Ryan Ripp, COO – Flat Rock Global (EP.59)

Hello, I'm Ted Sidies. Management Management Operations. Institutions in the industry. Through conversations with executives across operations, And finance, you'll hear how key operating partners run their businesses. Capital Allocators content at Capital Allocators. I'm Scott McDonald. My guest on today's show is Ryan Rip. Ryan is the co-president and at Flat Rock Global. the junior tranches of CLOs. If you read anything about the industry, the headlines are often about how alternatives

to the wealth channel. But the thing I always turn to is have going to work operationally. There's so many aspects to explore, such as access. education, investment process, legal onboarding, distribution, and tax report. To dig into the details, I turn to Ryan for some answers. Ryan shares his insight on how FlatRock sees interval funds as an innovative strategy.

For retail alternatives. We discussed some of the operational mechanics for a daily NAV, ongoing investor access via platforms like Fidelity and Schwab, with retail alternatives. Rapid growth across the industry. Entering the space, it's an area to pay attention to. Please enjoy my conversation with Ryan.

Ryan, thanks for joining me today. I'd love to hear how you found your way into the CLO space. Thanks. Happy to be here. Definitely a circuitous route in terms of how I got here. I was an investment banker and then equity research analyst out of undergrad decided after six years or so on that that I had an interest in doing something more operational closer to

how companies operate, advisory, et cetera. So I went to business school and when I came out I went to McKinsey and then BCG to work and advise, primarily like CFOs on CFO strategic and advisory type of project. After a number of years of that, I still felt like I'd wanted to get even closer to the actual operations of a business and not just advising operators, but actually doing the operational elements of the business myself.

I ended up at a Flat Rock and the way I found my way there was that our CEO, Bob Grinwald and I had met a number of years ago while I was still in business school and he was just founding the firm. They were looking for someone to just consult part time and help them get things up and running. So I worked with Bob then, finished business school, went to work at McKinsey and B C G. Bob called me out of the blue a couple of years into my career at B C G and said, Hey

We're growing. We're looking to take on someone to fill more of an operational seat. I know that being an actual investment analyst wasn't as much of what you were looking to do, but We have a role where we could see someone growing into a COO, CFO type of role over time. At that point I had scratched

the itch on consulting and decided to take the plunge into flat rock. That's how I ended up in this space. Obviously I didn't know much about CLOs at the time, and it's been a five year learn to curve to get up to speed. So what was the moment when you decided I like advising people, but I really wanted to get my hands dirty? Was there any one particular moment? It wasn't one particular moment.

A lot of what you do in consulting is you come in to come up with a plan for what a company needs to do. And you'll spend a couple of weeks to a couple months on the ground alongside some of the senior leaders in the company, helping them come up with what the go forward plan is. And what you really typically leave behind oftentimes is a long PowerPoint deck. But you don't actually ever get to know how much, if any, of that PowerPoint deck got implemented and how effective it was.

doing that a multitude of times made me feel as though I didn't want to write the PowerPoint deck anymore. I wanted to be the person that took what was in the deck or what was in the plan and actually made sure that that was being carried out in the best way possible. So you've written a bunch of playbooks and partnering with some pretty successful organizations that must have translated pretty well for starting your own sheet of paper.

I think it did. The biggest thing that I learned in consulting that's been really helpful was how to put what McKinsey would call it structure around a problem. You've got this amorphous big problem, it seems Impossible from thirty thousand feet. How do you start to break that down into subcomponents and break one big problem into little problems? And once you do that, it becomes more digestible and putting a structure and a sequence around how you address all that becomes a lot easier to do.

That's what really helped me. get up to speed and get up and running quickly at Flat Rock because I had this big problem, if you will, which was I'm stepping into the seat. I need to figure out how to operate in a space that is newer to me. And that seems overwhelming at first. So then you take and say, okay, let's figure out the accounting piece. Let's figure out the legal piece. Let's figure out the compliance piece. And if you start to break those into subcomponents and figure out

What's my operational plan for each one of these sub-elements that I need to dig into? It becomes easier and more digestible to attack.

