Alts For The Mass Affluent, And The Fed’s Inflation Gamble – July 2022 Round-Up

Alternative investment sponsors are targeting the mass affluent to achieve new growth, and the Federal Reserve has finally decided to get serious about fighting inflation.

Listen in as AltsDb co-founder Andy Hagans discusses these stories and more with Michael Johnston, VP of Business Development at AltsDb, in the July 2022 Round-up.

Watch On YouTube

Episode Highlights

  • Why alts sponsors are increasingly turning towards everyday accredited investors to maintain their positive growth trajectory.
  • The latest 2022 projections for alternative investment inflows .
  • Andy’s feelings on the recent statement from the Federal Reserve (this one might surprise you).
  • Michael’s analysis of the SEC’s proposed emissions reporting rules, and why the proposed rules are likely to change in the coming months.
  • The new milestone that’s been achieved by a prominent OZ sponsor (plus details on an upcoming online event in the OZ space).

Today’s Guests: Andy Hagans & Michael Johnston, AltsDb

About The Alternative Investment Podcast

The Alternative Investment Podcast covers new trends in the alternate investment landscape. Hosts Jimmy Atkinson and Andy Hagans discuss tax-advantaged investment strategies to help you grow your wealth.

Listen Now

Show Transcript

Andy Hagans: Welcome to the Alternative Investment podcast, I am your host Andy Hagans and today we have the Alternative Investment news round up for July 2022. Bringing you the most important headlines, you need to know now from the world of alternative investments.

And joining me today I have Michael Johnston, who is the VP of Business Development at AltsDb and OpportunityDb. Michael is also the original founder of ETF database. I’m sure, a lot of our listeners are familiar with that site, so he has a lot of deep knowledge and expertise in the world of finance, Michael welcome to the show.

Michael Johnston: Thanks and it’s great to be here.

Andy Hagans: Yeah you know I want to dive right in we have some links prepared and those will be in the show notes, but Michael I wanted to just kind of get your overall mood.

You know you talk with so many sponsors so many developers and investors, and you know I think there’s a lot of people are almost like holding their breath right now.

On the other hand, you know I’ve talked to some sponsors who are like hey this is this is called a business cycle it’s not a big deal so.

What’s your take what’s what’s the mood you know, in the alternatives industry right now that you’re seeing on the business development side?

Michael Johnston: Yeah well great question Andy I think there’s the old saying that markets hate uncertainty and, by extension, investors hate uncertainty and you know to summarize I’d say there’s a lot of uncertainty right now.

There’s geopolitical uncertainty there’s political uncertainty, we have elections coming up there’s uncertainty about.

Interest rates and inflation, the list goes on and on, so there’s there’s a lot of unknowns and, in particular, talking to folks who are putting together big commercial real estate developments for projects that are going to have a you know, an extended amount of time of course they’re deploying capital.

That uncertainty kind of compounds and becomes a bigger and bigger issue so lots of uncertainty right now I think anyone who tells you they know with with 100% certainty what’s going to happen is probably lying through their teeth to you.

Or maybe there’ll be be lucky and guess right, but I think it would be primarily luck so that’s that’s my My big thought is it a lot of uncertainty and it’s very true that investors hate that and markets hate that.

Andy Hagans: yeah and you know we’ve had these low ultra low interest rates for such a long time and we’ve had low inflation for such a long time, I mean.

The trend towards deflation with with globalism, and you know all of the trade and efficiency gains.

You know we’ve just kind of gotten used to this world, and I think for me at least it’s a little bit of a gut check like.

High inflation is a thing, and you know the world doesn’t necessarily orient itself to very low inflation, for a very long period of time.

and very low interest rates for a very long period of time, I mean you only have to go back to the 1970s, but I wasn’t alive in.

The 70s, you know, so I don’t have that muscle memory, you know, but I talked to some sponsors and then some developers who do and they’ve seen.

A lot of business cycles and you know they’ve just seen a lot of different macro environments and.

they’re not really faced, but at the same time, I think you’re exactly right that that nobody has a crystal ball.

And and knows exactly what’s coming Next, I will say the sponsors that I talked to core the most confident.

are the ones who are you know, for lack of a better word conservative right conservative conservative with leverage conservative with their underwriting you know not trying to grab every last dollar, but basically trying to manage assets, so that they can sleep well at night.

Michael Johnston: yeah I think that’s absolutely right Andy I mean you can imagine that someone who’s got.

A lot of floating rate debt right now kind of on one side of the spectrum the opposite of what you just talked about, not necessarily conservative they’re probably having a lot of sleepless nights right now.

Whereas folks who are you know a little bit more conservatively leveraged less debt in their capital stack not not quite as much to worry about.

