best guess of what they're worth. It's like
I'm saying that my house is worth five hundred thousand
dollars because Zillo says it's worth five hundred thousand dollars.
But then when I will go to sell it, I
find that people are only going to pay me three
hundred and eighty thousand dollars. So Yale and a lot

(04:21):
some of these other companies have a Zilo priced assets,
but they need real buyers, and when they come across
these real buyers, sometimes they demand a haircut.

Speaker 1 (04:31):
Like the analogy. Great stuff this morning, as we talk
with Tom Plum and Nathan Plum of Wisconsin Capital Management
online wizcap dot com. That's wis cap dot com, wiscap
dot com, whizcap dot com. We can learn more about
Tom and natall on the website. Also start that conversation,
no obligation, no pressure, Got a question, just head on

(04:52):
over to wizcap dot com. So as we talk about
this stuff, Nathan, the Trump administration I'm seeing in the
in the headlines and then the news making equity, private
equity more accessible to regular investors.

Speaker 2 (05:09):
Yes, Trump signed on August seventh and executive order that
said you would like to see private equity and private
investments go into retirement plans for four one case. And
the four to one pay market is a multi trillion
dollar market, so it's one of the few markets that
you know, private equity have not traditionally been in. So

(05:33):
but you know, these private equity investments, they use something
called leverage or they put debt on these investments, and
so that is traditionally something that's not allowed into a
four to one K plan. So, and you know, leverage
and debt, as you learned in the financial CRESST crisis,
is a double edged sword. So if you're in debt

(05:53):
and the asset value goes up, it actually enhances your return,
so you look really really brilliant. But unfortunately the market
doesn't always go up. So when the market goes down,
you're caught down with leverage, it actually amplifies your losses
and that's when you see people go bankrupt and are
forced to sell things. So the you know a lot

(06:15):
of people have their four one ks, don't look them
very often. Four one K platforms required to give quarterly statements.
But what you may see in the future, what these
private equity firms are going to try to do is
try to get into these target date funds that are
very popular with people. So you when you set up
your four one K, the default is what year do

(06:38):
you think you're going to be hired, and they choose
you your fidelity freedom, you know, twenty fifty or de betting,
and just how old you are, and that's all the
thought they put into it. So but you could unwittingly
be starting to do it invest in these and so
we just want to raise the alarm and educate our
listeners here.

Speaker 1 (06:56):
That's interesting too, Nate, when you mentioned you know a
lot of us, don't you know, whether it's we get
the annual message or the email or used to be
kind of the big printed out thing of kind of
a breakdown of your four oh one K options and
what's going on there folks may not be aware of
what's all and currently what's all in there, and then
of course setting themselves up up as well for exposure

(07:18):
to this. And we're going to get into kind of
kind of more of the details. Is it a good
thing here to have this, and of course the importance
of diversification Before we do that, though, I did want
to talk about, of course, today's show brought to you
by our good friends at Wisconsin Capital Management. And one
of the things that I really love about about getting
to know Nate and Tom has been you know, it's
really for folks. If you've heard you know that generic

(07:40):
that cookie cutter financial advice advice. Been listening to the
program for a while, you know, Tom and Nate are
very very different. They want to work for you and
if you're unsure it's actually inside of your four oh
one k or looking for a second opinion with with
someone that'll sit on the same side of the table
with you. Of course, folks at Wisconsin Capital Management, they're
the folks you want to talk to, right Tom.

Speaker 4 (08:03):
That's right. You want to talk to somebody who has
some financial training can do some true analysis of what
the impact of some of these things can be, but
you know, basically you need to find out someone who
is not selling you a product but is looking at

(08:24):
providing you a service. We've often talked about sustainability of businesses.
If someone is selling you a product, they're selling you
a product they're hoping to get paid and then they're
hoping to move on and sell somebody else a product.
But someone who is trying to work with you on
a service that is not being paid by commissions or

(08:45):
something like that, they can give you some honest and
fear advice that's not pushed around by where the money is.

