SAM Webinar: Let's Talk Alternatives, Private Credit

Austin Root, Chief Investment Officer at Stansberry Asset Management, and on behalf of everyone at SAM, I'd like to welcome you. Thank you for joining us. And we look forward to talking to you about the virtues of private credit investing, especially when you do it the SAM differentiated way. Joining me today on the call are Mario Valente, Deputy Chief Investment Officer at SAM, and Jake Abrams, Senior Analyst at SAM. Gentlemen, welcome. Thanks, Austin. Thanks for having us. Looking forward to it. Yeah, absolutely. Now, regular viewers of our webinars are probably very familiar with Mario. This is the first time that we have cracked open the proverbial seal on Jake. So Jake, welcome to your first webinar. Thanks. Excited to be here. Yeah, we are as well. This is this is a great time. We're going to make great use of your time. So thank you, all of you that are joining us. Appreciate you taking an interest. And we look forward to get started. What do you say, guys? Let's let's get rolling. Fantastic. So with that, let's go ahead and get started. We'll talk about what we're going to be talking about today. You know, we, we started putting this together as a investor presentation for our investors that are in SAM's SAM Alternative Investment Opportunities Fund One. But there were things that we wanted to share with even that group that we felt like could be beneficial for some of our other clients that are not in SAM Fund One for one reason or other, but may be interested in SAM Fund Two. And then we were like, gosh, we actually should also include some prospective clients that are that, you know, aren't clients yet, but have shown us that they might have an interest in learning about alternative investments and private credit. And frankly, we thought all of that introductory information actually would still be valuable for our existing Alts Fund One clients to hear, because we've added a little bit of a little bit of a little bit of detail to that. And so we thought we would just smash all this together. Mario is going to take us through the first two pieces of this. Then Jake and I will spend, you know, probably the bulk of the time on on number three here talking about some of the special investments that we've made in Fund One, how and why we've made those. And we really think that that'll be helpful and informational. on how we think about the world. And then finally, we'll talk about Fund Two and introduce that, leaving plenty of time for Q&A at the end. So with that, I'm going to hand over the reins and the mic to Mario to get things started. Thanks, Austin, for the intro. I appreciate it. So I thought I'd take this time just right now and just kind of revisit very briefly the different investor classes. that are permitted to participate in alternative investments. So let's start with the accredited investor. So the current definition of an accredited investor is an income of $200,000 for an individual or an income of $300,000 for a couple or investable assets of $1 million or more. Next, a qualified client has 2.2 million investable assets. And since many private investment funds, have a performance-based have a performance -based fee structure where the advisor earns 10% to 30% of profits, usually above some performance threshold, the fund will usually require potential investors to be an accredited investor and a qualified client. And finally, a qualified purchaser is an individual or trust that owns $5 million or more in investments. Generally speaking, qualified purchasers have a favored status amongst asset management firms because their unified presence can permit a fund to not to have to register under the Investment Company Act, which would relieve some administrative pressure. Okay, which finally brings us to the 3C1 structure. Most alternative funds have high thresholds for investment. Either they have investor minimums that range from $2.5 to $5 million, and or they may require that investors possess qualified purchaser status. The 3C1 structure is really is a pool of assets consisting of a maximum of a 500 investors that functions as a single entity with the purpose of providing access to one or several alternative investment vehicles. Not only can 3C1 investors gain access to alternative vehicles through a lower investment minimum, but there's also the possibility for enhanced diversification given the 3C1 structure's ability to invest across multiple vehicles. And as you'll recall, the same alternative investment fund number one is a 3C1 structure. So Austin, let's go to the next slide, please. Great. So as a quick reminder, there are a few different types of alternative investments are arguably the most well known is private equity, which can be broken up into a few different subclasses. First one, a leveraged buyout is an entity a leveraged acquisition of another company using a leveraged acquisition of another company using a significant amount of borrowed money to meet the cost of the acquisition. Venture capital is a form of financing provided by firms to early stage companies that have been deemed to have high growth potential. Growth capital is a type of private equity investment, usually a minority interest in relatively mature companies that are looking for capital to expand operations and or finance to expand to expand to expand to expand to a significant acquisition. Private real estate mostly focuses on commercial income generating properties across a wide range of assets from warehouses to multifamily housing to office, hotel, and retail. And finally, finally, we have private credit, which is really a tailored direct lending capital solution that spans the balance sheet and borrower type. So this ranges from senior secured loans for blue chip corporate borrowers to junior unsecured credit for financing new building construction to loans against specialized assets such as airplanes or contractual revenue streams like royalties, for example. For a borrower, for a borrower, the advantages of private credit include certainty and speed of execution, which are features especially attractive in volatile public market conditions, as well as confidentiality. So let's go to the next page, Austin. Yep. So like any investment strategy, there are drawbacks to investing in alternatives. And these drawbacks manifest themselves in the form of illiquidity in relatively high fees. And like any complex investment vehicle that possesses the potential for higher returns, that also means the potential for greater risk as well. But most would argue that the benefits associated with alts far outweigh the drawbacks. So let's start with the excess return premium that is earned across illiquid investments, which is depicted in the upper right-hand chart. So in exchange for a lack of liquidity, usually in the form of a 5 to 10-year lockup period, the illiquidity premium that one cumulatively earns over the lifetime of an investment vehicle can be significant. And this illiquidity premium is a major reason why institutions like pensions and endowments allocate such large percentages of their capital to alts, which is depicted in the lower right-hand chart on the slide. If we go to the next slide, Austin. I would argue that this next slide captures the most compelling dynamic surrounding alts and the reason why institutions allocate so aggressively to this strategy. So this slide here, which we've shown in past webinars, just happens to be one of my favorite slides put together by our team. And it shows a graph of two distinct curved lines called Efficient Frontiers, which represent a set of investment portfolios that are expected to generate a certain level of return for a given level of risk. Okay, so