Private markets outlook: CIO Mike Kelly—The new investing imperative

In the finale of our Private Markets Outlook series, we sit down with Co-President and Chief Investment Officer Mike Kelly for an in-depth look into the new investing imperative in private markets. 

Mike joins Research team members Alan Flannigan and Andrew Korz to explore the shift from disinflation and low rates to today’s environment of volatility, inflation and uncertainty. He gives insights into how private markets offer new opportunities for growth, diversification and operational value creation—especially in the U.S. middle market.  

The Private Markets Outlook podcast series from Future Standard features special guests and portfolio managers from across our firm, each bringing unique perspectives on private equity, private credit and real estate. Get more private markets insights at futurestandard.com/insights 

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Follow the value, not the herd: The new private markets imperative
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U.S. exceptionalism at a crossroads 

For more research insights go to https://futurestandard.com/insights

Transcript

[00:00:09] Intro 

[00:00:09] Alan Flannigan: Capital concentration, higher interest rates, and greater policy and geopolitical uncertainty are ushering in a new private markets imperative. 

Welcome to the final episode of our Private Markets Outlook series titled “Follow the Value Not The Herd.” Over the course of this series, we’ve spoken with portfolio managers from around Future Standard who have shared their unique insights on real estate, private equity and private credit markets, and how the defining trends we’ve highlighted in our outlook are shaping the opportunity set.  

Today, we’ll speak with someone responsible for executing upon this new imperative and delivering this value proposition to our investors. He leads the firms efforts across investment management, product development and capital markets. We’re very pleased to sit down and have a conversation with Future Standard’s own Co-President and Chief Investment Officer, Mike Kelly. 

Meet Mike Kelly CIO and Co-President of Future Standard 

[00:01:10] Mike Kelly: ​Thanks for having me.  

[00:01:11] Alan Flannigan: And as always, I’m joined by my esteemed colleague and leader in investment research, Andrew Korz.  

[00:01:18] Andrew Korz: Good to be here, Alan.  

[00:01:19] Alan Flannigan: Terrific. Thanks Andrew. So, Mike, thanks for being here today to share your experience with our listeners. I really want to just lead off very simply. Tell us about your background and your experience getting into the investment industry and what’s led you here today.  

[00:01:37] Mike Kelly: Sure, Alan. I’ll take it back to my first job in investment banking at Solomon Brothers. I spent a couple years doing that and then went up to the fixed income trading floor at Solomon, the storied trading floor that Liar’s Poker took place at, 42nd floor of Seven World Trade Center. I went back to business school to try to make a switch into asset management in the buy side—this is now the mid-nineties—and I was really intrigued by alternative investments, in particular hedge funds.  

What I saw was a pure meritocracy, so a place where someone could go and, just based on skill and perseverance and competence, could really make a career for themselves at a very young age. That really drew me in. The problem was I didn’t know how to break into the hedge fund industry. Basically what I did was—this is pre-internet now and pre-email—I had a printed out directory of all of the major hedge fund firms. I still have this.  

They’re names of the leaders, their phone numbers and addresses, and I simply went down and cold-called every one of them. I was only able to get one on the phone. Lee Cooperman, who happened to answer his own phone. Lee, from Omega Advisors. I just offered my services to come work for him for free. He told me at the time he only hired PhDs. I was getting my MBA, so I thought I was disqualified. But what he clarified was, to him, PhD stood for poor, hungry and driven. There you go. I checked all three of those boxes and he said, "I’m a value investor, I like the price. Come start working for me on Monday." 

And that began my career in alternative investments. I worked at Omega for a number of years until I went over to Tiger Management, the storied hedge fund run by Julian Robertson. An incredible experience. 

From there, with several partners of mine and I, we started a firm called Frontpoint Partners, with the mission of bringing alternatives to institutional investors; which was quite a novel concept in the late 1990s/early 2000s. Obviously a lot’s transpired since then.  

Within 14 years or so of my career—so now in my mid-thirties—I became the Co-CEO and Chief Investment Officer at Frontpoint, which at the time was one of the largest hedge funds in the world.  

