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On this week's episode of the Financial Planning Podcast, Jeff Schwaber talks about unlocking the power of interval funds for advisors and retail investors.

Schwaber, the CEO of alternative investment platform Bluerock Capital Markets, is a more than 30-year veteran in the investment management and alternative investment industries. He is responsible for overseeing the equity capital raise of more than $23 billion since 2003 and leading three investment management sponsor companies to top rank industry leadership.

Bluerock Capital Markets CEO Jeff Schwaber

Before joining Bluerock in late 2016, he was president and head of distribution at Griffin Capital Securities where brought in approximately $7 billion in equity in just over four years.

Given market volatility and inflation, Schwaber knows advisors are seeking to diversify with alts allocations within client portfolios. But limited accessibility, especially related to real estate, creates challenges. Schwaber believes through an interval fund, advisors can access a wider array of alternatives without forgoing the benefits of performance transparency, daily pricing and regular liquidity, all while gaining increased income, reduced portfolio volatility, lower correlation to public markets and other perks that alts provide.

During his conversation with FP Podcast host and lead editorial producer Justin L. Mack, Schwaber talks about the benefits of interval funds in the battle against market volatility; how Bluerock sparked the evolution of the alternative and direct investment space within the RIA and IBD community; and how the man who financed Superman helped him break into the business.

Listen to the new episode — as well as to all future and past episodes — by subscribing to the FP Podcast on Apple , Spotify or wherever you get podcasts.

Transcript:

Justin L. Mack ( 00:02 ):

Good morning, good afternoon and good evening. Welcome to the Financial Planning Podcast. I'm your host, Justin L. Mack, wealthtech editor with Financial Planning. And on this week's edition of the FP Pod, we're chatting with Jeff Schwaber, CEO of Bluerock Capital Markets. Jeff, thank you so much for joining us on the show this week.

Jeff Schwaber ( 00:19 ):

Thank you so much, Justin. It's a real pleasure to be here. I appreciate it

Justin L. Mack ( 00:22 ):

Jeff is a 37-year industry veteran who leads Bluerock. He joined the team from Griffin Capital Securities, where he served as president and head of distribution. And during his run there, Griffin emerged as one of the industry's most prolific fundraisers, bringing in approximately $7 billion in equity over a four and a half year span. Schwaber was also a founding partner and head of capital markets and distribution at Behringer Harvard where he oversaw an equity intake of approximately $6 billion. Today is the top guy at Bluerock, an alternative asset manager specializing in real estate. And on this week's show, we're going to go deep on interval funds and how they can be an advisor's access key to alternatives. With market volatility and inflation, advisors are looking to diversify with alt allocations in client portfolios, but there are some hurdles. Namely in terms of accessibility particularly when it comes to real estate. We'll get into all that and more this week. But Jeff, I always love to start at the beginning. So before we get into the topic at hand, tell me a little bit about your path into the industry. Was being in asset management and financial services a childhood dream or did you find the business another way?

Jeff Schwaber ( 01:27 ):

<laugh> That's a great question. Well, it was 38-years ago, so I'm going to have to strain my memory to go back that far. But no, I actually remember it vividly. I will tell you, Justin, I didn't find my career. It found me in a rather interesting way. It wasn't a dream of mine. I knew I always wanted to be in business and finance was certainly at the forefront. But after dropping out of law school, just finding out that it wasn't for me and ruining a three generation chain of attorneys, I actually went into real estate. And I was leasing office and warehouse space. In the middle of the negotiations of the expansion of the office space for the gentleman who was literally the largest financier of major motion pictures in the world, and did so on a securitized basis … on the day we were signing the lease, he said to me, Jeff, you're in the wrong business.

( 02:19 )

I want you to hang up your real estate license. You're going to get a thing called a Series 7. You'll become a wholesaler and eventually I see you taking over the capital markets here. And at the time, he had just financed the Christopher Reeves "Superman" movies and deals. Called Krypton Associates, interestingly, and had secured a five picture deal with MGM United artists for "Rain Man," "Moonstruck," "A Fish Called Wanda," "Thelma and Louise," and "Overboard" with Kurt Russell and Goldie Hawn. So, a pretty interesting way to enter finance and capital markets. But we raised hundreds of millions of dollars in partnership with Warner Brothers and MGM, and that's how I got in the business.

