#46 Nick Parcharidis - Transforming Access to Alternative Investments

The Nalu Finance Podcast

In this episode of Nalu Finance, we sit down with Nick Parcharidis from iCapital to explore the evolving landscape of structured products and alternative investments.

Nick shares his 30-year journey through global capital markets and discusses:

• How platforms like iCapital are democratizing alternatives
  

• Key differences between US, LATAM, and European investment structures
  

• The rise of tech-driven, portfolio-integrated solutions
  

• Why structured products are gaining traction beyond institutions
  

He also offers a bold prediction on the growth of alternatives to $29 trillion AUM and explains how tools like Architect help advisors optimise portfolios with asymmetric payoff profiles.

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Nick Parcharidis, Managing Director for Private Wealth Solutions at iCapital

🎙️ Transcript: Nick Parcharidis: 00:11 If our clients are successful, we're going to be successful. And we knew what we were doing was addressing a client's needs.

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Stefan Wagner: 00:39 Hello, everybody. I'm here with Nick Parcharidis, Managing Director for Private Wealth Solutions at iCapital. Nick and I have known each other for a very, very long time, probably 25 years plus, I would say. Both of us spend a lot of time in structured products, but you have an extremely extensive career in structured products across many regions. And maybe you can take us a little bit through your journey and how you actually got into this space.

Nick Parcharidis: 01:07 Yeah. Thank you, Stefan. And thanks for having me on the podcast. My journey dates back to the early nineties, uh, even before we knew each other, um, at Citigroup in the late nineties. Um, and it started post business school at a time when, um, the exchanges, the American stock exchange, the CBOE, uh, we're going through a period where they were losing market share to their larger exchanges, the New York stock exchange, uh, and then later on ice. And so they were very involved in business development. And I left a firm called Shearson at that time, which some of us on this call may not remember. And I joined a team at the American Stock Exchange, which one was the early pioneer for ETFs. Right. It was the early invention of spiders in 1992. Uh, the, the mid cap later on the cues, but along the way, I met my mentor there as well. Um, who exposed me to derivatives and the first generation of structured products. And it was a very different world than it is today. We actually, um, developed the market at that time by drafting a lot of the rules that were in place and parameters. for the first generation of structured products in the U.S. Obviously, Europe was always a much more advanced market in that space, but we literally crafted the rules. There were only about six firms that were involved in the business at that time. And it was primarily an opportunistic business. I was primarily involved in creating indices and ideas and putting together issuers and distribution to eventually list and trade some of these early generation structured products. And then right around the turn of the century, right around the time of the dot-com crisis, emerging markets, I joined Citigroup. Um, at a time when you were in Citigroup as well. And that's when many of the firms were making decisions to make this part of their, uh, main core capital markets business. Um, and I went there initially to launch their equity structured product business, um, in the Americas. And that eventually led to a business in Latin America as well in 2005, when we saw the success we were having in the U S market. spent a number of years in Latin America trying to replicate that success, obviously a very different market. And then post-credit crisis in 2008, we eventually went multi-asset, where we were introducing equity and rates and so forth. And then later on, that led to a joint venture between our private bank and Private Wealth Solutions, where I was running all product and strategies for our individual clients. And that was my corporate life. And then the big transition occurred in 2018, as you know, where I finally left Citigroup, we launched a new initiative, a fund business through an RIA, and then here I am at iCapital, where we migrated that business over to iCapital.

Stefan Wagner: 04:05 Yeah, I think you may, I mean, you started, went, the bigger firms became bigger and bigger over time, and then you went back and basically took the dive and basically started your own business with colleagues. A little bit, you know, what sort of motivated you and what you thought was the, you know, the challenges and the experiences going big, big, big, very small, and then going back to something that's clearly in certain parts of the market, quite a leader with iCapital.

Nick Parcharidis: 04:37 Yeah, so what a couple things motivated me, one was the group of people that I was joining, right? They all had a similar background. uh, at major banks and wire houses running private wealth solutions businesses, uh, both for retail and for private bank. Um, so we had vast experience in knowing what had worked and then also what, what did not work. Um, and so when we launched this new initiative, we thought we can build on some of the successes we had at the banks by addressing some of the headwinds that we had. We always, We always knew we were growing the business, but we thought we could significantly grow it more and tap into some growing trends in the U.S. One was the growing trend for fee-based advisory accounts in the U.S., which were accounting for about two-thirds of all AUM. The second was the explosive growth we saw in passive investments as well. So those two key drivers. And then also we were seeing what was happening in the mass affluent annuity space as well. Um, and so all those things led us to take what we were previously doing and apply it, uh, with some additional, uh, bells and whistles. Um, and so it was a, it was a more effective way to deliver these solutions. And ultimately the most important thing of what I'm saying is. I knew we could add value to clients. You know, we always think of it from the perspective of if our clients are successful, we're going to be successful. And we knew what we were doing was addressing a client need.

