All the Biggest Tombstones: M&A, ETF, Mailbag

On Fox One, you can stream your favorite news, sports, and entertainment live, all in one app.

It's

in unfiltered.

This is the best thing ever.

Watch breaking news as it breaks.

Breaking tonight, we're following two major stories.

And catch history in the making.

Gibby, meet Freddy.

Debates,

drama, touchdown.

It's all here, baby.

Fox One.

We live for live.

Streaming now.

How many vendors does it take to meet all your organization's food needs?

Just one.

EasyCater, the workplace food platform that lets teams order from a huge variety of restaurants, over 100,000 nationwide, all through a single vendor.

In addition to all that variety, EasyCater also gives you full visibility of your organization's food spend with invoicing, centralized reporting, and seamless integration with expense management systems, all on one platform.

EasyCater, your business tool for food.

To learn more, visit easycater.com/slash podcast.

Bloomberg Audio Studios.

Podcasts, radio, news.

Hello, and welcome to the Money Stuff Podcast, your weekly podcast where we talk about stuff related to money.

I'm Matt Levine, and I write the Money Stuff column for Bloomberg Opinion.

And I'm Katie Greifeld, a reporter for Bloomberg News and an an anchor for Bloomberg Television.

What do we got today, Katie?

We're going to talk about M ⁇ A fees.

We're going to talk about private asset ETFs.

And then we're going to do a mailbag.

Mailbag.

Mailbag.

All right.

Let's get to it.

M ⁇ A fees.

So

how do investment bankers make money in a normal M ⁇ A environment?

Stereotypically, investment bankers get paid for closing M ⁇ A deals.

Yeah.

They spend most of their time prospecting for deals, and occasionally a deal actually happens, and then they get a big check.

You know, I wrote that they do most of their work for free, and then sometimes they're wildly overpaid, right?

Like you do a lot of pitching, you do a lot of advising clients, you do a lot of working on deals that don't happen, and then you do a few deals that do happen, and you get a $20 million check.

And like you said, occasionally deals close.

It feels like occasionally it's turning into

somewhat infrequently deals close in this M ⁇ A environment.

The norm is if you do a deal, you get paid, right?

And doing a deal is like a little bit of a vague concept.

You pitch a lot of deals that never happen or like you do some work and stuff.

But like if you sign a deal, you say to the expected that most of the deals that sign close.

Two companies agree to merge and then they merge, right?

In the current environment, it is less common.

I mean, it's still pretty common, but it's like a little bit less certain that a deal that signs will close, right?

Because of...

antitrust regulatory scrutiny is like the sort of big headline thing, but other reasons do.

It's the golden age of antitrust.

It's the golden age of antitrust.

And so so like some big companies sign big deals and then they don't close.

And if you're a banker whose fee is contingent on closing, then you don't get the fee and then you're really sad.

So what do we do for these four investment bankers?

Because you wrote about it this week.

Probably.

You wrote about it this week that it was a Reuters article.

I hope I'm pronouncing that name right.

No, was it Reuters?

I can say that again.

Well, you wrote about this week a Reuters article about these poor investment bankers who deals aren't closing as much as they were.

What are they to do?

There's been some amount of structuring where you could get your fee in some set of installments, right?

Where like you get paid a little bit when the deal signs and more when the deal closes, or you could get paid something for a busted deal.

But now bankers are charging more of their money upfront, like when a deal signs.

So like when they deliver a fairness opinion and like the deal is sort of formally announced, the bank gets a check.

And they're also, when deals get busted, banks will write in their engagement letter, if you sign a deal and then the deal doesn't close for like regulatory reasons, often the company will get a breakup fee for deals not closing for regulatory reasons.

And banks will say, if you get a breakup fee, we want a chunk of it.

And like both of those things, getting a chunk of the breakup fee and getting paid on announcement, are like more common now.

And they make up a greater percentage now than they used to.

So it's like now banks are getting like in aggregate 20 or 25% of their fees on signing as opposed to like 5-ish percent a few years ago.

And they are asking for like a quarter of the breakup fee instead of like 10 or 15%.

And you know this world intimately much more than I do.

But I mean, to me, that sounds totally reasonable.

Oh, yeah.

It's totally reasonable.

It's just like it was a norm that they didn't get paid that way.

And it's funny, you know, I was an MA lawyer and then I was an investment banker.