Be careful what you wish for. I got it at a very early age. I’m now in my mid-fifties. I would say the journey is definitely more important than the destination. We had a lot of fun, some great times. We did the Big Short. Michael Lewis wrote the book about that episode in our firm’s history. 

We sold the firm to Morgan Stanley. My partner and I ran it for Morgan Stanley for several years. Obviously, Morgan Stanley, an incredible firm. Then I went on to become the CEO of Orex Asset Management, Japanese Holding Company. I bought Robeco, which is a $350 billion European asset management company for them. 

But I really wanted to be an entrepreneur again. And at that time, I had this view that the next stage for alternative investments was to bring those strategies to a broader audience, to an individual investor audience. I was introduced by a couple of individuals at GSO—Ben Goodman and Doug Ostrover, as well as a friend, Scott Fletcher—to Michael Foreman; (who, they introduced me to, to Michael). That was about 12 years ago. 

[00:05:28] Alan Flannigan: What led you to ultimately choose FS? You had this vision for the next step that you wanted to take in your career, but what about that fit seemed right to you at the time? 

[00:05:37] Mike Kelly: Yes, as I saw it, what was then called Franklin Square was truly a pioneer in the market. The first ever non-traded BDC brought to the market. The firm was about 11, 12 billion [dollars] in assets under management. Bringing income strategies to individual investors through their brokers and advisors. What really resonated for me was Michael’s vision about doing that on a broader scale to a broader audience within the private wealth market. My background was and still is building asset management companies. I wanted to harness that skill here and help turn what is now Future Standard into a world class asset management company. 

[00:06:24] Alan Flannigan: Sure. You’ve shared some of the experiences that led you to where you are and I’m also curious—I think it’s helpful for people to understand some of the characteristics. Everybody talks about the what, but what’s the why behind how it comes together in terms of attributes of someone to be a successful long-term investor, to be a successful manager of investment teams and builder of organizations. 

[00:06:49] Mike Kelly: I started really learning about investing by reading everything I could get my hands on and if I had to give anyone any advice, it would be just to value avail yourself of everything you can read. Obviously, there’s so many ways to do that now; there weren’t as many ways when I was starting my career; I went to the library and bookstore and just bought everything I could. 

I think about the Market Wizards series of books and speaking to investment leaders and those who had perfected their craft or were in the process of perfecting it. What struck me was that no two great investors are alike. They’re a little bit like fingerprints. They’re all very different, but you have to come up with your own style that works for you. I think that’s a really important lesson within investing. 

I had the luxury of working with some of the best minds in investing, which helps at Omega, at Tiger Management, at Front Point and now here at Future Standard. You surround yourself with the best investment thinkers. And so Lee Coopermans, the Julian Robertsons. But not just them, all of the analysts and portfolio managers that I had the pleasure of working with, who have gone on to run some of the most successful investment firms themselves today. Tiger Global, COtwo, Maverick and so forth. You learn by doing, you learn by getting in there, investing, making mistakes, not making them a second time is a really important aspect of it. What I really enjoy about investing is it uses both sides of your brain. The left side. Right side. It’s part art, part science, and I think you need to bring real creativity to idea generation and diligence. You really have to use innovation and creativity to bring ideas to bear. 

Then you have to really use a scientific approach on learning what worked and what didn’t work, like reflecting what happened and why, and just getting better over time. I think those are really important aspects. 

As far as you know, other traits, skills, personalities that I do think lead to successful investing. It’s not the same to say that a great investor will, by definition, become a great manager of investment teams and leader of investment teams. I do think those are conflated. They’re not necessarily the same skillset. I can give you plenty of examples of people who have been great at one, but not great at the other. 

So I’ll take them in turn. I think as an investor, the ability to do intense focused work is critical. It’s the start. At the same time, once you have done that work, you need to be, in my opinion, a flexible thinker. What I mean by that is you do the intense work. You arrive at a high conviction conclusion, but you don’t wed yourself to that conclusion. You open yourself to change your mind if the facts change or you get confirming evidence or disconfirming evidence along the way; you don’t block out the disconfirming evidence and allow yourself to only see the things that give you conviction. I think that flexible thinking is paramount among the best investors that I’ve worked with and have observed. 