What was it like when you first showed up? When I showed up, it was very much still a startup. Flat Rock today is about one point five billion across three interval fund strategies. When I joined we were a hundred and seventy five million across two strategies. And the pace of capital raise had been relatively slow at that time, the business was still gaining its legs and expanding its.

maturity level. There was just a lot to do in terms of thinking about how do we work with our fund accountants, how we work with our attorneys, how do we rethink what our calendar looks like every year in terms of all the big rocks that need to be done every year from uh SEC and a compliance and a regulatory standpoint. A lot of that had just been a little bit

fluid day to day in the organization'cause they just didn't have someone dedicated and focusing on it and managing the process day to day. And what I really set out to do was How do we start to put a lot more structure around what we're doing day to day and have a plan that we execute day in, day out and a schedule that looks the same year to year? Has it always been interval funds from day one?

No, actually the first fund that we launched, FlatRock Capital Corp., which is now FlatRock Core Income Fund, was launched as a private BDC. That fund performance was fine, but struggled to raise capital on the RAA channel. And then we launched our opportunity fund as an interval fund structure because it was a better fit for the assets.

What we found was that it was a lot easier to raise capital in that fund than in our FlatRock Capital Corp BDC because the interval fund structure is just a lot easier for RAs to use. You don't have to do paper subscription documents. You can buy shares on behalf of clients with the click of a mouse on a Fidelity or a Schwab. the reporting then becomes a lot easier for RAs, et cetera. What we then did is we took Flat Rock Capital Corp.

and restructured that into an interval fund. So then we were purely an interval fund player from there and then subsequently a few years later launched a third interval fund, flat rock enhanced income fund. there's this big push for alternatives to go into the mass affluent channel, but technology is still in certain elements in the traditional sense. Do you feel like moving over to an interval structure actually alleviated a lot of the friction with people going to market?

That's a really good way to think about it. It alleviates a lot of friction for financial advisors in terms of using some of these more illiquid alternative assets. And the reason for that is you no longer have to use sub documents. If you're trying to allocate to a CLO fund like ours and you're trying to do that across a hundred of your clients as part of a model.

To do that, what you have to do then, historically, was that you'd have to fill out a hundred different subscription documents, get them all notarized and then sent in and send a hundred different wires to the manager and then wait for all of those subscription documents and allocation requests to be executed. That can take a lot of time from a labor perspective for you. Also from the time of making that investment decision to then actually getting processed in your clients.

owning that investment can take weeks, if not months. Now, what advisors can do with these interval fund structures is when they want to allocate on behalf of a number of clients at once. It's as simple as logging into their Fidelity or Schwab portal where their clients' assets are custodied.

typing in the ticker and the amount and actually just executing the buy that same day and the clients see in their account the next day. That's why interval funds have become so popular and folks are looking to launch them quickly is it really works well in this mass affluent RA channel operationally. What about from a tax perspective? You kind of eliminate the K1.

In most of these instances, you're going to just get 1099 reporting. That's the case for all three of our funds. It's all 1099 and just gets picked up as part of a regular process. Certainly advisors are very happy not to have to deal with K ones and the delays and lengthier tax filing process that comes with that. So if you had a traditional fund and having them fill out the subdoc, I always feel like there's an education piece.

with an interval fund you have a streamlined approach, but beforehand, if you have a structure trying to educate them on how to fill those out amongst all the other products that they have. there's an education piece that's missing just on the operational aspects of it. That definitely rings true for me, having dealt with some subscription document stuff in the past.

getting clients to figure out how to fill out a subscription document is sometimes a painful process. It requires a lot of education. also iteration it becomes frustrating for advisors sometimes where they fill out a subdoc to the best of their ability. They send it to us or to our fund administrator for processing and There's some box that's not checked or something that was not filled out correctly, and then they have to do it all over again. That's an enormously painful piece.

The other piece of the interval fund structure that really works well for advisors is allocation decisions into these assets are a repeatable process. Once you know how to do it once on Schwab or Fidelity, you can do it for any fund that you want to put clients' money into that has the same structure.