let's focus on the lower curved line connected by the dark blue and orange and gray dots, which represents a set of portfolios consisting of only equities and fixed income. And as alternatives are introduced into the portfolios, which is depicted in the upper curved line connected by the yellow and the light blue and the green dots, a very interesting thing happens. So the curve shifts up and to the left, meaning that enhanced diversification leads to increased returns and decreased risks. Right. Which is frankly, which is frankly, which is frankly, the fundamental pursuit of any investor seeking to optimize their portfolio performance. So let's go to the next slide, Austin. Oh, go ahead, go ahead. Add, I mean, I think, you know, this is sort of the holy grail, Mario, that if you can increase risk or increase returns, while also lowering your risk, golly, that's very hard to do. And I think one thing I just want to make sure that our clients and prospective clients are aware. This is data over 30 years. Prior results do not guarantee future results, of course. But it is pretty compelling. Look, you are giving up liquidity for part of your portfolio to get this and you need to be aware of that drawback. Liquidity is an important attribute of many, many assets. But if you are willing to do that for part of your capital and you invest it prudently the way that we are looking to do, you can generate these types of holy grail type return profiles. Exactly. And in my mind, Austin, that's one of the fundamental reasons why institutions, right, like pensions and endowments in that prior slide allocate so aggressively versus the individual retail investor. Yeah, I agree. Great. All right. Sorry. So let's, oh, this, now this is my favorite slide. Okay. This is your slide. I'll give it to you. There's, there's, it's, it's so, it's, it's so, it's genius in its simplicity, right? Because a lot, it's basically the colors that are communicating the salient thoughts, right? So, so this is another graphic that we've shared in prior webinars because, because it does a great job, you know, showing how we think about the different types of alternative investments, right? So, so the first classification that we consider is, you know, how, how do we understand the different characteristics amongst the investments, right? I think the important takeaway here is that while private credit doesn't really offer the same kind of upside capture as the others, the downside protection is incomparable, right? And perhaps even more importantly, how do we see the current environment impacting each of the alternative types, right? We believe that depending on where we reside in the overall macroeconomic cycle, some alternative investments may fare better than others, right? Because lenders in the private credit market charge borrowers' interest at a floating rate, their rates of return are protected and oftentimes bolstered during this high, high rate era of central bank tightening. Also, private debt enjoys continuous interest payments and a maturity date of the loans, which provides stable distributions to investors. Conversely, private equity firms have been watching the value of their holdings decline as the cheap money boom years have really kind of come to an end. And, and they're finding it. And they're finding it. And they're finding it harder to sell companies, which in turn depresses the amount of cash that they can return to their investors. And sometimes private equity firms must find creative ways to return capital back to investors, like, like selling their stakes in the secondary market at depressed prices. So, so I think we think the takeaway is pretty clear. In the current macroeconomic environment for alts, we believe that being a direct lender unequivocally possesses the most optimal risk-adjusted return characteristics for our SAM clients. And so now, Austin, I'd like, I'd like to pass the microphone back to you because I think you have some final words to say about the merits of private credit. Fantastic, Mario. Fantastic, Mario. Thanks very much for that. Yeah, I do. Actually, we were talking with our wealth managers yesterday. And they asked, are we going to talk about the macro environment at all on this presentation? And I said, not really. We have one slide that we're going to hit on it. So this is the one slide for folks. I do want to, it's a good moment to pause, though. We're going to pause, though. We're going to pause, though. We're going to pause, though. We're going to pause, though. We're going to pause, though, and we'll go ahead and pause, but we'll put those in a queue and Claire will help us queue those. And by the end, we'll get to as many of those as we can. If we don't get to all of those, we will absolutely make sure to get back to you. I also want to say that these slides are available to you. So just let us know if you like these slides and we'll be happy to supply you with them. So look, in today's market, we think this is not the type of market that you should be, if you're worried about the world, trying to protect yourself by sitting solely in cash. We do think that dry powder, having some dry powder is prudent. Absolutely. Particularly as asset prices go up, it's prudent to have some dry powder on the side, because if we get into an environment where folks are selling quality assets at fire sale prices, we want to be in a position to be able to buy some of those world class assets at great prices. But for the most part, this is an environment that we see governments around the world will take the path of least resistance to be able to deal with mounting debts. And the way to do that is to continue to debase their fiat currencies. That's going to happen across the board in our eyes. And so what you need to do is to be able to deal with the cash. And so what you need to do and what we believe you need to do is in order to defend your capital, in order to defend your purchasing power, you actually need to play offense with a good bit of your portfolio. And so how is it that we think you should be playing offense? Well, it's owning productive assets. And what do we mean by that? It's these three things. It's those assets that are generating value and or cash flow for you. But two key points. First and foremost, we want to make sure that those cash flows, those returns are in excess of inflation. If you're generating 2% returns, but inflation is 5%, you're still losing purchasing power over time. They're in excess of your cost of capital. Some folks that don't have any debt have a very low cost of capital. But if you're a household that is using some debt to finance your life, let's say it's a mortgage or something else, you want to make sure that you generate any dollars that you're investing incremental to that should be generating a return that is higher than your cost of capital. Otherwise, you should just pay off that debt. Finally, we want to make sure that your assets are provide an attractive risk adjusted return. At SAM, we are not focused solely on finding those assets with the absolute highest potential return return. I think that if we were talking within alternatives, angel investing, so venture capital in the earliest stage companies might have the highest potential return profile. It also has the highest risk profile. I mean, Jake and I have talked about this. That's kind of a spray and pray approach. You're spraying a bunch of money and pray that one of them. And pray that one of them grows to the sky because a lot of them will die. We are not looking for that type of thing when we're talking about owning productive assets. We want attractive risk adjusted returns. And for our money, private credit rings the bell most loudly