And they feel confident that, if they.

won’t necessarily thrive during this period that they’ll certainly survive and and I think that’s you know the mindset that a lot of folks have there’s.

there’s times, where you where you make a lot of money and there’s times, where you just surviving get through it and then often on the other side of that when the folks who didn’t survive have disappeared.

You get that chance to be opportunistic and to really thrive, so I think you’re absolutely right that the folks who are you know conservative who have maybe.

been kicking themselves a little bit over the last few years as risk it’s been a risk on environment and taking on a lot of risk has been very heavily rewarded now they’re you know now they’re it’s their time to shine hear.

Andy Hagans: The chickens did indeed come.

yeah and you know what’s interesting is you know we’ve seen the the bear market in traditional asset classes, you know, obviously bonds really had nowhere to go but but down.

You know, speaking from from like a year ago and, obviously, you know publicly traded equities are now in a bear market and those have fallen quite a bit off their peaks but.

Alternatives industry it’s it’s not like it’s been totally immune, but just that macro trend of so many investors, you know.

Reallocating some of their portfolio to alternatives has, I would say soften the blow and that brings up the first article that we have in today’s round up is on the Wall Street Journal.

And so the article titles blackstone and other large private equity firms turn attention to the vast retail market.

Firms court individuals, this is the subtitle firms court individuals with 1 million to 5 million in investable assets and Michael I think that that’s technically the high net worth.

Market, I think you know most people’s definition of very high net worth would be 5 million and higher, so this is your you know your everyday accredited investor or the article I think refers to them.

As the mass of fluent and you know it’s really kind of interesting because you know, as I was just saying that the alternatives industry, it seems like it’s been almost immune.

To you know these drawdowns that have heard the traditional asset classes like sure, maybe assets will be repriced in the you know various segments of the alternatives landscape.

But the industry is still seeing inflows but you know this article says, you know behind this effort, and that that is the effort to target the individual investors.

Is the recognition that institutions which committed nearly 1.3 trillion to private markets in 2021 according to pitch book have all but filled up on them.

And so you know they’re talking about how a lot of these institutional investors allocating more to all.

But they’re pretty much there they’ve pretty much reached their target so quote the shift is now largely complete pension funds and sovereign wealth funds.

have an average of 26% and 35% respectively of their portfolios in these private asset classes, at the end of the year, so I think the question then is, where does the next growth come from if institutional is have already hit their target.

Michael Johnston: yeah that’s right, and so you know there’s a there’s a big market here of these high net worth accredited you know some kind of various terms for the same group, but an.

Net worth north of a million dollars, and I think you know this article mentioned it Andy, but this is a huge segment of the US population I think there’s 20 million millionaires are actually 21 million millionaires in the US.

A huge number there’s about as doing a little research before this I think there’s almost 6 million households that have a net worth of $3 million or more, and a million and a half households that have 10 million or more.

So you multiply those two numbers together right 1.5 million households with with $10 million in net worth.

And you get some some pretty big dollar amounts that are for the most part, not invested at all and alternatives, I think it’s article said it’s maybe as low as 5% that’s currently currently invested.

In all, meaning that the bulk of that network is invested in traditional asset classes, probably mostly stocks and bonds and cash right now.

So you know there’s a there’s a huge market here.

That that these firms are looking at now that they’ve kind of made as much progress as they’re going to make with the institutions, so I think you know from that perspective it’s kind of a logical, as you mentioned next step for growth.

Whether or not successful is kind of a wholly different question and we can we can talk a little bit about that, but not surprising that that these firms are going after this massive amount and the so called retail market those those households between one to $10 million in assets.

Andy Hagans: yeah and in the article has a quote from matt brown that the Chief Executive of CA is he says it’s a land grab.

Your the mutual fund boom 2.0 and of course he’s referring.

To the mutual fund boom in the 1990s, and I think that’s exactly right, I mean if you’re talking about the mass affluent now you’re really talking about.

Any investor, who has a financial advisor pretty much anyone in that demographic where you know it economically makes sense for them to have.

An ra or another professional advising them are managing their assets, you know now, in theory, could be you know selling literally or figuratively their client.

On alternative investments, and you know I think there is a whole lot of room for growth there because most advisors.

are barely using all this, I mean most advisors are not using DST is most advisors are not using qof so I mean I think a lot of financial advisors don’t even know what a qf is I mean, would you think, would you say that’s a true statement Michael.

Michael Johnston: I think that’s right, I think that number is is picking up I think we’ve seen anecdotally that that is definitely taking up, but I think that’s right, I think the majority of them do not know.

And, in part because they you know they they don’t need to know or they haven’t needed to know up until this point.

