Adam Torres and Kim Flynn discuss investing in alternatives.
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Show Notes:
Many asset managers are beginning to add alternatives to their portfolios. In this episode, Adam Torres and Kim Flynn, President of XA Investments, explore XA Investments and the use of alternative investments.
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About Kim Flynn
Kimberly Ann Flynn is the founder and President of XA Investments. She is responsible for all product and business development activities. Kim manages the firm’s proprietary fund platform and consulting practice. Kim has developed an expertise in closed-end fund and interval fund product development and is a frequent contributor to media and industry events on topics including interval funds, alternative investments, and London-listed investment companies. Kim has earned the CFA designation and is a member of the CFA Institute and CFA Society Chicago. She is also Series 7, 63, and 24 licensed.
Previously, Kim was Senior Vice President and Head of Product Development for Nuveen Investments’ Global Structured Products Group. In her 11 years at Nuveen, she helped develop over 40 closed-end funds, raising approximately $13 billion in capital. In her leadership role at Nuveen, Kim was responsible for asset-raising activities through the development of new, traditional, and alternative investment funds, including CEFs, ETFs, UITs, and commodity pools.
Kim received her MBA degree from Harvard University, where she was a William J. Carey scholar and President of the HBS Volunteers. Before attending Harvard Business School, Kim spent three years working in Morgan Stanley’s Investment Banking Division (1999-2002) in their Chicago office. She earned her BBA in Finance and Business Economics, summa cum laude, from the University of Notre Dame in 1999 where she was a valedictorian candidate, Rhodes Scholar finalist, and the first recipient of the Paul F. Conway Award, given to a senior in the Department of Finance who embodies Notre Dame’s tradition of excellence and who enriches the ideals of the university.
About XA Investments LLC
XA Investments LLC (XAI) is a Chicago-based boutique alternative investment management and consulting firm founded by XMS Capital Partners in 2016. XAI serves as the investment adviser for both a listed closed-end fund and an interval closed-end fund, respectively the XAI Octagon Floating Rate & Alternative Income Trust (NYSE: XFLT) and the Octagon XAI CLO Income Fund. In addition to investment advisory services, the firm also provides investment fund structuring and consulting services focused on registered closed-end funds to meet institutional client needs. XAI offers custom product build and consulting services, including product development and market research, sales, marketing and fund management. XAI has established a recognizable brand in the marketplace based on its interval fund research and insights. XAI believes that the investing public can benefit from new vehicles to access a broad range of alternative investment strategies and managers. XAI provides individual investors with access to institutional-caliber alternative managers. XMS Capital Partners, LLC, established in 2006, is a global, independent, financial services firm providing M&A, corporate advisory and asset management services to clients. XMS has offices in Chicago, Boston and London.
Full Unedited Transcript
Hey, I’d like to welcome you to another episode of mission matters. My name is Adam Torres. And if you’d like to apply to be a guest in the show, just head on over to mission matters. com and click on be our guest to apply. All right. So today’s guest is Kim Flynn, and she’s president over at XA Investments.
Kim, welcome to the show. Thank you, Adam. All right, Kim. So excited to get into today’s topic. So we’re going to talk about interval fund market trends, really how financial advisors are embracing the use of alternatives. We’ll also kind of define alternatives, what that means for the investors out there that maybe have, don’t have much experience with alternatives or that market.
So we’ll get into that as well. But before we do, we’ll start this episode, the way that we start them all with what we like to call our mission matters minute. So, Kim, at Mission Matters, our aim and our goal is to amplify stories for entrepreneurs, executives, and experts. That’s what we do. Kim, what mission matters to you?
Sure. Our firm is focused on education around alternatives. And the reason education is so important is that the burden for saving for retirement, you know, is on your shoulders. It’s on my shoulders. And access to alternatives that pension funds endowments have historically had, we have not. And so making alternative investments more available and frankly, helping people understand the benefits.