On top of that, secondly I would say, the ability to identify your own variant perception is really, really important in investing. Variant perception is a non-consensus view. It’s not enough you know that variant perception was a concept that was popularized by Michael Steinhardt, who’s a legendary investor. And what it is, is the ability to see things that others do not. Either opportunity or challenges and risks. 

It’s not enough for me to say, well, I’m bullish, like the market on Nvidia. I mean, that’s already reflected in the price. It’s not enough for me to say, I’m willing to lend this company at a particular spread that everyone else is willing to lend at. I have to be able to look at an opportunity and say, I am more bullish than the projections, more bullish than the thesis that others have. Or I am more focused on the downside here than it appears others are, and so I’m either going to not participate or I’m going to short this company if I’m a hedge fund investor. And I think generating real compelling returns starts with identifying what your variant perception is versus what’s already priced into the markets at a given time.  

Contrasting that to being a leader of investment teams, I think, is a bit different. Here, I would say, what’s most important is humility. As a leader, it’s not about you. You have to let go of your ego. Really it’s about harnessing the best out of your team, allowing investors to do their best work, and getting out of their way. Helping them ask the right questions, prioritize giving them the resources to do their job are all important. It’s not about you as a leader, it’s about the investment managers. It’s about the clients, about doing right for the clients.  

I’d say the other thing about being a leader—there’s a great quote from one of my favorite  

see-ers, so to speak, Charlie Munger. And he says, show me the incentives and I will show you the behavior. 

[00:12:37] Andrew Korz: I love that quote. 

[00:12:38] Mike Kelly: And that quote should be tattooed on the walls of every investment management firm. Because I think when you reflect on our business, nowhere does that quote probably speak better than investment management. 

People will come to me and ask for advice on managing investment professionals and they’ll say they’re struggling with it or having problems, and what advice would I give them. And I always start by asking them to describe their incentive mechanism and framework. Because therein usually lies the issues and the answers.  

[00:13:13] Andrew Korz: Mike, I really want to double-click on a couple things you just brought up. Number one, flexibility and the second thing, humility. When we think about being an investor and dealing with market uncertainty. A lot of that is number one, being willing to be flexible with your market views and understanding when things have changed. Number two, being humble enough to admit when your process or your framework no longer works.  

So I want to start off big picture here. I think right now you can’t really think about the markets without thinking about the macro. It’s everywhere and we wrote this private markets outlook and certainly the takeaways are asset class by asset class. But really, the fundamental case we make is really partially a macro case. You are, I think at least to some effect, a macro guy. I want to start there. 

When I started at FS in 2017—I’m sure you remember this sort of prism through which we and a lot of other folks viewed what was going on in the world was the new normal. Secular stagnation,  whatever phraseology you want to use, but it described the same thing. Which was slow growth below target inflation, low interest rates, low capital intensity and ultimately for investors, a search for income.  

I think that’s very much changed, call it in the past four to five years, where now, we’ve had above target inflation for almost five years in a row. Obviously, higher interest rates. We’ve got this CapEx boom that we’ll get to later in AI, and energy infrastructure. For investors, the focus, the challenges have really moved more towards diversification, valuations and certainly concentration in public equity markets. 

At the same time, some things haven’t changed. The demographic challenges that we have economically haven’t changed. Certainly the same companies that dominated the SaaS, cloud era are also dominating the AI era and also the outperformance of U.S. assets that hasn’t changed either. 

You’ve invested through inflexible…through lots of different financial market eras, epochs, however you want to call it. Do you think we’re in something fundamentally different right now than we had been, call it pre-COVID? If so, how would you describe that and what are the core— if I’m an allocator listening to this—what are the core implications that I’m taking away from my portfolios? 

[00:15:47] Mike Kelly: The short answer is yes. I do believe we’re in a new regime. And you’re right, I did start out my career as a macro investor and consider myself a student of market history and economic history. So I’ll speak to my view of the arc of history, at least over my career, and look at it over the past 30, 40 years. 

