Almost a year on since Leon Capital Group hooked up with New York-headquartered tech platform iCapital that is focused on alternative investments, we talk to Leon's founder and chief executive about trends playing out.

In August 2024, Leon Capital Group, a family office, which oversees $10 billion of private capital,  said it was collaborating with iCapital, the New York-headquartered tech platform that has been one of the most prominent names opening access to alternative investments such as private equity.

As this article this week from US correspondent Charles Paikert notes, the level of activity around this “access” story is now significant. Interest in hedge funds, venture capital, private equity, private credit, real estate and other non-publicly traded vehicles has never been higher, and Wall Street’s major asset managers are rapidly rolling out and promoting alternative products. But as the article notes, a skeptical tone is also evident. In the past, there has been concern about the "hype" element.

FWR recently caught up with Fernando De Leon, founder and CEO of Leon Capital Group, to ask him about trends and the state of the market.

FWR: RIAs, multi-family offices and others in the wealth sector are being regaled, a lot, about the virtues of private equity, private credit, venture capital, infrastructure, property, etc. What is holding advisors and clients back from doing more? 
De Leon: Historically there was hesitation amongst the advisor community that saw alternative Investments as more risk than reward, partially reinforced by a lack of transparency and liquidity. The alternatives industry has done a great job creating investment vehicles with more pricing transparency and liquidity optionality. But currently, there are substantially less exits from prior fund vintages, so return of capital (DPI) has stalled, and advisors and limited partners generally have throttled back capital commitments.

FWR: Is there a risk that the alternatives story is getting overhyped? What happens if there is a significant financial/economic downturn? Are clients’ expectations suitably ready? If not, what needs to be done? 
De Leon: There are over 5,000 investment management firms, and each of them manages on average three funds, so we’re already seeing regression to the mean from the proliferation of fund vehicles pursuing overlapping investments. The risk in alternatives for investors today is thinking that you are diversified, both in strategy and across sponsors, and not realizing how correlated certain sponsors and strategies are. As with any industry in an economic downturn you’ll see winners and losers emerge, but it will take longer to flush out than in the public markets, because the markets are more “malleable,”

FWR: Please explain why being a direct owner and assets operator has advantages, and what the challenges are as well. Can you give examples?  
De Leon: Direct ownership enables a level of agility and alignment that is difficult to replicate in a traditional fund structure. In today’s rapidly evolving environment – where technologies, consumer expectations, and industry dynamics shift every 24 to 36 months – remaining competitive requires the ability to reinvent quickly. That kind of responsiveness is only possible when decision-making is concentrated and not encumbered by competing interests outside the business itself. 

Equally important, being on the frontlines of operations exposes opportunities that are otherwise invisible from a distance. At Patient Capital [a medical business], we discovered a critical gap in access to affordable healthcare financing – not by reading a market report, but by living the pain points alongside our healthcare teams and patients.

Most consumer credit platforms focus on 680+ FICO [creditworthiness] scores, leaving behind most Americans. We assumed a robust solution already existed, given how ubiquitous point-of-sale financing is in other industries – but it didn’t. That insight, the conviction to act on it, and the ecosystem to create it, only came from direct operational exposure.

The most rewarding and the most difficult part of direct ownership is people. Building companies means building teams, and that requires constant balance: nurturing talent while making hard decisions based on the evolving needs of the business. Often, the individuals who help you reach a certain level are not the ones best suited for the next phase. We’ve addressed this by creating a shared services incubator that allows us to rotate talent across companies – whether in healthcare, financial services, or real estate – while preserving culture and institutional knowledge. It’s a structure that allows for growth without losing the human element.

FWR: We’ve heard you speak about the supply chain of capital, which is dominated by organized pools of capital that compete with private owners. Can you please explain what this means and how you address it? 
De Leon: Today the American economy is dominated by four primary modes of capital: private ownership, venture capital, private equity, and public corporations. I admire the advantages each of them contributes, but, candidly, each embody significant limitations and I’ve tried to solve these with our investing format. 