on all of these metrics in the current environment. But don't just take our word for it. Take the largest private equity investor in the world who is not espousing the virtues of private equity. He's been espousing the virtues of private credit. So Steve Schwarzman is CEO of Blackstone, largest private equity investor out there. And I'll just read his quote really quickly. If you can earn 12 or 13% in senior secured debt, what else do you want to do in life? If you were living in a no growth economy, somebody can give you 12 or 13% with almost no prospect of loss. That's about the best thing to do. And we agree. We will tell you a little bit about that we aspire to generate a little bit higher returns than that. But no promises, but certainly agree with the sentiment. So it's this slide. If there's no other slide that you focus on, this is the one that I think was the reason that we sort of came together and said, let's sort of combine these three groups of folks together, folks that are invested in fund one, clients that are interested in fund one, potentially fund two, but aren't invested yet. And then folks that want to learn about private credit. And that is that there has been growth in private credit in the marketplace and so much growth that I think it's worth asking, is there a bubble in private credit or how should I be worried about it? And what are you, Sam, doing that's different from what the mainstream is doing? And so I just want to frame that with this one slide. First and foremost, first and foremost, there has been growth in private credit. It's been along many of the big private, big investors, including Blackstone, by the way. So Blackstone, Aries, Apollo, these are some of the larger private credit investment managers on the planet. We think they're very good private credit investors. We have no allocations to any of this type of manager. And I'll explain why. But it's not to disparage what they're doing. It's just a different sort of goal and framework. These are investors. And this is the approach on these sort of four vectors. First and foremost, it tends to be junior unsecured debt. They're lending behind a piece of secured debt or senior debt. So while you're ahead of the equity in terms of priorities of your claim against the assets of that business, you're behind some senior piece of debt, generally speaking, generally speaking, generally speaking, most of the assets going to this sort of traditional approach to private credit are with competitive bids where there's a lot of different private credit managers bidding on that particular lending piece and or their private equity sponsored deals, meaning that KKR, a nice, very good private equity, investor does a buyout of the business. They have a bank loan attached to that that provides 10 or 20% of the capital they need to do the deal. They don't want to have 80 or 90% of the capital be equity. So they find a piece of junior subordinated debt to fill the middle of it. So maybe they only have to do 20, 30, 40% of the purchase price in equity. That's what I mean by private equity sponsor deals. Many of the private credit investors out there are focused on that type of the market. They tend to be larger deals. These managers are managing a lot of capital. And so they want to do large deals. They want to do plain vanilla deals that can get done very quickly. And then finally, the manager goal. Now, to be fair, they are looking for to generate nice returns on their investment for sure. But really, this is an asset gathering model where they win, they do better as a firm by generating 10 to 12% returns on $100 billion of capital than they would generating 14 to 18% returns on $1 billion of capital. So that's the model. That is where most of the capital is going. Our approach is differentiated. It's more targeted. It is focused, first and foremost, not on junior debt, but on senior secure debt. We are avoiding sponsored and competitive deals. We are finding not the large vanilla deals. We find those niche strategic deals where as a lender, you can be a partner to the borrower. And then finally, this is sort of the piece that really we're focused on. Our managers are focused on high IRRs. That means internal rates of return. So the average return per dollar that they loan, they want that they loan, they want that number to be as high as possible for the investors in their funds. And we as investors in their funds are very happy for that being the goal, not to deploy as much capital as possible. That in a nutshell, is really the emphasis of what we put together in SAM Alternative Investment Opportunities Fund 1. I just want to talk about the other thing that we did, and Mario alluded to it, but the biggest risk when you talk about investing in alternatives is while the average return of alternatives is in private markets is higher than the average return in public markets, the amplitude, the difference between the very good managers and the very bad managers is much, much higher. There are many very bad managers and very good managers relative to the spread. And so what happens is manager selection is mission critical. So we focused a lot of time on our manager due diligence. We also wanted to make sure that we had diversification. We wanted to be concentrated on our absolute best ideas, our best managers, but we also wanted to be prudently diversified. And in our estimation, the way to do that is to have at least four of our absolute favorite funds and allocate on your behalf to those four funds. We ended up going with five funds. So SAM Alternative Investment Opportunities Fund 1 is allocated across these five funds. Now, as you're looking at the slide here, I think the more important numbers are the ones on the left in the pie chart, the percentages. The ones on the right are the current commitment levels that we have made as a fund to those investment managers. I say, I want to focus less on that and more on the percentages because two things. One, some of you in the fund have told us that you want to invest more capital. So if you have an existing slot in the fund, you are able up till the end of this year to increase the size of your allocation. And we've had some folks come back and want to do that. The other thing is we have a few slots left. We had about eight slots left when we closed the fund in February. A couple of those have been allocated to folks that were kind of getting their documents ready. And then we have a few open for folks. If that's something that now that you know the fund is happening, now that you know more information, if you want to get into it, we have a few slots. So that's what's available. Let's go ahead now, though, and talk about each one of these managers that we've allocated to in a little bit more detail. The first one in our largest allocation, these are in order of allocation size, is recurring capital partners. I will not go into every line detail on every one of these, but I think it's probably worth for this first one to explain a little bit more what we're talking about in each of these bullets. So again, we wanted to focus on targeted niche lenders. Recurring capital does one thing and one thing only. They lend to B2B SaaS companies. So software as a service companies that focus on the business to business software. This is mission critical software that ends up being the operating guts of your business. Think of a simple one that is your your order management system, your order management system, your order management system for a restaurant. You know, if that goes down on you, it's very hard to make sure you're booking all your tables or, you know, there are facilities where you need to make sure you manage every part of that facility and