Show V/O: This is Alternative Allocations by Franklin Templeton, a monthly podcast where we share practical, relatable advice and discuss new investment ideas with leaders in the field. Please subscribe on Apple, Spotify, or wherever you get your podcast to make sure you don't miss an episode. Here is your host, Tony Davidow.
Tony:
Welcome to the latest episode of the Alternative Allocations podcast series. I'm thrilled to be joined today by Rafay Farooqui, CEO and founder of Subscribe. Welcome Rafay.
Rafay:
Tony, it's great to be here. Thanks for having me.
Tony:
Well, this is an exciting time for our industry. There's so much going on, but for those who don't know, maybe give a little bit of background, what is Subscribe and what are you doing?
Rafay:
So, Subscribe was founded in 2015, so we're coming up on our 11th year in the industry. And the premise behind it was to deliver to the industry as a whole, the first modern operating system for managing a private markets program. And that could be at any type of firm.
So it's a very revolutionary idea, very open architecture. We didn't necessarily build it for wealth managers or institutions or fund managers or fund admins or law firms. All the type of firms that we serve today, we thought that the industry generally needed a rebuild of the infrastructure that allows it to operate and scale.
If you think about industries that innovate being on paper, being on email, being analog, really cause friction and are a bottleneck to growth. So we thought, why don't we build the first operating system for private market funds for the entire industry and deliver them a beautiful buy button that works at scale with clicks.
Tony:
So that is an ambitious goal. And for somebody who's been in the industry a long time, I do remember the old days and the old days are 10 years ago, 15 years ago, where everything was mechanical and paper driven. And it was very cumbersome to open documents, to fulfill all the cash flow needs that you need to operate effectively in the private wealth ecosystem.
And it sounds like you and others are really trying to solve that mousetrap and I applaud you for doing that. It's something I think we hear a lot from advisors that that friction makes it a bit of an impediment to even start their journey. What are the specific sort of pain points that you hear about from advisors?
Rafay:
Whether it's an advisor or any other allocator into private markets, they've got a whole host of issues because they're coming from a traditional background and things are just easier to analyze because more information is available readily. Transactions are digital, CUSIP-based at scale, they settle immediately. The values are delivered to you almost instantaneously. It feeds into your portfolio reporting system. So you have this end-to-end loop that's just solved for you and your job becomes analyzing whether or not you should buy that product.
With the alternatives allocator, whether that's an advisor or anybody else, the challenges are not only on the product level and the allocation level but also on the logistical and operations level. So it's a full stack job that you have as head of alts at any firm. You're actually thinking more about operations than you should have to. So when you ask me, what are the challenges and advisors facing, it's mind share.
Do they have to worry that putting a product in a client portfolio is going to cause unintended consequences to that relationship because they had a bad experience signing the document or getting a value updated on the quarterly meeting. So solving that is a huge delivery that many firms are trying to fix for the advisor. But the advisor shouldn't have to be thinking about operational logistic issues as they're thinking about portfolio management and preserving capital for their client.
Tony:
But those are the frictions that I think advisors face every day. You know, it's easy to say, I know what the end state should be. It's the how to.
How do I get there? How can I model it? How do I make sure that it fits neatly with my traditional investments?
And part of it isn't something that is easy to solve. Just because the nature of private market data is it's often delayed. I would imagine, and maybe this is an area we'll delve into a little bit here. I would imagine the growth and the evolution of evergreen funds have somewhat simplified or it's certainly made it easier for advisors because many of those are bought. And it's similar to a mutual fund. I hate to make the mutual fund comparison because I think we're always going to be a little bit stickier than that.
But how has that helped or what sort of evolutionary changes have really helped jumpstart your business and this aspirational goal that you've outlined for us?
Rafay:
Well, there've been a couple of things that have really pushed us into the center of the innovation. I would say that we were very early to this idea. I always laugh and say, when we launched this and we're pitching this to people, they said, how's this different than DocuSign?
Docusign's our signature provider, but that's it. They just get the last mile signature, but everything else has to be done with logic prior. What's interesting about this problem is that it's very fragmented in the way that people are solving it.