Stefan Wagner: 06:09 Now, you mentioned also looked after Latin business. Is there a significant structural difference between the US and the Latin American business?

Nick Parcharidis: 06:19 I would say both structural but also cultural, right? One of the things I learned back in 2005, and it took me, I was literally the first three years spending a lot of time in Mexico, Brazil, the Southern Cone, Chile, Uruguay, Argentina, in some ways, very similar to Europe, uh, in the sense that you had many different jurisdictions structurally with different rules and regulations, uh, and a different roadmap on how do you do business culturally, their definition of longterm and what we were used to in the U S market were very different. You, you didn't venture to issue anything that was beyond 18 months, you know, and, and so that was considered longterm. And a lot of that has to do with, you know, the political instability in many of those places, you know, historically, The other thing that was very different is it was a market that had a strong bias towards fixed income, right? Bonds was their core holding. And so everything we were doing had to fit into a bond compliment or a bond surrogate or replacement. So no surprise, income types of structured notes that were shorter duration where you could leverage the higher interest rates played well in the LATAM region.

Stefan Wagner: 07:36 Touched on it a little bit. I mean, the key rappers is sort of the difference between you mentioned fully funded warrants. Is there other ones? I mean, I think the US particularly uses insurance based solutions.

Nick Parcharidis: 07:46 Absolutely. So in the US, you primarily have insurance based solutions. You have notes as well, right? And then you have market link CDs, which also carry FDIC insurance. I mean, those are the three primary vehicles. You fast forward today and it's evolved a lot, and I'm sure we'll chat about it a little bit later as we talk about innovation, but now you have ETFs and 40 Act UITs as well, which are delivering a buffer like solutions, for instance, in structured products. In Latin America, a key driver is also tax, right? So very important when you're issuing something into Latin America that you're doing it in a way where any income is going to be treated as income and not dividend where they're being taxed at a higher rate. Right. And you can't have mass offerings that are registered. So you have to do it via a higher frequency of just reg S offerings. And that really is important because Most clients that are investing in Latin America have an onshore account and an offshore account denominated in us dollars.

Stefan Wagner: 08:53 Excellent. Let's start looking forward, sort of what we see as trends and sort of, I mean, maybe in the current environment, let's talk about that one a bit. Volatility is rising, interest rates are falling. Regulation is tightening Europe, while the US clearly is moving towards more deregulation. Then you have artificial intelligence, automated information, how we price and sort of distribute, maybe manage and risk manage these structured products. The industry is evolving very fast. So how will you and, in that respect, iCapital adapt to that one?

Nick Parcharidis: 09:29 Yeah, so I think the one thing that has changed significantly versus when you and I got into the business in the early 90s is platform and technology. So platform and technology has been key given how quickly markets are moving as it relates to volatility rates. I would actually say that What we're seeing here is record issuance because of a lot of what you just described. You know, the market here in the US, I didn't think I'd see it in my lifetime, but literally year over year was up from 135 billion to about 200 billion, which is close to what we're seeing in Europe. It could be challenging at times, obviously, especially when rates are low and volatility, as you know, plays an important part in everything we do, right?

Stefan Wagner: 10:14 Now, I've seen similar things, you know, the automation that makes it possible to have smaller sizes and also more tailored in that respect for the specific client because he can get his smaller slice, but also find more and more connectivity to other platforms. These platforms are starting not only to be standalone anymore, but they also start branching out to what other ecosystems they're connected to if they're getting ESG data or to custodians or exchanges and everything else.

Nick Parcharidis: 10:44 There's no question. And, and we've done a, we've spent a lot of time and investment in integrating our I capital platform, uh, where an advisor can come in at any given day. And, um, we have something called marketplace where we have over a hundred thousand advisors who come there and they can come there and access education and content and aftermarket support for traditional alternatives, whether they be hedge funds or private equity or credit. structured products from all the major issuers, and then annuities from all the carriers.

