Podcast transcript

Speakers

David Pappalardo, Senior Vice President, Advisor Solutions Group
Peter Sullivan, Vice President
Chris Nero, founder of Bridgeport Technology

This article and the data and analysis herein is intended for general education only and not as investment advice. It is not intended for use as a basis for investment decisions, nor should it be construed as advice designed to meet the needs of any particular investor.

Podcast transcript

Narrator: Welcome to Advisors Edge, a new podcast for financial intermediaries designed to keep you abreast of what's new and what's next in modern wealth management. In each episode, top experts in the field will share the latest intelligence on market trends, asset allocation, due diligence insights, and more. It's part of our smart series, highlighting new thinking from Segal Marco Advisors research and trends, helping you make more informed decisions. This podcast provides information from reliable sources, but no guarantee is given for its accuracy. It is for general education purposes only and not intended as legal, tax, accounting, or investment advice. It does not constitute an offer to buy or sell securities or investment products. Consult your own advisors before making any decisions. Segal and Segal Marco advisors are not responsible for any actions taken based on this podcast. Now, let's dive right into today's episode.

David Papalardo: Hi, everyone, and welcome to the Advisor Edge Podcast. I'm David Papalardo and I lead the private wealth consulting practice at Segal Marco Advisors, which is called the Advisor Solutions Group. And I'm happy to be joined by my colleague, Peter Sullivan, who's a senior consultant in the practice. Today's episode focuses on the most frequently discussed topic we have with our clients, which is alternative investments. The discussions involve not only which strategies to invest in, but the best ways to access those strategies. While the industry has seen a lot of growth in these types of investment vehicles, a more impactful trend is how best to utilize technology to ease the operational burden to access alternatives. Today's episode has a timely guest given the trends in the industry because it features someone with considerable experience and a vision for how alternative investments can be accessed by the private wealth industry going forward.

We're joined by Chris Nero, the founder of Bridgeport Technology, and Chris has spent decades at the forefront of this space as both an entrepreneur and the founder of multiple companies focused on alternative investments. After getting into Chris for the last two years and seeing the flexible approach of the Bridgeport platform, Segal Market Advisors recently announced our collaboration with Bridgeport to be the due diligence provider for the platform, which we're very excited about. Chris, thanks for joining us today.

Chris Nero: Dave, so happy to be here and love talking about one of my favorite topics, private markets. And there's been so many interesting things that have gone on in particularly the last two or three years. So excited to dig in and just chat about what's going on in our industry and how things are moving so quickly.

David Papalardo: Great, Chris. We appreciate you being here with us today. So perhaps the best place to start is if you could give us a little background on your career and really the founding of Bridgeport.

Chris Nero: Yeah. Happy to, Dave. So I have been in the financial services space, believe it or not, about four decades now. Got into it in the late '80s. I started as a regulator with the SEC in the Boston office in what was called then the Division of Investment Management, which later became OC or Office of Compliance and Inspections. Was there for about five years, and then I went off and worked for two large asset managers in Boston. One was Scudder, one was a group called United Asset Management. And then in the late '90s, decided it was time to leave Boston and the cold and moved out west to San Diego. And then I was a partner and a CFO for what was a relatively small hedge fund in San Diego. We started at about 300 million and grew that firm to about a billion five, but learned a ton.

I spun out of that hedge fund in about 2000, and I launched a company called HedgeWorks. We really, at that time, were doing a lot of third-party analytics for some endowments that were moving into hedge funds and really moved into the fund administration space as well. And then as that business grew, we went from San Diego to Boston and Cayman, and then we sold that business in 2008 to Deutsche Bank. That became Deutsche Bank's alternative fund services business. So I was a global head of that business for three years. We grew that from fund administration. We started doing balance sheet lending, custody, and then we had build the infrastructure for a large platform that Deutsche Bank distributed across a 12th management business, which was called the X-Markets Platform.

So did that for a few years. And then one of the things that we saw, I think as we got into probably 2012 or so, was really just that private markets continued to proliferate. I think a lot of that had to do with Sarbanes-Oxley, Basel III, and really a lot of folks were turning more and more to private markets and less and less to public markets. And so that really, I think, sparked the idea of Bridgeport and really how can we get more involved in private markets and what can we do to really bridge a lot of the operational gaps that we saw at that time?