Is it fair to say that you spend more time with these advisor educating them on the CLO space and the opportunity that you're providing? We definitely have to spend a lot of time educating folks on the investment opportunities and our funds because admittedly CLOs and especially CLO equity and mezzanine debt are niche your asset classes that

require a learning curve and time to get up to speed on. But we spend a lot of time there. And fortunately now we don't have to spend much time with advisors on what is an interval fund or how to allocate to an interval fund or redeem from an interval fund because Many of them are using a number of different interval funds in their portfolios for clients and have been doing so for a number of years now.

How do you do that education? What's a typical arrangement where you get somebody who's not familiar with CLOs and educating the advisor? And does the end client get involved or are you just interfacing with the advisor?

It's more rare to have the end client get involved, but it does happen. One thing that I've really enjoyed about working with RAs and raising money through the RA channel is it's very much a relationship driven business because you are raising money from smaller firms that are spread out across the entire United States and they're not all in major cities and GDP centers and so

You get to travel, you get to meet people in different offices, hear about their different philosophies, also how they've built their businesses. And over time, sometimes it's a couple of months or sometimes it's a couple of years. You educate them on your products, they track them for a while, and you build relationships naturally through that education process.

we spend a lot of time meeting with RAs, getting to know RAs, and also trying to educate them, not just on our products, but the CLO space more broadly. That's a multi-year process typically and one that I've really enjoyed because I've made a lot of friends through that process and from our client base at FlatRock over the last few years. From a qualification perspective, you don't have the QP standard anymore, is that correct?

Our funds do not have a QP accreditation requirement on them, but some interroll funds do. It really depends on your asset mix and sometimes the decision of the advisor administering the fund. And what about asset minimums? We don't charge asset minimums. I know some do. We've thought about it a lot, but this gets back a little bit to the education piece.

And I think why if you're an interval fund with a more niche strategy like ours, minimums might not be a good thing. What we've found is that advisors If they think our strategy is interesting, we'll want to put a little bit of their own money into the fund as a tracking position and watch it over time.

And that just gets them to pay more attention to the fund. It gets them familiar with how our nav might move month to month or quarter to quarter. And it ultimately gives them more time and more of a reason to focus on us and our product. Advisors doing that has been a very good thing for us.

And if we had a minimum in place, you just wouldn't have a situation where an advisor might put a couple thousand dollars of their own money in as a tracking position to watch for six months to a year before allocating on behalf of their clients.

I wanna turn to the actual operational components of it. You guys are running daily navs. I'm just curious of what do you insource, what do you outsource? What does that framework or structure look like? It's a big question because it's a big production that comes into printing a daily nav for each of our funds. If you look at

the W-2 employees of Flat Rock. It's a relatively small team. But the truth is there's been an enormous industry that's built itself out providing infrastructure to firms that look like ours. There's a lot of contracted infrastructure around us. I have a few direct reports that handle things day to day, but if you were to draw an additional line out to all the service providers we partner with and interface with on a day to day basis,

There's probably twenty or thirty people that I have to interface with at least once a week, most of them every day, in order to drive these processes. It's really important to have a really robust set of infrastructure around you in terms of the different service providers. So a fund administrator that you can work with and it'll do all the

processing day to day of your day to day journal entries for the fund, a transfer agent, typically they're partnered with the fund administrator. So we use Ultimus for both. But the transfer agent is the one that's responsible for tracking all of your shareholder activity, making sure that trades into your fund from investors get processed. Making sure that everyone's dividends that get paid out make it into the correct client accounts.

retaining third party legal counsel is really important and we interface with them very, very frequently. You have to have a compliance environment, some people in-house, the compliance function, we found it works great to have a third party compliance officer, Treasury at our partners at US Bank. So the list goes on and on and

We're interfacing with all these third parties almost every single day to make sure the trains stay on the tracks. With regard to the fund administrator selection, were you looking for somebody with more hedge fund like expertise? for the daily nav or what were the main drivers to find that right person that could deliver what you guys are providing?

There are a lot of different fund administrators out there, but most of them, a lot of their experience is with one of two things, either more flow assets like equity mutual funds. or with hedge funds and private equity. which have complex assets and sometimes complex accounting, but they're frequently only doing monthly or quarterly closes, so they're only

printing a nav once a month or once a quarter. We really sought out partners that did two things. One, had a lot of expertise or understanding of different types of unique off the run assets, but two had the technology and infrastructure in house in order to print daily naft because There's a lot of calculations that have to be done from an accounting perspective every day to arrive at each fund's net asset value.