I think the other interesting you know thinking about this push Andy is, this is not a homogenous group here and in a couple ways.

So, think about someone who has a million dollars, who lives in New York City or in the Bay area versus someone who has a million dollars, who lives in the middle of the country and Kansas or South Dakota or you know pick one of the one of the flyover states, and I say that lovingly.

it’s kind of a very different that money goes a lot further in some places than it does in others, so it’s not a modulus from from that sense and that a million dollars and on the coast is not a million dollars in the middle of the country.

And then, these are all types of this money came from you know from there’s some old money here there’s some new money here.

there’s going to be very different perspectives on how to grow wealth from someone who say inherited the bulk of their wealth versus someone who has built a business say you know.

local or regional business and has accumulated wealth that way versus someone who’s built wealth through you know, a salary at a big tech company.

And maybe they’ve all gotten to the same bottom line and their bank account, but I think based on how they accumulated that wealth and and where they’re living.

kind of feeds into some you get some very different investor avatars here that this is to just kind of reiterate what I said at the top, by no means a homogenous group.

Andy Hagans: yeah you’re right, and I mean a lot of accredited investors get to where they are from real estate, you know from being actively actively involved in real estate, so I think.

Certainly, a lot of active real estate investors you’re seeing increased interest from them and a lot of these products where they may be investing passively but there’s just that you know sort of familiarity that the muscle memory.

You know, with real estate investments yeah and I do think it’s notable you know anytime anytime you read blackstone.

Right you just sort of you sort of stop and take notice and you’re like oh blackstone’s doing what so you know the article.

talks about they launched their first perpetual vehicle aimed at individual investors in the alternative space in early 2017 and it was a lower cost non traded read.

And now blackstone sources nearly a quarter of the the 915 billion in assets from private wealth for that fun, so the firm has now added two more funds targeting individuals.

A non traded vdc company and a real estate vehicle that’s focused on European assets, so you know blackstone obviously believes it’s a growth area and if blackstone thinks it is then you know, frankly, it is and and they expect to reach a 1 trillion in assets.

Overall, this year, and they said in April, they get four to 5 billion of inflows per month from these three products combined so that’s just a massive amount of money just going to this one individual firm.

Michael Johnston: yep I think that’s right I think you’re right that what blackstone is doing is typically well researched and probably typically a good bed, and I think.

As mentioned to that they are investing heavily in doing this, and the biggest portion of that is just the the boots on the ground or the.

Employees who are helping to sell this and helping to onboard this and I think that’s a pretty big lift you know you’re not talking with institutional investors who.

You sleep eat and drink this stuff you’re talking with dentists and doctors and owner of a beverage distributor you know the list goes on and on, of ways that that individual investors have accumulated this wealth.

But a lot of them did not do it through through investing a lot of them don’t have finance degrees, a lot of them don’t work on Wall Street.

And I think that’s kind of reflected in some of the numbers here in this article of the investments that are being made in the salesforce it’s going to go out and talk to the dentist talk to the doctors talk to the lawyers.

and explain to them, and you know it’s not something there that they’re familiar with so there’s definitely an education process here, and I think that’s reflected in the investment being made and the salesforce here.

Andy Hagans: yeah absolutely and and just to follow up on that and kind of close out for this article, it mentions that blackstone has a team of 278 people.

many of whom are educating advisors on the product so they’re obviously investing on that yeah makes me think that in the alternative space in particular there’s really a need for some sort of media company.

To cover the space, and you know, maybe even like launch a podcast.

Where they talk to leading oh wait.

Michael Johnston: it’s a dad right idea that’s a dad joke.

Andy Hagans: Moving on to our next article, which is related this is on the DIY or a follow up to an article that we carry last month.

In you know we love to report on on these reports from Robert a stanger and company, so the headline here non traded all raise $52 billion through may but stanger lowers the REACH and vdc sales projections, and so you know I guess my headline interpretation here.

Is that all are still doing well they’re still seeing inflows but it’s not as if they’re totally immune to the bear market going on.

In publicly traded equities and i’ll just read a little bit from the article to give everyone the exact numbers so fundraising for non traded adults.

Total of 52.1 billion through may 2022, which was a 108% increase over that same period of 2021 according to Robert a stanger.

And company and then more specifically sales of net excuse me sales of navarrete topped $18.9 billion, followed by non traded vcs which had $13.8 billion.

interval funds had $11.6 billion and DST had $4.5 billion dollars blackstone continue to lead the space 19.2 billion raised year to date it’s non traded reach alone raised 11.6 billion, while it’s perpetual life, etc, the blackstone private credit fund raised 7.6 billion.

So there’s still seeing inflows Michael is just the projections are not quite as bullish now as they were a few months ago.

