Brian Dally: I am too. Thanks for doing it. I did a quick intro about you. But I really want to start by hearing more about your background. Can you walk us through some of the roles you've played in investment management?
Robert Varghese: Sure. So I've been in this business for a number of years. I started out in investment banking and quickly [00:02:00] realized that my passion lay more in investment management. And so, went to work, actually for a fairly well known fintech company called FactSet.
I was there with them for five years, had a chance to work with a lot of the different money managers around the country, around the world, really learning the business.
I got hired away by one of my clients, and went to work for an institutional investment firm up in Boston, where I was relatively quickly given an opportunity to run a mutual fund.
Did that with some success for a few years, and then realized I was ready for a change, both geographically and professionally. And so I was hired away by a firm in Texas. Some people might call this a large family office, others may refer to it as a multi-strat hedge fund. It was the Bass family.
And so it was an extraordinary opportunity.
I would argue that it was probably the greatest [00:03:00] professional experience of my life. The only downside, if there was one, was the fact that I started right around the GFC. So, I was there with them for about two-and-a-half years. And then, crisis happened. Basically, Sid Bass decided, you know what? I don't really care for all this government intervention in markets. And decided that he wanted to do something else. So, I found myself kind of doing some consulting work, a brief stint in academia.
And then I came down here to Atlanta, probably about 12 years ago. And worked for a super regional bank here and worked with their equities, derivatives, asset allocation teams. What you come to find out when you work for a bank is that risk appetite is a little bit different in a bank. And so, I kind of quickly realized that I wasn't going to really be able to ply my trade there.
Looked around, and I was hired as the chief investment officer for [00:04:00] an ultra high net worth RIA here in Atlanta.
What was unique about them is their emphasis on alternative investments. And so I would say, that started the second half of my career, if you will, with a broadening exposure to alternatives.
And so, that set me on this journey. Right after that experience, I actually went to work for a boutique commercial real estate private equity firm. The focus was in the hospitality sector. We had a portfolio of like 30 branded hotels across the country.
Of course, this is right when COVID hit. And while COVID impacted everyone, it was truly an existential threat to the hospitality industry, as you can imagine. We saw occupancy rates go from 80% to 3% overnight. And so, I'm proud to say that we persevered and survived that ordeal. In fact, we [00:05:00] were probably one of the only firms to actually execute a deal. We bought a hotel and managed to sell it 18 months later. Probably the best transaction in the history of the firm.
After having gone through that experience, and I think it took its toll on everyone in the firm, I started looking around and I was actually looking for a place to place my own capital. And I came across this firm in Atlanta that was part fintech, part private credit.
As I learned about them, the investment was a no-brainer. But then I thought, I think I can help you grow. Because they were in growth mode. And so I spent a year with them, helping them grow their business and then began consulting for other firms in the private credit space.
And then it was about a year ago that I learned about the opportunity here. And as I thought about it, this really married two areas that I was particularly passionate about: private market investing and fintech. And [00:06:00] so, been here now nine months and it's been a great experience.
Brian Dally: And now you're my first victim on the podcast. Perfect.
Robert Varghese: That's the gravy.
Brian Dally: So, you used a couple of terms there that, for people who mostly know about stocks and bonds, one term that you used was alternative investing or private market investing. For some people who maybe are active on Robinhood or something, that might sound a little intimidating or not for them.
Can you, from your perspective, say, describe for people what exactly private market investing or alternative investing is, and why is that starting to become mainstream?
Robert Varghese: Sure. So, what most people are familiar with is public market investing, stocks and bonds. Pretty much anything outside of that can be considered alternative investments. A subset of alternative investments is what [00:07:00] we refer to as private market investing and, more specifically, that's private debt, private equity, real estate, infrastructure. Those are four broad categories, if you will, within private market investing.
Another way to think about it is, all private market investing are alternative investments, but not all alternative investments are necessarily private market investing. And the example that comes to mind today is something like crypto. This is certainly an asset class that people can make money in, but it's not so much private market investing. It's not something that we do here at Groundfloor. But it is part of that bigger umbrella of alternatives, if you will.
As far as why these things are becoming mainstream, that's just the way these things work. Most investments or asset classes start small, if you will, right? It's this [00:08:00] niche thing that someone is trying to make a go of. Suddenly you're boasting high returns. It gains more mainstream attention, financial presses on it. Then as more people want to hear about it, or learn about it, they want to figure out how they can get access. And so that's what you're seeing happening, I think, across alternatives in general, but private markets in particular.
Brian Dally: That makes sense to me. Thank you for that. So as a person who's spent a couple decades now looking at public and private market investments, so I think a lot of people want to know, what's wrong with just investing in stocks? Is something wrong with just investing in stocks? I mean, the S&P 500 alone has been up over 600% since 2008. When I went to business school, my professors said, just buy index funds. Right? What is it that leads people [00:09:00] now? What's the rationale for not just sticking with public markets?
Robert Varghese: I have nothing against stocks. Probably two-thirds of my career was spent in the equity space. So, stocks are fantastic. In fact, I would argue that there is no other asset class in which you can probably achieve higher returns than in stocks. But, with that high return comes risk that most people don't often think about. And by risk in this instance, I mean volatility, right? So the stock market's been up 600% as you sort of quoted, but that hasn't been a straight line up and to the right.
There's a lot of volatility and that's the thing that a lot of people have a hard time stomaching. And so, why branch out? Because even as you think about stocks and bonds, that's just one portion of the investment [00:10:00] landscape. There is a whole nother world that can help diversify and broaden your portfolio.