Lawyers traditionally get paid by the hour.

That's not really true in M ⁇ A anymore.

A lot of lawyers, like bankers, get paid success fees.

There's a reason why bankers get paid success fees, right?

So success fee, like when the deal closes.

In like a classic sell-side assignment, if you're selling a company and they're getting $10 billion for themselves, you're like, I want half a percent of that.

And they're like, ah, it's like free money.

It's like all this money gushing in the door.

You can have half a percent of it.

And like, that's a lot of money, right?

When you are a sell-side banker and you get paid only on deal closing, you are effectively getting paid by someone else, right?

The client who hires you is like, ah, it's not my money.

Like the buyer is paying that money anyway.

we'll be gone you know we'll be great you know we're getting bought out at a premium so we don't care about giving you half a percent of that right and so if you're a banker you can charge a bigger fee if it's entirely contingent if it's like you pay no money unless you get bought out right so it's an attractive proposition it's just like if more deals don't close then like your business gets very risky and like sometimes you don't make any money you know lawyers traditionally get paid much more reliably.

They bill by the hour.

Even law firms that charge charge success fees, but a deal doesn't close, they usually get paid something anyway, you know?

Whereas like bankers traditionally got less of that.

And the lawyers like the way they get paid.

And there have been criticisms from like lawyers and judges of how bankers get paid because like if you're a banker and you get paid only on completing a deal, you have incentives to make sure that deals get done, right?

The client is like, I don't know if this is actually a good idea.

Do we really want to sell?

Like we might be better off on our own.

There is a stereotype.

The banker's like, no, you got to sell, man and this is like not really true and like a trusted investment banker knows when to say no and whatever but like yeah it's like some amount of truth to this where like the investment banker is always incentivized to do a deal whereas someone else might sometimes correctly advise the company like do nothing

bill for their hourly rate rather i don't know how you feel but i was very excited reading money stuff this week and then there was a current news happening that very neatly illustrated what we're talking about because this of course what we're talking about m a bankers wanting more of the breakup fees in part due to antitrust concerns.

And this week, one of the biggest stories was this cybersecurity startup named Wiz.

Google had offered a takeover bid of $23 billion,

and Wiz turned it down.

They said that they were going to go for an IPO instead, but Bloomberg reported that Wiz decided it could ultimately be worth more as a public company, but also concerns about the potential for a protracted regulatory approval process also encouraged it to go this route as well.

So, I mean, $23 billion is hard to walk away from.

I think the CEO called it a humbling offer.

But I mean, if the deal's probably going to come under scrutiny and probably won't close, maybe it's not worth the headache.

Yeah.

I mean, you see a lot of this, like where if you're a company and you get a really tempting offer and you're like,

there's a 50% chance this won't close for regulatory reasons.

Like you're in a much worse situation situation in a lot of ways if you like spend months working on getting this deal closed, sort of suspending all of your operations to plan a merger, and then like it falls apart for regulatory reasons and you're kind of back to nowhere.

It's a bad situation to be in.

And so the money sounds great, but you might say, you know, this is like a mirage of getting all this money.

I mean, from the banker's perspective, too, the deals that don't close are the ones that in some ways take the most work, right?

Because you sign the deal and then it's like this antitrust investigation.

You're like sort of, you know, working to integrate the the companies and also like respond to regulatory concerns.

It's a lot of work, and then it doesn't close, and you don't get paid.

So, who's happy here?

Is there a silver lining?

Like, are the lawyers happy?

Maybe the bankers are sad, but the lawyers are happy.

The bankers are fine.

Like, what's happening is they're changing their fee structures to get people.

The people who are unhappy to some degree are like the companies who were used to paying for success.

I'm like, you pay nothing unless you get a merger.

And now it's like, you, you pay something if you don't get a merger.

And, like, that's a bummer to have your deal fall apart and still get the bill from the bankers.

The global industrial renaissance is transforming industries and reshaping our world.

Over the next decade, sectors like energy, infrastructure, and technology will require an estimated 75 to 100 trillion in CapEx to modernize and meet the growing demand.

This unprecedented level of investment is beyond the scope of public markets alone.

Long-term projects need long-duration capital.

That's where private capital comes in.

And that's where Apollo leads.

With significant scale, the flexibility to adapt to evolving CapEx needs, and a steadfast focus on enabling economic growth, we're partnering with companies to provide the financing solutions that fuel the future.