Michael Johnston: yeah, and I assume that that Andy is primarily driven by, as you mentioned the markets have pulled back quite a bit here, so people who.

lot of people have dropped out of that millionaires club that we were just talking about right or no longer have 3 million or 5 million or 10 million right as their.

Their net worth it’s tied up in publicly traded stocks has declined, and that makes people kind of tighten up a little bit.

I do think there’s a you know, a flip side of that potentially that the bears out in a longer term sales cycle.

When you’re trying to get people to take money from publicly traded equities and and bonds liquid securities and trying to convince them to make a bigger allocation to illiquid all.

it’s a hard sales pitch when the markets gone nothing but up like it has for the last several years here right you’re trying to tell someone that.

They should move away from what has done, really, really well for them and go into something that is you know more more opaque and less known and more complex and less liquid.

That can be a tough sales pitch, and I do think that, as folks are reminded that the market does go down, sometimes the stock market doesn’t always go up.

That is one of the selling points of all Andy and I know that you know that the difference between what’s logical and what’s emotional when when things are down 20%.

But I do think there’s a flip side of that that you know, I wonder if that portends a strong second half of the year here is folks think logically about it and say.

yeah you know the right stocks go down, and maybe I shouldn’t have everything tied up and and spy or other other publicly traded equities.

Andy Hagans: yeah absolutely yeah and I think another factor to consider is is if you’re looking at someone’s portfolio allocation, you know a lot of times I referenced that the old.

is more like the 50 3020 now well if you’re if you’re pretty close to that 20 target with all already, and then you know the 50.

You know your allocation to traditional equities basically nosedives you might be over allocated to also, at least on paper, just because those other buckets in your portfolio.

are being repriced a lot faster they’re just a lot swinging year in you know I want to, I want to read this quote from Kevin gannon friend of the show Chairman of stanger.

He says quote based on current fundraising levels we have revised our 2022 projections to $40 billion for non traded reach down from 45,000,000,030 $5 billion for non traded BBC down from 40 billion, but.

remain confident that our overall fundraising projection for all alternatives stanger covers will still reach 120 billion and.

And he goes on to say what we expect some short term choppiness and fundraising due to the capital market environment.

We expect alternative investment strategies and capital formation to continue an upward climb so he’s still seeing an upward climb maybe the slope of that climb is a little bit more of a nice walk rather than a hike.

You know, but, but it is good to be in the adult industry, I think, I think, at a time like this in a way it’s kind of earning its keep because you know as an investor and alternatives illiquid all.

You know the assets held by any fun you invest in you know realistically their prices moving up and down, along with those publicly traded equities.

But the fact that you don’t see it every day, the fact that you don’t see manic Mr market if I could quote I believe that’s the great Ben Graham.

The fact that manic Mr market isn’t you know texting me every day saying hey you know your your ownership of xyz stock is down 8% today or up 2% or you know it’s just like i’m invested in qof.

I don’t really need to worry too much about that for 10 years, I think it can help some investors just psychologically handle the bear market a little bit easier.

Michael Johnston: yeah I think that’s absolutely right Andy and you, you kind of skipped over it at the beginning, but I think the number was 108% growth year over year like that’s that’s a phenomenal number.

and

You know, like we were talking about a little bit earlier blackstone is is onto something here and they’re a big driver of that hundred and 8% growth, I think probably a significant portion of that is due to their efforts.

Andy Hagans: yeah and we don’t have Jimmy with us on this episode, but I can hear like his ghost talking to my ear like remind everyone that these estimates do not even include.

Q laughs because you know it’s a pretty big segment and we have on news link on cue laughs later on in today’s show, but now I want to move forward we’re going to talk about the elephant in the room, the two elephants in the room, actually.

headline from Wall Street Journal, this is from about a week ago I believe so Powell says fed must accept higher recession risk to combat inflation sub headline.

Federal Reserve is raising interest rates at aggressive pace as price pressures hit 40 year high so you know I put in my little dad joke in the article Michael that Powell, is in between the rock and a hard place and he’s saying everyone i’ve chosen the rock.

Michael Johnston: yeah yeah I don’t envy I don’t envy that decision that he has to make Andy because there’s there’s two bad outcomes here, and I suppose you can hold out hope that we’re going to have a soft landing I don’t know how realistic, that is, or you know that’s kind of a flexible squishy term.

Andy Hagans: We you know I I hold out hope that.

Tomorrow i’m going to wake up and i’m two inches taller than I.

Was.:

Michael Johnston: yeah well good luck with that.

You know I think I guess i’m not surprised by this, you know there’s there’s a lot of factors at play here.

But you know this there’s a political factor at play here right we have elections coming up in a few months and you’ll go look at any of the polls that come out you ask people what their biggest issue is.