Speaker 1 (08:54):
And I know, Nate, one of the things you want
folks do is when they get that appointment and talk
with you, you want them. You want them to bring everything,
don't you.

Speaker 2 (09:03):
Yeah, you know it's an easier discussion to say, hey,
I don't know what exactly what I have, or so
I just protus on statements or email them to Nathan
on a secure link, or you just people physically bring
them in. If you don't have everything, I think that
there's just so many things that you can stop you
from seeing, uh, someone like us, like a financial planner
or a wealth management firm. But the key thing is

(09:25):
just to show up and we can guide you through.
Hopefully we're not intimidating and uh yeah, we can guide
you through the journey and hopefully you educate you and
really make you feel comfortable with everything.

Speaker 1 (09:35):
It's a great opportunity, no obligation. All I got to
do is head on over to the website whizcap dot com.
That's w I s c ap dot com. You can
schedule a conversation or call to the office and talk
directly to Tom or Nathan. Again, that's wiz cap dot com.
W I s cap dot com for Wisconsin Capital Management.
Trusted advice, local roots, real expertise. We're going to continue

(09:57):
our conversation with Tom and Nate. We will do that
next as Ask the Experts with Wisconsin Capital Management continues
right here on thirteen ten WUI b A thirteen ten
w U I b A and Ask the Experts, joined
this morning by Tom Plum, who is a chartered Financial

(10:18):
Analyst and Nathan Plump, certified Trust Financial Advisor with an
executive MBA. Of course, they come to us from Wisconsin
Capital Management Online wizcap dot com. That's wi scap dot com.
Don't forget, no obligation you can start that conversation, ask
those questions right online or of course give them a
call as well. All that information available to you at

(10:38):
wizcap dot com. That's wi s c ap dot com
talking this week about about understanding private investment in private
markets and kind of really what's out there, and Nata,
I've got to ask as we as we talk about
you know, more options, I think sometimes people say, well, well,
should should be looking this at A at A is

(11:00):
a good thing? Or or what's kind of the takeaway
overall on this, Nathan, This.

Speaker 2 (11:04):
Is how we really differ from a lot of our
competitors and peers in industry. So almost every financial advisor
and wealth management firm really preaches diversification, and usually diversification
is a good thing, but it's almost become too much
of a good thing right now. So the you know

(11:26):
Wright style Wall Street, which is you know, one of
his genius thing is making these financial products.

Speaker 3 (11:32):
They're always creating these new.

Speaker 2 (11:34):
Financial products to sell, and these people that tell them
are ultimately these financial advisors of wealth management people. So
the thing is that it kind of gets a little
bit too far. Like you know, we take continued education
here as with all wealth management firms and the answer
is like, does this add to a diversification? The answer

(11:55):
is yes, no matter how poor this investment might be.
I mean, if you said, shit, he had a timeshare
to your portfolio to diversify it on the test your
CTP takes is the answer is always yes.

Speaker 3 (12:08):
So it doesn't.

Speaker 2 (12:09):
Factor things in like ill liquidity or scarcity. It doesn't
factor and leverage or risks, or how much debt is
on it. It depending how liquid things, depending how much
things are priced. So if you are hav these small
issue stocks or bonds, they're not priced every day. And
then you know this Yale model that would come so popular,

(12:32):
it just became gospel. You know it just when you
needed to sell, you sold it. It's such a big
discount that it took all your all those beautiful historical
returns away. So you end up being kind of just
like the market. So you don't hear that story from
other people, you know.

Speaker 1 (12:51):
I think of like the guy with the big giant toolbox,
which is always super impressive and really cool and really
useful by the way, if you know how to use
all those tools. The problem I think we run into
is sometimes people get themselves in over their head using
a tool that they may not you know, may look
or may believe is the is the proper one, but
it turns out they didn't know how to use it.
And that's one of these things as we talk about

(13:12):
some of the things that could be dangerous here, you
definitely want to want to pay attention to. And and
you know, Tom, we mentioned earlier about you know, many
financial planners, you know, folks as CFP designations, are being
trained to kind of bring in whatever to a portfolio
as long as the quote unquote, as Nate pointed out, diversifies.
Can you kind of explain that, kind of dig into

(13:33):
that a little bit more, Tom.

