Money Stuff: Private Assets Need Public Buyers

The basic situation in asset management is that the alternatives managers have the products and the traditional managers have the customers. For a long time, the way normal people invested was through mutual funds run by traditional asset managers like T. Rowe Price or Fidelity. These managers run active mutual funds, charge fees on the order of tens of basis points, and have accumulated hundreds of billions of dollars of customer assets. And they have good distribution: They have relationships with investment advisers, who put their clients in the managers’ funds; they have good brand names and advertising; they run funds for 401(k) retirement plans.

But these days that business is pretty tough. Actively managed mutual funds are not especially popular. If you are a normal retail investor and you want to invest in the stock market, you might buy an index fund: Index funds charge fees on the order of single basis points, and most active mutual funds do not reliably beat the index, so it has become conventional wisdom that index funds are the correct way to invest. Or you might buy individual stocks, because that is more personally entertaining than entrusting your money to a mutual fund manager. But active funds are a little passé, and we have been discussing their “slow but surely declining trajectory” for years.

Meanwhile the “alts managers” like Apollo and Blackstone and KKR, which got their start running leveraged buyout funds, now also run hundreds of billions of dollars for customers, investing in private equity and private credit and infrastructure and real estate and other things that are not public securities. Their fees are higher than those of the traditional managers, but customers feel that they are more justified. Private investing plausibly is more active than public investing: You can’t just buy stocks on the exchange; you have to source and negotiate deals by hand. Also, there are no private-market index funds to make active managers look bad. [1]

This is a great business and there are lots of customers — insurance companies, endowments, sovereign wealth funds, pensions, etc. — who give alts managers billions of dollars to manage, but there is some limit and, uh, arguably we’ve reached it. The action these days is in finding ways to sell private assets to retail investors: There are trillions of dollars of individual retirement savings, which right now are largely in relatively low-fee public-market investments. It would be broadly good for the financial industry — and specifically good for the alts managers — if more of those savings were in higher-fee private-market investments.

There are various legal impediments to this — what makes investments “private” is that they can’t be sold directly to retail investors — but those impediments are quickly going away. But you still have to solve the problem of distribution. The traditional managers have long experience selling investments to the general public; the alts managers don’t. There are trades to be done.

There are different approaches. The alts managers can build retail distribution channels. (Apollo now sort of thinks of itself as a retirement solutions company.) The traditional managers can build their own private funds. (Hard!) The traditional managers can buy alts managers. The alts managers can buy traditional managers. Here’s one approach:

Goldman Sachs Group Inc. will invest as much as $1 billion in T. Rowe Price Group Inc. and team up with the asset manager to sell private-market products to retail investors.

The unusual arrangement means Goldman will use its balance sheet to hold equity in T. Rowe, whose stock has tumbled more than 50% from its 2021 peak. The companies will collaborate on a range of investments for retirement savers and wealthy investors, they said in an emailed statement.

Goldman will make “a series of open-market purchases” to amass up to 3.5% of T. Rowe’s stock, potentially making the Wall Street bank one of its five biggest shareholders, according to the statement. It will be Goldman’s only investment in an outside asset management firm. …

The partnership comes at a critical juncture for the asset management industry, with traditional players pushing into alternative assets that have been dominated for years by the leading private equity firms. They’re searching for new revenue sources, while the private-markets leaders want to lean on the sales teams and relationships of the traditional firms to attract retail investors while institutional fundraising has slowed.

T. Rowe has been in a rut since 2022, when stock and bond markets plunged, slamming performance and prompting clients to pull billions of dollars from the firm’s stock and bond funds. Investors have continued to shift money to low-cost index funds and ETFs, leaving T. Rowe exposed because of its primary focus on actively managed public investments.

Goldman isn’t exactly buying T. Rowe for distribution, but it’s buying a little of T. Rowe and getting some distribution. (Disclosure, I used to work at Goldman, which I referred to yesterday as “both an investment bank and, somewhat aspirationally, an alternative asset manager.”) Here is the press release:

This collaboration will leverage the strengths of both firms, including respective investment expertise, solutions orientations, and a deep understanding of the needs of intermediaries and their clients. A central focus is on providing a range of wealth and retirement offerings that incorporate access to private markets for individuals, financial advisors, plan sponsors, and plan participants. …

The firms will offer new, co-branded target-date strategies that leverage T. Rowe Price’s expertise in the retirement blend series while broadening plan participants’ access to private markets by incorporating investment capabilities from Goldman Sachs, T. Rowe Price and OHA. Goldman Sachs will serve as third-party provider of private market strategies for the target-date series. The firms intend to launch the solutions in mid-2026. …

The firms are collaborating to deliver an innovative, scalable advisory platform for advisors and other RIAs to offer managed retirement accounts at scale in-plan and out-of-plan. This includes integrating retirement planning and advice from the firms into the T. Rowe Price recordkeeping and Individual Investor platforms.