There's a lot of point solutions helping you with parts of it, and you're piecing them together to make it all work. Data is slow, reporting is slow, documents are manual, availability of product is either on email, PDF, or some marketplaces. So you actually don't have the two things that you actually need to start with to probably solve this, which is centralization and the second is standardization.
That's really the approach we take is, okay, we go into a firm. How do we centralize everything going on? Your products, your workflows, your connections to other systems, the data you need, because when you're forced to centralize the problem, you don't have the luxury of saying, oh, we have this other software that does this and we have this person in the corner that's doing that. You really have to take a holistic approach to the program and solve something end to end. And then that forces you to say, well, if we're going to plug this in, it's got to be standardized.
And how do you standardize it? Do you work downstream or upstream, or do you just fix the problem as a converter? So nobody has to do anything upstream or downstream. You're doing all the heavy lifting.
So when I look at where the industry is today and what they're trying to solve and how they're doing it, if you're not starting with centralization and standardization, you're working probably backwards on trying to solve the problem. You got to get the problem in one place and then smooth it out.
Tony:
I wanted to take us down the path of thinking about the wealth channel because that's where we hear so many challenges. I would be remiss if I didn't come back and revisit that because you serve multiple allocators. You're working with family offices and institutions.
Maybe talk a little bit about who is the client you serve? What's that larger ecosystem look like?
Rafay:
We have three food groups. We have the LP, which is the investor side, the GP, which is the product provider, the manager side, and then the SP, the service provider, which mainly includes law firms and fund administrators. When you think about a transaction in private markets, these three elements need to come together to consummate the deal. You can't do a deal without all three.
And the problem is that they're not communicating. They're not centrally tracking things. They don't have each other's information. And to keep up with the single transaction is very messy. When we looked at the problem, we said, what's common? How do we get to them all? What are they facing every day that's common? And it's the subdoc. Everybody's got to do a subdoc.
It doesn't matter if you're the largest sovereign wealth fund in the world or you're an employee at an asset manager investing in your own fund. You are doing a subdoc. The problem of the subdoc of getting data on to documents and signatures is a common problem.
So it made sense to us to start there and say, well, if we fix the digitization of the transaction, data on docs and signatures and workflows, well, now we can go to any firm. We can go to an asset manager who has that problem across their funds and across their distribution channel. We can go to a fund administrator who's serving all those asset managers.
We can go to the law firms who are serving all those asset managers have the same problem. And we can go to every investor that is seeing that problem one to many, because when they deal with one asset manager, they have one workflow and another asset manager, another one. So the first thing we did was centralize around a singular problem that was a global problem for the entire industry.
From there, we realized, okay, well, everyone's got the same problem. Wealth managers have a more acute problem, and we'll get to that in a second. But institutions’ problem isn't different. They don't like doing paper subdocs either, believe it or not. It's not just the wealth manager. We found a huge audience in the institutional allocator, the outsourced CIOs, the investment consultants, which many of the leading investment consultants are our clients today.
They centralize their subscription document processing on our platform. So they don't have to go to multiple other portals that are providing point solutions at law firms or at fund administrators. They don't like to have multiple processes. Centralization, endowments and foundations, pension funds and sovereign funds. So they're all using our platform because they have a common problem.
Now in the wealth management space, Tony, it's interesting, given my background in founding another firm in the industry called CAIS. What I understood there when we were trying to build the solution here was you have to build for complexity so you can solve the entire industry's problem.
Because if you build for the simple use cases, it inevitably breaks down for the complex user. So we looked around and said, who's the most complex investor in the world? It's the Wirehouse, the private bank, because they have 17 steps to a subdoc.
They have central product control, compliance, trading, validations. And then you get to the sales associates and the advisors and the clients and the allocation, you get to do a nice subdoc. But by the time you get there, you've done 16 steps.
And so if you think about even your organization, the challenges of just getting approved on a platform and then actually getting a dollar in the door for that distribution, think about those steps.
It's very different pitching to a sovereign wealth fund that spends two months doing due diligence and writes you a $500 million check. We said, let's look at this wealth management organization, fix all those steps. And then if you come in to use our platform and you only need two of the 17 steps, you can turn on those two and not the other 15 and it works really well.