Speaker 4 (13:35):
Well, a lot of the financial planners are trained with
they use and look at a thing that we call
the coin chart, And if you think about it, it's
like a heat map that shows year by year how
different asset classes have performed and how they correlated with
each other. And if something is a low correlation, even

(13:56):
if the investment is expensive, ill liquid, or hard to understand,
and some planners are taught that they should justify adding it.
Other financial planners will take a look at what provided
the return last year and with the idea that everything
returns to some median. They will sell all the good

(14:17):
investments or the investments that have gone up to buy
the ones that are down, assuming that everything is just
kind of random, and the ones that were down now
it's their turn to go up. So they're taught to
justify their diversification and their movements because there's no idea

(14:38):
what's good to perform. And to tell you the truth,
I think you want a financial planner or somebody you're
working with who has some idea about what's good to perform.

Speaker 1 (14:49):
And Nate, I could see a bob in your head
over there. You really want to jump in on this,
don't you.

Speaker 2 (14:54):
Yeah, we call it internally diversification. So there's diversification and
this one. You're so diversified you just end up, you know,
not really taking a position at all, which you know,
so if your CFP just says, look at this chart,
no one knows what's going to happen, you might as
well just be in everything. These financial advisors are just

(15:18):
essentially checking boxes to make the chart look pretty and
not doing any real investing for you.

Speaker 1 (15:23):
That's you definitely want the real stuff, not the pretty charts.
Although the pretty charts do look nice, it just doesn't
really doesn't really doesn't really help with everything. And and
as we talked to one final thing on this, you know,
when it comes to your portfolio and being diversified, that's
that's It's really about finding things that make sense, isn't it.

Speaker 4 (15:44):
Oh? Yeah, definitely. And the reason why this is such
a hot topic right now, Sean, is because of an
old adage, follow the money. Private equity firms, hedge funds,
those type of entities, their fees are typically two to
three i'm the traditional money manager's fees. As Nathan mentioned

(16:05):
some of their places where they were getting the money
from large endowments and pension funds, they're starting to dry
up as a source of new money. So they're looking
at some huge potential new money as they look to
expand and to keep their fees going. So that's one
of the reasons why they're trying to go to the

(16:26):
average investor through these things like for one k's and
other types of retirement savings accounts.

Speaker 1 (16:33):
Talking this morning with Tom and Nate Plumb of Wisconsin
Capital Management online whizcap dot com. That's wiscap dot com.
You can schedule conversation or call the office and talk
directly with Tom and Nate. Again, I'll get too is
head on over to the website wizcap dot com. That's
wiscap dot com for Wisconsin Capital Management, strusted advice, local

(16:53):
roots and real expertise. And Nate I saw a note
in hear about about the buffet table, which cued me
in right away. I couldn't look away. What is the
buffet table? What are we talking about there? My friend?

Speaker 3 (17:05):
Yeah, I personally really like analogies.

Speaker 2 (17:07):
So you know these you know, people tell me like, oh,
I have such an great, great investment, it's so good
that I want to include you on it. That should
be kind of a red flag. And you know, I
just kind of the analogy I like to use is
just imagining late to a busy Christmas with feet, you know,
at on Christmas Eve, right, so, and this is at

(17:28):
this buffet, all these big pension funds and endowments and universities.

Speaker 3 (17:32):
You know, they're invited early.

Speaker 2 (17:33):
And they already kind of you know, got what they wanted,
picked what they wanted, ate what they wanted, and then
they go, well, there's some extra food that why don't
we just open the doors up to some uh, some
smaller guys and let them just eat the leftovers. And
so that ends up being kind of a decent analogy
for private equity. There are some good private equity investments

(17:55):
out there, they're extremely rare. And you know, if he
has such a good ideas down there and innovations versity,
I doubt you're going to share that idea to the world.