And I think that's why the volatility that a lot of people have experienced, that they realize they don't quite like, so they're looking for other ways to, as I said, find that diversification, if you will. And so it's not an either/or situation. For me, the way I look at it, it's an "and," right? You should have elements of both in a good portfolio.
Brian Dally: I think a lot of people are coming to that conclusion. But when they do, you brought up the term risk. A lot of people wonder if it's an alternative, if it's private, isn't that code for risky? I mean, you've overseen hedge funds, private equity, real estate. How do you answer that for people who, because if something's unfamiliar, or hasn't been accessible to them, it of course sounds [00:11:00] probably more risky, or there must be a catch. So how do you answer that? Is the question about risk?
Robert Varghese: So I'm going to speak slowly and clearly here. All investing involves risk.
Brian Dally: Amen.
Robert Varghese: I want to repeat that for the audience. All investing involves risk. Quite frankly, you cannot have return without risk. They're almost, not quite two sides of the same coin, but the reason something offers the return that it does is because there is an innate element of risk involved with it.
If there's anyone out there who thinks that there is some type of security that exists in the world today that has zero risk, one, you're wrong, and two, the return is almost de minimis, right, at this point. In fact, we have a term in finance, the risk-free rate, which referenced the 3-month Treasury bill, right?
Well, [00:12:00] a prominent rating agency a number of years ago, in their infinite wisdom, decided to downgrade the United States. The very second that they did that, there ceased to be anything that can truly be called risk-free. Right? And so, that's just an example to say that everything has risk. As an investor, what you need to do is to make sure, like risk in and of itself is not a bad thing. What you need to do, and what we do as professionals, is to make sure that we are appropriately compensated for that risk. That the return that we're receiving appropriately adjusts for the risk that's maybe inherently involved. And so, whether it's stocks, whether it's bonds, whether you're looking at private credit, whether you're looking at real estate, it's important to understand what this asset is, how it behaves, and is the return that you're potentially going to get worth it for you?
And look, that risk-return [00:13:00] is going to be different for every person based on what their needs are, what their risk tolerance may be. And so, risk in and of itself is not a bad thing.
Brian Dally: As you look at the news today, I think a lot about duration risk, term risk, liquidity risk. I mean, risk doesn't just come in the price going up and down.
Robert Varghese: Yeah. It's not just volatility. And I'm glad you're bringing this up. When we think about risk, like, what is risk? True risk is that which you don't know that can hurt you.
Brian Dally: Right.
Robert Varghese: Truly. That's what it is. Everything else is sort of this synonym or something else that people are perceiving as risk. It could be volatility. Modern finance teaches you that it's the standard deviation of returns that people think of as risk. But, if you look at the history of the term, real risk was about, what are the [00:14:00] odds that this goes wrong and I am ruined financially, right? And so what you need to do is, and again, hopefully that's not the type of investment you're going into, but there are ways to measure that, price that, and factor that into what you're doing.
Brian Dally: I appreciate that answer a lot. I have one more question before we wrap. When you look at private markets today, you've been in this for a while now, as long as a lot of people have been, in this way, what are you hearing and seeing that's new and different and exciting? I mean, not just from Groundfloor, because we're doing a lot of exciting things that we're going to be sharing over the coming year. It's an important year for Groundfloor. But what is it that you think in the marketplace people should be paying attention to?
Robert Varghese: Honestly, there has been no other time in history where people have had more [00:15:00] access to information, to technology, and to financial products. That in and of itself, for me, is incredibly exciting. Again, I've been in this business for a while, and as I said, I started out in equities and I can remember, going back to when I graduated from college, mutual funds were still the rage, if you will.
And then all of a sudden in 2000 ETFs came out. State Street introduced ETFs. This was going to be a game changer. But you can see what the reaction was against these traditional fund managers. Because again, they were looking at this as an existential threat, and the threat really was fee compression, let's be honest. Mm-hmm. But you can see how ETFs were suddenly going to change. You can now get exposure to just about anything that you can imagine. That was truly the only limitation in the course of [00:16:00] 25 years that's truly come to roost. Because now you can get exposure through ETFs, through various asset classes, whatever it is. Natural resources, you name it, right? And so it's that ability to get exposure.
And so, what you're seeing in private market investing, we talked about credit, private equity, real estate infrastructure, and there are other things as well, but what's exciting is how people are thinking about these products.
How we can gain access, how do you structure a product? This is that constant evolution that's happening. And I think there's more to come and a lot that still hasn't been unearthed. And to me, my job, if you will, is to figure these things out and to bring that to our investors. And so this is a really exciting time to be in this business. And I would just tell people to stay aware, because [00:17:00] there are going to be new and exciting ways to diversify your own portfolio and to create wealth.
Brian Dally: Great start to our conversation. I think we're going to take a pause here.
Robert Varghese: Okay.
Brian Dally: But we're going to be back for part two. Looking forward to that. I want to get into talking more about what you see for the future of investing, when we continue. I want to get more in the weeds about Groundfloor as well. Turn our attention internally and share some of what's happening inside.
For our audience, you can connect with Robert via his LinkedIn, which we'll include in the show notes. You can also learn more about private market investing at Groundfloor.com and in the Groundfloor app. Check out all episodes of the podcast and suggest a future guests for us at Groundfloor.com/podcast.
Please like and subscribe wherever you tune in so more people get to see this show and learn about private [00:18:00] market investing. Thanks again for joining us on Beyond the Stock Market.