Justin L. Mack ( 03:01 ):

Very, very cool. But it just goes to show there's no wrong way, right way, any certain way to get into this business. And if you get into it and you love it, which obviously you do, like you said, 37, 38 years later, that means it worked. So very cool way to pivot from one very different industry to another. And today, tell me a little bit about the work you're leading as CEO of Bluerock. We covered your history and the growth at the other firms you were with, but at Bluerock now, what kind of work are you guys doing over there?

Jeff Schwaber ( 03:30 ):

Yeah, that's a great question. I appreciate it very much. Yeah, Bluerock is one of the leading, both in performance and in capital raising and just overall presence, alternative asset managers in the industry. And we have about four or five different verticals in investment funds. Our core flagship fund is an institutional real estate fund that just celebrated its 10 year anniversary with really delivering some stellar performance with very low volatility. It generates significant income tax efficiency and there's never been a down year in that fund. So it's really exciting. We also run an industrial REIT we just listed on the New York Stock Exchange … a single-family rental REIT. One of the hottest sectors of commercial real estate and corporate finances. It relates to alternative investments. And we also launched a credit fund focusing on senior secured loans called Bluerock High Income Institutional Credit fund, and has some really exciting features and dynamics.

Justin L. Mack ( 04:38 ):

All right. Definitely. And would love to talk more about Bluerock's history in this space. Like you mentioned, the first to do it in many ways, and obviously we've seen things change over time with more people getting into the game and that bigger focus on alternatives as a whole. So I would love to get your thoughts on, of course, being at an organization like Bluerock, considering its position related to alts and interval funds and everything we're going to talk about today, but just your thoughts on being at a company like that and also seeing new players come in. Seeing the game change after more than 30 years. Just your thoughts on being at an organization like this now.

Jeff Schwaber ( 05:13 ):

Well, it's incredibly rewarding from a professional perspective. Obviously your work takes up the majority of your time in the day and in your life. And I've had the privilege of really seeing this industry incubate back from the days before the turn of the century. It sounds a little funny <laugh> turn of the century when there were small syndicators that were raising capital in limited partnerships and they were heavily scrutinized for their fees and their load and liquidity features, et cetera. And to see the industry evolve into a multi-billion dollar performance leading industry with some of the largest asset managers and bulge bracket investment banking firms participating, et cetera, has really been quite a journey. Very, very exciting stuff right now in the industry.

Justin L. Mack ( 06:09 ):

Yeah, absolutely. And talking more about alternatives in general, and again, their importance in a modern client's portfolio and the need for the modern advisor to understand how to work with them, the different options, and being able to deliver that value to the end client. So alts, overall, what's the big deal and when do we stop calling them alternatives considering how vital they've become? I mean, I'd say they're pretty mainstream <laugh> but I digress. But in terms of helping advisors help clients, why do alternatives matter so much right now?

Jeff Schwaber ( 06:38 ):

Yeah, firstly, I will tell you I couldn't agree with you more. We need to find a different name. Alternatives, obviously, just as an alternative to classic stocks and bonds in the 60/40 portfolio. But I agree it's time for … it has a bit of a, not negative connotation. But it does beg a question.

Justin L. Mack ( 06:57 ):

Almost secondary. And I think if there's anyone out there who's leading the charge on I don't know, the marketing or PR for alts. That doesn't really exist, but just putting it in the universe <laugh> if you come up with a good name, let me know. We'll say it on the podcast and I will take full credit. But anyway, I will let you continue. So alts, why are they so vital now?

Jeff Schwaber ( 07:15 ):

<laugh> Yeah, sure. Well, I'll tell you for a lot of reasons. Obviously it's timely now Justin, because we are experiencing a state of pretty escalated disruption in the capital markets, despite a little bit of a snap back in the three major equity indices. And the way I like to discuss that is, if you think about it, if you go back again to the turn of the century, there's been three times in the last 20 years that the equity markets have imploded on average close to 50%. It happened during the dot com, coinciding with the terrorist attacks. Then it happened during the great financial crisis, and then the COVID flash crash. We fell a little less. Like 35 or 40%. And as I'm fond of saying, the Dow and the NASDAQ aren't more credible places to watch half your money disappear. And it's so critical for individual investors.