Speaker 1 (18:04):
Love the analogy there, And as we kind of wrap
things up real quick when it comes to just average folks, Nathan,
what should what should the average listener do if if
private equity starts showing up in their in their retirement plan.

Speaker 2 (18:18):
Yeah, I think you just may want to rethink some
of your investments. So like, if you're like forty three
percent of the people out there, you're just in some
target date fund, it might be time to change that
into some other options that your funds have. And also,
if you this is a for one, gave old job it,
it really should incentivise you to roll it over so

(18:40):
you can pick your own investments. So again, you know,
it's deal thatage here with any kind of financial planner
or wealth management firm that you just kind of review
your plan, you kind of understand you know what's in
the plan, Like these target dates are just a huge
mashup of other mutual funds in each yes, and they're

(19:01):
hard to understand. So we can you know, unlock that
for you or kind of x ray that for you
to use a better analogy and then need just a
valio how much risk you're actually taking, because we want
you to know that you're in the right calculator risks
for your age. So if you're taking too little risk
when you're young, you're not doing the right thing. If
you're taking away too much risk as you older, you're

(19:22):
probably also not doing the right thing. So that's where
everything gets bespoke, It gets personalized and kind of cater
to you to make sure that you can sleep at
night and nate.

Speaker 1 (19:32):
When we talk about this stuff. You know, getting you know,
a second opinion. It's always good to get get a
second set of eyes and find somebody that's that's really
not there to sell you any type of product that
really can give you an honest assessment of this stuff,
isn't it.

Speaker 2 (19:45):
Yeah, So you want to get someone a second opinion
on thing. If you see their first reaction, it's like horribly, Oh,
I can't believe you're in this or you're you know,
I would kind of watch the shock value of that.
They're obviously just putting on sales skills for you. So
I think you're just someone that gives a balance measures approach.
And this is the pros of the portfolio. This is

(20:05):
the cause of aforeio. These are the risks you're taking
and not give you the you know song and dance
that my investments are so much better than someone else's.
You know this, we'd like the people that come to
us like that, and that's and you.

Speaker 1 (20:18):
Talk about some great opportunity as well. And folks that
come to see Nate and Tom, they'd love to talk
with you again. You can start that conversation right online
at wizcap dot com. That's wi scap dot com. You
can schedule a conversation right from the website or call
the office. You can talk directly with Tom Ornate again.
That's whiz cap dot com. That's wi scap dot com
and Tom. Before we wrap up this morning, let's talk

(20:40):
a little bit about Wisconsin Capital Management. A little bit
of insight into into the inner workings of Wisconsin Capital
Management and what it's like working with with both you
and Nate.

Speaker 4 (20:51):
Well, you know, John, we're independent, locally owned. We've been
managing money in Wisconsin for nearly forty years. We have
no sales, quote photos, we have no product kickbacks. We
just do real math, real research, and real people trying
to help other people make smart decisions. So we think

(21:12):
that we can cut through a lot of the fluff
that you see, a lot of the jargon and help
you feel comfortable that the decisions you're making for your
financial future fit in with what you really need to happen.

Speaker 1 (21:26):
Real people making real decisions. It's a really important day
to make that first call, that conversation. Get it started
right now again the website whizcap dot com. That's wiscap
dot com. Learn more about Wisconsin Capital Management. Start that
conversation right online. Of course, you can call the office
talk directly with Tom and Nate. Of course Tom Plum
chartered Financial Analysts Nathan Plum, certified Trust Financial Advisor with

(21:49):
an executive MBA. Again, you can make those appointments right
online at wizcap dot com. That's wis cap dot com.
Tom Nate always great chatting with both of you guys.
Enjoy this fantastic day.

Speaker 4 (22:02):
Thanks Sean, it's been wonderful chatting with you again on
a subject we think is very important.

Speaker 3 (22:07):
Fantastic, absolute pleasure, Nate.

Speaker 1 (22:09):
Always great to see you as well, and of course
we've got news coming your way. Next right, you're on
thirteen ten Wiba