And if you don't have the right technology infrastructure around you to automate a lot of those calculations, it just becomes too manual for a lot of these fund administrators to be able to keep up with it. Finding the right fund administrator with the right technology stack.

to be able to automate a lot of those processes was really important in our diligence process. If you to unpack that technology stack, there are any critical components that it may be unique I wouldn't say any unique technologies. It's more just ways of working and culture. Any of these firms and we diligence five or six of them in theory could build the automation tools to do what needs to be done. It's not an overly complex coding exercise, but

Part of it is just inherently more in some of these firms DNA than others to think through how do we automate this calculation? How do we automate that? When we decided to go with Ultimus, and even before we actually decided to go with them, we're talking to them. a lot of the discussions we had with them and that they were asking us about were when do these data inputs when would we receive these every day? And they were thinking about

How could they ingest all this information, automate it to create an output quickly and accurately without a lot of manual processing that created the risk for human error? A lot of the other firms that we were talking to a lot of what they were talking to us about is they take the data from our spreadsheet, put it into their spreadsheet over here, then crunch these numbers. That just in my mind

left a lot of risk for human error and processing mistakes to happen that we just really can't have when we're printing daily navs. If you have a problem, it can't take two days to fix. Exactly. If a mistake does get made, we need them to be able to quickly be able to dig into the calculations, figure out what everything was that flowed through the automation, and then hopefully click a few buttons to actually write the ship and fix the error.

Is there anything that you do personally working with these service providers in order to make that arrangement go smoothly? because inevitably things happen. Nobody bats a thousand in this space and anything there that you could share? A couple of things. One is more preventative and one is more

to deal with errors as they occur. So from a preventative standpoint, given how much our fund administrator relies on automation, we've spent a lot of time with them to figure out how can we structure all the data that we send to them and also structure our communications that we send to them day to day on journal entries, marks, et cetera, so that it can be as easily ingested and automated into their calculations as possible. For instance.

We send them every day a daily run of all the third party marks that we get from the third party and S and P that marks our book daily. We can't just send them some random spreadsheet output. We really work with them. How can we structure this spreadsheet in such a way?

in order to make sure that you don't have to have someone take the spreadsheet, copy, paste it, transpose it elsewhere. They can literally drag and drop this thing into a processing engine that will ingest that data without human interference and automatically pull that data into their system and feed it into the NavCal. structuring all of those inputs, that's the preventative piece that you really need to be thoughtful about.

remediation, dealing with errors as they occur. I think you need to have a formalized daily review process. We don't take the nav that they printed for granted. Everything that gets printed every night then immediately gets reviewed by us. You know, we have a bunch of spreadsheets lined up'cause we know where all of our accruals should be, et cetera, and we can feed that through and say.

Hey, this accrual looks off on this given day. The accrual rate should be X. Instead it was Y. If you build enough automation around that process too, you can catch those errors pretty quickly as they occur and you can get that stuff remediated. before the next day and the market even opens. With that process, you're probably less beholden to turnover, which inevitably happens at service providers or in house. And if it's fully automated, it probably less of a concern.

I definitely would say that's the case with Ultimus. Obviously, unfortunately we've had folks leave their team and had no new folks come on, but because there is one such a standardized process they've set up But two, also there's a culture, if you will, around some of this automation and use of technology. It feels like everyone over there is rolling in the same direction and knows what to do, even as new team members join our account. It feels pretty frictionless to get them up to speed.

I wanna talk a little bit about investor relations. How is this different from maybe a traditional fund structure where maybe you have a full IR team in-house and here they're buying and selling stuff on a ticker? On Fidelity, there's an advisor. What does the investor relations function look like under an interval structure? For us and I think for a lot of our peers, it actually doesn't look that different. Most of the firms that we talk to have

an internal capital markets team or some folks might refer to them as wholesalers or investor relations professionals, et cetera. But we have a team of five folks. And their coverage is broken up by regions. So we have a different individual responsible for each different part of the country.

their responsibility is to go out and introduce themselves to RAs, build relationships with RAs Educate them on our products and hopefully over time get those individuals or those advisors to invest with our firm. I don't think it really looks that different than what you'd see at a hedge fund or a private equity firm in some respects.