That’s what we’re really focused on here at XA. It’s great. Love bringing mission based individuals on here to share why they do what they do and how they’re doing it really what we can all learn from that. So good. Good to have you on. And just to get us kicked off here. Alternatives. How did you first get introduced into that space?
And for and for some of the audience that have been watching this a long time, you know that, you know, 14 years before media. So I’m interested because you’ve made a career of alternative. So how did that start for you? I think like a lot of people’s careers, it’s been sort of stepping stones. And then once I found a match in, in a mentor, it really set me on the path that I am today.
But I started my career in investment banking, working at Morgan Stanley, and I didn’t love it. I liked that it was fast paced, but I, I felt like I had more. to offer. And I wanted to spend my days thinking about the capital markets. And so I found myself in asset management. I ended up working at Nuveen Investments, which is a leader in certain innovative product structures, and they’re well known by a lot of individual investors.
So that’s where I found really terrific mentorship and to distinguish what I was doing. I knew I wanted to be at the cutting edge. And was looking forward. And now that alternative investments are really more available. That was where I wanted to spend really the next part of my career. And so I founded this business XA investments.
And I actually happened to found the platform that I run with a couple of former investment bankers from Morgan Stanley. So you never know where your career connections are going to lead you, but. Yes, our focus is on alternatives. And what’s exciting about that is that, you know, some of the smartest individuals in asset management.
You know, they’re, they’re no longer running a large mutual funds. They’re at hedge funds. They’re at crypto shops. They’re running private equity. And so that was what was appealing for me. What do you think is drawn people to the, these individuals or even yourself? Like a lot of different routes you could have went, like, what made you stick with alternatives?
Like what was so interesting about it? Well, I think it’s the challenge of, you know, on the face of it. Do you really understand what a private credit is or what private equity is? So you have to dig a little bit deeper. Once you do, you know, you understand that private equity is simply companies in the U.
S. that that are not traded on an exchange. They’re privately held. And so I think that once you dig under the surface, you Of alternatives while seemingly complicated. I think there’s there’s ways that we can relate and understand these businesses And so that was what was compelling I I felt like it was sort of foreign and once I familiarized myself with the return potential diversification potential you know That was what encouraged me to learn more Talk a little bit about about your process and just the process of how you go about looking for and sifting the private markets for these investments.
Like what does that look like? Well, Adam, let me give you an example because we’ve spent the last two years working with firms on real asset type products and real asset products are things that provide inflation protection. And as we all know, you know, when we go to the grocery store, we go to target.
Inflation is top of mind. And so you want an investment that can help you and is going to return more an environment where, where we’re seeing inflationary pressures. So an example would be infrastructure. Another example might be farmland. And I’ve spent the last couple of years helping asset managers take what they do for institutional investors, And bring it to individual investors and farmland and infrastructure These are tangible assets, you know people you you see a fit, you know a photo of a beautiful piece of farmland I think it creates some of that familiarity and understanding that helps people as they, they approach investing in alternatives.
So real assets has been a really hot area in the last couple of years. And I think is, is brought a lot of people from stock and bond investing to consider some of these other types of investments. Why do, I mean, that, that’s a good point. Why do people like just the individual investor, why, what are some reasons, and obviously it’s going to vary from person to person.
And if somebody wants, you know, individual investment advice, they should talk to their financial advisor or their asset manager. I mean, that’s a given, but what are some of the general reasons that people seek out alternatives? Just the investor on the investor side of things. Yes. So what an investor is looking for in an investment that’s not a stock or not a bond, you can, it’s sort of a catch all description of assets that are going to be moving in a different direction than the stock market.
So the diversification is you might generate a positive return when your equity portfolio is down or off for the period. And so what we’re looking, we’re also looking for things that aren’t moving with capital markets, you know, so an example of this might be catastrophe bonds or which, which depend on weather risk.
or insurance linked securities or litigation finance, they all capture returns from different sources of risks. And, and that’s helpful because so many U. S. investors are overweight, large cap U. S. equities. You know, we talk a lot about stocks like NVIDIA and it just, Underscores the notion that people are sort of heavy in a couple of names.