And it’s inflation and it’s gas prices are they say the same thing six different ways i’m concerned about i’m concerned about.

The grocery bill or gas prices or inflation.

Andy Hagans: yeah you’re right.

you’re right Michael because I don’t have the article pulled up, but maybe we should add it to the show notes, because we were discussing that survey that we saw and it was like top 10 issues voters.

cared about which I thought it was humorous because the way was like number one.

Inflation number two the economy number three gas prices number for groceries or something like that it was like.

Okay you’re really talking about inflation like five different ways, and if you add up all the percentages it’s not the top issue for 35% of voters it’s the top issue for 75% of voters.

Michael Johnston: yep yeah and on the you know the flip side of that what what isn’t a concern for a lot of people right now fortunately knock on wood here is the job market like.

Unemployment is pretty low people aren’t worried about finding employment every play you know sure Andy you drive around and see 100 signs a day that say now hiring starting at.

You know what was a lot more than starting wage was when I was bagging groceries at kroger for 525 an hour so.

there’s lots of jobs out there and they’re fairly you know fairly attractive hourly wages or salaries.

So that’s not on people’s minds, and you know that’s kind of the the risk that you run going down this raising interest rates is that you do throw it into every session where those jobs become harder to come by.

Andy Hagans: Well, can I just can I give you my take I mean.

i’m going to cut you off because i’ll give you my heartache you can rip it apart um I think Chairman Powell is 100% right about this and it’s pretty rare actually that.

i’m going to cite the Federal Reserve or the chairman and say that you know he’s totally right it number one I can get lower into the article, but he actually expresses some humility.

About you know just not knowing where inflation is going to go.

But, but I mentioned the rock and a hard place if inflation stays at eight or 9% you’re talking about economic instability and a recession that lasts for a long period of time in is very hard to dig out of if I can recall ECON to one.

I think the term is a wage price spiral something like that, if I remember from from that college course you know sustained inflation is definitely worse than you know your everyday typical recession, I mean if we have two or three quarters of negative GDP growth.

But inflation goes down even into the fours or hopefully threes That would be a success.

At this point, you know i’m i’m handicapping.

Our economy at this point like they’re the Detroit tigers like i’m looking ahead at the next 10 games and i’m saying gosh if we could win four of those i’d be really happy.

I think that’s what Chairman Powell, is doing here he’s saying gosh I hope I can steer us towards a mild recession but out of the sustained higher inflation.

Michael Johnston: yeah and I think you know, put another way Andy like I think that we, I think everyone has probably seen some version of the survey or this data, and we can put a link to one of them in the show notes, but you hear the stats that.

I think the one I saw recently is 60% of Americans aren’t able to withstand a surprise expense of 500 to $1,000 and typically you think you know surprise expenses your car breaks down and you need a new car or there’s a hole in your roof, and you have a major repair bill.

But what a lot of people have gotten is a surprise expense that probably exceeds 500 to $1,000 not all in one fell swoop it’s not this acute thing like your car breaking down on the side of the road.

But it’s 10 bucks more for tank of gas here and 20 bucks more for Carter groceries there and and you get to $500 and unexpected expenses pretty quickly so.

You know I think there’s there’s real pain potentially behind this for for a huge swath of the country that isn’t able to sustain this.

Andy Hagans: yeah and you mentioned, you mentioned the help wanted signs.

And the thing is unemployment is low, but but wage growth has not kept pace with a lot of these components of inflation right So if I if I get a 9% nominal pay raise but rents are up 30% year over year and my geographic area i’m not feeling great you know so.

I think you know i’m actually impressed by him at least today like on this specific you know press conference or this specific.

statement I mean he even said, you know when he was pressed over whether central banks had a better grasp of inflation his response was quote we now understand better how little we understand.

about inflation and i’m wondering where was this humility over the past 10 years where was this humility, you know even two years ago.

but better late than never, I guess, and it’s you know it’s really amazing because this article goes into you know the the the eurozone um let’s see eurozone inflation hit a record of 8.1% in May, the ECB signaled it will increase its key rate currently set at minus.

0.5% by Point two five percentage points in July, so it will still be negative just less negative and then possibly moving into a positive interest rate nominal interest rate.

In September, I mean or is their head just in the sand.

I mean what.

what’s going on over there, in Europe, Michael I mean.

The worst thing is is they have the eurozone right so.

Some of these countries have different local conditions with energy costs and things like that, I think, right now, the UK is kind of seen like.

And this is why you brexit because, having all of these economies linked together can be very dangerous in this kind of situation but but what’s going on with their central bank, I mean do they are they really not concerned about this.