David Papalardo: Great, Chris. That's a wonderful background. Thanks for providing that. And you mentioned that at the beginning, we've seen so much progress in the space of alternatives, particularly in the private wealth market, and a lot of it driven by not only new vehicles, but also the advent of so much new technology. So when you surveyed the industry, what convinced you that the alternatives market needed a new digital platform?

Chris Nero: It's interesting, Dave. I think one of the major things that we saw was all of the changes that we're seeing or the dynamics between public and private markets really weren't cyclical. They were structural. And really, as I mentioned earlier, part of that was post-Sarbanes-Oxley. Part of it was Basel III, which really provoked ... If you look at private credit markets, essentially, they were more of a niche business 15 years ago, now that business is almost $2 trillion. And so there were so many things. We looked at, you had at one time about 8,000 publicly traded companies, that number is pretty much cut in half. And so it was clear to us markets had changed. The wealth channel in particular was really migrating less and less from public markets more and more into private markets. And I think what we had seen at that time is the options available to investors, the options available to advisors had come a long way.

There were some ... We would refer to as legacy platforms that were curated and open to advisors and gave some investors opportunities to start moving into private markets. But I think the main thing that we saw was that folks have been so accustomed to the fluidity, I would say, of public markets and how well they work. A lot of that is exchange-driven, regulatory-driven, just a long history that has been streamlined. But when you looked at private markets, there really wasn't a lot of tech there. And so our view was, what can we do or what kind of technology can we create to really facilitate markets so that they open up? And when we look at access, I think we've all discussed access. Access is really ... There's really two things it comes down to. One is getting access to great managers and great private investment opportunities. The part that we saw that we felt needed a lot of work was really more on the technology and operational side. As advisors are looking more and more to private markets, what technology can we provide that gives them an experience that they're accustomed to on the public side? And so that gets into a number of things.

That gets into onboarding clients, transaction procurement, getting access to not just a select group of private investments, but really opening up the market so that they have a lot more latitude. And as we say, giving them the opportunity to invest freely across private markets and really so that they can create investment opportunities that best align with their clients and get the most optimal outcomes for their clients. And really what's been lacking there isn't so much great quality managers, but more technology to bridge that gap to open up the floodgates, so to speak, to really give people better access and accommodate it with much better technology.

David Papalardo: Well, that leads into my next question, which is the Bridgeport platform is certainly not the first platform to try to bridge the gap from a technology standpoint in alternatives. So for many of our listeners that are either financial advisors or on the asset management side, what does Bridgeport offer that you think is different from some of the existing digital platforms out there?

Chris Nero: It's a great question, Dave. We really look at that from two perspectives. I think the first one is when we look today across the competitive landscape, there's tended to be, I guess what we would refer to as more of a walled garden approach, where you have some great platforms that have brought to them some deeply experienced managers. And so as an advisor, I can go to that platform. It's fully curated, meaning it's been diligenced. The technology has been put in place and there's a variety of different investments I can choose from, and that's great. And I think that served the industry very well and continues to. I think what we've seen, however, is that again, advisors want much more latitude. And so rather than having access to just select investments, maybe we call that somewhere between three and 5% of private markets, advisors really want a lot more latitude. For example, they may want more early stage venture, they may want more pre-IPO secondaries. I think at the end of the day, when they look at their investment universe, they want to align that investment universe best with the types of clients they have, the outcomes those clients are looking for, and they want that universe to be a reflection of that.

And so the one thing that we've done is we have aimed to really provide what we call an agnostic digital manifold. And really what that means is we provide this technology to advisors, we provide it to third party administrators, we provide it to private issuers, diligence providers like yourselves, custodians. And really the idea is to provide that technology in a way that opens all of the doors up for advisors. So for example, if they want to create this universe that is going to reflect ... For example, if the bulk of their clients are more high net worth entrepreneurs, they're going to want much more latitude in terms of what they can invest with. And so our technology can really bridge that gap and give them a better client experience, a better client outcome, and a lot more latitude in terms of what they're going to invest clients in. And so that's really what we focused on is being more agnostic in nature and really just being a digital technology provider.