Certainly it's a different target market we're going after than the large private equity firm that's trying to raise money from large pension funds. But the function in day to day blocking and tackling I think is quite similar.

What about liquidity? I don't want to make any assumptions around liquidity. I'd love to hear directly from you about how that all hangs together. Liquidity in interval funds is extremely important. Over the years, I think you've seen some examples of interval funds that have run into struggles because they just didn't have the proper liquidity for the fund structure. At a very high level An interval fund runs a quarterly tender process, typically four or five percent of the shares in the fund.

So what that means is that for four to five weeks a quarter, the tender process is open or the tender window at the fund is open. And during that window, clients can look to sell back their shares to the fund. And all those sell orders get aggregated and on the final day of the redemption window, we look at how many shares are looking to be redeemed. And if that number is equal to or less than 5% of the total shares in the fund, then everybody gets 100% of their money back.

more than five percent of the shares in the fund are looking to be redeemed, then typically what you'd see is that everyone's redemption request gets prorated. and the remaining unprorated part that doesn't get redeemed stays in the fund. If you had seven percent of the shares looking to tender,

And five percent was the number, everyone would get five sevenths of their money back, the other two sevenths of their money would remain in the fund as shares, and you could look to redeem that remainder next quarter. That in a nutshell is how the process worked.

You need to make sure that you have sufficient liquidity on hand to meet a full five percent tender every quarter. I like to say that a five percent tender is sacred. We really cannot ever be in a situation where we cannot meet a full five percent tender.

So what that means is that you need to do one of two things. Always have five percent cash on hand, which is not what you want to do, because that can create material cash drags on the fund. Or alternatively, make sure that you have five percent total liquidity on hand leading into the final days of the tender window. So what that means for us is we don't hang on to five percent cash at all times in the fund. We try and stay as fully invested as possible.

But we understand that we need to have a certain number of investments that are more liquid. And that can be sold relatively quickly if needed in order to help meet a tender. We also have lines of credit and other sources of fund financing that we've put in place that we can draw on if we need to in order to fund tenders.

And then the other piece is that while we don't ever want to be in five percent cash, we do want to build cash over time and over the course of a quarter to make sure that we have the full five percent cash plus liquidity on hand as of the end of that period. We run a rolling three month cash forecast that looks out on a weekly basis and we know roughly what our inflows and our outflows are going to be every week.

If we think we have a liquidity shortfall vis-a-vis a 5% tender and we're eight weeks out from the tender, that's going to show up in our forecast. And so we're not finding that out five days before the tender window. We've got eight weeks to say, hey, it looks like we might be a little bit light on cash relative to where we think the tender could potentially shake out.

What are the options that we can think about in order to make sure that we have sufficient liquidity on hand as of that tender date in order to fund a full 5% tender if that's what we actually get hit with? Is that a CFO function or a PM function? We do it in tandem, at least once a week and then multiple times a week as we get closer to a tender date.

We sit and we review our cash forecasts for all three funds. And it's myself and the accounting team that works with me, but also the investment team. because we know a lot more about Treasury and what's happening there and where we are on the line of credit, but they obviously are much closer to the day to day expected distributions that we're receiving on the CLO investments or loan investments that we own.

So it's really a collaborative effort between the portfolio management team and the CFO finance team to make sure we're getting that forecast as accurate as possible.

I wanna turn to just the market in general. Where do you see things going? I mean, this area, you guys are at the front of what I see is where the market's going with a lot of alternatives targeting this market. There's a structural opportunity here and love your thoughts on big picture. There's a couple themes that we're levered to as a firm. One is the introduction or expansion of alternative assets.

into the private wealth channel. It used to be twenty years ago, you'd hear your typical advisor talk about the sixty, forty stock and bond portfolio. That is a lot less common and a lot less popular these days. In general, RAs and other types of advisors are looking to put more alternative assets and client portfolios to hopefully enhance overall yield and overall return outcomes. As a result of that, what you're seeing is that

feels like every firm is looking to launch some sort of product that targets that mass affluent wealth channel. A lot of those look like interval funds. Some are tender offer funds, some are other alternative structures, some private BDCs, et cetera. But this is a mega trend that we're seeing, which is more and more firms are pivoting to try and raise more and more money in this channel. So I do think the overall theme of the growth of alternative assets

in client portfolios in the wealth channel is going to grow over time and grow materially from here. The other piece is the growth of interval funds as a structure. Even today, we're seeing a number of new firms looking to launch and register interval funds and come to market with products. And I think that's because as if you will, a derivative of the theme I talked about of the expansion of alts into the mass halflined channel, then it begs the question of what is the best structure.