Michael Johnston: yeah I don’t know it’s it’s a great question Andy and I think it, you know to.

kind of call back to something we were talking about earlier and you were giving giving Chairman Mao some credit, and I think all agree with that that.

What he’s doing is removing some uncertainty, we talked about at the beginning that markets and investors, by extension, hate uncertainty and he’s at least being decisive here and it’s taking a little bit of that uncertainty, you know off the table.

And you know it’s not it’s going to be a bitter pill to swallow, but at least we kind of know what’s coming now.

Or at least you know we think we know what’s coming, and I wonder, you know, to get back to your question about about in Europe, you know with that plan of what they’d laid out there, I would be highly skeptical of that.

That you know they’re going to do these little incremental rate hikes is an investor over there, I wouldn’t know what to expect.

You know, I have no idea what the next inflation print is going to be, and you know, certainly wouldn’t wouldn’t take the the Central Bank at their word of what their expectations are for rate hikes.

Andy Hagans: So you and I also sorry I also got a wonder, like the situation in Germany, I mean their energy costs have to be rising much.

faster, higher rate than some of these other eurozone countries so that’s really unfortunate.

You know I I remember reading like about you know all the controversy over the EU and in the euro is a currency, and I mean it’s generally been a success, but its critics pointed out like this specific circumstance as like oh you guys are going to regret this.

It seems like we’re we’re here.

yeah.:

Michael Johnston: yeah I think you’re right, I think you know it’ll be interesting to see how the next few months unfold, because you know in in Europe and, here, to a lesser extent.

Because I don’t I don’t have a great answer for you Andy I don’t have a great prediction of exactly how this is going to play out.

But it seems like as you’ve kind of alluded to they’ve painted themselves into a bit of a corner here, and maybe the the political winds will will shift a bit and kind of a clear path will emerge but it’s pretty murky right now, from my perspective.

Andy Hagans: yeah and, obviously, you know we focus on, you know the American alternatives market and the you know investments in the United States but.

Definitely, this is a global situation right with energy crisis and global inflation, I think that some of these other countries and the EU.

are counting on the Federal Reserve to team inflation in the United States and they’re thinking that you know that reduction in demand from the United States will help to balance things a little bit take the pressure off them a little bit.

You know, in their country, so I guess want to see if that comes to pass.

Michael Johnston: yeah that’s an interesting theory there.

There may be something to it but boy that that seems awfully risky to to to bet on that.

Andy Hagans: Well, happy Independence Day, we can we can print more greenbacks if we need to and on that note on the political and here.

we’re going to cover this business article real estate forcefully pushes back on SEC proposed emissions reporting rules.

And you know, this is a really interesting article, because actually Michael this was printed and published on June 27 which I think was just shortly before recent Supreme Court decision on regulatory authority.

So there’s really a lot going on here.

With international politics and domestic politics and that Supreme Court ruling so there’s a little bit of uncertainty.

But you know what i’m just going to read from the first couple paragraphs just to kind of bring everyone up to speed in case any of our listeners.

aren’t familiar with this controversy quote major players in the commercial real estate industry are urging the SEC to pump the brakes.

On a key piece of its proposed emissions reporting rules saying it’s too difficult to compile the data.

Industry groups like real estate Roundtable narrative and the commercial real estate Finance Council wrote comments to the SEC last month.

Advocating against individual companies being required to report emissions generated by certain building materials for tenants, a key component of the agency’s proposed climate change disclosure rule.

So some institutional investors are you know they’re cheering this on.

But some of the individual firms that would be affected by this, you know, are not cheering it on so a quote from the comments that were filed on June 17 quote marriage strongly believes scope three.

Greenhouse gas emissions disclosure by reads should be voluntary.

REACH should only be required under the SEC is emerging rule to report, climate change, information and data arising from operations under their direct and immediate control and.

Commercial real estate tenants and supply chain contractors should in turn be responsible for be responsible, excuse me for disclosures of data arising from their own.

business operations so Michael I thought the interesting thing was almost every entity every company.

Every spokesperson in this Article No one was objecting to the overarching goal of measuring and reporting.

It was sort of a devils in the details type objection, where I think you know.

One of the situations, let me see if I can scan through and find this but, like with it with a triple net tenant, for instance, the owner of an asset may not even have insight into the energy being used by that you know triple net.

tenant.

Michael Johnston: yeah that’s it that’s exactly right that’s one of those use cases where this gets.

In in you know, on paper, maybe this looks great, and I think on on paper to summarize the idea is.

That the REACH real estate owner is going to be required to provide some level of reporting on use of electricity and use of resources that has an impact on the environment, so that investors are able to assess those risks.