I would start the trend that has recently ended at around 1987, so right around the time of the stock market crash. At that time, Volker had raised rates significantly to crush inflation. And from the late eighties on, we began this series of disinflation and a lowering of interest rates as disinflationary trends continued; growth slowing. We actually had favorable demographics as the boomers were still in full functioning. And that transpired a 35-year cycle that only ended, I would call it 2021, to the point you alluded to. 

But over that megatrend cycle—I would almost say golden era—we had disinflation, lower rates, globalization, favorable demographics, a great backdrop to be investing in, frankly, stocks and bonds. 

Then you have 2021 hit and yes, I believe a sea change started. Some people will point to COVID, but I think COVID was a catalyst. It wasn’t the cause. The end of the zero interest rate era and free money. The end of globalization as we’ve come to know it in the post-Bretton Woods regime. The onset of inflationary forces. The list is long to name, but the deglobalization trends, climate change, tariffs, immigration policies, fiscal imbalances, these are all inflationary. And they’re here to stay for some time. 

The net result of all of that is—you know what matters to allocators—we are now in a period of higher volatility. We are in a period of higher uncertainty, higher rates for longer, not lower rates for longer, higher inflation. All of that, which has impacted the correlation between stocks and bonds. The period where bonds acted as a ballast to stocks when stocks would have a hiccup—bonds would be there to offset your portfolio—are behind us right now, and I think this all challenges the traditional approach of the 60/40 model.  

Having a 60/40 model or somewhere in between that can build a diversified portfolio. Concurrent with all of this, we now have very concentrated and very expensive equity markets. Mag 7…35%–36% of the index. Stocks trading in excess of 20 times. We all know what the data shows usually portends much lower annualized returns over the coming decade. Haven’t seen it otherwise in the data. 

The sum total of this is that the playbook must change for allocators. And we’re always fighting the last war. And so if an allocator is just looking at that 35-year slope, they might invest a certain way. But I would advise thinking about it a little bit more holistically around these forces and think more clearly around other sources of income, other sources of growth, other sources of diversification. This is where I do believe alternatives and private market access, the things that we do here at Future Standard, conduct to help our clients navigate what I think is going to be a prolonged period of uncertainty.  

[00:19:47] Andrew Korz: This is one way we framed our outlook. Over the past, call it 15 years, the S&P 500 is up, I think 700%. And to your point, for most of that period, bonds…the returns weren’t incredible, but they were diversifying and the Sharpe ratio was good and the 60/40 worked. Certainly, private markets strategies added value, so private equity outperformed public equity, generally speaking. Private credit delivered income in excess of what public markets delivered, and certainly real estate performed quite well. 

As we think about private markets, the way I see it is that, to your comments, the need for alternatives has grown; just given all the macro forces we’ve talked about. At the same time, there are a lot of forces within private markets that suggest it’s more about just allocating to private markets. You have to dig deeper and think differently about the different segments as that marketplace has grown. One trend that I really want to click on—that we talked about in our outlook—is scale and capital concentration. You’ve watched this industry grow up. You’ve watched it, especially over the past five years, really expand into new parts of the market. 

Again, one of the side effects of that has really been an increasing concentration of capital within a handful of firms. And then if you think about each sort of vintage, a handful of strategies or mega funds, they call it…I know we’ve talked about this on the podcast before, but you think about U.S. private equity, first half of this year, 60% of capital went to mega funds. 

About 5% of funds took in 60% of the capital. So, this has accelerated. If you go back to 2021, there was only 40%. I think this has really accelerated post-COVID. And I think what it’s ultimately done is it’s pushed some of these strategies into larger and larger investments and larger and larger segments of the market. When you have this much capital going to those segments, it gets more competitive. We have some data in our outlook that speaks to this, but I want to get your perspective on it. 

When you think about the trade-off of scale and specialization going forward in private markets investing, how do you think about how impactful this new world is for this disproportionate  distribution of capital? How important it is for returns going forward.  