Learn more at thinkitnew.com slash renaissance.

How many vendors does it take to meet all your organization's food needs?

Just one.

EasyCater, the workplace food platform that lets teams order from a huge variety of restaurants, over 100,000 nationwide, all through a single vendor.

In addition to all that variety, Easy Cater also gives you full visibility of your organization's food spend with invoicing, centralized reporting, and seamless integration with expense management systems, all on one platform.

EasyCater, your business tool for food.

To learn more, visit easycater.com/slash podcast.

Okay, let's get to the good stuff.

Let's talk about private asset ETFs.

We've already spoken about this.

Yeah, you were like, I think last week you were like, How are we going to put private assets in ETFs?

I was like, ah, there's got to be some way.

Now we're going to talk about it for real.

We're going to talk about it for real because it's...

one of the most fun and most frequent thought exercises that's happening in the ETF industry right now.

You have this like super in-demand asset class, this super in-demand wrapper, and you have all these big brains trying to figure out how to put private assets into an ETF.

And no one has cracked the code yet, but you're going to tell us how.

I'm not going to tell you how, but I'm going to talk to you about different attempts to do that.

And you're going to opine on it, probably.

There's like all these proxy sort of things.

It sort of is similar to when there weren't Spot Bitcoin or Bitcoin Futures ETFs.

So you would have these ETFs that were launched that held a bunch of Bitcoin miners and things such as that.

Those exist right now.

Then there was this filing for the Crane Shares Mann Liquid Private Equity Index ETF, which would basically seek to be a, quote, proxy for private equity performance and risk exposures by focusing on small and mid-cap stocks that have characteristics similar to companies in private equity buyout funds.

And I thought that was interesting because it's not buying shares of publicly listed private equity firms.

There's a few ETFs that do that right now, but it's basically trying to mimic the portfolio of these private equity companies.

Yeah.

There's a theory that like the value add from private equity consists of like taking a certain tranche of kind of smaller mid-cap sort of cash flow companies and then levering them up a lot.

The thought is like you can do that on your own.

Instead of investing with KKR or Blackstone to like buy out these like mid-cap companies and like put a bunch of leverage on them, you can just buy their publicly traded shares and like like they got a margin loan against your shares and then you've kind of like recreated a private equity portfolio that is true at like a very high level and then it's like it abstracts away from like whatever operational improvements they make whatever clever financial engineering they do it takes away all of the like stuff they pride themselves on doing but like the basic thing of like buying some companies with cash flows and borrowing against them like yeah you can do that on your own the idea is the etf can do that on its own i don't know if they actually do the leverage part as much as like yeah like yeah people like started publicly traded vehicles to like try to mimic private equity returns by doing that kind of trade.

Yeah, it is unsatisfying though.

One reason it's unsatisfying is that when you talk about like private assets being a hot asset class, like one thing that means is like private credit is very hot.

But like when we talk about like people who want to go to parties and say that they own

like the thing they want to own is like SpaceX right or like Stripe, right?

It's these hot startups.

Taking a like slice of mid-cap companies is is not that.

There's no proxy for very fast-growing private tech space startups, right?

Like this is like a proxy for like a middle market private equity fund, which is like not quite the like sexy thing that you're trying to sell.

Yeah.

And I mean, part of the reason that we're talking about this so much, and I've made us talk about this for two weeks in a row, is because speaking of a deal that actually did work, BlackRock bought private markets data provider Prequin.

And then BlackRock's chief financial officer said that basically they want to take some of the data that prequin has create investable indices and launch quote things like exchange traded products so when i say the best and brightest i mean you know some of the biggest ones i look forward to you telling me how they're going to do that well That's the question, Matt.

How do they do it?

You take a look at the SEC's rulebook.

They have a 15% limit on illiquid investments for funds.

So, I mean, maybe you have an ETF that's like 15% private assets, but the way that they define illiquid investments is that basically they're assets that can't be sold in seven days without significantly changing the market value of the investment.

So that's also kind of unsatisfying.

I mean, you have an ETF.

It does hold private assets.

They can only be 15% of the fund.

And then you kind of dilute the rest with like equities or cash or something.

I love the idea that like it's a 15% priority.

And then you put the rest in like the S ⁇ P, right?

Yeah.

This is like 85% goes to your index allocation and like 15% goes to your private allocation.

And like you just keep that in mind when you buy the thing.