The second thing I would say is, as we spoke about earlier, we've been in this business for four decades. The last three of those, we've been in private markets. And so most of our team has been in private markets for two to three decades. We've all worked together throughout that time. We've done this on a very large global scale for some very commercial organizations. And so I think one of the things that we've learned is advisors and asset managers as fiduciaries, they need professionals that have deep knowledge, not just on the operational side, but also on the tech and infrastructure side. We're typically working in multi-jurisdictional environments. There's a whole host of regulations. And so the experience that we bring is very unique. And I think what we've learned is advisors are great at relationships, they're great at bringing successful outcomes to their clients. And so they really need some deep expertise just in terms of what's the best way to bring clients from a more traditional, for example, 60, 40 portfolio into alternatives where they want to start allocating somewhere between 10 and 25%, how do they best do that? And so that experience, I think, has been invaluable for them. And so that I think is also a key differentiator for us.

David Papalardo: Right. And Chris, you've mentioned that different firms have certain different preferences. And one of the things that we've experienced is certainly each firm, whether they're a large RIA or a smaller private bank or family office, is that they're all interested on alternatives, but the cohort of managers that they're interested in varies pretty significantly. So when you think about your platform, talk a little bit more about the flexibility and the customization that your platform can offer to users.

Chris Nero: That's a really great question, David. So one thing that we look at when we work, for example, with an advisor, we really want to be wholly additive to their process. And really what that means is when we speak with them, we're not looking to reinvent their whole operational environment. Our view is as they transition more and more to private markets, we want to come in, we want to work with them to help them install technology that will be additive. We know they have legacy systems, we know they have an existing protocol. And so with our platform, the digital manifold is really set up in a way where simple things like onboarding clients, procuring transactions, digital subscription profiles, bringing in either external diligence parties or providing a platform to accommodate internal diligence, whatever the case may be, all of those things are really a big part of what we do. The second thing I think is integration. Integration and what we call composable technology is critical. And so that really allows us to go in, work with whatever systems, whatever protocols that advisor has today, plug in our technology and really bridge that gap.

And so at the end of the day, as we see it, the most optimal outcome for an advisor is the way my reporting environment works today, the way I interact with my clients today, I don't want to change. I really want to bring private market or private investments into our organization. And I want that to be seamless from an operational perspective, from an end client experience perspective and I don't want to do that with added friction or operational disruption. And so that flexibility has proved to be invaluable for many advisors. I think the second piece to that is, as we spoke of earlier, just the flexibility to add specific funds. It could be private credit, it could be venture, but whatever the case is, give the advisor full optionality in terms of what they want to have on their platform.

Peter Sullivan: And Chris, I'll jump in with a question that's in the area of ease of use and just practical considerations around using Bridgeport. Is there any challenges or things that you're good at in terms of handling the integration of the custodian in the mix for an advisor client?

Chris Nero: Yeah. It is a very important part of the process for advisors. I think that one of the things that we look at ... And again, for many advisors moving into private investment is still relatively new. And I think one of the things that they're accustomed to is if, for example, today they have all of their public market investments at a specific custodian, one thing that can be daunting to them and to their clients is if they make an investment on the private side, they will often see that cash go off their custodian statement. And so it almost looks like it's off balance sheet, so to speak. And so really what they like to see is, okay, if I just moved a million dollars out of the custodial account, I need to see the other side of that trade, so to speak, there should be an asset coming in.

And so custodial integration from that perspective is extremely important. And so we work with all of the major custodians. I would say that some have great connectivity, some are still a work in process. And so it warrants us being very flexible in that way. And so API connectivity is obviously always the best way to go, but there's a whole variety of ways in which we can integrate with custodians. But it is a critical part of that process. And I think those are things that as we've built Bridgeport, which we've been doing this now for eight years, those were all very important considerations in terms of how we structured the platform, how we structured the technology and what we call the composability of the technology we're using.

And I don't think it necessarily stops there, Peter. It also goes hand in hand with administrators, diligence providers like yourself, really having the ability to integrate. And that's where the scale comes from. That's where the more fluid transaction process comes from as well. Is if you look across all of the constituents in private markets, I think historically people have focused more on just the buy and the sell side, but you have administrators, you have custodians, you have issuers, you have diligence providers, we also have lenders. And so our technology is really designed to work across the full private markets value chain and integrate everybody. It's really what we refer to as a full digital ecosystem.