So your question was about our other clients, but really, even for our other clients, we built the model around the complex wealth firm use case because it really was instructive on how complex firms can use our operating system. And today, what we find is whether we're pitching to a law firm, a fund administrator, a placement agent, a fund manager, or any type of allocator, the fact that we have robust functionality to tackle multiple steps to the allocation ends up being a big win for us in winning that business.
Tony:
I chuckled a little bit when you said it was a challenging environment for advisors. I suspect all of our advisors were probably shaking their head up and down because that's something we hear. Just in general doing business, there are more steps.
It's a little bit more cumbersome. And oh, by the way, if you're an advisor that serves hundreds of clients, scale and efficiency, boy, that's a big challenge. So when you talked about centralized and simplified, I get it.
That worked for all client segments, but you're right. It's probably amplified for an advisor that has so many clients and they're looking to simplify it. One of the things I hear a lot when I'm traveling and working with advisors out in the field is they want to simplify everything.
They want a simplified menu. One of the nice things about a Franklin Templeton is we have a robust menu of traditional and alternative managers who work with one firm. You've got access to a lot of different things.
But in many ways, it sounds like you are the hub where you really are that intertwined piece of the whole ecosystem from documentation all the way through. You now have a curated menu of all these world class managers who fight to get access on your platform. You have these all use case experiences working with big institutions and sovereign wealth funds that you can translate down.
So it would seem like your business is growing because you're solving one of the acute needs in the marketplace. What specifically are you hearing from advisors as they are starting their journey and realizing all advisors are different stages of that journey? But for those who are power users, they're probably pretty comfortable using these strategies.
But for the newer ones, starting that journey, the paperwork can be cumbersome, finding how do I vet one manager versus that? What are you hearing in your travels? And I suspect it varies a lot, but there's probably some common messages there as well.
Rafay:
There absolutely is. And it reminds me of the phrase, what have you done for me lately? So let me explain that to you.
We came in and it was a mess. Operationally, you couldn't find things. You didn't know where things were. You didn't know where to log in, how to do things. And now slowly in the 1200 wealth management firms and the 55,000 financial advisors that we serve, that's becoming a secondary thought because things are working well.
So your question is, well, what are they asking for now? Because they've forgotten about all the problems they used to have. And by the way, we serve 6,000 fund managers like yourself. And they also have forgotten about all the problems that they used to have and are thinking about the next step.
So it's a pertinent question because where is the puck going? What are people actually focused on? Well, that simplicity, that standardization that we're bringing is making people refocus on availability and moving fast and being able to react to client conversations.
And so the first thing we're seeing is asking for more simplicity and centralization. We'll give you a simple example. Most interval funds that are ticker based and traded sit on a mutual fund display and transaction platform at most large banks.
But all their alternatives, even the semi liquids that have paper or draw down, sit on a completely different interface. And so if you think about it, if I'm going in and I want to allocate to a private credit fund, I have to go swivel chair to two different destinations to understand what's available in private credit. Because they're, as you know, many private credit funds that are just ticker based but don't need a document for transaction.
And they trade like a mutual fund, but then you have drawdown ones that might be in the similar strategy, but for whatever reason are in a drawdown structure. Not having these juxtaposed is a big gap in me being able to serve my client because both are approved at my bank and both are approved for the client. So what we're seeing advisors ask for is, hey, can I get one place to get my education, to manage my pre-qualifications and my approved accounts, to see what's available across the alt space for that 40/30/30, or that 30% of that portfolio now.
What are my options? And then I can make a decision whether I want to press a button for a ticker, fill out a subdoc, if I want a 1099 or I want a K1. I can make that decision secondarily.
But moving the value to the front or the real value of what we provide, which is, let's refocus on the products and the allocations. That's what advisors are asking for. Give me a place where I can search for stuff.
And I'll give you another example is just searching for things. Today you can search for long, short equity, but you should be able to search for tax aware or tax advantage or things that a client's portfolio actually perform in a different way. These things are just emerging now because people have forgotten about all the operational problems.