[00:22:23] Mike Kelly: So there’s a lot in there. I’ll start by just speaking to how we came to this point in the evolution of private markets. Backing up to when I was first coming out of school, out of business school in the late nineties, there were 8,000 publicly traded companies, roughly. We had something called the Wilshire 5000 Index, which had 5,000 of the companies in the stock market represented in one index. Today, there’s, in the U.S. roughly 4,000 publicly traded companies. So there’s not even enough public companies to comprise of the Wilshire 5000. I looked...  

[00:23:11] Andrew Korz: It’s the 3000 now, right. 

[00:23:11] Mike Kelly: Yeah. It’s like the 3000 now. I think some of this was market-dynamic driven. You had this prolonged period of industry consolidation in M&A that took place. Roll-ups. Technology certainly accelerated this trend across so many different industries we can name. Media, energy, consumer goods. There was just a consolidation winner-take-all trend. Technology. 

[00:23:40] Andrew Korz: And globalization probably helped. 

[00:23:41] Mike Kelly: Globalization absolutely helped that. Low interest rates also accelerated that trend because you could finance these, this consolidation trend. 

Secondly. There were regulations. If you think back to the early 2000s, Sarbanes-Oxley came out and that made going public and staying public very onerous and costly. From an audit standpoint, from a governance standpoint, reporting standpoint. And so some companies frankly just either didn’t want to go public or didn’t want to stay public and either took themselves private or asked third parties to take themselves private. 

The third aspect of this was what I would call the rise of the private markets professional—professionalization—for lack of a better word, and today, you simply don’t need to be public to avail yourself of very sophisticated capital markets. And that wasn’t the case 10, 20, 30 years ago.  

[00:24:40] Andrew Korz: It’s sort of like strength leads to strength, right. Absolutely. As, as, as the market matures, more companies can access that and that matures the market more. And it’s, sort of, this flywheel.  

[00:24:48] Mike Kelly: We’re seeing even early-stage companies in AI avail themselves of massive amounts of equity and credit capital at an early stage of growth. And it allows companies  to stay private longer or indefinitely. And you even have, again, some public companies being taken private. We just saw the Electronic Arts deal. You have companies like SpaceX, Databricks, OpenAI, Stripe. These are companies valued at 500 billion and greater that  

may never need to go public. And to me, that’s a supply of opportunity to provide private capital that has never been in existence before and it has allowed the private equity market to go from what was this niche-y little industry in the eighties and nineties, to being a force that’s over $10 trillion globally today. 

To your point about the opportunity, there are these mega cap companies. There are mega cap funds that serve them. That’s not what we do with Future Standard. We are operating in the middle market. We are looking at companies of a billion dollars of enterprise value or smaller. So you’re talking about companies with a hundred million of revenues or smaller. You’re talking about companies with earnings and EBITDA of 25 to 75 million. So clearly not the domain of these mega cap private equity companies. We’re focused on those because we can add significant value and we can work with private equity sponsors who focus on selectivity within this fragmented ecosystem of middle market companies. 

And what drove a lot of private equity returns going back 10 years ago or so was really…it spoke to this era that of market backdrop that we were just talking about where you use greater turns of leverage, cheaper cost of financing. You were able to get in at a reasonable price from a multiple standpoint with the idea of seeing multiple expansion. So you didn’t need a lot of top line growth to take a modestly growing company and turn it into a private equity opportunity that could return high teens on a net basis. 

Today, we took base rates up. The Fed took rates up 500 basis points. Cost of financing’s way up from where it was. Multiples are very expensive in the large and mega cap space, calling it high teens, low twenties multiples. The prospect for margin expansion is not prevalent, as it used to be. 

These are companies that are being levered at 6, 7, 8 times. You can’t expand leverage. There’s a certain maximum upon which you can focus—what we focus on—on the core middle market; these are less levered companies. These are companies that are faster growing. These are companies you can buy at a more modest multiple. So you could see some prospect for multiple expansion. 