And that’s why this diversification is important. And I, and I liked the, the fact that you named a couple of these, like, let’s just, I’m just going to pick one randomly litigation finance. So when I was managing assets, one of the things that I used to kind of bring to investors attentions that is that, you know, a mutual fund, a ETF, like once upon a time was a drip plan.
And once upon a time. These are all products. These are all products that are marketed to the industry and that are market through either financial advisors, asset managers web platforms, just depending. But these are products that you’re purchasing as an investor or you’re investing as an investor, right?
But you’re buying into that type of product once upon a time. Mutual funds. Somebody would have thought that mutual fund. Well, I, I can’t, I’m not purchasing a mutual fund. I need to have direct ownership right into that individual stock and all these other things. And then the market evolved over time.
And as it evolved over time, it became more acceptable to invest in. And now obviously mutual funds are a way that many, many people get exposure to the stock market. But now, now juxtapose that kind of concept with maybe litigation finance because someone has air. doesn’t mean or because somebody doesn’t know exactly how it works.
It’s just not, it hasn’t been marketed maybe to the mainstream as much as some of these other products that I’ve mentioned before doesn’t mean that it’s not something that should be considered in, in a portfolio. And that can compliment a portfolio. And in your case, you’re talking about the, you know, for example, the correlation of just saying, okay, well, you, if your stocks are going one way, you want something else maybe to, to hedge that possibly, or to compliment the overall portfolio.
Talk, talk a little bit about that. Like, and, and from your experience, cause for my end, I’m looking from the investor side but from your end, I know you’re also working with managers. So I know maybe even some managers. I haven’t really considered while how that would work into their clients portfolios because it’s a different conversation when you start bringing in alternatives.
So maybe talk a little bit about that from your standpoint. Yeah. And when you’re talking about Alternatives we’re speaking largely about actively managed funds actively managed strategies in the case of litigation finance This is an actively managed pool of receivables Think about a court case or or settlements that you read about in the news or if you’ve ever been personally involved in a court case.
Some of these court cases can go on for, for years and years and years. And so part of what litigation finance is doing is there’s a financing, some of these multi year cases, you know, some of them are corporate litigation, settlement type cases with big. Multi million dollar wins. But if that comes after a five year period you need to pool the risk associated with different court cases, different forms of litigation.
And so that’s what an active manager is going to do. And the interesting thing about it is because, you know, This is an entirely different type of risk that’s diversifying to your portfolio, and and it does produce some income. There’s income characteristics that are beneficial. And, you know, the nice thing about it in a similar way is as a As a collective farmland fund, you’re getting diversification from the different parts of the portfolio.
So, you know, you may be uncomfortable buying a single parcel of farmland but if you’re investing in an actively managed pooled vehicle like a registered fund the benefit of diversification comes through. In farmland, you’re going to get geographic diversification. You’re going to get crop diversification.
And so that form of diversification will differ depending on if we’re talking about litigation, finance, multiple court cases on one hand, or farmland, different types of crops that are being grown in different parts of the country, but that diversification is so important and you need an active manager who understands that area of investment.
And could deploy capital most effectively. And so we, we don’t encourage people to go out and do these, do these things directly, unless you have a lot of innate knowledge of, of farming or farming has been in your family for a long time, but for us, you know, where that’s not the case, the, the pooled nature of it provides a lot of diversification potential as well.
Yeah, it makes so much sense. It makes so much sense when, when you kind of explain it all, it’s like, yeah, especially on the part that, you know, you do obviously need an active manager. I know you didn’t say that, but I’m saying that, like, for me, for me, that’s my words. But I’m just, cause I’m like, at last thing I’m doing is I’m going out there like, all right, we’re gonna, let’s start getting some direct investments into these and and start getting into farmland.