Yeah.

That's a cool idea.

That's like very like amateurish financial engineering, but like,

you know, you do that, you short 85% as much of like an SP ETF and like, yeah, you're right.

You got a private asset CTF.

And that gets you a lot closer than anything else right now, obviously.

Yeah, I do think that's like a hard thing to market to be like, this is an 85% S ⁇ P ETF and a 15% pile of private assets.

That's weird.

It is a little bit weird.

It's also also weird, by the way, because the ETF structure is like, there are legal limits, but there's also like the point of the ETF structure is that you can create and redeem it in kind, right?

Or you can create and redeem it anyway, right?

So like

if

the

price of the ETF is not in line with like the value of the underlying asset, then like some arbitrageur can like buy the ETF and, you know, sell the assets or vice versa to bring the price back in line.

It's much harder to do with private assets that don't trade.

Even away from like the SEC rules, you need to set up some mechanism to keep the price in line.

Because the easy way to do a private asset ETF, more or less, is, and we've talked about it a bunch of times, the Destiny Tech 100 fund, right?

The easy way to do it is you have a product that trades, that is a closed-end fund, that owns private assets, right?

The whole problem with that is that the trading price of the product doesn't have to have anything to do with the value of the underlying assets.

And so Destiny traded at a huge premium in a way that makes it feel not like a great proxy for the assets because you're not buying SpaceX.

You're buying this huge premium.

Yeah.

And that's like a hard nut to crack, right?

Yeah.

It's like the ultimate liquidity mismatch.

Some of the conversations that I've been having around private asset ETFs, and I've had a lot of them with issuers who aren't quite ready to go on the record yet, but the big question is, how do you take a wrapper that is liquid by definition, trades like water, take these assets that don't really trade and put them together?

And it sounds like a lot of the conversations I was having in early 2020 about fixed income ETFs, there was a lot of scratch.

I was going to say, like, right.

So, first of all, like, liquidity mismatch is a term that I used to write about all the time when I had like a jerky daily section in the newsletter.

Yeah.

Titled People Are Worried About Bond Market Liquidity.

Because people are like, oh, these bond ETFs, you can trade them all the time, but the bonds don't trade that much.

And what will happen

something

in your eyes.

And dear listener, I wish you could have seen it when I said liquidity mismatch.

It's such a misconception to think that you can't have a liquid wrapper for an illiquid thing because all stocks are that, right?

Like a company is like a bunch of like factories and like employment contracts and all this like super illiquid, like hard to value stuff.

They're not just lines.

on the screen.

Right, right.

Like a company, all sorts of stuff, but you can like completely abstract it to a line that trades like every millisecond, right?

So the liquidity mismatch point is so strange.

What people worry about with bond funds and it's really much more about mutual funds than etfs but people lump them together people worry about like it's not the liquidity of the wrapper versus the liquidity of the underlying it's like sometimes you want to take the underlying out of the wrapper and like that is hard right like you're used to liquidly trading the etf and then like you like get the bonds and oh these bonds don't trade with a company that's not a problem because you're not taking assets out of the company.

Right.

With a closed-end fund, it's not a problem because you're not taking assets out of the closed-end fund.

The problem is, is, as with a company, it can trade at a price that doesn't reflect the value of the underlying assets.

I would say the other problem with like

this whole idea

is that it's one thing to be like, people want to buy private assets, so we have to find a convenient wrapper to sell these private assets to retail investors.

But like, where do you get the private assets?

Like, there's plenty of private assets in the world, right?

There's plenty of people who will sell you a private investment.

But, like, there are fewer people who will sell you SpaceX, right?

There are fewer people who will sell you Stripe.

The private assets that people really want are allocated.

They're like

owned fairly tightly by like big investors who, one, might not want to sell.

And two, the company tries to keep them close, right?

Like Stripe tries very hard to prevent.

its investors from selling any stock to desktop.

I was going to say, BlackRock can just do a ton of, what, forward contracts on Stripe?

If you're big enough, you probably can get some of these things and you probably can negotiate terms, right?

But there are a lot of big financial institutions that would love to have a big pile of Stripe or SpaceX to sell to their customers.

And these private companies, to them, like there's a reason they haven't gone public, right?

And like going semi-public by like selling some shares to some vehicle that is going to list publicly is kind of an annoyance for them.

