By Steve Garmhausen

Many of Freestone Capital's 2,800 clients are uneasy about the Trump administration's economic policies, including deregulation and tariffs. But Erik Morgan, managing partner of the Seattle-based firm, which manages more than $11 billion, says the uncertainty may yield promise. "There are two sides to every story, and there are opportunities that can present themselves both in the short term and the longer term," says Morgan, who oversees a team of 100. "And we're trying to be smart in terms of looking at those opportunities."

Speaking with Barron's Advisor, Morgan, a Barron's Hall of Fame Advisor , discusses appealing private investments such as manufactured housing, litigation finance, and bourbon. He says the stock market faces lots of risks at the moment but argues that artificial intelligence will be a productivity game changer. And he says that the lesson of DeepSeek Monday is that the global competitive landscape for AI is going to be a "battlefield."

Where are you from and how did you get into the business? I was born in Seattle. I then moved to northern New York state, just across the border from Canada, for high school. It was a blue-collar industrial town that afforded me the opportunity to work in all sorts of different jobs. I worked in chemical factories, I worked on dairy farms, I worked for some cash-only businesses. I really saw a different way of living. But then I recognized the weather in Seattle was better. So I came back here for college, earned a business administration degree from Washington State University, and then started my career at what I thought was Prudential Bache but was actually Prudential Life Insurance. I was there for about six weeks until I figured that out and then was fortunate enough to get what I would call my M.B.A. working for wealthy folks with a local registered investment advisor, The Rainier Group. This was in 1992, so they were relatively early in the independent space. We did business transition, estate, and investment work for the owners of private companies and their families. I did that for six years then had the opportunity to go to Arthur Andersen, where we started their investment advisory practice in the Pacific Northwest.

In 1999, Gary Furukawa, an early Amazon shareholder, was establishing Freestone to manage his wealth and that of other clients. What drew you to the company? I had a wonderful experience at Arthur Andersen and developed relationships that have been valuable to me for the balance of my career. I was presented with an opportunity here, and they said all sorts of nice things, like, "Oh yeah, we have free pop and pizza on Fridays." I was on the partnership track with Arthur Andersen, and their partnership agreement was probably 2,000 pages long. My offer letter here was two pages. I remember thinking, "I'm really not a big-company guy. I like independence. I like nimbleness. I like the ability to be more in control of what we're doing and how we're doing it." So I made that switch.

Your career timeline matched up nicely with the Seattle technology industry timeline. Yes. If I were in a different city, I might be selling copiers for a living. I was very fortunate to start my career in this industry at the time when Seattle had transitioned from a Boeing town to a Microsoft town, into an Amazon town, and now into a technology-slash-wealth creation hub. Being at the right place at the right time has been a tremendous benefit for me and for our firm.

Can you say a bit about how the business is structured in terms of ownership? We're an LLC. We have roughly 20 equity members. The business is managed 50/50 by Gary and myself; we have 50% of the voting rights and comprise the board. We have a management team of which everybody is an equity owner responsible for running the business on a day-to-day basis, and it's 100% owned by our employees.

What's been your approach to growing Freestone? We have taken the approach of building the business one client at a time and taking good care of them. We've largely stayed away from the acquisition market. We are laser-focused on talent acquisition and trying to find great people from an investment perspective, from an advisor perspective, from an operational perspective, from a leadership and management perspective. We also recognize the benefits of planning and that investments in a vacuum don't really serve the client as well as a comprehensive approach. So we're trying to be the best wealth and asset management firm we can possibly be.

What is your investment approach? We run endowment-style portfolios that are tailored for affluent people, those with somewhere between $5 million and $100 million of assets. They will have a meaningful amount of their portfolio invested in public equities and debt, and anywhere from 10% to 35% in assets that are something other than public equity and public debt. A meaningful amount is in real estate and private equity. We have some in absolute-return vehicles or hedge funds. And we are always on the lookout for opportunistic investments that we think we can take advantage of and bring some noncorrelated returns to our client base.