Peter Sullivan: You mentioned friction between the advisor and the platform and it's a particular interest and germane to alternatives. There's a lot of friction there. Is there any friction or challenge that disappears when you're using the Bridgeport platform? I'm thinking maybe a challenge or a source of friction that maybe clients don't realize is important or there until the last minute.

Chris Nero: Yeah. No. It's a great question. There are a number of things. I think that, again, if you compare what most advisors and investors are accustomed to on the public side, you really have straight through processing. If I'm going to invest in a publicly traded ETF or a mutual fund for a client, it's pretty simple. I click a few buttons, the transaction is settled. I don't need to get a 50-page subscription agreement to execute that trade. So I think on the transaction execution side, we've really created what we call digital transaction gateways to make that process much more streamlined and straight through. So you have the transaction side. I think the other thing that we've taken for granted in the public side is there's so much information available. So if I'm going to buy a particular stock at any point, I could put the ticker symbol in, I can get everything from financials to quarterly reports to a whole set of different data points. The private side is very different. That's where I think most investors and fiduciaries are going to rely on folks like you to do a lot of that diligence work for them. Well, that creates a much longer transaction cycle. And so that's another thing that we believe is you have to look at and understand the full private markets or private investment lifecycle. It's a much longer lifecycle.

And so when we look at technology, when we look at friction, our view is how do we grind that down? And that's really about integrating documents, digitizing them, giving, for example, a diligence provider the ability to access the same information that we see and leverage all of the information that we've collected, that the issuers collected, and we do that in one place. And so centralization of data is so important, and that really grinds the friction down. Once you get through the transaction procurement process, now you move into the reporting side. And I think historically, when you are an advisor investing across multiple different issuers, you're really going now and you're collecting capital statements, balances, K-1s, 1099s from multiple issuers and multiple administrators. And that becomes problematic. And in some cases, I think even dissuades advisors from moving into private markets. And so the way our platform is structured is it's going to centralize all that data.

And so if you're getting reports from five different issuers or five different administrators, those are all going to become centralized. They're all going to come through Bridgeport. And so now as an advisor, you're really getting the same experience on the private side that you did on the public side. You can go to one place, you can see all those values, statements. And I think what we see is the client experience is in a much better place as well because of that.

Peter Sullivan: I think you're addressing this question, but I think it's really important to ask. The primary goal that we have when we talk about alternatives with our clients is to increase the penetration of alternatives into investment portfolios. So broadly, I'll just ask, how does Bridgeport increase an advisor's ability to increase the penetration of alternatives throughout their business across clients? And how does Bridgeport support scale?

Chris Nero: Yeah. No. that's a great question, Peter. I think it really comes down to, again, what we will typically look at is what is an advisor's experience today on the public side? And I think that there really are very minimal operational disruptions or hiccups that they contend with. I mean, there's been so much innovation over the last probably four or five decades at least on the public side. And so I think historically, if an advisor were to look and say, maybe we want to take clients five to 10% into private markets, I don't think what they've seen historically is a five to 10% increase in operational disruption or operational challenges. It's probably been more like 50% or 100%. And so in a lot of cases, it just didn't make sense, frankly.

So I think that's what we've looked at is how do we bring technology in so that basically there's no operational disruption. And so advisors have a day job, and so day-to-day, they want to continue to bring in the best outcomes for their clients. And so we really want them to have an experience where they feel like, okay, we can bring our client portfolios now to five, 10, 20, 30%, whatever they see fit in terms of how much they're going to allocate to private markets. And we want them to feel like they can do that in a way where there's zero disruption. And so I think that goes back to also just having the experience in this business, particularly on the private side and understanding how that works.

We always say our business today, when we work with an advisor or an issuer or an administrator or diligence provider, our sales process is not a transactional one. It's much more consultative. You really need to understand how this works. We need to go in, we need to educate an advisor, and we really need to do the heavy lifting. And it's not a ton of heavy lifting, but they really need for us to come in and say, "Look, we're just trying to get from point A to point B and your technology needs to bring us there and be additive. It can't be disruptive." And so that's really played a major role. And I think that our technology has been designed in a way where it just inherently gives them that scale. If they want to go to 50% in private markets, the technology's structured in a way where it's really going to allow that.