If you crack the code in such a way that your vehicle provides even by proxy like a mark for the private assets, right?

If you're like, if you can look at the like Katie Greifeld private markets ETF and be like, oh, that tells me that SpaceX is trading at 37, then like, that's like what SpaceX is trying to prevent.

Like they don't want their price to go up and down every day.

Yeah.

And so like to the extent this works mechanically, it's annoying for the issuers.

And then like, you know, the question is, if you have this product, it's easier for you to get

bad private companies to like, oh, yeah, sure, I'll sell you 100 million shares for your thing.

You know, you talk about BlackRock wanting to index the private markets.

Like, if you could get a true index slice of the private markets, first of all, that might be bad, right?

What you really want is like the good companies.

But the real worry is like you would end up with not an index of all the companies, but like the bad ones that are willing to be involved in your index.

Yeah.

That might be even worse than just yeah.

So you want your blue chip

private companies, the one who would have IPO'd in a normal market, but were not.

in a normal market.

It's not clear to me exactly why some of the blue chip companies don't IPO.

And like some of it is like, yeah, we're in a bad IPO market, but I think some of it is you're now in an environment where you can be a very large private company without IPO and your cost of capital is not that high and you have some like attractive benefits of not having the nuisances of a public market.

Elon Musk doesn't like being public that much, right?

Like would SpaceX go public even in a good IPO market?

I don't know.

Yeah.

And I mean Stripe is sort of the same idea.

They could have IPO'd.

Right.

I mean, if you had an index of private assets, could you just do like swaps for exposure?

That's the other thing I was thinking.

Like, when I was thinking about just like the abstract question of like, can you do an ETF of private markets?

The natural way to do it is the way Bitcoin ETFs worked before the like spot Bitcoin ETFs were approved.

For whatever reason, you can't hold the asset here because you can't buy the shares or because you have liquidity rules that don't allow you to buy the shares.

So you hold like a derivative on the underlying asset, right?

Like you get some hedge fund, bank, speculator to write you a swap on the value of SpaceX shares, and then

you use that.

You put that in the thing, and that's your proxy.

That sounds like it could happen pretty soon.

Yeah.

It's like tricky, right?

First of all, the SEC has rules about derivatives and funds, but again, it can be done, right?

Bitcoin Futures ETFs did it.

Secondly, you have to have someone write you that swap and

be short SpaceX or Stripe, which is a risky bet.

Now.

Somebody who writes you that swap might be able to hedge it by owning the underlying shares, right?

But like that's a risky proposition too.

Like you don't know who that person is.

And like, you know, their contracts with the company might ban them from hedging by writing swaps.

And you have like pricing problems, right?

Because like,

you know, the forward contracts for some of these private companies, it's like when they go public, you deliver the shares.

And so like there's ultimately a price for the forward contract.

But like, how do you market to market before they go public?

With an ETF, like you kind of need a daily market price and it's

hard to mark that thing to market without actual trading.

And with swaps, it's not obvious that some of these things will ever go public.

So I don't know.

You could do it that way, but like you have a lot of mechanics to work through.

A lot of big questions, but boy, isn't it fun to think about?

I love it

for enterprise organizations.

Managing all your food needs is a tall order.

But with Easy Cater, you get a single workplace food vendor with the tools and resources to make it easy, giving teams across your organization an easy way to order from a huge variety of restaurants, all on one platform, all while consolidating your corporate food spend so you can control costs, streamline billing and payment, and simplify reporting.

EasyCater, your business tool for food.

To learn more, visit easycater.com slash podcast.

Every business has an ambition.

PayPal Open is the platform designed to help you grow into yours with business loans so you can expand and access to hundreds of millions of PayPal customers worldwide.

And your customers can pay all the ways they want with PayPal, Venmo, Paylater, and all major cards so you can focus on scaling up.

When it's time to get growing, there's one platform for all business, PayPal Open.

Grow today at PayPalOpen.com.

Loan subject to approval in available locations.

It's time for Mailbag.

Mailbag.

Mailbag.

So we did a call out for...

Mailbag questions last week.

We were thinking, well, should we say we want you to keep sending questions?

questions yeah we got really good ones we did get really good we're gonna try to like respond to them enthusiastically so that you'll send us more yeah please send us more into a mailbag we're gonna answer a few of them right now but please send us more in the hopper yeah boy and they are fun to read uh

andrew had a fun one we were talking about ron baron last week and uh and Andrew wrote, I was catching up with Friday's show listening to the general trend of active management getting squeezed on their fees.