But when it comes time to you know, to actually execute this and even just in the you know the quote, that you read Andy you read scope three so their scope one their scope to their scope three.

there’s different types of control that you have whether it’s direct operations or or indirect operations, and you know there’s another example of there that.

You know the lighting that you’re doing in the parking lot of your apartment building that’s going to fall under scope to But then when your tenants are actually using their their washing machine that scope three.

You know if you’re your head spinning just hearing us talk about this, and hopefully not too many people tuned us out as we’ve gotten into this part of the.

Of the article it gets pretty complex pretty fast, you know, no, no landlord tenant relationship is the same there’s all types of different types of commercial real estate.

That that keeping tabs on this gets pretty complex pretty quickly and that mean what does that mean it means additional compliance costs that means some some nice bills for for for lawyers and for accountants and for consultants are going to help everyone figure this out.

And it, you know, probably means that those compliance costs are passed on to the to the tenants and then probably ultimately to their end users.

Andy Hagans: yeah and possibly not great timing right given, given the last article that we discussed, and I should note from the article quote Republicans.

They call the climate disclosure rule quote the largest expansion of SEC authority without a clear legislative mandate from Congress in a letter.

On may 4 and then of course involved in all this, the United States Supreme Court had a ruling last week and we’re recording this the first week of July.

They had a ruling that significantly rolled back some of the federal government’s ability to issue new regulations without Congressional consent.

i’ll be perfectly frank, I don’t understand all the ins and outs of that new Supreme Court ruling, but I do think that it is pretty likely to affect these proposed rules or this situation.

You know so hopefully you know we can get some clarity and maybe a plan in place that everybody’s a little bit more in agreement on.

Michael Johnston: yeah and I don’t think you’re alone Andy and wondering exactly what the ramifications of I think was West Virginia versus the EPA case.

That you’re referring to, I think, certainly at a high level.

The expectation is that that has curtailed the powers of the so called administrative state meaning where there’s not a clear mandate from from Congress.

It limits the ability of entities such as specifically and the Supreme Court case the EPA, but I think the expectation is that’s extended to entities such as the SEC.

limits their ability to essentially make laws and and pass binding binding resolutions here without explicit consent from Congress, and I think this is, you know, this is a little bit of a little bit of a stretch of.

Of the SEC authority i’m just going to read here briefly from you know from the SEC perspective.

The SEC chair had said, our core bargain from the 1930s, is that investors get to decide which risk to take as long as public companies provide full and fair disclosure and are truthful and these disclosures.

investors need reliable information about climate risk to make informed investment decisions so so that’s the argument, there is that the SEC saying.

investors need this information about climate risks to be able to make these decisions, so therefore we have the ability to force the company’s the publicly traded companies, at least to provide that information to them.

And I think you know, regardless of how you feel about the the the Supreme Court decision and where you stand politically, you know I understand the point that the Chair is making there I also understand that that’s a bit of a bit of a stretch.

Of the SEC is authority and of their purview so yeah I think this is pretty uncertain right now Andy I wouldn’t be surprised to see this.

In the light of supreme court decision and certainly if you know what a lot of people expect if the the Republicans take back control of the House, and possibly the Senate.

wouldn’t you know be surprised to see this mothballed are tossed aside or significantly less, and I think there’s some discussion here.

If you don’t toss it out completely, but you significantly increase that the safe harbor provisions here that some of the stakeholders would be would be happy with that.

So I wouldn’t be surprised if some of the pushback here is ultimately successful.

Andy Hagans: yeah and, as you mentioned the stakeholders weren’t even really objecting.

to doing this, in theory, or even, in some of the process, it was just some of the details seemed like they weren’t very well thought out, so I think you’re right, and you know if it turns out that the SEC doesn’t have the authority to require this maybe the CDC could get.

involved.:

Andy Hagans: I can okay so on a lighter note on happier news I want to do to recognize this news article and opportunity db our sister site.

About a big milestone from an opportunity zone sponsor and, as we were talking about that DIY or COM article.

about the Robert a stinger and company report on all their numbers do not include qualified opportunity funds, and I know Jimmy our partner Jimmy.

who’s not recording with us today, but, but he likes to talk about those inflows have been honestly massive and so they’re actually a big segment.

Within the alt universe and urban catalyst is one of the premier sponsors operating in the opportunities own space and they’ve recently hit another milestone so.

they’ve raised more than $100 million for urban catalyst opportunities own fund two, which is their second posey fund.

And back in December 2020 urban catalyst had closed their rosie fund, one after completing 130 $1 million raise so they have a huge I would say prestigious opportunities own project in downtown San Jose.

which really I, I guess, I would say.

I think it’s a project that just really features, the opportunities own industry and and the potential of the program so it’s really one of the premier funds, and I should mention that they sponsor a lot of our events.