Goldman has the private assets, [2] T. Rowe has the public distribution, and these days everyone wants both. 

US courts have consistently held that President Donald Trump’s broad tariffs are illegal, because that’s what the Constitution says. Trump has appealed these rulings to the Supreme Court, which has generally been more willing than lower courts to discard precedent and let Trump do what he wants. Will he win? I don’t know. Here is a Polymarket prediction market on “Supreme Court rules in favor of Trump’s tariffs,” which at noon today showed about a 51% chance of the tariffs being upheld; the similar Kalshi market is at 54%. Those numbers feel about right to me. A coin toss between what the Constitution says and what Trump wants.

What if the tariffs are invalid? The government has been collecting tens of billions of dollars a month in revenue from tariffs that are, for now, illegal. Will it … have to give the money back? I have no idea? As a matter of legal theory, it does seem like the government would have to give back money that it collected illegally. As a matter of legal realism, it seems somewhat impractical for a court to order the government to refund tens of billions of dollars to thousands of companies. Here is a Polymarket market on “Will the Court Force Trump to Refund Tariffs,” trading at about 12%. Here’s a slightly different Kalshi one (“Will a Court order a tariff refund?”) at 34%. That is, prediction markets think that, contingent on the tariffs being illegal, there is still a decent probability — between 25% and 75% — that they won’t have to be refunded. [3] An outcome like “okay these tariffs are illegal and you can’t do them anymore, but you can keep what you’ve already collected” does seem sort of plausible.

Still even 12% isn’t nothing. Axios reports:

Corporate America may be due for a multibillion-dollar refund after a federal appeals court ruled President Trump's sweeping global tariffs are unlawful.

Why it matters: The case will likely go to the Supreme Court, but if the ruling stands, corporations could be primed for billions in back pay, if they're willing to ask for it.

State of play: "Depending on what happens with the court cases, there may be an opportunity to get some of those tariffs refunded," says Everett Eissenstat, former deputy director of the National Economic Council in the first Trump administration and now a partner at the law firm Squire Patton Boggs.

And DealBook reports on refund-rights trading:

Financial firms have made a proposition to importers: They would buy companies’ legal claims over refund rights.

“We have a lot of clients asking about it,” Lenny Feldman, a managing partner of Sandler, Travis & Rosenberg, a law firm specializing in international trade, told DealBook. (His firm is not involved in such transactions.)

For importers, selling refund rights is a potential way to cushion tariff losses, even if some offers have been valued at pennies on the dollar. DealBook hears that large U.S. companies are among those weighing such proposals.

I suppose if you are an importer and you sell your refund rights at 20 cents on the dollar, that has the additional advantage that maybe the buyer goes to court to ask for a refund, instead of you. “Legal uncertainty is not the only hurdle,” notes Axios: “Many large companies may also want to avoid sticking their necks out.” 

An important discovery of modern environmental, social and governance investing is that (1) some investors actually value environmental commitments and (2) therefore issuers — companies or countries that sell bonds — can get paid for environmental commitments. There are various ways to get paid; among them:

1. A company or country can issue a “green bond,” with the proceeds earmarked for environmental projects, at a lower yield than its regular bonds. If you can sell a regular 7% bond for $100, maybe you can sell a green 7% bond for, like, $102. The $2 is called the “greenium.”
2. Denmark once proposed a detachable green commitment: It would issue regular bonds for $100, and also issue a “green certificate” for $2. The “green certificate” would somehow represent Denmark’s promise to invest in environmental projects, and people who liked that commitment could buy it. “Owning both the conventional government bond and the green certificate is equivalent to owning a sovereign green bond,” Denmark argued, a bit of financial metaphysics that I very much enjoyed.
3. A country with $100 of regular debt outstanding could swap that debt for (1) $90 of new debt plus (2) a commitment to do green stuff, which investors would value at $10. This is called a “debt for nature swap.”