It reminded me of a conversation I had in the sauna with this guy who was in town for the Baron Funds annual meeting.

He ran money for an institution and told me he kept some money in their funds just for the entertainment at their annual meeting.

Look at the bands that get to perform at their meetings.

Fleetwood Mac, Justin Timberlake, lots of others.

I thought that type of thing would have been eliminated years ago, but he said you just have to have any amount of money invested and you get an invite.

That is incredible.

I love that.

That's like a real model in investment management, right?

Yeah.

It's like you give your clients clients some like, you know, ancillary cool service, and in exchange, you get to manage some of their money for them at higher fees than they would pay the Vanguard, right?

The guy in the SADA is like an institutional allocator, which is like a little weird, right?

Because he's putting his client's money into Barron so that he can go to the Justin Temperlake check.

But like you read about like private equity funds have like LP advisory councils, like sort of like a board of directors where like a private equity fund, like, you know, 10 of their big investors will be on some sort of board where like every quarter they review the investments and like, they chat with the GP.

But they have those meetings and like

vacation destinations, and like those meetings are fun, right?

If you're like the like state treasurer or whatever, you can like go to like a really ritzy resort for a weekend to like be on your advisory council and like then maybe you allocate some more money to that private equity fund.

Makes a lot of sense to me.

I was so delighted to get this email because this touches on something that you were writing about in the newsletter this past week.

You quoted Sebastian Malaby.

He is the author of More Money Than God, Hedge Funds and the Making of the New Elite.

And one of the conclusions that you reached in the newsletter this week was that the parties are less fun because traditional stock picking is going away.

I think there was a vogue for hedge funds being like celebrity stock pickers who like went to conferences and were like, ah, put it in my best ideas, blah, blah, blah.

Right.

And now it's a much more like grinding out alpha kind of business.

And, you know, it's just like more professionalized and less like party driven.

But it's still like, there's still a lot of like party driven stuff in

finance.

The other thing, you know, in this vein, a famous fact about finance is like some number of investment firms either like started as or like are marketed by email newsletters.

And like Bridgewater is the most famous one.

Like Bridgewater sort of starts as an investment newsletter.

And people are like, oh, your newsletter is so good, I'd like to give you money.

And now like they have the most money of any hedge fund.

They sort of say, well, you know, some investors allocate to Bridgewater not because the returns are so great, but because they like getting Bridgewater's research, right?

You know, it's more boring than like going to the Justin Timberlake party, but again, it's like you're providing some benefit other than like managing the money in the best way.

And people are willing to give you some of the money in exchange for like nice aura around all the services you provide, and they hope that you'll make the money go up.

Interesting that you mentioned Justin Timberlake, but not Fleetwood Mac.

I was just like thinking of the kids these days, but of course, Justin Timberlake is like far beyond the kids these days.

It's going to ruin the tour.

It's going to ruin the tour.

What tour?

Is poker staking a security?

Is poker staking a security?

Do you want to read this email?

Yes.

No, I love reading.

From an anonymous reader.

Writer.

No, I guess they're a reader.

Anyway,

from an anonymous reader.

It is fairly common for poker players to be staked.

By that, I mean that a person or a group of people provides some or all of the money the poker player is gambling with parentheses either as the entry fee to a tournament or the bankroll they use to play in cash games and in return they get some agreed upon percentage of the winnings, if there are any.

There are even sites where you can buy and sell stakes for tournaments.

Do poker stakes pass the Howey test?

Are these staking websites unregistered security exchanges?

So I was talking to people at an investment firm last week and

they kept asking me questions and I kept saying, I'm sorry to do this, but really this is about crypto.

Yeah.

I'm sick of crypto.

We're all sick of crypto.

But like crypto has really changed how a lot of people understand a lot of things in finance.

And like this question is a crypto question.

Do you feel like they're trying to trick you?

No, no.

I'm not sure that our anonymous reader thinks it's a crypto.

It's just like it is a crypto question.

So here's the deal.

There's like an ancient Supreme Court case called Howie

where the Supreme Court said that a security subject to like SEC securities regulation is an investment of money in a common enterprise with profits to come solely from the efforts of others.

Right.

And so for most of like my career, if you ask what is a security, people go, yeah, it's like a stock or a bond, right?