It wasn't about finding something that is tax advantaged. It was about being able to execute it well. Now it's about, okay, give me the next level of how do I really bring this together for the benefit of my client and my practice.
Tony:
So that leads me to something that I always ask us about because when I'm traveling, I'm always, where are we today? But more importantly, where are we going? You made the analogy. Where's the puck going? What are you hearing from advisors? What's the next thing that you're working on that you're trying to solve for them?
Rafay:
There's probably two things. One is platform functionality, which since we're an operating system and a technology and not necessarily a marketplace and a distributor of products like other platforms. Since we operate whatever the client brings to us and we operate it well, there's always new problems.
Hey, you do that really well. Could you think about this problem and see if you can add on a module that does this. And I'll give you a good example.
Education. So we host educational requirements for firms where their advisors have to take a 101 or a 102 or 201 on alternatives before they can trade. We host pre-qualification of accounts, that process. We host sales kit deliveries and then all the validations around controlling whether or not you can actually do that trade.
All these came as a function of them coming back to us saying, thanks for doing the subdoc. Can you also do this? And so we have a long line of things that we're also doing because of that. It expands from menu building to transaction to compliance, but now also reporting. We have built a complete reporting solution to capture all reporting documents from K1s, capital account statements, extract all the data, normalize that and integrate that data into downstream third-party portfolio reporting systems that they need.
This is more of a utility and a point solution that some firms provide on a standalone basis. But for us, it should be just part of the same pipe. And so we've gotten into post-trade reporting in a meaningful way. And we're doing a lot of things there and we'll be launching a few things coming soon to all the wealth management firms.
Importantly about that is that we also see as you need more functionality as an advisor, you're paying more for things. The irony here is that technology should actually provide lower costs. If you think about our lives today versus 30 years ago in just purchasing things, because we have Amazon.com, I think you would agree that our cost of acquisition of consumer goods has gone down generally because of that mechanism.
If you think about alternative investments and the solutions in the market, they have increased the cost for not only fund managers like you, but also for advisors, also for clients with all these expenses and all these charges or tolls that these platforms have. We're seeing a continuing trend in point solutions that are solving for post-trade reporting, charging by position and marking up the cost of every position rather than giving advisors economy of scale and lower cost to operate at scale.
So one part that we're seeing is the firms are asking for fewer solutions to do more, which we're stepping up to the plate on. And the second is they're looking for that cost to come down dramatically. This is really important for their business.
I don't think that any advisor is out there saying, I can't wait to scale my alternatives business and pay our technology providers more as we grow. I think that what they're thinking is we're going to scale and we get to pay less to grow. And so we're very aligned with that, that the cost of these solutions should be much lower, and we're delivering on that.
On the product side, it's very interesting. It's usually a sign of the times where cap rates are, interest rates are, tax rates are, low basis stocks with AI stocks being very high valued. Being tax aware and tax advantage is all the rage.
So if you can find products that help you defer those taxes, lower those taxes, I've always said that wealth management is about 90% tax management and 10% preservation of your capital, and that's a good result. That's what we're seeing. So we're seeing a lot of demand for those type of products, long/short SMAs that harvest.
We're seeing demand for 1031s, DSTs in the real state space, and other products like qualified opportunity zones and things that really help the portfolio on the tax side.
Tony:
I definitely see the value from a Franklin Templeton or any of the big asset managers out there who would want to be on your platform because that modern operating system that simplifies things. From an advisor perspective, that's where I was going to ask you, what are they saying they're looking for, you teased about tax management. We'd all like to believe there's a pretty robust platform out there, and the menu of options are pretty robust, but it always seems like advisors are looking for something that they don't have. Beyond tax aware, are they looking for more, are they looking for venture capital, or is there different areas that maybe we can all think about how do we solve for them?
Rafay:
Wealth advisors are probably not too different than every other investor, and so co-invests are all the rage. And so if you can get direct access in a SPV level one exposure into one of the big names that seem to be going continually up, and they're just about to go public, that's great. And in a way, if you're a wealth management firm and advisor, and you can't competitively offer that to your client, the next firm might be able to.