you're using software to do that recurring in a lens to those types of mission critical operating software as a service businesses. Look, they generate really strong, uncorrelated risk adjusted returns. I think one thing that's important for them is they are senior secured. They secure against the recurring revenues of the business. So they are that they are first in line. If something went wrong, they would own the business and the cash flows, the very sticky cash flows associated with that. They have floating rate debt. They do have floors, though. So it is a nice heads I win tails I don't lose situation where we're if rates were to come down, recurring capital would not see their rates drop too much. Sometimes the floor is a little bit below the prevailing rates, but it's not it's not precipitous drop. This is another interesting thing for them. They tend to have three to four year loans, but they they amortize over that three year period. So we will get distributions back from them. Part of that will be interest and part of that will be return of principal. So they're looking to kind of generate 12 plus percent cash interest rates. They enhance that return with back end warrants or success fees upon the payment, full payment of the debt back or upon a successful IPO or sale of the company. There are success fees that are paid to recurring capital. There are they're targeting net investment internal rates of return. Just sort of think of that as average annualized rates of return on your capital of 14 to 16 percent or above. That was kind of their their target before in the lower interest rate regime. We expect it to be higher here going forward. Very low loss rates. And I just think I'd point out, you know, very experienced. Experienced a SaaS operator and investor, Brian Henley, the founder and chief investment officer is saying, look, this is right now the most attractive investment environment that he's ever seen since founding the firm. So with that, Jake, I didn't know if you could you could provide us a little more color. Yeah, I think recurring capital is actually a pretty good case study in the type of process that we use to utilize to source these managers. There really wasn't, you know, a secret sauce, nothing too proprietary, just really good old fashioned hard work. Austin and I would as a team kind of scour through hundreds of private lenders through different sorts of platforms after identifying dozens of them that had something interesting or we thought might be unique about them. We met with them virtually or in person to sort of suss that out. And once we met with Brian, it just became really clear immediately that this was someone who lived and breathed SaaS. This is someone who founded tech companies, went to work for a tech company, buying other tech companies. It's just the kind of industry experience that you can't replicate. It has to be earned. Great. I totally agree. Yeah, it was it was a it was absolute pleasure to meet with him. We've brought him over to our part of the he's in Austin, Texas, but, you know, we had crab cakes with him. And, you know, it's been it's been a great relationship so far. Next up is Colbeck Capital Management. So this is a larger business and more more assets under management, more employees than than recurring, but still a relatively small niche operation focused on that middle market direct lending. And the way they describe it. And the way they describe it is they're lending to companies during periods of transition. And they're doing it in a way that they can be very quick. And they and it's during times that perhaps other forms of capital are less accessible. They do, you know, they do, you know, the examples of the types of transition or periods of change or for a company that they will tend to borrow from Colbeck acquisitions, extreme organic hyper growth where your earnings can't fully fund as fast as you're growing. There are restructurings or special situations. There's business transformations where they're trying to offload one asset. Lots of lots of different things. This company is also targeting very high returns that that IRR. I want to there's two two two words in that bullet that I want to make sure people catch. One is unlevered IRR. And then the other is this acronym MOIC, or MOIC. I'll hold off on that for a second. First, unlevered. So it's important to note that many private credit investors will lend lend to a company and then they will borrow against that and sort of lever up to juice their returns. Our managers are not doing that. And in particular, Colbeck is generating really outsized returns without levering up what they're doing. That's important to us. We don't want to leverage on top of leverage when things go bad can go really bad for us as investors. So we focused on priority folks that weren't doing that. And we're prioritizing folks that weren't doing that in this first fund. Now, what is MOIC? That's a multiple of invested capital. So that's important because as investors, we're not only looking for high internal rates of return that IRR, which is the amount of return we make on an annualized basis for each dollar invested. We also want a high multiple of invested capital because we saw a number of lenders that showed us that showed us that showed us that showed us a high RRR, but a low MOIC. They may only lend to someone for 12 months and they do it at a high rate. But as an investor, we commit all this capital and we get some back 12 months later and we haven't really generated a high multiple of invested capital. So it's important as we put this fund together, we wanted to make sure, of course, that IRRs were strong, but also that we had funds that could generate high MOIC or MOIC. The only other point I'd point out is these guys have been doing this for a while. They still have zero losses realized across any of their funds since inception. And these guys are veterans. The way that they phrase it is, look, we generate equity-like returns with unlevered senior secured risk. Jake, what would you add here? Yeah, I would just add, I mean, these are serious industry veterans. When we met with them, they've been working together since the 1990s. Their careers have spanned multiple different companies, decades, but they've all been in this part of the market. And that was actually what inspired them to sort of go off on their own to try and take advantage of this fragmented part of the market. And so far, they've been very successful at it. Yeah, that's absolutely right. I started my career, as some of you may likely know, at the Blackstone Group, where we were advising companies that were trying to emerge from or avoid bankruptcy and would deal with some high-power lenders in that scenario. I did a little name game with Jason Kolodny and Jason Beckman. And these guys knew all the folks I used to work for. And so we have a chance to do due diligence on them. And it came back A+. I didn't give Jake you an opportunity to talk about our entire due diligence process. That reminds me, why don't we talk a little bit about kind of what we did to get to these five funds? Yeah, so we did a lot, as you know. Like I mentioned with Recurri, I mean, we went through hundreds of different managers just at a high level trying to isolate anyone that we thought was more differentiated, had something special and unique about them. We sort of whittled that list down to roughly 50 managers, something like that. We began meeting with them, reviewing their decks, their track records, their materials. We kept sort of whittling down to the market. We wanted this fund to be concentrated in our best ideas, which I think it is. But we also didn't want to be, we wanted to have some diversification