All of this stuff happened because environmental investing had a big vogue, but there is nothing necessarily environmental about any of it. The form of all of these trades is “investors want countries to do certain things, and they will pay those countries to commit to do those things, and the countries want money.” When you put it like that it sounds weird. I think that, 20 years ago, if big institutional investors went around saying to sovereign nations “we will pay you a few million dollars to do policies that we want,” that would have seemed a bit presumptuous. But the rise of ESG investing made it more plausible. “We will pay you a few million dollars to save your coral reefs,” sure, right, whatever. But once you open the door to that sort of policy-for-money trade, why stop with coral reefs? 

Bloomberg’s Natasha White has a story about investors paying countries for other policies they like:

Debt swaps pioneered by Credit Suisse to fund nature conservation are enjoying a second life, as bankers see an opportunity to apply the model to everything from post-war reconstruction to energy security.

The swaps help governments refinance debt at more favorable terms and put any savings toward a pre-determined policy goal. After a drought in dealmaking since late last year, as many as four new swaps may be completed by the end of 2025, according to Jake Harper, senior investment manager, private credit at Legal & General Group Plc. But none of them has a nature-focused goal, he says. 

The development feeds into a broader movement in ESG (environmental, social and governance), as investors and issuers stretch the label to cover areas they see as more relevant to the current geopolitical moment. Examples include efforts by Citigroup Inc. to put together a deal to help Ukraine rebuild after the war. ...

“At the end of the day, these are policy instruments,” [Antonio] Navarro says. He launched ArtCap in 2023, the same year Credit Suisse was acquired by UBS Group AG in a state-engineered rescue. This year, he’s been pitching an energy security swap that would channel savings into US oil and gas imports, as well as help finance the construction of liquefied natural gas plants in emerging markets. ...

Marine de Bazelaire, former European head of sustainability at HSBC Holdings Plc, says borrower nations should be wary of engaging in debt swap deals that shift control of domestic priorities to overseas entities. “At the end of the day, we’re talking about the wealth and real assets of countries and their capacity to monitor what is core to their sovereignty,” she says.

Yes, right, in theory it is quite weird for a country to trade off part of its sovereignty for a lower interest rate on its debt. On the other hand, all sovereign debt works a little bit like that — if you’re issuing sovereign debt, you are at least committing to investors that you will pay them back, and you might also be committing to them that you will follow sensible economic policies — so it is just a difference of degree. Also presumably these are mostly policies that countries want to commit to — Ukraine wants to rebuild! — though I guess the point is to bind future governments that might not have the same policy priorities.

From 2016 through 2018, US federal prosecutors investigated how Walmart Inc. dispensed opioids at its pharmacies. Walmart was never charged with a crime, but in 2020 ProPublica published a story titled “Walmart Was Almost Charged Criminally Over Opioids. Trump Appointees Killed the Indictment.” Walmart’s stock price fell 1.88% on the news, which is honestly not very much. Still. I often say around here that every bad thing that a public company does is securities fraud. Criminally or almost-criminally selling opioids seems bad, and the stock did drop a little, so shareholders duly sued Walmart for securities fraud. Last week they lost on appeal. My schtick is creeping into the US legal system; from the opinion:

Although Walmart is a public company, and although plaintiffs allege wrongdoing on its part, not everything is securities fraud — a public company’s mischief is not actionable under the securities laws unless the company’s disclosures contain a misrepresentation or misleading omission of material fact about that mischief.

A footnote cites me for the proposition that “not everything is securities fraud,” though I more often prefer to exaggerate and say that everything is.

The gist of the opinion is that Walmart actually did disclose that it was being investigated by “governmental entities related to nationwide controlled substance dispensing practices involving the sale of opioids,” so it’s not like it was hiding this from investors. The shareholders who sued argued that Walmart should have more specifically disclosed this particular criminal investigation, but the court found that “the securities laws do not require disclosure of all material facts in equal detail.” 

There’s one other funny point in the opinion. Walmart disclosed that it was being investigated for opioid stuff, yes, but the plaintiffs argued that this disclosure was misleading, because it didn’t also disclose that it was guilty. The court didn’t buy this argument:

Plaintiffs argue further that Walmart’s filings were misleading because they omitted Walmart was, in fact, violating the CSA and engaging in the conduct for which it was being investigated. But the Second Circuit, in an opinion we find persuasive, concluded — where a company disclosed to investors it was under investigation for facilitating tax evasion—the company did not also need to disclose that it was “engaged in an ongoing tax evasion scheme.” … Rather, the company did enough “[b]y disclosing its involvement in multiple legal proceedings and government investigations” and “indicating that its involvement could expose [it] to substantial” penalties — just as Walmart did here.

