Outlook for Fund of Funds Investing

EMS:

Hi Marissa, thank you so much for being with me today.

Marissa Frizzell:

Hi, Elana. Thanks for having me.

EMS:

Absolutely. So, to kick off the conversation, tell us a little about the firm and how you got to where you are today.

MF:

Absolutely. So, Proteus is an alternative investment platform, and we strive to remove the traditional burdens of investing in non-registered investments. Some of the burdens we aim to alleviate with our technology are complex subscription agreements, the unpredictable reporting that we all think of when we think of alternative investments, high minimums, a heavy due diligence effort, and the ability to properly diversify across multiple asset classes under the alternative investment umbrella. And what I mean by that is if an investor hasn't done a lot of investing in private markets, mainly they've just done stocks and bonds and they want to get into private equity and hedge funds, well the minimum for a fund might be $5 million. It's going to be hard for a run-of-the-mill high-net-worth individual to stretch their money and really diversify. So, we aggregate and use fund to funds structures to help investors get diversified quickly. So as a firm, Proteus, we form and manage master feeder structures. We provide an online client portal and manage fund to funds. So, our typical clients are financial advisors and then ultimately their clients. Where we came from as a firm is pretty interesting, and it builds a little rapport when our clients know the story of where we came from. It ties in with my background too. I also worked at this firm. So, the founder of our firm, Jason Brown, actually started another company in 2002 named Archway Technology Partners. Archway provided its clients who happened to be the largest single-family offices in the country with accounting, reporting, and portfolio management software. So, think of SAP for a large operating company, we were that, but for family offices. So, in layman's terms, we go into the offices of billionaire families and link up their brokerage accounts, their custodial accounts, as well as all of their private equity deals, their hedge funds, real estate, art, wine collection, private loans, livestock, you name it. We would put it all together on the platform and then pull all of that into one report so the families could see one line item how much they were worth. We also, as a part of that, set up automated accounting and reconciliation for their offices to be able to really operate efficiently. And it was incredibly interesting being in that seat to be able to see how the wealthiest of families invested. It was incredibly eye-opening. Their portfolios were all very heavy in private investments. So, we saw firsthand how as an investor, being as close as possible to the wealth generators, the operating businesses, was ideal. And it became pretty obvious that we were in a unique spot to be able to use our expertise in partnership, accounting, technology and investing, and from that company and that experience to make this type of investing in private markets more accessible to investors outside of just billionaires. So that's really where the idea for Proteus comes from. So, since Proteus, we've only been around really since 2019, we've actually been doing a version of this since about 2002. So that original company, Archway Technology Partners, sold in 2017 to SEI. It still operates under SEI Family Office Services, but today, Proteus, we are completely independent, private employee-owned firm. And like I mentioned earlier, most of our clients are financial advisors that want to get their clients access to the type of investments that have typically only been reserved for the ultra-wealthy and institutions.

EMS:

Marissa, given your focus on fund to funds investing, I would love to hear your overall outlook for the space.

MF:

Yeah. So, Proteus manages over ten different fund to funds pools based on different sub-asset classes. So, for instance, we manage a fund specializing in private equity, one on real assets, real estate, hedge funds, private credit. Each fund to funds that we manage is made up of between three to seven different underlying funds. Our CIO, Eric Knauss, is ultimately responsible for the construction and management of the Proteus fund to funds. Under his leadership, they're gaining in popularity on our platform with advisors that are looking to get their clients' exposure to alternative investments, but they don't necessarily have the experience or expertise in private market investing. So, by going through the fund to fund structure, the heavy lifting of the due diligence and cash management falls on us.

EMS:

Marissa, more specifically, what are some of the greatest opportunities you see in fund to funds investing and why?

MF:

So, in terms of investing opportunities, we're still seeing a lot of deals come through. We've got a direct deal in real estate that just became available through a fund-to-fund structure. We've got private equity secondaries. Private credit is still very, very popular and we're seeing a lot of great funds come through. To hit on an opportunity that's a bit closer to home, for us specifically in the fund-to-fund world, we're seeing a lot of advisors that want to build out white-labeled fund to funds and even models that incorporate a selection of their fund to funds. So, we're seeing this as a great opportunity for more investors to be able to access high-quality fund managers that otherwise might've been out of reach. Now, how we work with an advisor that wants to white-label a fund to fund or models is we would still serve as the manager of the fund, but the advisor would have an input into the investments that are selected for advisors that are willing to invest the time into putting a product like this together. And we see that they're really able to differentiate themselves from the rest of the market and bring something truly unique to their clients. So, I'd say that's a really neat opportunity to take advantage of the fund to fund structure.

EMS:

Marissa, on the other hand, what are some of the greatest challenges you face when it comes to fund to funds investing?

MF:

So, I thought about this question a lot, and I think it's always comes back. There are so many challenges in this space in alternative investments and private market investing and fund to funds as well that are operational, there are a lot of accounting challenges, certainly what investments do you pick and why, but I'm going to go back to education. I think that educating investors is still one of the biggest challenges of this space. Most of our investors, so I'm speaking for us specifically, don't necessarily have a lot of exposure to other alternatives. So, it can be a challenge to make sure that they understand liquidity, sort of restrictions like lockup periods, redemption timelines. And the industry is starting to put out some really good materials and we're constantly iterating our materials to make this what I'd just call a historically opaque asset class a little less so, but it is certainly still a challenge.

EMS:

Marissa, I wanted to ask you to discuss ESG and see how Proteus integrates or addresses this topic.

MF:

Absolutely. So when we perform due diligence on a fund manager for possible inclusion in our platform, we always inquire as to their ESG policies and we make all of that information and the due diligence that we perform on managers that ultimately make it onto our platform or in the fund to funds available to our investors. So, Proteus, we're pretty agnostic on this topic. We don't have a specific mandate for ESG investing, but we certainly want to make the information available for investors that are trying to follow specific guidelines or have their own mandate. So, from our perspective, we want to make the information available. So, we always ask and have similar questions and make those answers available to our investors, but we don't necessarily require our managers to have a specific policy.

EMS:

Marissa, we've covered a lot of ground today and wanted to see if you have any final thoughts you would like to share with us.

MF:

Yeah, I appreciate all the questions. In terms of future plans for the firm, we're just excited. I hope it's come through that our history is in technology. So, while we manage investments, we want to continue to make technology work for us and for our investors. We continue to add entities to our structure. And rather than adding staff or more accountants, we're upgrading our technology constantly to be able to manage tasks at scale. We've had some really fun AI initiatives this summer that are already making life easier for our investment management team and accounting teams. I'm just really looking forward to getting our name out more and more. Once folks hear our story, they'll quickly find out that we're doing things a little bit differently, and I can't wait to have the opportunity to spread the word and ultimately change the way advisors can offer alternatives to their clients.

EMS:

Marissa, I wanted to thank you so much for sharing your perspective with our listeners.

MF:

Thank you for having me. I really appreciate it, Elana.

EMS:

And thank you for listening to the EisnerAmper Podcast series. Visit eisneramper.com for more information on this and a host of other topics. And join us for our next EisnerAmper Podcast when we get down to business.