in there so that we could really spread across the credit spectrum. That's right. That's right. That's right. And the other piece of this, so you did a good job of highlighting that and forgive me for not, is we did some operational due diligence as well, our team. So we want to make sure first and foremost, they're great investors, but we also want to make sure that these folks have a good organization. So we partnered with Mercer Management and another investment consultant. to understand the background of what they were doing. We also did some, this background work on ourselves. Jake is invested in other alternative investments. I'm invested in alternative investments. Mario has connections and investments. So we're all working to try to understand these folks. And that has been really helpful. I'll tell you, I'll leave their name off, but our number one investment early on from an investment perspective, failed this operational due diligence that we did. And actually, as it turned out, the managers parted ways shortly after we kind of said we were uncomfortable. So that's an important piece of this. We want to make sure we're not only investing with great managers, but great managers with sticking power and great operations. Hey, Austin and Jake, I think, I think one dynamic that I think is also fair to illustrate is the months of preparation. that kind of led to this point, right? The dozens of man hours that the both of you contributed to get that funnel, to distill that funnel, right? From the dozens or so of managers that you started with all the way down to these final five, right? Because we wanted to make sure that we curated the best. And in order to do that, it took a lot of time and effort. That's right. No, I appreciate that. I appreciate that. I know you were part of that as well, but I appreciate that. I'd say Jake lived, breathe and eat this, ate this for quite a bit of time. So, as did we all. Great. Let's keep moving. So next one is Benefit Street Partners. So this is a cool one because it is a entrepreneurial like business within a huge established investment platform. So Benefit Street Partners is a $75 billion credit manager. majority owned by Franklin Templeton. Majority owned by Franklin Templeton or Franklin Resources. They have like the, this is almost like the Corvette sitting inside GM though. They have this really cool Skunk Works investment ops fund and called Special Situations Fund. That's within sort of a sleepier, more stodgy multi-credit, multi-strategy credit manager that we just really, really were attracted to. Given their unique, given their unique, uncorrelated investment returns. They definitely are looking at some sort of traditional middle market lending and direct lending, but they also had found some interesting investments within litigation finance, within royalty streams. Mario mentioned that at the top. And then also some opportunities for secondary investments where it may be a distressed credit or restructuring opportunity where their initial foray is to buy some distressed assets with the idea that they could become the senior lender over time. So we like what they're doing. I think one interesting aspect of this is, and the interesting aspect of investing in, in alternatives is sometimes you get a free look into part of what folks have invested in before you have to make your commitment. And in this case, we thought they had a really good partial investment case already. So I don't know if you could talk a little bit more about that, Jake. Yeah. I think the interesting thing here is their early win that we mentioned on that slide came from the litigation finance sleeve of the portfolio. Litigation finances, you know, you know, so I think it's a relatively unknown, sort of esoteric type of lending, but it essentially involves putting up the capital to fund sort of major headline news grabbing type lawsuits. You know, think like asbestos or tobacco, things like that, that really have the potential for huge multi-billion dollar payouts. But someone needs to finance that, that lawsuit. And so Benefit Street was, you know, you know, very strong and they were able to fund a, I'm not sure we can get into the specifics on here, but they were able to fund a lawsuit that I'm sure many of you have seen the, the attorney ads for that has gone in their favor. And we were able to, as Austin said, get a, get a first look at that before we were forced to commit capital. Right. Now I will say, once you see the ads, it's late. These guys were early. So whatever litigation you see on TV with the late night 1-800 numbers, we're not focused on those. We're focused on the ones before they get to the mainstream. Good. So those were our three main allocations. I'm going to, we'll just be a little quicker on these last two, where we can save some time for questions if you have more specifics. Crescent Cove. So we like the idea of venture debt investing, invest venture debt lending. So lending credit to the tech high technology, venture backed, but really not even venture backed, really more just technology enabled businesses where in many cases, these things are under banked, but they're super high growth. And Crescent Cove was the one that we found. I'll let Jake talk a little bit about how we found them, but just as a super special manager that we, I know one of the principles from a prior life very well. So we were able to do some due diligence there as well. Their track record is tip top. They're basically generating incredible returns while having a senior secured position, very experienced team. But again, focused mostly on technology enabled businesses within TMT, technology, media, telecom area. So Jake, I don't know if you want to provide a little bit of context for how we found Crescent Cove. Yeah. Crescent Cove was interesting because it didn't necessarily follow that sourcing strategy I explained earlier. Towards the end of our diligence process, we were actually talking with someone at Colbeck and just sort of in passing had asked them if there was anyone that they thought was doing interesting work sort of outside the arena that they play in. And they immediately came back with the small firm in California called Crescent Cove, who we reached out to. And it was only then that we realized that Austin had this connection with one of the managers there. But we were very fortunate that things played out that way, because this is a really strong fund that we were very excited to have in the portfolio. Yeah, they limit the size of their fund. So they really weren't even that excited to call us back, but we worked on it. And we're very happy to get an allocation here and looking forward to how that benefits you guys as investors. Okay, finally, Marathon Asset Management. So Marathon is a highly experienced, very good global asset manager focused on credit. There again, this is kind of the, you know, the hemi engine, the supercharged part of their business within their distressed credit fund, special opportunities fund. It's a pretty broad mandate that they have. But I would say that, whereas other credit managers are afraid of old economy and complex situations, these folks, if the asset value is there, and if the if the if they're secured by enough of what they think is, is good assets, even in a bad environment, they will enter, you know, but with both arms, these complex situations to get them figured out, because ultimately, they believe they're less competitive, they're harder to figure out, and they can generate excess returns, when everyone else is just focused on the easiest, most plain vanilla stuff. So super experienced team. Here, again, we do know someone on the team, it always helps to kind of do that