( 08:07 )

And the institutions have shown this. And the endowment model has shown this, which are weighted probably 50, 60% in alternatives, and maybe 12% in equities right now. But it's critical to have investments that are non-correlated to the capital markets that zig when the market is zagging. We've had 20 years of low to no interest rates, and now in a rapidly rising interest rate environment, bonds are taking it on the chin. I think the (Bloomberg Aggregate Bond Index) is down 16%. That's our flight to safety and it's down 16%. So to have something that isn't subject to these flash crashes and algorithms that kick in. It's called in-sympathy selling. Because 90% of all equity trading is computer-based, what's called program trading. And when the Dow is down and the S&P is down a thousand points. Or 3%, 4%, 5% in a day, everything is down. And alternatives have been a great source of diversified investing that generally are focused on income first. Income pays, and you have that yield protection. And also real estate comes with significant tax efficiency in the form of depreciation and other items … so your taxable equivalent yields are higher. And it's an inflation hedge, so it tends to appreciate through market cycles. And you couple that with that income for a total return and a non-correlated component to the classic 60/40 stock and bond portfolio. And it's a very important portfolio diversification tool.

Justin L. Mack ( 09:41 ):

Definitely. And shifting over, before we get into the second half of the show, making that shift over specifically to those interval funds and the work Bluerock is doing. Talk to me a little bit about some of the challenges for advisors. Accessibility challenges when it comes to real estate. What are some of the hurdles? How do interval funds help them clear those?

Jeff Schwaber ( 09:58 ):

Yeah, sure, sure. Well, it's actually most closely applicable to what we offer. So our interval fund is focused in the NCREIF Property Index. The NCREIF is an acronym for the National Council of Real Estate Investment Fiduciaries. And there is this ultra elite universe that retail investors generally knew nothing about of the most prestigious private equity firms and institutional real estate asset managers. Firms like Clarion. And Heitman. And Morgan Stanley Prime. A $35 billion, $37 billion fund. Blackstone Property Partners. Blackrocks famed granite funds that were the exclusive investment domain of only the largest pensions in institutions. Only CalPERS and Texas Teachers and the Harvard Endowment could invest there. And the minimum investments were like five or $10 million. So completely inaccessible to the retail investor. And the performance has been stellar. In 44 years, I think there's only three or four down years. No equity based investment can say they've been positive 93% of the time over the better part of 40, 50 years. And Bluerock formed an interval fund. So this is a 40' Act registered investment company registered with the SEC. It's a mutual fund. It acts just like any other open-ended mutual fund except that it marks to market every single day. It has a five letter ticker symbol. You click a button and buy it. The only difference is you can't sell it every day. Liquidity is quarterly. And that's why they call it an interval fund. It has interval liquidity.

Justin L. Mack ( 11:35 ):

All right, awesome. And with that, we're actually going to take a quick break and enjoy a word from our sponsors. But when we return, we'll have even more with Jeff Schwaber, CEO of Bluerock Capital Markets. Talking interval funds, how Bluerock changed the game a little bit in that aspect … and of course some Financial Planning Podcast good vibes. Stay locked. And we'll be right back.

And welcome back to the Financial Planning Podcast. I'm your host, Justin Mack, and we're diving back into our conversation this week with Jeff Schwaber, CEO of Bluerock Capital Markets. Now, Jeff, in the first part of the show, we talked about, of course, the work you're doing, the importance of alternatives in a modern client's portfolio and advisors needing ways to kind of clear some of the hurdles as far as accessibility and being able to work with those in a way that's effective.

( 12:23 )

Wanted to transition with your thoughts on client demand for alternatives. And I don't want to ask you the question that I hate asking because I see a million articles every week about the 60/40 and if it's dead and what you need to be doing and all of that stuff. I won't ask you that question … but in terms of the modern investor, what are their thoughts when alternatives come up? Are they excited about that? Is there a demand for more of this? And how are advisors, I guess, adjusting or pivoting to that demand?

Jeff Schwaber ( 12:54 ):

Sure, sure. Good question Justin. Yeah, I mean, I would say that in general investors are more familiar with classic capital market securities like stocks, mutual funds and bonds. So alternatives are a bit demonstrable. They require a little bit of education but the demand has obviously been soaring. And you've seen, I mean, I could just go down the list between KKR, and Blackrock, and Blackstone, and Starwood Capital, and Franklin and some of the largest asset managers are really putting a lot of guns behind the growth of alternative investments. And that generally comes in the form of some type of a real estate asset or a debt or credit asset. Yes, there's some hedge fund that manage futures and timber and infrastructure and what I'd call secondary and tertiary asset classes. But certainly real estate and credit have really ruled the roost. And we run the largest real estate interval fund in the world with north of $7 billion in assets. It's invested in about $380 billion of real estate securities, or north of that. So the acceptance has really exponentially grown just over the last year or two or three. And the inflows are substantial, measured in the hundreds of billions of dollars.