That is, if a company is doing crimes, and it discloses to investors “we are being investigated for doing crimes,” that is good enough. In some ways it would be better disclosure for the company to add “and also we are guilty of those crimes,” but it is not strictly required. [4]

The chief executive officer of a public company will generally, as part of her compensation package, own a lot of stock in the company. The point of this is to align incentives. If she does a good job as CEO, the stock will go up, and she will get rich. She wants to get rich, so she will be motivated to do a good job.

What if she does a bad job as CEO? I mean, in theory, that stock ownership creates another incentive: She should quit, so that someone else can come in as CEO. Getting a new good CEO should make the company more valuable, which should make the old bad CEO’s stock more valuable, which she should want. It’s like the theory of the “golden parachute,” the large severance package that CEOs (even bad ones) often get for selling their companies. It’s not a reward for being a good CEO; it’s an incentive to stop being CEO if that’s in the best interests of shareholders.

That is, uh, maybe not exactly what’s going on here, but:

The meme-stock rally at Opendoor Technologies has been very good for its former chief executive.

Carrie Wheeler, who resigned under pressure in August, filed paperwork Tuesday giving notice of her intent to sell 7 million Opendoor shares worth roughly $35 million. That stake was worth $3.6 million as recently as late June, before the stock went viral on social media. ...

The social-media mob began calling for Wheeler’s resignation in August and eventually got what they wanted, in a unique case of investor activism involving vocal individuals.

Opendoor shares hit a new multiyear high on Tuesday.

I mean, the job of a meme-stock CEO is to give retail meme investors what they want, and if what they want is for you to quit then you should quit. And get paid for it! The system works.

One theory of mine is that “tone and body language” is, in financial usage, a euphemism. The idea is that investors and analysts regularly have private meetings with executives of public companies, where the investors ask questions and the executives answer them. The executives are not supposed to disclose material nonpublic information in these meetings, but of course the investors go to the meetings in order to learn stuff about the companies they invest in, and empirically the investors seem to be better informed after the meetings. What do they learn, if not material nonpublic information? The polite thing to say is that they ask questions, and the executives answer the questions using only public information, but the investors can draw conclusions from the executives’ “tone and body language.” I have no idea why this would work, in the general case. Like, sure, if you ask “will the company meet its earnings guidance next quarter” and the chief executive officer says “our guidance is publicly available and you should look to our public statements” but he is sweating copiously, I guess you can take that as a “no.” But does that happen?

On the other hand, if you ask the CEO “so are you in trouble for having an affair with a subordinate or what,” and he looks glum and stares at his shoes, then that is (1) a somewhat realistic scenario and (2) possibly useful information that you can trade on? Like presumably the CEO is not actually going to freeze up or sweat profusely or run from the room if you ask him about earnings, but an illicit romantic affair? I could see it. Anyway Nestlé S.A.’s stock was down about 3.6% at one point on Tuesday morning, after the company dismissed CEO Laurent Freixe because of an affair with a subordinate, and some investors really did get some advance notice from body language. The Wall Street Journal reports:

[Freixe] unexpectedly joined his chief financial officer on an investor roadshow, meeting last week with analysts and investors in London, Frankfurt and Zurich, according to people familiar with the matter. At the last minute, Nestlé asked Barclays for a slot at the U.K. bank’s flagship consumer-staples conference, due to take place in Boston on Tuesday, the people said.

Freixe appeared quiet and downbeat, according to people present at the meetings. By then, many analysts covering the company had read about the relationship on the Swiss blog. Based on Freixe’s body language, according to the people present, some wondered whether the investigation might be more serious than the company had previously said.

Analysts who had breakfast with Freixe in London late last week didn’t mention the rumored relationship, even though it was a topic of concern for their investor clients, according to an attendee.

They didn’t actually ask about it because that would be rude, but his demeanor answered their question anyway. I suppose that in general if you go to an investor roadshow and the CEO is quiet and downbeat, that is a bad sign, whether or not there are rumors of an affair. The job of a CEO is not to be quiet and downbeat!

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