extra layer of the extra layer of due diligence. And so I think that what I would say here, and I don't want to steal Jake's thunder. I'm not sure, I can't remember what you're what you want to say here. But I think that it's nice that we have a manager, that's a little bit more bearish on the world than some of our other managers, that says, look, we could be entering with all this global debt, we could be entering an incredibly dislocated, distressed credit environment, distressed credit environment. And we couldn't be more excited about it. So yeah, I think the one thing I'd highlight here is this is a fund that is poised to do well in the current environment, but they're poised, at least on a relative risk adjusted basis to do even better, if we have some stress and even distress in the credit markets. That's right. Yeah, I think that's right. And we like that. So again, we've sort of felt like we kind of have a nice diversified look within these five managers. I want to come back to the allocation pie here to just talk a little bit about what capital has been called to date. As investors in the fund know that we've had 35% called to date, it's a little bit different across these different funds. One of the funds, Crescent Cove has called capital twice and in a short amount of time is already 65% of the committed capital has been called and soon to be invested. So we like that. I think that begs the next question, when will the next call be and how do we think, what do we think about that? So these are no promises on this slide, but these are sort of forward looking statements on what we expect. And we do expect a next capital call in July. We have a number of managers that have talked to us about a call coming later in the third quarter, such that by the end of 2024, our expectation as a team is to be kind of at least 70% of our capital called and invested by the end of the year. So that's really great. Getting more than two thirds of the fund invested in less than a year. We're excited about that. That means we're putting your capital work quickly and we'll start generating returns on that right away. And so when do we get those returns? Well, we have just had announced distributions from recurring and cold callback. Very small one from callback, a bit more substantial one from recurring because again, remember, recurring debt profile is amortizing debt. So they're getting paid back more per quarter than some of the other managers. That want to wait till they get fully invested. And then we'll start paying us interest back. So we are targeting regular distributions. Our managers are now all paying quarterly. We weren't sure how that was going to happen. When we talked about this fund, we can confirm that our managers can pay quarterly. And if those are evenly set up, maybe we pay more often than quarterly, but more likely we'll probably have fewer payment distributions to you and just do them once a quarter with the first one coming. July 15th. We continue to expect annualized distributions of 7% to 9% kind of during this investment commitment period. It will be smaller than that as folks are increasing the amount they get fully invested. And it'll be larger than that once they're fully invested. And it'll be a lot larger than that as we start receiving proceeds back in terms of return of principal and success fees and the like. So that's kind of the way that we are seeing the fund right now. And because of that, we wanted to then talk about how we're seeing Sam Alternative Investment Opportunities Fund 2. And so to do this, I wanted to pass it over to Mario, who has a very unique seat at Stansberry Asset Management. Not only does he help us with the Alts Fund, he is a portfolio manager and chief investment officer. He also is a wealth manager. He also is a wealth manager. So I thought he could talk a little bit about kind of how this came to be. Thanks, Austin, for that. So when we launched Alts One, Sam Alts One in approximately October of last year, our wealth managers had dozens upon dozens of very helpful conversations with our client base over the subsequent two and three months. And there was a lot of time. And there was a lot of time. And there was a constant refrain in those conversations. And it was, gosh, this sounds so compelling. Don't necessarily have an appropriate sleeve of assets or taxable asset sleeve for Alts One. However, I do have an asset sleeve in terms of IRA dollars or Roth IRA dollars that I'd like to invest. Can I do that? And unfortunately, up until today, the answer was no. Right. Alts One could only accept taxable assets. Well, today, we're very proud to announce the fact that we're launching Sam Alternative Investment Opportunities Fund number two. And in one of the prime, in fact, the primary distinction between Alts Two and Alts One is that this vehicle will be permitted to accept essentially only IRA dollars, both traditional and Roth IRA dollars, both traditional and Roth. Okay. The theme will be the same. The vehicle will also focus on private credit. And in fact, there may be a little bit of overlap in terms of maybe having the same manager from Alts One, either one or two or three, perhaps. Another differentiating characteristic here with Alts Two is that we have a slightly higher minimum commitment amount in Alts Two, $350,000. In terms of timing. We're looking to do a first close sometime during the third quarter of this year. And then a final close occurring in January of 2025, assuming, of course, that we don't receive the maximum number of investors before that date. And as a reminder, this vehicle is a 3C1 vehicle. So we're only permitted to accept 100 investors in this vehicle, just like Alts One. Okay. Awesome. I know you probably want to apply or maybe have a few thoughts about Alts Two that you probably want to share with our client base. Yeah, no, thank you, Mario. I think that one thing, a couple of things that I think are important to sort of flag for folks, we're providing this diversified group of managers. I think that I think that's impactful in its own right because we've done the due diligence. We've done the manager selection. We really like these managers. And while no guarantee, we think that the managers that we've detailed in Fund One are highly indicative of the types of managers, if not the managers that will be invested in Fund Two. So that part in and of itself is, I think, super value add for our clients. The other pieces, though, that I just want to make sure we're clear on because I don't think we've said it outright is these managers will very unlikely. This is hard for you to replicate yourself. First off, they may not want to take just your capital. We are one qualified purchaser to them. We look like one investor to them. And they don't have to deal with some of the back office stuff. Stansbury Asset Management will handle that on your behalf. You will open up accounts if you don't already have them with us. And we will manage that for you. The other piece, though, is we have in circumstances, and again, also no guarantee here, but in Fund Two, we were able to negotiate lower fees than you would be able to get on your own. And in some cases, lower fees, fees so low that it more than paid for our management fee is paid for our management fee. And so to be clear, we do have a 1% management fee for Sam. And then each of the managers have their own management fee. We have gotten lower fees in many cases as a result of bringing people together and then wanting to be introduced to a newer type of investor that used being individual investors. So I think it is a triple win. There aren't many of those that actually happen, but I think this is really good for clients. The managers that