And I think that also comes down to integration. Can they move into private markets and then have all of those transactions, positions, valuations brought into their existing reporting system and done in a seamless way? Because that's really part of it is they want clients to have full visibility into what they own, understand what they own. And so that's a big part of the way our platform's been structured.

David Papalardo: Chris, you talk a lot about technology, and obviously that's a central focus for Bridgeport, but more broadly speaking, for the whole industry, technology really has revolutionized a lot of what we all do. But from your perspective, what shouldn't be automated? Really, where does human oversight still matter from your perspective?

Chris Nero: Yeah. It's a great question, Dave. And I think it goes back to the same point where we really have to look at public and private markets today they're very different. When we look at public markets, I think it's fair for all of us to say they're largely process-driven at this point. And a lot of that comes from ... Again, these are very large companies. They're well capitalized. We have exchanges, we have DTC, we have a lot of technologies and a lot of technology in place. And so with that, we can rely on a number of processes.

I think when we look at private markets, private markets is still very much what we would call a cottage industry. If you look at private issuers, for example, a typical private issuer, whether that's a venture capital firm, a private credit firm, private equity, these are relatively smaller companies that don't typically have 70, 80,000 employees. They can often have less than a hundred employees. And so when you break that down a step further, they're much more people driven and there's much more dependency on humans. And so technology, I think can take us a long way in terms of bridging the gaps and really integrating advisors or enhancing advisors' ability to invest in private markets. But this is still very much a people business. And so having human oversight, we believe is essential.

When you walk into, let's say, a large hedge fund or private equity firm, the human dynamic plays a very significant role. I think what we see is there is quite a bit of human dependency. There's a lot of intellectual property that sits with five or six key individuals. And so that human intervention, that intuition, that experience we believe is essential. And the way we look at that is we believe that if you place great technology in the hands of great people, that's where you have a game changer. And so the technology is great. I think it allows for much more productivity, enhanced visibility. It really adds so much value to the process, but it certainly does not replace human intervention and human oversight.

David Papalardo: Great. And in the interest of time, Chris, one last question. When people are listening to this thinking about potentially using the Bridgeport platform, whether they're an asset manager or a financial advisory firm, I think a question that probably comes up is who pays you? You meaning Bridgeport? Is it the advisors? Is it the asset managers? Is it both? And from your perspective, why is that the right alignment?

Chris Nero: It's a great question. I think what's somewhat unique about what we do, Dave, is we've talked about is we really provide technology across the full private markets value chain. So most of what we're doing is we have this, what I refer to as a digital manifold, and then we license that across a variety of use cases or user interfaces. So for example, a third party administrator will pay us a licensing fee, they're going to get access to that digital manifold, but within their user interface, that's their main control panel. And that really dictates how they're going to access our digital technology, it's white labeled. And so really rather than building that themselves, which could be a huge capital expense in a lot of time, they're really using this digital manifold, which is now taken across this entire ecosystem and there's a tremendous amount of overlap between all of these constituents.

And so they'll pay for their user interface and their access, and we can customize that user interface from them. And that really includes everything from white labeling it to adding features that are critical to their piece of the puzzle and what they do. And the same goes for wealth advisors, the same goes for private issuers themselves. If they want to basically transition into a fully digitized environment, they can do that through us and they'll pay us a licensing fee. I think historically the way it's worked is, as we discussed, there's probably 95% of the market plus that doesn't sit on some of the legacy platforms and hasn't had the benefit of being digital. And so those are the folks that we talk to and really are looking to digitize their environment. When we think about the wealth channel, digital syndication and really selling into the wealth channel is a whole different dynamic than a lot of these managers are used to.

And so having the flexibility now and the optionality to go into a digital environment is critical. So it really comes down to licensing. So every constituent that uses our platform, issuers, administrators, diligence providers really are paying us a licensing fee. And so we think that that makes good sense and it's worked well for us, but it's something that we're always examining. And obviously we want it to be as fair and competitive as possible. So it's always a focus for us as well.

David Papalardo: Great, Chris, thank you for that. And thank you for your time. This has been great. And on behalf of Peter and myself, we appreciate you sharing your perspective on something that we spend a lot of time talking to clients about, which is the growth in alternatives, how to access alternatives, and really all of the dynamics around the operational concerns. So thanks again, Chris. We really appreciate your time. And for all of our listeners, thanks for tuning in and have a great day.