What's an alternative investment opportunity that you like right now? We continue to be fans of the manufactured housing, or mobile-home park, community. It's important to point out that we are providing affordable housing to people. We're not jacking up the prices and doing some of the things that some other private-equity firms might be doing. We're also doing some litigation finance, where we are providing financing for large law firms to prosecute cases. And we've purchased about $160 million worth of bourbon and stored that and have sold a significant amount of it. That has been a good investment for us. And we're seeing some opportunities in distressed real estate right now. We've had a significant investment in oil and gas, and we've been making more investments in what I'll call lower-middle-market private equity.

When you look at the U.S. stock market right now, what do you see? We see a stock market that is incredibly bifurcated. It's largely driven by companies like the Magnificent Seven that are pushing valuations higher. We look at the prices you're having to pay for those types of companies as being pretty darn high. We see a lot of risks from an inflation standpoint: Is that going to be more persistent than we anticipated, given economic factors and political factors?

While we see a lot of challenges in the market going forward, we see AI as an unbelievable productivity enhancer in the short and medium term. So we need to temper our conservatism with optimism that there are real opportunities out there. We want to be smart and not doom and gloom, because everybody's out there trying to make the world a better place, and the ingenuity of American companies and worldwide companies is pretty impressive.

What's the takeaway from DeepSeek Monday? You have to be prepared for whatever you think is reality to change, and you need to be nimble and able to react to new information. Don't necessarily take what you see in the news media as sacrosanct; digging deeper into things is necessary. I think we need to better understand what's going on in China and with their AI initiatives, and what their government and their industry is doing to disrupt the United States and become the leader around that. I think there are national defense issues and political considerations, in addition to just general business considerations that we've got to get figured out.

My opinion -- and this is one person's opinion -- is that this is going to be, figuratively, a battlefield. I think AI is going to be winner-take-all. And if the United States wants to be the leader, we're going to have to look at it as if we are competing head-to-head with another state that operates under a different set of rules.

Do you think DeepSeek exposed the big U.S. AI-related companies as overvalued? If the DeepSeek thing is accurate, if the dollars invested are as low as they're talking about, if they developed that technology on their own and it was not acquired in some nefarious way, then I think yes, there's a lot of air that will have to come out of these companies. I think the markets have done some research though, and said, not so fast. I think more than anything, it was a warning that this is a competitive space that is based on intellect and human capital. And human capital can be anywhere in the world, and there are going to be big sponsors of that on a state level that our corporations are going to have to compete with.

We last spoke in-depth in 2017, when Freestone was allocating a fair amount of capital overseas. What are your thoughts about international investing in the Trump era? Well, as smart as we thought we were the last time we talked in 2017, the circumstances have changed. Our thinking has evolved, and we've reduced our international exposure. China has become less of a focus for us. It's still a place in which we have exposure, but we're underweight there. We have overweighted the United States. From our perspective, technology companies, financials, and energy companies are in a position to succeed. And a lot of these leaders in those three industries are here in the U.S. So we've kind of onshored our investment dollars. To be clear, we are an apolitical organization. We're just trying to react to the world as we see it.

How are clients feeling about the Trump era so far? Are they cheering? Are they trepidatious? We are on the West Coast, and if you look at the Electoral College map, you'll see that this area is not a strong supporter of Donald Trump. Our client base is generally, but not exclusively, uneasy about the changes that are occurring from an economic perspective. I think it comes down to the short-term impacts of any tariffs that are imposed or may be imposed in the future, the inflation that may come of that, and the interest rates and all of the challenges that that creates. So that is certainly a concern, at least in our local market here in Seattle and San Francisco. I think there's some fear that while deregulation may be a boon to the economy in the short term, the longer term ramifications may create some heartache. So in our marketplace, there is, generally speaking, some trepidation about where things are.

From our business perspective, we're trying to be stewards of our clients' capital. There are two sides to every story, and there are opportunities that can present themselves both in the short term and the longer term. And we're trying to be smart in terms of looking at those opportunities.

We've been thinking about the onshoring or nearshoring trend, and the benefits that may bring to Canada and Mexico and North America. So while the pain may be real as it relates to tariffs, there could be real opportunities once the dust settles that we want to take advantage of. There are generally opportunities in the markets. You just need to keep your eyes open and keep your wits about you.

Thanks, Erik.

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March 07, 2025 13:29 ET (18:29 GMT)

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