we've selected, it's really good for them. And we frankly think it's great for Sam because we do better when you do better. And this opens up the aperture. And that allows us to help you diversify your investment portfolio better than if we were only focused on publicly traded investments. Jake, I don't know if you have anything else you want to add to that. I think you covered it. I can't say it any better than that. Cool. Okay, great. Well then, sorry, you had one more slide. I do. And again, I think this slide's very important. It should not be overlooked, right? Because when discussing alternatives with clients, I know when I have these discussions with clients, the first thing I highlight in these conversations is the illiquidity factor, right? Lockup periods for five to seven years are standard for these types of investments. And serious consideration should be taken about whether your principal assets are needed for near-term expenses. However, the illiquid nature of certain alternative investments can potentially be a boon to your long-term investment horizon. Even though investors may not be able to withdraw funds on a daily basis, this higher illiquidity can allow for investment in possibly higher yielding assets. Another dynamic to keep in mind when thinking about alternatives is that alternatives are often influenced by different market characteristics and circumstances than traditional investments like stocks and don't always follow that same performance path, right? But it is these exact idiosyncratic characteristics that make alternatives an attractive source of diversification and return potential. So at the end of the day, when you're thinking about whether you should invest in alternatives, reviewing your overall portfolio risk tolerance in the context of your entire financial picture is really a great place. to start. So Austin and Jake, I think it's probably time now to go ahead and open it up, the discussion to some Q&A. What do you think? I think that's great. No, well said. Just to echo your last point there, we want to make sure that this is the right investment for you in the context of your overall entire financial picture and investment goals. So we welcome the opportunity to talk to you about that. Both existing clients, of course, but then also potential for prospective clients. So let's go ahead and do that. And again, if you have questions, I already have a couple here in the queue. But if you have questions, just go ahead and click those in and we'll get to as many of those as we can. I just want to put these disclosure notes up first and then I'll stop sharing so you can see a little more of our mug. Look, the first question. Look, the first question that we have is if interest rates decline over the next few years, how will that impact private credit investments that you've made? I think I hit on that a little bit, but I think it is worth noting. One of the attributes that we saw private credit have is floating rate debt for the most part so that as interest rates went up in the last few years and that had a very negative effect on fixed rate credit instruments. It had little to no effect on floating rate other than to increase the return profile in many cases because you were getting a higher interest rate as prevailing interest rates went up. Most of our, I think every one of these is, there's a couple exceptions, but just about the vast majority of what we're doing is both floating rate and has some floor at it. So as interest rates go down, all else equal, that probably has a little bit of a softening of returns. Not as much as you think because of the floors, but then also remember that is better for the borrower. So it actually ends up being more likely that our, as a lender, we'll get paid back. And in many cases, lower interest rates help refinance out the debt that we have and then lead to success fees sooner. So all else equal, we're a little bit agnostic. We think there are pluses and minuses to interest rates going up from here and pluses and minuses to going down from here, but by and large, less so than public market debt that's fixed rate. I don't know how, if you guys agree with that sort of. Framing of it. I would, I would, I would say that echo that sentiment. Exactly. The other thing I would probably add is generally speaking in a lower rate environment, you might have, you know, easier access to capital, which could translate into higher enterprise values for the portfolio companies that, that we're lending to. And why that's relevant is because oftentimes these loan packages have, have attached warrants. Right. And to the extent that these enterprise values increase, that's great for the warrants. And that's great for the IRRs for the LPs at the end of the day. Great point. Great point. While, while you have the mic, then let me ask this, it says same question for recession. How do you expect a potential recession will impact private credit and your investments? I, I think because of the fact that we're focusing on managers that are primarily investing in the, in the senior secure part of the cap structure, right. At a first lien status. I think it's important to recognize that they're there. That part of the capital structure is largely shielded from some recessionary characteristics. Now, I don't want to be naive and say a recession wouldn't, would not impact portfolio companies at all. Right. But the fact that we're investing at the top of the capital structure does give us a great amount, amount of, of coverage and protection. If a recessionary environment were to happen in the next one to two to three years. I agree. That's what I would have said, which is look, I mean, all else equal, I think just about every investment will do better in a environment where the economy is strong. And so we were, we're, we're, we're rooting for that, but to be senior secured, you're going to do far better than if you were junior or unsecured or equity. If things, you know, if, if things go pear shaped as some people would say, I'd also flag what Jake pointed out is that we, a manager like marathon, you know, is chomping at the bit for a little bit of distress. So we have that, we have a little hedge in there in our portfolio. Well, one thing I would add Austin too, is, you know, on those slides that you presented on each of the managers, the bullet points that jumped out to me were the loss rates, right? The loss rates were, which were near zero. And it's important to highlight that because a lot of those managers were managing capital during COVID. Right. So even during a global pandemic, right. When the equity indices were down 30 plus percent, their loss rates were still near zero. Right. Right. Yep. Good. Let's see. Actually. I don't know. Jake. Well, why don't we all three think about this one and you can see what comes to mind. Can you talk about a private credit manager that you researched, but decided to pass on? What were some reasons that you didn't invest in certain managers? I think I mentioned one, which was an operation due diligence fail, where we liked what they were doing. Had some questions about the, just the management structure. It was these managers that were on a platform. It was almost like a millennium hedge fund type platform. Mario, where we liked them, but we didn't, I just wasn't sure how it was working. And as they failed to raise capital as quickly as these managers expected, they kind of got angry and agitated and broke away from this platform. And, you know, that was one reason where it was an operationally, we weren't really sure how it was working. How this worked out and we're glad that we passed. Can you think of others, Jake or Mario? Yeah. I think the most common reason that