Stefan Wagner: 11:18 That leads me a little bit to my next question. I mean, we talk about alternatives, which can be anything from structured products, hedge funds, private equity or private market investments. How do you sort of deal with that and how you compare them, how you position them versus the client in terms of risk-adjusted returns or expectation management and education?

Nick Parcharidis: 11:43 The way we kind of look at it here, if you step back, is that everything we do is an alternative. I mean, one can argue, obviously, that defined-outcome structured investments, defined-outcome annuities, I mean, they all have asymmetric payoffs. Some traditional alternatives are obviously actively managed. These are passive. But we start with that as a basic premise, right, on the platform. And also, it starts also with asset allocation, right, meaning that, A compliment to bonds and stocks, we've done a lot of work on beyond 60-40. In other words, traditional 60-40 allocations don't necessarily work, especially when we're seeing significant market moves during small periods of time. Like, for instance, Q4 of 2018, you know, you have a sell-off not only in equities, but you have a sell-off in bonds. So it's that. It's asset allocation and letting people know, and here's some fun facts, there's actually more opportunities in the private space today than there are in the public space. So for instance, back in the 1990s, you had probably here around 8,000 plus public companies. Today, that number is a little bit over 4,000 companies. Okay. Versus private market opportunities, where for instance, if you look at companies that have an excess of a hundred million dollars in revenue, 90% of those companies are private. Right, so the private market opportunities, in that sense, you have more opportunities to look at. And if you look at performance over a long period of time, typically they will have higher risk-adjusted returns. Now, the trade-offs are obviously liquidity and everything else. So we do a lot of education as to how to include them in a portfolio, the pros of adding them in asset allocation, and then understanding the liquidity, the higher hurdles, and everything else.

Stefan Wagner: 13:38 I mean, that's a really interesting trend, which is sort of another one, a question I wanted to ask is if you sort of had to make a bold prediction about the future of structured products and alternatives, what would it be?

Nick Parcharidis: 13:51 Yeah, I actually think, Stefan, we're in the early stages. I like to say in the third inning. We've seen significant growth over the last couple of years. I think I read a number where AUM and traditional alternatives globally is as of 24, I think it's about 17 trillion. Um, and I've read, I've read studies where that, and I, and I believe this, that will grow probably in the next five years to about 29 trillion. Right. And the reason for that is platform So we use this concept known as democratizing alternatives. So a lot of education, making it easier for advisors to buy these alternatives, you know, documentation. And then there's a lot of innovation in that space. So, you know, trying to not only offer it to institutional clients or the ultra high net worth, but to high net worth as well, for instance, and lowering the, the, the, the hurdles in terms of what it takes to buy some of these investments. So I'm, I'm very optimistic about not only traditional alternatives, but also structured products, irrespective of market conditions, where even if rates go down or volatility, um, is, isn't favorable to new creation. The reality is, is, um, we can adapt and you just have more, more usage by advisors, whether they be IBDs, RIAs, much more so than fee-based accounts, as well as private bankers.

Stefan Wagner: 15:22 The beauty I find often about the structural products, if you speak about one, is that you know very clearly if the market ends up where here or higher or lower, exactly what your payout is, is very deterministic. I think sometimes we didn't help each other very much with all our fancy names that if you didn't grow up in that industry, you didn't understand what we were talking about. So I think that's the time. But how do you sort of, or how does ICAP help with all these thousands of your users on the platform to make sure that they are, how, where do they go into the overall portfolio of their client who also have stocks and other investments?

Nick Parcharidis: 16:00 Yeah. So that's a, that's a great question because you and I wrestled with this for years, um, in terms of putting it in a portfolio context. And, um, we're actually been rolling something out, um, called architect. Um, and architects mission is exactly that. is allowing advisors to adjust their portfolio allocation to structured products, which have an asymmetric payoff, to see how they can improve risk-adjusted returns. And so you see certain trends, and this won't come as a surprise, but plain vanilla growth plus buffer, limited protection on the downside being used as complements to the equity allocation, for instance.

Stefan Wagner: 16:39 It's a defensive play.

Nick Parcharidis: 16:41 Exactly, more defensive. And for those that want even more defensive, you know, preservation ideas that have less upside, for instance, and more protection. And then you have, obviously, the income plays as well. So we try to categorize them in terms of risk profile. And then we have the tools to show how the different return risk matrix will change as you add these different type of risk buckets to an existing 60-40 portfolio.