And then really importantly, the private equity sponsors that we partner with do have the ability to add operational value to these companies. These companies are open to not just take in capital, but have these sponsors on their boards, help them with hiring, retaining people. Help them accelerate revenue growth, expand margins, address costs. It’s much different if you’re going to approach Elon Musk at SpaceX with capital. He doesn’t want your...what does he need...opinion.  

Thank you very much for the capital. Take your opinions elsewhere.  

But if you are a middle market company operating in health care services or rolling up an HVAC business, the ability to take capital and understand how to use automation and address expenses and really work with a great private equity sponsor who has seen these trends before and has helped businesses grow. That’s just significant value that I think is brought to bear. And that combination of favorable characteristics that I spoke to, as well as the operational value, is what drives the returns for our clients, and drives that outperformance that you see middle market private equity, middle market private credit have, versus their large and mega cap counterparts. 

[00:29:27] Alan Flannigan: Mike, I’m struck by something that we know, but it’s always a helpful reminder of just how much the opportunity set is increasingly staying within the private markets. And as Andrew talked about, really the flywheel of capital building up within private markets and the lack of need to go public. And again, the Sarbanes-Oxley additional reporting requirements, it’s just not as necessary to bring those wealth creation opportunities to the public markets for those companies.  

Yet, that’s how many investors have historically accessed wealth creation opportunities to fund their retirements, to grow their pensions, to fund their lifestyle, which is actually what this is all about ultimately, for many people, is you need to grow your wealth to a certain point, to have that sustained lifestyle. And I think it elevates the importance of vehicles that make sense for folks to access these return characteristics, and there’ve been many new vehicle types that have been launched in recent years to help increase the access for the private wealth channel to alternatives. 

And I think one of the real innovations that we’ve seen in private credit in particular is really matching the risk of the assets being held in a vehicle that makes sense to hold those assets. We talk about moving it outside of the banking system where it’s short-term funding for that asset base. Something where it’s more matched term, more stable, much lower leveraged. But there are still many people that would say that these vehicles have not been time tested, as much as some other types of fund structures and if there were a significant downturn that there could be a risk.  

So how do you think about the quality of vehicle structuring and risk management of alternative investment pools when delivered in the private wealth channel, particularly in some of the new structures that we’re using today?  

[00:31:20] Mike Kelly: Yeah, Alan, I think it’s an important question and why I believe so strongly about the mission we’re on of democratizing alternatives, and why it speaks so clearly to me. You used the key word access, and I do think access has really evolved tremendously, just over the last decade or two. We do have evergreen strategies that bring private equity to individual investors at much lower investment minimums than we’ve ever seen historically. 

And that structure and access has taken years to get to this point. We had fund to funds and feeder funds and high load products and we have over the years solved for operational complexities and regulatory challenges, exemptive relief to make sure that the allocations of opportunities that were going to institutional investors historically could be made available at the same seat at the table for individual investors. 

I think those are really important points of evolution so that we have strategies that give you similar fee structure to institutional investors and that same degree of allocation, and there’s always going to be friction when it comes to illiquid investments. These are private investments. They take a significant amount of time to diligence. They’re not readily tradable in the marketplace, and you’re putting them into a wrapper that in many cases has some degree of semi-liquidity, which is a challenge. And the structure, the intention of the structure is to protect all investors.  

Education is critical in all of this for the advisors and their clients to understand how the individual investor can make themselves and the liquidity available over some course of time. There are limitations to that. There are scenarios where an investor can get out completely in one quarter into a semi-liquid evergreen strategy, and there are instances where they’ll only be able to get a pro rata amount of their redemption amount. And again, that’s intended to prevent the structure from liquidating the private investments at a significant discount to where they were purchased. And so it’s intended to protect all of those investors and the performance within the fund. It has been time tested.  

We’ve seen it in the marketplace. Even most recently, where investors have tried to take out more than the 5% allowable quarterly redemption amount and the limitations worked. They worked to protect the investors and to build a queue for investors to redeem. Those investors ultimately were able to get their capital out without impairing the underlying fund and the rest of the investors. Will we see other tests over time? But I think it goes to understanding what the structure is, how it operates and understanding the availability of liquidity over time. It’s a much better experience than for individual investors today than it’s ever been. 