we ended up passing on some funds was just because what they were doing, we didn't feel was particularly differentiated, even within their own space. You know, there were tens of managers that we met with. We reviewed their materials, their data rooms, but at the end of the day, they fell more into that, you know, vanilla competitive. Bidding bucket. And there just really wasn't that outsized risk adjusted return potential. Yeah. I think that's right. Mario, I won't remain nameless, but you found an interesting manager for us that we did due diligence on. And the returns look good on an IRR basis, but I'm specifically thinking on this one, they're multiple invested capital. So it was like 18% return IRR, multiple investment capital 1.2. Because they were getting paid back. Because they were getting paid back so quickly. And they were only investing a small portion of the fund. So you'd have a, if you had a million dollar commitment, you may only have $300,000 invested at any one time because that rest was getting paid back quickly. That might work for institutional investors, for individual investors. We want, if I've committed that capital, I want you to invest that capital. Good. Okay. I have, let's see. Can I combine my wife and my IRA together to meet the minimum for the private credit fund? I'll just go ahead and answer that one. The answer is no. In this case, they're unique slots. So while if you were to establish a relationship with Stansberry Asset Management, and the minimum is $500,000, you can combine your household to get to that minimum. For each of these slots. For each of these slots, it's a unique tax ID. And it's a unique, you can't combine two people or two entities into one. You'll take one slot and that would be it. So unfortunately, that's the way it works. Also want to just flag, we want to make sure that this is appropriate for you. While we do have a higher threshold of $350,000 on that, we don't want this to be all of your investable net worth. We want to make sure this is appropriate for you. Everyone on this call, you're on this call because you're an accredited investor. So you do have a certain amount of capital, but we want to just make sure that is. And we want to make sure you talk with a wealth manager just to confirm that. When we receive distributions, are those considered interest income? And do these distributions impact my total commitment level? You want me to take that? You want to take that, Mario? Why don't I take the first one? You can take the second one. Sure. So are these interest income? In many cases, the normal distributions you're getting are interest income. Not necessarily, though. If you think about the example we gave you with recurring capital and some of our other managers structure it this way. If the loans are amortizing, then the borrower, as they pay back, part of that payment will be reducing the principal. So return of capital. And part of it will be interest income. That's actually more tax favorable in many, many cases. And then you'd have capital gains on the back end, once you've returned all of your principal. Obviously, the tax favorability matters more in fund one than fund two. And maybe, you know, that's, this is a now a time to say there are some, you know, great tax benefits in fund two of using IRA, non taxable money, you know, so not, I guess not the Roth IRA, but the traditional IRA money for that. But what's it, what about that second piece, Mario? Well, I think that if you receive, if an LP receives a distribution in some form, your commitment level still is unchanged. Correct. Right. Right. That's important. Although I will extrapolate on that and say a lot of conversations I had with clients, they were worried. They were concerned because a lot of my clients that I spoke to had experiences such that they faced higher, higher commitment amounts than they were, what they were initially committing to. Right. And they were spooked by that. And I was, we were emphatic. And we said, no, in fact, whatever commitment amount that you commit to is the maximum dollar amount that you will be committing. Right. That's right. So that's, this is getting a little bit in the weeds, but there, there will be managers that send you send you send money back, but it's recallable where they may want to come bring it back to reuse it. We're not going to distribute those. Cause that's, again, we don't want to increase your commitment beyond what you've committed to. So great, great point there, Mario. We'll, we'll make sure that. I see, I see a great administrative, but relevant question in the box here, Austin. If the, if the, if all, if all, if all investment to fund allows use of IRA contained funds, how will you handle RMDs? Great. Yeah. Great question. That's, that's, that's, that's, that's a great point. Well, I want to be clear that we're not guaranteeing that the distributions will be big enough to satisfy your RMDs. So I think you'll meet with your wealth manager to sort of figure that out. Maybe you want to do a portion of your IRA to make sure that the timing, you know, doesn't line up where you're, where you can hit those RMDs, at least in year one. Because some of the funds will take a little while to get invested before they give you distributions. For example, we've gotten two, two of the five funds will distribute in July. I would guess the next quarter we'll get a lot more than that. But, but, but I will say with no promises or guarantees that we do expect the current distribution to be in the seven to 9% rate on an annual basis and higher than that later in the fund. And that would satisfy most scenarios of RMDs. But again, I don't want to, I don't want to guarantee that. And it's certainly not true for all RMDs. So, or every scenario that I probably haven't thought of. So you'll work with your, your wealth manager to figure that out. Would you, would you answer the same way, Mario? That's exactly correct. I think it basically a conversation with your wealth manager would help determine what would be the appropriate amount if you're interested in terms of allocating to the altitude vehicle with IRA dollars. But having said that, this is potentially a good way to satisfy that. No guarantees. Great. Why don't we, we're getting, we're running a little late. So I really appreciate everyone's time here. We do have more questions in the queue, but I just want to end with this one because I think it wraps it up pretty well. And maybe I'll throw this to you, Mario, which is, I'm interested in learning more. What are the next steps I should take? Next steps to take. If you have, if you're currently a SAM client, please reach out to your, to your wealth manager. They would be very happy to, to start a dialogue with you about ALT2. If you are not a SAM client and you're currently a prospect, I would currently encourage you to reach out to perhaps Bill Pedersen or Tom Casper. He probably had a dialogue with already. They would be great in terms of having that, that first conversation. And if you've had, if you don't have a SAM client, have a wealth manager, if you haven't reached out to anybody on our business development side, I would encourage you to go to our website. Our email address and phone number are there. And you can easily schedule a conversation on our website with a business development individual or wealth manager to have this conversation. All right. That's great. Well said. Jake, Mario, Claire, thank you for helping out with this. Thanks to all of you for watching. And, and, and, and staying, sticking around for the Q and A. And we welcome future questions and interactions and, and look forward to helping you invest in alternative investments. And in this case, private credit.