And most SEC cases are about, you know, stocks and bonds, not all, but like most.

And that was like the focus of securities.

And so you had this world where people would offer stocks and bonds and the SEC would regulate it.

And you had this world of people that did other like investment opportunities, other like, you know, ways to make money.

People traded baseball cards, you know, like.

people had beanie babies and all this stuff was like clearly not a security and like no one would think it was a security.

And then crypto came along and crypto is like, we're going to start companies.

We're going to raise hundreds of millions of dollars from public offerings.

We're going to use that money to do businesses and promise people a share of the profit of that business.

And we're going to all call it crypto on the blockchain.

And it's not going to be a security because it's not a stock or a bond.

And we're going to not be regulated and we're going to steal half of the money, right?

Yeah.

And so the SEC responded to that slowly.

by saying, this is all securities, right?

This all passes the Howey test.

This is an investment of money in a common enterprise with profits to come solely from the efforts of others.

And so it's all a security.

And this is like hotly litigated, and there's a lot of fighting over particular cases.

But that's what the SEC thinks.

But one result of that is the SEC then kind of goes back and looks at everything else that no one would have thought was the security 20 years ago and is like, oh, is that a security?

That kind of also looks like a crypto token.

I quote sometimes Hester Pierce, who's an SEC commissioner, like the SEC basically approved some crypto company for doing like

gift cards for private jet travel or something.

And Esther Pierce said in a speech, like

if those tokens are securities, then you can't distinguish them from any other sort of gift card.

Like is a Starbucks gift card a security, right?

And like there's like now kind of almost like a live question is a Starbucks gift card a security.

So anyway, poker.

Like if you're investing in someone's like poker business, yeah, that's clearly a security.

It just is.

We looked online and there's some Laurie articles being like, yeah, this this is obviously a security.

Is there any history of enforcement?

In 2017, the SEC

looked into one of these staking platforms, and the staking platform actually sued the SEC to make them drop their case and say, we're not a security.

It didn't get litigated.

The SEC moved on and dropped the case.

It's 2017.

I think the 2024 SEC

One, might not bother because they're busy with all the crypto lawsuits.

But two, if they did bother, they'd be like, this is clearly a security.

What are you doing here?

So I don't know.

I might be missing something in the legal analysis that poker staking sites are currently doing.

But like, yeah, this is a thing that the current SEC would probably think is a security.

Poker staking.

Poker staking.

It's a security.

Starbucks gift cards, though.

Not legal advice.

Gosh.

There's two questions.

Like, one is, is it a security?

And the other is, like, are you offering it to the public?

Because if you are, then you have to like register with the SEC, blah, blah, blah.

If you're not, if you're only doing it to certain kinds of credit investors, then it's like less of a problem.

So maybe that's how poker staking works, but it's like a little risky.

Yeah.

All right, Harita asks, having just listened to the episode on hedge fund training programs, I'm wondering where the tipping point for too many portfolio managers is.

Like, is alpha like calculus, where you just keep reducing it into smaller and smaller amounts, and the marginal return on a new PM is falling?

Or is there finite alpha?

So when we train our 10,000th or 100,000th portfolio manager, we have perfect equilibrium where all the portfolio managers find all the new alpha for the day and no more can be found.

Then you just have a replacement market for portfolio managers, like long snappers in the NFL.

There's always exactly 32 professional long snappers because teams all carry exactly one long snapper, I think.

Imagine being the 33rd best long snapper in the world.

There's like camps for long snappers where they train you to be a long snapper.

And if you're the 33rd best in the world, you're like, yeah, you know.

Gotta say, I have no idea what a long snapper is.

It's a guy who throws the football between his legs a long distance so that someone can kick it.

Jeez, Louise, it sounds like a fish.

But in any case, I do love this idea that there's finite alpha, that like alpha is a scarce

commodity.

So I was talking actually this week to a hedge fund manager who like helped me.

orient my thinking on this.

If you think about what hedge funds do, and particularly like these kinds of hedge funds.

we were talking about like the hedge funds that have like the big multi-strategy funds that have a lot of portfolio managers and like have training programs to like identify new portfolio managers.

What those funds are doing is like they're providing some sort of financial service to the market.

They're providing like typically liquidity, but like they are intermediating some trades.

In some ways, they're doing what banks used to do, right?