And so it becomes a big dynamic on who's winning the end client. So we are seeing demand and access for that. At the same time, secondaries continue to be very valued in this market because of low DPI's that everyone's seeing that cash isn't being returned at the private equity level, that being able to buy into a secondary fund is an attractive long term allocation.
So you're positioned well if you're looking or you have that strategy. I think it's interesting you mentioned venture capital. Venture capital has always fallen under that private equity bucket for a wealth advisor, and it hasn't ever really been a large allocation. And we still don't see it as a large allocation in many of the wealth firms that we deal with.
That being said, because of the co-invest, which you could argue are venture capital investments, just very large ones, the exposure to top decile venture capital is almost non-existent in wealth management. And part of the reason is they're always oversubscribed. They're dealing with endowments and foundations. They have their list of investors for many years. And as soon as they open up, the capacity is taken. There are some platforms out there providing that and they do a good job doing it.
But I do think that that is a difficult place to understand what you need exposure to. The startup small VC fund is not for everyone. But what I am seeing at the advisors, maybe the more sophisticated ones, is that they are starting to look past the big name products.
They're starting to understand that smaller managers might over time perform a little bit better. That has been the historical trend, the smaller the manager and the exposure in the market, maybe the higher return. Otherwise, you do get more of an index type return.
So I think that finding smaller managers that have a niche that they focus on, things like royalties or legal strategies that give you exposure to something non-correlated and different continues to be something more sophisticated investors are seeking.
Tony:
So, Rafay, I'm going to leave you with one more question and I'm going to really challenge you on this one. You've been doing this quite some time. You've seen tremendous growth change, greater efficiency, more demand.
Where do you think we are five years from now? What does that operating system look like five years from now?
Rafay:
I don't think I gave this introduction, but I started my career at Goldman Sachs in 1998 and I was covering hedge funds. The firm was private and it was the internet boom and so everything was going public and opening at $100 a share and then going to 200 the next day. So, we've seen booms and busts and because I'm 50 years old now, so I've seen a few crises, the internet bubble, Russia, long-term capital, the banking crisis.
I've been around enough in a short period of time where I realize things don't go up in a straight line all the time and I don't think this time is different. I do think things are up and to the right. I do think private markets have ballooned because 87% of the exposure in economic activity is private, so you need it.
We understand that. I hope that the public markets come back. I'm a big fan of stock exchanges and I hope that people list this so everyone gets exposure.
In terms of the operating system five years out from now, what's happening and what you have to realize is happening is if we've laid the pipes for a new infrastructure and operating system in private markets, let's say that we've achieved that and we'll continue to make that better. Well, the next thing is data and pricing. So if you look at these private instruments, private credits, even private equities, there are many forces that are starting to, I like to say, CUSIP these.
So you can identify something like a SpaceX with a identifier while it's private and that if it's in a lot of portfolios, it normalizes. So if you think about having a normalized infrastructure for operating and trading, an OMS like Subscribe, and then you have data that's standardized and pricing that's standardized, spreads should collapse, trading should increase, returns should reduce, and hopefully you don't have a crisis all at the same time where things actually have big drawdowns where you're going to have a whole different private markets environment where things are trading in the secondary market more fluidly, blockchain is coming up, real-world assets where you're tokenizing everything. So the future looks like everything is priced, it's tokenized, it trades at scale, and you can buy whatever you want at the click of a button.
And we just love being part of that movement, which I think will be a nice stamp of approval that five years or 10 years from now, private markets are trading like traditional markets.
Tony:
Well, Rafay, we're going to have to have you back to revisit that. It's an exciting picture that you're painting. And I do think that we're definitely on the cusp of major innovation.
We're trying to do it on our end. I know you and others are trying to perfect it for advisors and the operating environment. So thank you for all that you've done. Thank you for sharing your insights today.
As always, for all of our listeners, we love hearing feedback on the podcast, topics that you may want to consider in the future. And we're trying to respond to your needs.
I thought this was very on point as we definitely hear the pain point on putting together portfolios and accessing information and that whole operating model, which definitely has improved, but it's got a ways to go. So great discussion today, Rafay. Thanks so much for joining me.
Rafay:
Tony, great to be on the podcast. Thanks for having me.
Show (VO):
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