For a lot of firms, this interval fund structure works really well for the reasons that I discussed. Ten ninety nine reporting, daily navs, the ability to buy or rebalance portfolios using a ticker as opposed to using subscription documents. I think you'll see more and more interval fund structures and other similar structures, tender offer funds, et cetera, come to market as well. Is there anything that you would say wouldn't really work under that structure?

An interval fund structure, I describe it neither as liquid or illiquid, but semi liquid. Every quarter you can get some semblance of liquidity. How much liquidity you can get depends on how many folks look to tender. But given that these are semi-liquid, what's really important to note is that you can't put wholly illiquid assets. into an interval fund wrapper. At least it becomes very, very challenging to do because interval funds do have

meaningful quarterly cash needs given the five percent tender construct that I was talking about. If you were to put a portfolio of hard real estate assets into an interval fund structure. It's just difficult to see how can you liquidate a warehouse or an apartment building or something like that on short notice in order to raise sufficient cash to funded tender.

So what that means then in order to do that, if you wanna have a structure that invests in hard real estate assets or some other highly illiquid asset, you need to have other additional sources of liquidity or you need to have some hybrid strategy where part of the portfolio is these hard illiquid assets and another part of the portfolio is something

more liquid that can be used to raise funds if needed. And then you don't have necessarily a pure play strategy that you're investing in anymore. The less liquid the asset, the less appropriate it is to put an interval fund in my vehicle.

If you think about the mutual fund world, it's almost inverted where you have highly liquid and then there was a bucket of illiquidity. Does the interval fund structure allow you to actually own things that are very illiquid? Yeah, we have C Interval funds that have owned things like hard property and things of that nature. So absolutely that's the case. Is there anything that you're reading out in the marketplace about

alternatives going to the main street market that people tend to overlook or miss? Do people underestimate the ease or challenge of this happening? I'm less educated on that. The big question is the use of some of these strategies in four oh one Ks. That's obviously always the holy grail that folks talk about.

how far along we are in the maturity curve of making some of these structures available in capital group or Fidelities 401k offerings, we're still pretty early there, but that is certainly, I think, the big push and what a lot of people see as the tipping point to really expand capital raising materially for these types of structures. And that still gets back into the illiquidity of some of those vehicles.

That's a sticking point is just how appropriate are some of these less liquid vehicles like an interval fund for the Mass Affle or even just your typical retiree with a normal amount of savings. I don't spend as much time on that'cause we don't raise money in that four one K channel right now or not trying to, but there's probably a lot of hurdles to jump through there before that becomes something that's very generally accepted and widely used. How do you get the bird off the ground?

Ongoing is one piece of it, but how do you bring something like this to market? In terms of actually bringing a new product like this to market, one of the most important things to do is to line up a material seed investor or group of seed investors. And the reason for this is these funds from day one have operational costs associated with them. And those operational costs are quite heavy and a large burden on the overall PL of the fund.

when the fund is smaller. There's obviously enormous economies of scale in standing up an interval fund or some other type of fund that grows over time, but you need to have a baseline amount of capital in the fund at inception so that the drag on returns created by the expenses is not so material. You need to secure that seed investor or small group of seed investors. What you see more and more, and I think the way people secure that.

is they typically offer some seed economics or founder economics to early investors. For instance, what you might say is, hey, ABC RAA, if you collectively allocate$20 million to this new strategy within the first 60 days of its launch, we will give you a fee holiday for the first two years. I think that works really well for both the RAA as well as the investment manager because