If you think about like the big trades that like these like multi-strategy funds do, it's things like index rebalancing where they like buy all the stocks before they get put into the index and then they sell them to the index funds or it's like the basis trade where they buy treasury bonds and sell treasury futures and like they're buying the bonds from treasury essentially and they're selling the futures to like investment managers who for whatever reason don't want to own the bonds themselves all of this stuff is like service provision it's like intermediation it's like liquidity provision it's like some sort of like business right it's not like the mystical skill of like picking the stocks that'll go up.

It's like doing work on behalf of people and you charge them money and they pay you.

So I think if you have that model, this question is like a little easier to understand, right?

Like how much alpha is there?

It's not alpha.

It's like, you know, fees for services.

And so like, if you find a new market where it would be valuable to provide liquidity in it, then like, there's more alpha in the world and like you can do some of that and you can get paid.

Right.

And so like the question of like, how do you train new portfolio managers?

Like, again, like when I hear this description, I think of like what banks used to do before they got like more risk averse and more capital regulated.

Like when I worked at a bank, it's like, hey, let's find a new like customer base that we can sell new kinds of derivatives to, right?

And like you sit in the lab and you cook up derivatives and you try to sell them.

I think there's like something like that at multi-strategy hedge funds where it's like you sit in the lab and you think up not like what alpha can we extract from the market, but like what's the need that people have?

Like what's the demand for a product that we can intermediate and then make money on?

So I think that's the answer, right?

Like, and I think the other part of the answer is like, if you're doing that, one thing you're doing is making financial markets more efficient, right?

Like,

when you talk to a lot of these multi-strategy hedge funds, you're like, What are you doing for society besides making a lot of money?

And the answer is: we're making markets more efficient, right?

Well, if you make markets more efficient, there's more trading, and like you're capturing a smaller slice of that trading because the market's more efficient, but like you're capturing a smaller slice of a bigger pie because you've made the market more attractive so more people trade.

So, like, is there finite alpha?

No, like if you like make the market more efficient, then like there'll be a bigger market and you'll get more of it.

Just imagine that written on a tombstone.

Here lies so-and-so.

They made markets more efficient.

Beloved, you know, husband, father, all the biggest tombstones.

That's true.

So they just throw the football between their legs.

Yeah.

That's it.

Well, yeah, yeah.

Well, but like accurately.

And like with people running at them.

Yeah, all right.

It's a hard job.

But like, again, I scream at a little camera for hours.

Yeah.

Accurately.

Right.

You also noble and worthy.

Right.

Yeah.

That was so fun.

Send us more mail at moneypod at bloomberg.net.

Moneypoo at bloomberg.net.

Jesus.

And that was the Money Stuff Podcast.

I'm Matt Levine.

And I'm Katie Greyfeld.

You can find my work by subscribing to the Money Stuff newsletter on Bloomberg.com.

And you can find me on Bloomberg TV every day on Open Interest between 9 to 11 a.m.

Eastern.

We'd love to hear from you.

You can send an email to moneypot at bloomberg.net.

Ask us a question and we might answer it on the air.

You can also subscribe to our show wherever you're listening right now and leave us a review.

It helps more people find the show.

The Money Stuff Podcast is produced by Anna Mazarakis and Moses Andam.

And special thanks this week to Cal Brooks.

Our theme music was composed by Blake Maples.

Brendan Francis Newnham is our executive producer.

And Sage Fauman is Bloomberg's head of podcasts.

Thanks for listening to the Money Stuff Podcast.

We'll be back next week with more stuff.

For enterprise organizations, managing all your food needs is a tall order.

But with Easy Cater, you get a single workplace food vendor with the tools and resources to make it easy, giving teams across your organization an easy way to order from a huge variety of restaurants, all on one platform, all while consolidating your corporate food spend so you can control costs, streamline billing and payment, and simplify reporting.

EasyCater, your business tool for food.

To learn more, visit easycater.com slash podcast.

The secret to steady business growth?

Fast funding with AmeriFactors.

If you're a business owner in need of capital for payroll, inventory, or expansion, you need AmeriFactors.

Get the help you need, even even with less than perfect credit, including bankruptcies.

AmeriFactors provides ready cash flow through accounts receivable management.

Get tailored solutions.

Call today for a free, no obligation, no impact to your credit score quote at 800-884-FUND.

That's 800-884-3863.

Or visit AmeriFactors.com.