[00:34:53] Alan Flannigan: So Mike, we’ve discussed the way in which investors get access to this market. We’ve discussed the need for that market and why the market that we spend so much time focused on the U.S. middle market presents all these different compelling attributes in terms of the ability to really add value through hands-on active management. To create a differentiated source of growth and something that you can go out and buy in public markets and certainly the different strategies up market within private equity. 

And it’s got me thinking that you would probably think there might be some differences in what a middle market focused firm looks like or how it operates. You pick the right market, but is it the right firm for that market? You can have a great idea, but you’ve got to have the ability to go out and execute upon that. I’m curious to get your view, you know, how have you thought about building the Future Standard investment business? You have to have success in this unique area of the market. 

[00:35:53] Mike Kelly: So Alan, there’s a few different ways to go about it. If you think about it and contrast it, you could be a boutique and a specialist who’s providing capital to middle market companies. So you could be a senior credit provider, or an LP secondaries player, and just focus on that. What we have done at Future Standard is to build a platform. And if you’re going to build a world-class platform focused on the middle market, you need to be in the right asset classes, but you also, to your point, need to be structured appropriately to maximize the opportunity. 

To undertake that you need broad capabilities in private equity and private credit, in real estate. We have teams in each of those areas. We have LP and GP Secondaries teams. We have a  

Direct Equity co-investment team. We have Senior Credit, we have Junior Credit. We have Opportunistic Credit teams who have an ability to work through more stressed and difficult credits. 

That approach of building a platform is much different than the approach of a boutique. To me, boutiques don’t have the breadth of resources and the ability to collaborate and generate significant deal flow that a platform like ours is. If you think about it, we’re generating significant both sponsored deal flow and non-sponsored deal flow from our tremendous network of relationships. We have 300 private equity sponsor relationships that have been built up over a 30-year time horizon, where we have very strong relationships and can really avail ourselves and build up that deal flow on both an equity and a credit basis. 

And so when you think about it, if you are a top middle market private equity sponsor, say someone like Gridiron Capital or Odyssey or One Equity—these are some of our best relationships. The value proposition of Future Standard to them is we can invest directly in your fund. We can invest alongside you in direct co-investments in your best portfolio companies. We can help you and your LP base, buy your fund on a secondary basis to provide some of your LPs with liquidity that they might need.  

From a GP standpoint, you may want to stick with your best trophy assets in a continuation vehicle. We can be there alongside you to provide that capital and to continue putting new capital into those best portfolio companies that you have. And importantly, we can lend to your portfolio companies. We can lend across a number of different structures from senior to junior capital, depending on what you and your portfolio companies need at the time. And so what that does for us as Future Standard, in our relationship with these private equity sponsors, is we’re viewed as a real strategic partner, not just a capital provider. I think in a world awash with capital, where capital is becoming more of a commodity, you want to be more strategic in your relationships with those that you’re investing with.  

[00:39:30] Alan Flannigan: Well, it’s something that interests me a lot, too. It’s what you’ve described is the private side of private equity. It’s having to have that relationship capital that goes back years of having done deals together, having built that trust and confidence with your partners over time, where that is kind of the essence of the informational asymmetry within the market. You think about more toward the upper end of the market. There’s these exceptionally large companies, folks know who they are. They’re run by skilled management teams already. And if you really want to be able to tap into a market where you can add value and find more opportunity, having that network of different capabilities across the firm, across different solutions and strategies. That goes back decades, that is somewhat of a competitive moat that is very hard to replicate and certainly can’t be done like that if you wanted to step into the market.  

[00:40:26] Andrew Korz: Mike, we started this conversation off high level. We narrowed the aperture down to fund structures and firm structure and all these sort of minutiae. I want to bring it back out and end our conversation big picture. I think you know, you’re a thematic guy. You like to think sort of long term. What are the big things? I think about hedgehog theory. Knowing one big thing frequently is the only thing that matters, right? If you knew China entering WTO in 2001, if you knew big tech in the 2010s and if you knew AI now, I think probably—and you spoke earlier about having a differentiated view right—everyone’s bullish AI.  