Stefan Wagner: 17:09 I mean, iCapital came out of the US, but you're clearly expanding globally. I'm particularly interested in Europe. How is iCapital positioning itself to serve more the specific needs of European investors when it comes to your business?

Nick Parcharidis: 17:27 So we've been in Europe now since 2020, basically, uh, we have about 300 plus people in Europe across three hubs, London, Zurich, Lisbon, as well. Um, we've rolled out our marketplace, uh, platform there, which allow advisors, um, that are looking for global opportunities to, um, to, to go to the platform for instance, and see where those opportunities are. but we're also working closely with wealth management firms in each as, as you know, better than I do each of the jurisdictions to make sure we're delivering solutions in local currencies and so forth that makes sense for that specific jurisdiction. Uh, we'll be bringing architect there as well. Um, very shortly. So we've been very active in the region. Uh, I think I mentioned to you before the call, I mean, to show you how serious we are up until now, we've had brand ambassadors in the U S. um, that were traditional us golfers like cam young and Lexi Thompson. And we just signed on our new brand ambassador, uh, Stefan Rogers and, and, uh, and Europe from Europe. Right. So, uh, we're serious about Europe, uh, and there's a lot going on in there from an education standpoint, platform standpoint. Uh, and then lastly, most recently we partnered with MPW capital, um, as we continue to expand our client reach and do more with clients in the middle East as well, even beyond just traditional Europe.

Stefan Wagner: 18:47 Yeah. Is it when it comes to these investment opportunities that you show is more like you're bringing US product in the sense to Europe or vice versa? Or how do you approach that?

Nick Parcharidis: 19:01 Yeah, that's a good… I think it's a combination of both, right? I think we're very cognizant of local rules and regulations which differ, right? And the way business gets done there as well. So oftentimes you have an intermediary that acts on behalf of the… the end client, like a nominee, right? So, um, we are offering local product to local investors as well. I think there's only certain jurisdictions that allow for, um, offshore product, but at the same time, we're acting as a gateway to us product as well, uh, to make that available to European clients as well.

Stefan Wagner: 19:40 Yeah, I also suspect that in the Americas, that business moves slightly faster than the European, particularly in my experience of the VC space and private equity space. Another question, which is sort of a very generic one, and that is a little bit, you know, you've been in this industry for a very long time, and I'm sure you will hang around for a lot much longer, in many more years. But what is sort of your definition of success?

Nick Parcharidis: 20:06 I think success starts with the client. We've seen it time and time again, uh, over at least in my case, my 30 years, right? Where it's an ever changing market, whether it be regulation, whether it be event driven, like the credit crisis in 2008. And I think what's amazing about this industry in particular, these solutions is you adapt to that. right? And, and so, and you adapt in a way where you're actually making a difference in clients lives, right? And clients defined as advisors, and their end clients, whether it's, you know, meeting a retirement goal, or some lifecycle event, and so forth. So, to me, that's the most important thing.

Stefan Wagner: 20:51 Slightly more personal question is, you know, what is at the top of your current music playlist, you know, when you when you go home in the evening, or

Nick Parcharidis: 21:00 Yeah, so there are certain groups that I've been listening to for some time and I don't deviate much. I must say that my playlist is very different than my three children who are now in their 20s, right? So I tend to be a little bit more old school. So I've always been a big U2 fan. I've always been a big Rolling Stones fan. So it tends to be rock and it tends to be bands that have spanned the decades.

Stefan Wagner: 21:23 Excellent, you know, let's show staying power, you know, like you. Yes, there's a little bit of a parallel there, Stefan. So last question, you know, if people liked what they heard and they would like to reach you, how can they reach you?

Nick Parcharidis: 21:38 Yeah, so first of all, thank you for your time on the podcast. Always great to reconnect with a friend and a colleague who I've known now for 30 years. People can reach me directly either at my iCapital email address, so nparcharidis at iCapital.com. or via LinkedIn as well. We'd love to chat, love to get people's feedback and thoughts, because I know a lot of your audience is in our industry and have some interesting ideas as well. So appreciate the time, Stefan.

Stefan Wagner: 22:10 No, Nick, it has been great. Thank you very much for coming on.

Nick Parcharidis: 22:13 Looking forward to seeing you next time you're in New York. All the best.