Cause I have no background. I’m no background in that, obviously. So speaking for myself, I know one of the other things that you’re doing is you’re helping asset managers launch registered funds. So let’s talk about that a little bit. Like, how are you doing that? Well, I mean, the goal is for these alternative asset managers who’ve largely been running private funds and private funds, you know, aren’t accessible to the individual investor.
But the reality is, is that. The growth in this in the U S market is happening at the retail level. And the reason for that is that, you know, I save for my own retirement as do you, and that’s where the money is accumulating. And that’s where the growth is institutional capital pools. Think of pension funds, they’re all shrinking.
And so those are declining growth rates. And if you’re running just private funds and you don’t have registered funds that allow retail investors in. You’re going to be missing out on this growth opportunity. So firms like McKinsey, they’ve been doing this research for years now, but it’s just in the last three years that asset managers have woken up to this and it’s not just the private equity firms or the hedge funds.
It’s the traditional asset managers as well. You know, I mean these traditional asset managers, you know, the pimp co’s the new beans the black rocks of the world You know their their world has been rocked by the shift, from mutual funds to etfs This is as that business has changed so much. And so there’s a lot of forces driving this move into alternatives and I think it’s It’s definitely beneficial for individual investors, giving them more choice, but it also makes asset is, I think asset managers now are having to learn a new business.
They’re having to develop relationships with financial advisors where they, where they’ve had none in the past. So it’s a whole new world for them. And it’s an awakening as to really how wealth management in the U S is going to be going forward. Hmm. What do you think has kept them from participating?
Obviously it’s going to vary from person to person or firm to firm, but what do you think’s kept them from kind of joining for so long? Or for kind of going in this direction for so long? Because it’s been coming for a while. It has been coming. So I think the reality is, is there’s now a sort of proof of concept.
There are firms that have have gone out there and raised very large evergreen vehicles, you know, so funds that go on in perpetuity. So Blackstone has been a leader in creating products in the non listed REIT, the non listed BDC marketplace. Those are just vehicles that house real estate investments and middle market private credit investments.
But interval funds is sort of the next product structure that’s become in vogue, but an interval fund can house anything. You could, you can put private equity, you could put a hedge fund strategy, you could put farmland into an interval fund. And so an interval fund is, is more versatile in the same way that a mutual fund is versatile, you know, mutual fund can house any liquid asset class, but the interval fund is really designed for private market exposure that tends to be less liquid.
What excites you in the alternative space in general right now? And I, it could be, I mean, it doesn’t have to be a specific investment, but I mean, like technology trend, otherwise, because, and the reason I asked you this question is you, you’ve been in this space, you know, there’s been your playground for a while, so to speak.
Like what excites you right now? Like what’s evolving? What’s new? Well, now that the market has grown. There’s 230 funds, which means there’s a lot of choice, but what excites me is that the good stuff is available. And what I mean by the good stuff is you’re talking about asset managers that have very long 20, 30 year track records managing institutional money.
They’re finally available. They’re finally here for individual investors, but in a product where I get a 1099 and I don’t have to deal with a K1 tax form for a private fund. So it just the fact is, is that we have. Very credible alternative asset managers that have been doing this using their same process, their same strategy.
They’re not watering it down when it comes to retail investors. And that’s really important because, you know, there’s plenty of firms that could, that could go to market with a product, but has it been time tested? And is it, is it the good stuff? I want the same institutional strategy, you know, so that, that’s what excites me.
Yeah. And so, I mean, based off that, just to make sure I’m understanding correctly, now retail investors through these types of investments will have access to maybe some investments that they could have never accessed because it was only for a pension fund or an endowment or some, or a foundation or something else.
Am I off on that? No, that’s, that’s right. And like, think about private equity because it’s gotten so many headlines recently. You know, companies are in the U. S. are staying private longer, and there’s so much growth happening when a company is private. A good example is Palantir, which has been in the news recently.
