Technology is becoming more pivotal in the finance sector thanks to emerging trends like fintech and automated services. On this episode of Mastering Innovation on Sirius XM Channel 111, Business Radio Powered by The Wharton School, Mike Gerber (C’95), Executive Vice President of Corporate Affairs at FS Investments, discussed how companies innovate and adapt even in such an established sector.
Gerber describes how FS Investments is changing the game for retail investors by granting access to alternative investments that were historically only accessible to very wealthy or large institutional investors. He explained three key elements in introducing these new funds: responsiveness, functionality, and simplicity. Firms must be able to listen to and understand the market, catering to the market’s needs rather than pushing out something that may be innovative, but not scalable. Gerber approached fintech and robo-advising with the same mindset: he emphasized following and learning from these trends, but believed the human element to investing still plays a critical component in his industry.
Excerpts of the interview are transcribed below. Listen to more episodes here.
Transcript
Mike Gerber We have an awesome mission at FS. We were founded with this vision of bringing certain types of investment products to retail investors that historically were available only to really wealthy families or large institutional investors, like pension funds and university endowments, like we have here at Penn. Folks can build more diversified and hopefully more effective portfolios to save for life’s milestones, whether it’s paying for college education, buying a home, or having a happy retirement.
Nicolaj Siggelkow: Great. When you say alternative investments, tell us a bit more. What is that?
Gerber: Sure. If you were to look at a portfolio of a large institutional investor like a university endowment, you’ll see equities, you’ll see fixed income investments and publicly traded securities, but you’ll also see alternatives or private security. You’ll see private equity, venture capital, private debt, and private real estate, but retail investors historically haven’t had access to those types of strategies.
When our grandparents were investing, they’d buy a name. They’d buy GE or they’d buy GM. They might buy their stock, or they’d buy their credit in the form of a bond. Then, of course, in the ’80s, you had a proliferation of mutual funds. You could build a diversified portfolio by going into one, two, three, or four mutual funds that have exposure to many different names. But, the reality is you were still investing in securities that are traded in the markets, whereas with alternatives, you get exposure to non-correlated securities. Retail investors historically haven’t had access to that.
We launched our first fund in 2009 giving folks access to private credit, something we thought would have the benefit of non-correlation and would help folks avoid the volatility of the markets. You can imagine what was going on in January of 2009, but it was a great time to come out with a private credit product, and it performed very well. Now, we’ve launched nine other funds across a variety of alternative strategies.
“The reality is: people don’t realize it, but the vast majority of businesses here in this country aren’t publicly traded.” – Mike Gerber
Siggelkow: Alternative sounds like it’s a small, little market, but give us an idea of how large is that market is, relative to publicly traded stocks.
Gerber: It’s a loaded question and a good question because the reality is: people don’t realize it, but the vast majority of businesses here in this country aren’t publicly traded. You have all of these retail investors pouring money into about 5% of the market, and very few investors – large institutions, very wealthy folks – playing in that other 95%. This is giving folks exposure to a much broader array of businesses.
Siggelkow: Yes. I’m thinking about, again, wanting to hold a diversified portfolio. You’re actually not diversified if you’re not in that part of the economy, which is a huge part of the economy.
Gerber: Exactly. Absolutely.
[…]
Siggelkow: How would you describe innovation within FS Investments? There’s probably innovation in terms of how to run a particular fund. There may be innovation about what new funds or products to offer. What’s the space of innovations that you’re thinking about?
Gerber: Yes, certainly, bringing new funds to market is a big part of what we do. It’s, in part, why we’ve had the success we’ve had. We have a great team of people that work on product development. I mentioned earlier, it was something for which I was responsible early on, and what that really meant was responsible for building a team that could execute on that effectively. We ultimately brought on a new partner: our Chief Investment Officer, Mike Kelly, who runs product development and who has built a terrific team. They have a very detailed and focused effort that they use to innovate on the fund side.
A big part of it is listening and understanding what’s happening in the market. Sometimes folks get interested in something and try to push it on the market when the market doesn’t want it, and that doesn’t always work so well. We have disciplined ourselves to be great listeners, to really understand what the market needs, what’s lacking in the market, and how can we fill those voids. We like to think of ourselves as problem solvers, so responsiveness is a keyword. Certainly, functionality: the stuff has to work, and we’ve tried some things that haven’t worked. Then, simplicity, that’s something we’ve really focused on. We’ve tried to bring some products to market that we were really excited about, but they were complicated. For our channels, it’s hard to sell complicated. The story has to work, and simplicity is important. Working through those factors – responsiveness, functionality, simplicity – we can be effective innovators.
“Working through those factors – responsiveness, functionality, simplicity – we can be effective innovators.” – Mike Gerber
Siggelkow: When you say responsiveness, this is interesting because my sense is, the products that you bring out onto the market are somewhat long-lived. This is not: “Oh, it’s an app. If the app doesn’t work, we’ll pull it off the shelf tomorrow and add a new app.”
Gerber: That’s right.
Siggelkow: You are more so constructing a car. Once we launch it, it’ll be around for a while. What is the time spent over which you think about offering a new fund?
Gerber: The funds that we’ve launched are permanent capital vehicle, so unlike a traditional drawdown private equity fund that you liquidate after 7 to 10 years, we expect our funds to exist in perpetuity, even longer than your car. Think of it more like your house.
We look at the underlying strategy, the underlying investment strategy. We look at the managers – the best managers with whom we can partner to execute on that strategy. Then, we look at the structure. What fund structure do we want to use to execute effectively on that underlying strategy? And, knock on wood, we’ve gotten it right, focusing on those three areas.
About Our Guest
Michael F. Gerber is Executive Vice President of Corporate Affairs at FS Investments. Gerber serves on the firm’s Executive Committee and manages the communications and government affairs teams. Additionally, he oversees corporate social responsibility and serves as President of the FS Investments Foundation. Prior to joining the firm, Gerber was a member of the Board of Directors for FS Investments’ third fund, FS Investment Corporation II, and practiced law at Drinker Biddle & Reath LLP, where he was a member of the firm’s Corporate and Securities practice group.
Gerber serves on the Board of Trustees of the University of Pennsylvania and on the Board of Directors of the Chamber of Commerce for Greater Philadelphia, where he is also a member of the Executive Committee. Gerber earned his undergraduate degree from the University of Pennsylvania and graduated cum laude from Villanova University School of Law, where he received a scholarship award for his involvement in community legal services.
Mastering Innovation is live on Thursdays at 4:00 p.m. ET. Listen to more episodes here.