Justin L. Mack ( 14:10 ):

Absolutely. And I love what you mentioned too about that this will require a little bit more education. Not as traditional commonplace, but for those clients who take that time and get that education … and I think we've seen now clients being more willing to go that extra mile or learn a little bit more. So you got a more sophisticated client base. Advisors have to keep up with that and have some more sophisticated conversations with clients when these kinds of topics come up. Any tips for advisors who are maybe seeing an increased demand among their current book of business or are actively wanting to go after clients who are into this? Any help for them? What should they be doing? How should they be focusing to make the most of this asset class?

Jeff Schwaber ( 14:50 ):

First I think it comes with education on their part. We are really an education-first company, and I know several of my contemporary companies or competitors are the same. We have onsite due diligence symposiums and a whole host of information on our website. But as I said earlier … if you went back maybe 30, 40 years ago. Before David Swenson or when David Swenson took over the Yale Endowment, rest in peace, and you look at the big three, they were 60%, 70% invested in equities and maybe single digits in alternatives. And it's, as I said earlier, flip-flopped closer to 60% alternatives and 12%  in equities. And they've outperformed the average retail advisor by somewhere between 200 and 500 basis points a year. You compound that over 20 or 30 years, it is an enormous number. And they're doing it by capturing what's called that illiquidity premium in alternative investments.

( 15:53 )

Secondarily, you have to be scrutinous. You know, can't just throw a dart on a board and pick the right sponsor. You have to have somebody like a Bluerock who has a multi-decade track record of performance that you can look back on through multiple market cycles and see how they perform when the sunglasses were out, and more importantly when the umbrellas are out. And then lastly, what I will tell you is there's a whole host of tools like Morningstar and Risalyze where you can take a portfolio and you can construct a client's portfolio. And say they have seven different equity mutual funds, and you can say, okay, I'm going to skinny these two back by 10%. And I'm going to add, for example, Bluerock Total Income+ real estate fund. And you can see exactly historically what that would do. And generally what you'll find is it reduces risk and volatility, and it enhances and increases returns. And that's what we're trying to do. Is maximize returns while simultaneously reducing volatility.

Justin L. Mack ( 16:54 ):

Absolutely. And tell me a little bit about where your focus lies as we're coming up here on the end of the year. People kind of use the new year as a way to reset the decks and see what their priorities are going to be. And earlier you said something about the importance of alternatives, having something that can zig when the market zags. A really nice way to put it because I certainly don't think we're done seeing zig-zagging in the market, and I'm sure you would say the same. So going into the new year, any trends that you have your eye on? where's Bluerock's focus going to be in helping advisors and helping clients in the new year?

Jeff Schwaber ( 17:25 ):

Certainly. Well, Bluerock Total Income+ will always be our flagship fund. It's our baby. We incubated that and the first to bring Class A private, institutional real estate to investors. But our focus right now. We are hyper focused on the launch of our senior secured credit fund. If you understand the corporate capital stack. And at the very bottom is common stock where most investors have the majority of their money. You're in the worst position. If anything happens to that company, you're the lowest priority and the last to get paid. And as you work up the stack into preferred securities and mezzanine and unsubordinated debt. Unsecured debt. The very, very top of the capital stack. Sort of floors 90 through 100 is senior secured loans. And it's a great place to have capital, especially now where you're getting a premium return. Our fund pays an 8% dividend just to put it in perspective.

( 18:25 )

And like I said, you're in that first position that you actually have a first lien priority interest in the company (and the) entirety of their assets. Their cash. Their receivables. Their property plant and equipment. Their inventory. So this is their mission critical first priority payment. You don't pay your senior secured debt, you're out of business. We're really focused on that. It's been attracting a lot of attention both institutionally as well as in the alternative investment management space. And we believe we've constructed a fund that we'll have the same type of leadership characteristics as our real estate interval fund.