Palantir is about to be added to the S and P 500. And that company was a unicorn until it went public in September of 2020. Right. And it experienced massive growth in the private fund, you know, in the private stage of that company’s development. And that’s what Americans want to tap into is the growth potential because growth potential equals return potential.
But, but Palantir, like a lot of other companies waited to go public. And so. Private equity is what is going to allow you or venture capital even at an earlier phase of growth Is what’s going to allow you to tap into that? That amazing amount of growth that’s happening in the u. s Yeah. And just to elaborate on that just a little bit more.
So, or to make sure I understand it correctly. So what happened, what the trend has been for a while for some of these, like really these companies that were doing well as they just, they stay private longer and the only people that are, or the only, you know, individuals or foundations or otherwise organizations, I should say that are benefiting from that.
Like. Early growth or that mid stage growth before they’re at a certain level are going to be the people that had access to the private equity or got the call or had access to the deals where the individual investors, not that’s probably probably not going to have that type of access. So by the time it gets to the public, it’s that big, maybe early.
Early growth is already, you know, they’re, they’re taking money off the table versus some of them are versus and already, already realized their game before it even gets to the public and them having an opportunity at getting a crack at it. Am I, am I off on that? Or no, I mean, you hear Elon Musk speak about it regularly, you know, his companies like SpaceX.
And xai are are private and I think he intends to keep it that way And so the only way that people have been able to access that there are some employee shares that trade But the the truth is is that you know, there’s a lot of people clamoring for that type of exposure And there’s plenty of other us private companies and it’s it’s really only through private market Type products and the interval fund space is one way to enter those types of private markets You know, we’ve talked about private equity, but frankly, in 2024, it’s, it’s all been about private credit.
You know, so I think what, what’s exciting is, is that the future for interval funds is whatever is in vogue. A couple years ago, it was real asset products. This year, it’s private credit next year. Maybe it’s a hedge fund strategy. You know, we’ll, we’ll see as as sort of the, the months the, the days get closer to the election, but that a variety of strategies, depending on your, your risk tolerances or preference are there, but that’s how you tap into some of this growth that you, you know, and you can’t, you can’t put these exposures into a mutual fund or an ETF, I think that needs to be said, you know, because, because these investments do tend to be less liquid.
It’s great. Well, Kim, this has been a lot of fun. I mean, finally getting you on this show, getting into your world of alternatives, your background, how you got started and a really current trends. I mean, what’s next, what’s next for you. What’s next for, for, for your firm. We just continue to help advisors learn about how they can enhance their practice using alternatives and we’re continuing to focus on our mission, which is making these Products and strategies more available to more investors right now alternatives are just a really very small part Of people’s overall retirement plan and we have work as an industry to get there So that’s what we’re focused on for 2025 2025 The good thing is, is that we have a lot of partners.
There’s a lot of firms that are focused on this. So you’re going to be hearing more and more in the days to come about interval funds. Amazing. And Kim, if somebody wants to, if there’s an advisor or asset manager out there that wants to reach out and learn more and see how you can also help how do they do that?
Go to XA investments. com. We’ve got a knowledge bank with white papers and other research on the marketplace. And I’m always happy to have another conversation as well. Fantastic. And for everybody watching or listening to this, just so you know, we’ll put the links in the show notes. So you can just click on the link and head right on over.
And speaking of the audience, if this is your first time with Mission Matters and you haven’t hit the subscribe or the follow button yet, we We invite you to do that. This is a daily show each and every day. We’re bringing on new guests, new ideas, and hopefully new inspiration and knowledge to help you along the way in your journey as well.
So again, hit that subscribe or follow button. So you get the notification when tomorrow’s episode comes out. And Kim, again, thank you so much for your work and thank you for coming on the show. Thank you, Adam. I appreciate it.