Private ownership best solves the principal-agent problem, but generally lacks scalable, replicable infrastructure. Venture capital correctly focuses on replicable playbooks to maximize revenue acceleration but has historically lost the discipline to drive profits at scale. Private equity has profit discipline but loses the plot in financial engineering and fee maximization. The best public corporations maximize the advantage of massive scale and access to the world’s most liquid financial markets, but having managers that aren’t owners, means that long-range outcomes are seldom maximized. 

The supply chain directing money from American savers, to institutions, to capital allocators, to investment advisors, to investible ideas and back and forth is so complex that fundamental conflicts of interest and abuses of trust are very difficult to even see, let alone address. For instance, when public pension plans own large LP interests in funds managed by a publicly traded asset manager, whose stock that pension plan also owns via mutual funds. Did the public pension plan pay management fees to themselves? When an asset manager sells a stake in their GP (valued on fee income) to an investment fund that has LPs that overlap their own funds, that is a circularity that is difficult to flesh out, but inevitably creates the wrong incentives for individuals, to the detriment of stakeholders.

I think direct ownership clarifies accountability. When the pain of a mistake is going to be felt intensely, you proceed with caution and look to minimize mistakes first. I continue to be the biggest shareholder in everything in which we invest, and our partners appreciate the alignment. 

FWR: Can you share your thoughts on short-termism and the dangers this creates? 
De Leon: Tell me the incentive and I’ll tell you the outcome. I always recommend that you ask the person you’re speaking to about any transaction, to please explain how much of their own capital is invested in the transaction they’re seeking. A large percentage of financial transactions are one-way call options for people with no alignment to the outcome.

It takes time to develop talent, build teams, invest capital and develop meaningful businesses. When leaders manage to the next fundraise or the latest quarterly earnings, I think you lose sight of what builds enterprise value. 

We want to partner with people that aren’t seeking instant gratification and are biased to repeatable returns. I call it the marshmallow test, the famous Stanford experiment that studied delayed gratification – the ability to resist an immediate reward to receive a greater reward later. The US financial system is riddled with one-marshmallow people.

The big money is not in the buying and selling, but in the waiting. We’re trying to let compound interest do its thing, that is, allowing sufficient time for the market to reflect intrinsic worth.

FWR: A decade-plus of almost zero rates, followed by a brief spike, has been tough on the economy, although perhaps not as harsh as some might have feared. How do you position to account for what you think is the likely path of public policy? 
De Leon: One of the simplest ways for investors to outperform their peers is to stay calm and rational when others are acting on emotions. Public policy is like the wind, it changes often, so making long-term decisions over temporary variables makes no sense.

Not losing money is first and foremost on our minds on every investment we make. We focus our investments on essential goods and services like housing, healthcare and insurance where strong fundamentals and positive demographic tailwinds provide us with a slight buffer from the inherent risks any investor must take. When we start there, we’ve done our job of controlling what we can control. 

FWR: Since you embarked on your financial career, what has been the largest change you have seen? What sort of changes and trends do you think may happen in future? 
De Leon: Technology systems that are embedded in every part of commerce have effectively imposed a royalty on all business activities. From payment systems, data management, customer acquisition, marketing, and software to perform most functions in a business. Some of these systems are visible and some are not, but we pay for them nonetheless, and they’ve eroded operating margins and concentrated profits in technology companies. It mirrors a feudal tax system and the only way I see that it can be undone, or rebalanced, is to own an equity position in those same technology companies that are receiving the royalty.

In the future, I think technology companies with (quasi) monopolistic income streams will use their buying power to acquire financial services firms (insurance, banking, investment management) to control a larger share of consumers’ total spend. Today they control about 25 per cent of Americans’ wallet share but tech platforms will gradually maneuver into 50 per cent of our total GDP. Most of the incremental gains will happen through disguised or discrete ownership structures, difficult to perceive or unravel.