Are you uniquely bullish on something within AI such that you know, it justifies the types of multiples that you’d have to pay? When you look ahead, whether it’s AI, perhaps, maybe it’s something, some subsegment within the AI infrastructure build-out, or maybe it’s something totally different. When you look out over the next five to 10 years, what is your highest conviction, big theme that you are increasingly confident is going to be a game changer within capital markets?  

[00:41:43] Mike Kelly: The one big theme. Wow.  

[00:41:46] Andrew Korz: It could be two if you want. 

[00:41:47] Mike Kelly: Don’t underestimate aging demographics. I think the advent of AI and its impact on health care, which is one of the fastest growing parts of the economy, and the ability to develop personalized medicine. Genomics and the impact on genomics and drug discovery, what that will do for lifespan. And I think we’re all becoming, as a human race, more educated about what it takes to live longer, healthier lives. The confluence of all of that is going to have significant ramifications on life expectancies and that will impact retirements, pension reform, insurance, life insurance. 

[00:42:51] Andrew Korz: Yeah. the fiscal outlook I would imagine, too. 

[00:42:52] Mike Kelly: Fiscal outlook, and so what does that mean for investors? We’re going to need to think very creatively about addressing how do you plan for a retirement that. Maybe you were planning for a retirement that was going to last X amount of time, and what if it lasted two or three X. 

Now what are you going to do? It’s exciting to think about living longer, but it presents a lot of conundrums for the way, again, we designed our pension system off of the German rail system of the late 1800s. That is not the case of where things are going in the future. I think the statistic was babies that are born today in Japan are expected to live to 103 years old. In the next 10 years, that’s going to be longer. And so we have to prepare for that. 

We have to design portfolios and design investment allocations and exposures with an insurance and so forth that are factoring in that level of duration and protection and through cycles and so forth. To me that’s a mega trend that doesn’t get enough press when we’re talking about AI. I think that’s just a tremendous one. 

How we power all of this compute that we’re talking about and we’re going to need, AI is four times as dense as traditional compute, and we’ve only gone into the training of models. We haven’t gone into the use cases of agenting AI. We haven’t gone really too broadly into text to visual, which requires even more dense compute. So the people spending all of this money on compute are not uneducated. They know what they’re doing. They know what they’re building. 

The question is how we’re going to power all of it, and what that means for renewable energy, infrastructure, nuclear carbon capture, rare minerals, powering the data centers, which really speaks to why we at Future Standard made the acquisition we did for Post Road Group in digital infrastructure because of all the opportunities that will bring about; that in some ways directly address AI, but in some ways, there’s a lot of indirect implications that are going to get created on the back of that. 

[00:45:24] Alan Flannigan: Mike, I think that’s a great way to wrap up here. It’s been a real privilege having you on the show here and it’s always interesting hearing from leaders like yourself, because so much of what you know it takes to be a successful investor, it’s not just about identifying the attractive opportunities that garner the most discussion. But we’ve really been able to have a conversation about everything else around that, that goes into bringing that mission to life and executing and delivering that for investors. We can’t thank you enough for joining the show and sharing your expertise with our listeners. 

[00:45:59] Mike Kelly: Andrew, Alan, it’s been a pleasure to be here. Thank you for having me. 

[00:46:22] Alan Flannigan: So this has been the series finale for the Midyear 2025 Private Markets Outlook, and what a way to conclude. 

Thanks as always to my esteemed co-host, Andrew Korz, whose vision and leadership in our research efforts are really what brought this outlook to life. Andrew, ready to run it back for year end? 

[00:46:41] Andrew Korz: Alan, if there’s one thing I’ve learned in research, it’s that it’s always outlook season. I’m ready to do it. 

[00:46:47] Alan Flannigan: For more on the Midyear Private Markets Outlook, including listening to previous episodes in the series, please check the links in the show notes. You can also find our full library of investment research, including the recently published third-quarter edition of Mapping the Markets at futurestandard.com\insights. 

Thank you.