Obviously the investment manager gets the capital, needs to start achieving those economies of scale. And then also what you find is that the more capital you raise, it begets more capital that you will raise because now people see other folks invested in it, they're willing to follow. But also I think it works really well for the REA that's making that allocation decision.

for two reasons. One, the return profile for your clients is going to be higher than it normally would, which is great. But also what you can do as an RA is really go back to your clients and present them with a unique or special opportunity and say, hey Look what I've been able to negotiate for you. And this is a unique capability of my firm in order to do this. And I think for them that works really well in their ability to demonstrate the value add they can bring to their clients in terms of

finding some of these unique opportunities and sourcing greater returns than they could otherwise expect to get for their clients in a normal environment. Is there any critical mass number that you like to target when you're getting something off the ground? You really, really don't want to launch with something less than

a twenty, twenty five million commitment and that's the bare minimum. The number that feels like the bogey when you start to achieve exit velocity in terms of capital raise and you can start to really have significant fixed cost absorption in economies of scale is that hundred million number. A lot happens at that point. Your hundreds of thousands in many instances of operational expenses start to become quite small relative to the fund.

But also from a capital raising perspective, a hundred million is a big round number. And once you achieve that level, it feels in my experience and our firm's history that that's a point of validation where people will start to feel more comfortable. investing with you. A piece of that actually, which is worth noting, is that as we talked a lot about with interval funds, there is this tender process and only five percent of the funds are gonna typically get redeemed in any given quarter.

A lot of RAAs don't want to make an investment into a fund and be twenty five percent of the fund. And the reason for that is that hey, if they wanted to exit their full position, on this fund, well, it's gonna take them at least five quarters to get out for their clients to get all their twenty five percent of the fund, it would take five quarters because they can only get out five percent a quarter.

The bigger you are, the more that we find RAs are comfortable making larger and larger allocations because They're sophisticated and understand this tender dynamic can create an instance where you might not get all your clients' money out in a given quarter. And that becomes more and more de-risked as the fund gets bigger and the investor base becomes more and more diversified.

So a hundred million is also where that happens where people start to feel like the fund is probably sufficiently diversified where you don't have this client concentration that creates risks around the redemption windows. There's still an institutional layer on this selection process and that's a great point. Yeah, a hundred percent.

Well, Ryan, I'd love to turn to close here. We have two questions that we'd like to ask people. And one is what advice would you give to an emerging manager from an operational perspective in this space? I've heard people say, and I'm probably gonna butcher the metaphor, but that founding a startup is like trying to build an airplane as you're trying to make it fly. I find that that's true with starting a manager like a flat rock. There's just a lot that we didn't know.

before we launched and had to figure out along the way. The biggest piece of advice I can give to you as someone if you're starting up a new investment management firm or starting up a new fund is

Spend a lot of time talking to operators in the space. Make sure that before you launch you have what you feel is like a very holistic structure for what your day to day and month to month calendar is gonna look like in terms of how are you gonna run your processes, what are the bogeys you need to make sure you hit on every single quarter, every single month. And then also make sure that you have all that mapped again.

Who are the service providers that can help you do that? Because hiring all that infrastructure in house is uneconomical and probably just doesn't make sense for you. Find the right experts for all those different functions that can help you deliver against that structure that you put in place on day one. That'll result in a lot fewer pain points and fire drills than you would get otherwise if you try and bootstrap it too much.

And then the other question I have is what book, article, or other resource you commonly refer to people? I will make a plug here for our CIO, Shiloh Bates. What I would read for anyone that's interested in in our space and what I do refer people to is Shiloh's book. He wrote a book. called CLO investing with an emphasis on CLO equity and double B notes. As far as we know, it's the only

book on this topic that's been written. And I do end up referring to it a lot for clients and prospects because this is a very niche space that's hard to get up to speed on. And this is about as one oh one and introductory as it can get. But then also further on the book gets deeper and deeper in terms of delving in the topic to help you build a deep understanding of the CLO space. That's what I would point to as much as I know that's a little self serving.

Well Ryan, this has been really insightful. Appreciate the time. And thanks. Look forward to staying in time. I appreciate you having me. If you like what you heard, hop on our website at Cal. where you can access past shows, join our mailing list, and sign up for the next video. Have a good one and see you next time.