If you go to Opportunity db calm and look at the webinar section, you can see some of their past presentations.

From events but yeah, this is a big milestone, and I think it shows that they’re not really slowing down after completing you know after after raising rather 131 million for fun one.

Michael Johnston: yeah and I think Andy that’s indicative of the industry as a whole, I think influence continue, I think there was initially some.

Some worry late last year, the osi program is a perishable benefit, and one of those benefits the 10% step up in basis did expire last year.

And there is, you know, some people wondering if that was going to mean that this year was going to be slower from a fundraising perspective if everyone was kind of her and to get ahead of the deadline.

I don’t think that’s the case at all the industry, you know continues to attract strong inflows.

it’s you know it’s going gangbusters here, money is continuing to come in here and and you know it should be pointed out that this is in a pretty challenging environment.

The oC capital is capital gains typically capital gains proceeds.

And you know we’re in an environment we’ve talked about this throughout the show where stock prices have gone down, and that means that a lot of people are sitting on a lot fewer games than they were not that long ago.

So, in a relatively challenging environment, given the nature of the incentive that it focuses on capital gains equity.

is still going strong as a testament to you know this industry in this program isn’t perfect but but got a lot of things right and investors are taking notice and, as you mentioned earlier, you know more and more financial advisors are taking notice and directing client money here.

Andy Hagans: Absolutely, and on that note, I want to inform our audience that the next cozy pitch day at our partner site opportunity db is now open for registration and so that event.

will be held on July 28 these events are a ton of fun, I mean they’re really the premier event that we put on three times a year.

At our company and Michael I know you’re you’re pretty much the guy working behind the scenes working hard to.

make these events, a success and we always get really good feedback from from the sponsors, as well as the attendees a whole lot of interaction.

And a lot of high quality funds, I mean they’re really just a lot of fun so Michael what do we have coming up for this coming pitch day later this month.

Michael Johnston: yeah so thanks Andy we’re looking forward to another great event, you know the appeal from the investor side of things, is that you’re going to see you’re going to get some variety you’re going to see.

Some multifamily deals some operating companies we’ve got some hospitality assets coming up at this next cozy pitch day, so you know if you’re an investor if you had a capital gain or, if you think you may have a capital gain in the future.

Or if you just want to learn more about ozzy’s, this is a great way to do it and really understand that diversity diversity of asset classes and of investment opportunities that are that are available.

So I would encourage everyone to sign up and attendance have a free event, and you can see some some great oC properties and there’ll be some good education as well, learning the ins and outs of how exactly this program works.

Andy Hagans: So I know a lot goes into planning these events, Michael does it take like a whole day or two to.

get them all plan.

Michael Johnston: At least at least a whole day possibly more to plan it’s No, it is, it is a huge amount of work and Jimmy our partner does a great job of.

Making sure that everything flows flows smoothly.

And that we kind of allow everyone to put their best foot forward and really highlight their as the project so yeah it’s it’s a ton of work but but well worth it.

I think we facilitated the investment of many, many millions of dollars and nosy deals which is certainly rewarding so yeah it’ll be it’ll be a busy month here but well worth it.

Andy Hagans: And so, if i’m an investor and I wanted to get a ticket the cost is $1,000 Is that correct.

Michael Johnston: it’s all free hundred percent free to attend if you’re an investor, so I just go to the pitch day calm and you can get signed up there for our July 28 event.

Andy Hagans: I knew it was free everybody that was just a little bit of shameless self promotion, but we do hope to see you there we get a lot of advisors, a lot of.

Self directed investors there’s a whole lot of Q amp a and interaction, which is always my favorite part.

just getting that live Q amp a and seeing all the pitches you know i’m sure urban catalyst will be presenting but there’s always a few new sponsors to something I haven’t seen before.

So i’m really looking forward to this event and Michael I think we’re getting short on time here, but I wanted to remind our listeners I know some people watch the show on YouTube but.

If you’re listening to the show will have all of these links posted in our show notes at all to db comm slash podcast so you can click on all the links.

That we mentioned today and, by the way, if you do, listen to the show on spotify or on apple podcast I would really appreciate, if you could leave us a five star review.

That really helps us spread the word about what we’re doing on the Alternative Investment podcasts.

And yeah i’m not gonna lie i’ve checked our stats in the past couple months and the show has really been growing we’ve been reaching a lot more people, so thank you to everyone who’s.

Already left us a review or rating or help spread the word about the show, and with that Michael I want to thank you for coming on the show today.

Michael Johnston: yeah thanks Andy this is fun.

Andy Hagans
Andy Hagans

Andy Hagans is co-founder and CEO at AltsDb, and host of The Alternative Investment Podcast. He resides in Michigan.