Justin L. Mack ( 19:02 ):

Definitely. And how, earlier in the show when I said I wasn't going to ask you if you thought the 60/40 was dead? <laugh> All right, I lied. What do you think? Do you think it's dead? But really asking that question to someone with your perspective, who has had the experience in the industry, seeing the changes, seeing the ebbs and flows, and now being able to work at a place like Bluerock, which is able to do everything that we've kind of covered in the show so far. What should it look like? Is there any kind of rule of thumb? Should we throw away that old thinking of any kind of rule of thumb and be a little bit more flexible considering how flexible the market itself is? What are your thoughts?

Jeff Schwaber ( 19:38 ):

My answer is a 100%. It's been dead for me for <laugh> for 20-plus years. But yeah, when you look at correlation, correlation is such a critical and overused word, but an important word. And I mentioned how three times in the last 20 years … every six or seven years you've seen that type of a selloff. And bonds are in the southwest quadrant of low income and low risk. Alternatives play a critical role, and it's different for every investor, Justin, let me couch it by saying that. I mean, it's different for an 80-year-old couple who's retired and living on a fixed income than it is for a 40-year-old executive that's making six plus figures and is trying to create wealth for his or her retirement. But as I said, the importance of alternatives is to have something that is disassociated with those public capital markets, that is income generated and focused.

( 20:44 )

And the last thing I'll tell you is the most classic measurement of risk and volatility, especially in 40 Act funds, is a measurement called standard deviation. And it sort of tells you how much your returns could deviate under stressed circumstances. And the standard deviation of the equity capital markets right now, and the three major indices is in the low 20s. If you have a one standard deviation event, and you could be down over 20%. We just saw that from the historic five or 10 year averages. You have a two standard deviation event and it starts to get cataclysmic. The standard deviation of our fund, for example, our real estate fund is like 1.7. You're talking about one 13th the volatility of the equity capital markets. So you know that under stress circumstances, you're still going to generate some attractive returns, you're yield protected, and you marry that with stocks and bonds in some capacity. And you're going to smooth out that portfolio. You're going to take that bandwidth that sort of goes up and down, that looks like an EKG, and you're going to tighten it up significantly. And it's a mathematical certainty that over time you'll generate higher risk-adjusted returns.

Justin L. Mack ( 21:55 ):

Absolutely, absolutely. Now, as has become customary here on the Financial Planning Podcast, I always like to end with a few good vibes. And we talked about your entry into the business, how it wasn't the traditional path, but now nearly 40 years later, the passion that you have for it, you can still hear it throughout the conversation. You can feel it. So I have to ask, what is your favorite part of the job? What keeps you coming back after all these years and all these zigs and all of these zags? What do you love most about the work you do?

Jeff Schwaber ( 22:24 ):

Yeah. Well I'll answer twofold. I mean first and foremost, in my line of work, I get to marry philanthropy with capitalism, if you will. I mean, we have over 130,000 shareholders that we're responsible for. And to see (and) to hear the feedback over just this year saying, we have a fund that's up over 20% in the trailing 12 when the equity markets were down about that much. And (people) saying, you just saved my portfolio. Thank God for Bluerock or this fund, that's incredibly rewarding. But I would say first and foremost, it's the people. The people that I work with, not only my clients, but internally. Bluerock has about 170 employees and I'm responsible for about 80 of them and more indirectly. And it's a team of just amazing individuals that together make an even more amazing team. I learn from them as much as they learn from me every day. So to be able to guide and mentor them and foster a culture of just total positive synergy, which is very important. Culture, probably the most often used word of Bluerock. And I'm 60-years-old. As I said, I've been doing this for 30 years, and to this day, I will tell you I get a little depressed on Friday and really excited Monday morning. I love my work. And I would say that's probably first and foremost.

Justin L. Mack ( 23:43 ):

Fantastic. Well, if you can still get that excitement from Monday morning, that is great. And if you ever wanna lend me some of that Monday morning excitement, I will not turn you down. And again, Jeff, I want to thank you so much for taking the time to join us this week on the Financial Planning Podcast.

Jeff Schwaber ( 23:57 ):

It's an absolute pleasure, Justin. Thank you so much for having me.

Justin L. Mack ( 23:59 ):

Indeed. And I wanna thank everyone for listening to the Financial Planning Podcast this week. This episode was produced by Arizent with audio production by Kellie Malone. Special thanks again to our guest, Jeff Schwaber of Bluerock. Rate us, review us and subscribe to all of our content at www.financial-planning.com/subscribe. For Financial Planning. I'm Justin Mack. Thanks for listening.

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