Transcript
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Legacy 9 is multifamily office based in Texas.
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We launched it in 2020 in less than 5 years.
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We've scaled it to just under $1,500,000,000 of
assets.
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What is your advantage against the large banks,
the JPMorgan's, the Goldman Sachs?
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What they don't have is the flexibility in the
private markets to really execute on unique
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alternatives.
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Ultimately, these families, they want better
access, better structures, better fee
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arrangements, and the banks have a lot of
limitations.
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They can't be as nimble.
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Tell me about cheapy stakes investing.
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It's only gonna grow.
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It's only gonna get bigger.
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Welcome to 10x Capital podcast.
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Thank you very much, David.
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I'm excited to be with you and talk about all
things GP Stakes Investing and Legacy Knight.
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Let's jump right in.
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What is Legacy Knight?
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Legacy Knight is an alternative, as we call it,
multifamily office based in Texas.
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We launched it in 2020.
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In less than 5 years, we've scaled it to just
under $1,500,000,000 of assets.
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And we work exclusively with family offices,
and we do that in 2 ways.
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Number 1, we have what we call our legacy
business, which is a 100%, you know, balance
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sheet advice, guidance, strategy, full
investments, family and office services, tax
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and estate, etcetera.
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So that's the legacy side.
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On the night side of our platform, which is
what I run, we curate and make, investments in
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the alt space, private credit, private equity,
venture capital, direct investments, real
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estate, real assets, and, we provide access to
those 2 family offices around the country.
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Those checks tend to be in the range of 20 to
up to a 100,000,000.
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And, again, they can be fund investments.
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They can be anchors of funds.
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They can be co investments, Lot of GP Stakes
investing.
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Sure.
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When we last chatted, we talked about your
advantage against the large banks, the
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JPMorgan's, the Goldman Sachs.
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What is your advantage?
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Those big bank platforms have a great history
in the public space.
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They obviously have a lot of resources at their
disposal.
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What they don't have, is is the flexibility in
the private markets to to really execute on
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unique alternatives.
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And when you're working with ultrahigh net
worth families as we do and that they like to
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do in their private banks, ultimately, these
families, they want better access, better
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structures, better fee arrangements, etcetera.
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And and the banks have a lot of limitations
both on the regulatory side and just in in the
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way they operate, a lot of bureaucracy,
etcetera.
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They can't be as nimble.
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You know, if you wanna put a fund on a on a
private bank platform, you can't do that with a
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100 or $200,000,000 vehicle because there are a
lot of mouths to feed across the private bank
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platforms.
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So they have to go with bigger managers, bigger
funds, which there's nothing wrong with that,
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but it does limit what they can do.
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Additionally, you know, they can only advise on
investments on their platform.
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So if a family comes to us and says, hey.
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I wanna look at this early stage tech
investment in an outside fund or know, direct
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investment, or maybe they wanna buy a piece of
real estate.
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You know, the banks are limited as to how they
can advise on that, whereas we aren't.
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And so we we are a full scope, full spectrum
adviser, to our families in addition to being
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investors as well.
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You've been an early adopter as investor in GP
Stakes both at your previous role at CAS
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Investments as well as today at Legacy Knight.
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Tell me about GP Stakes Investing.
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GP Stake as a strategy is a minority stake.
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In today's world, most of those are minority
stakes, typically 20% or less, into private
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equity and private credit managers.
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The first wave of this strategy was into hedge
fund managers.
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What these GP stakes funds realized, like like
Dial, but now Blueout, is, you know, investing
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in a PE firm, if they have a a 10 year fund,
those fees are a lot stickier, a lot more
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locked up, and so your downside protection is
is incredibly structured and protected.
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And so the asset class has really grown as
people realize that this return profile buying
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into locked up drawdown structured strategy
funds really was much more attractive.
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And so that's what we talk about today.
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We're talking about largely private credit,
private equity, and large venture capital
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funds.
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And what are you solving for the managers?
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Why would a GP sell a part of their stake?
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There are really 3 primary drivers, that that a
manager will sell.
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The first is, just to grow the business.
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So funds, the big are getting bigger.
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You know, a lot of firms, they had a a
$2,000,000,000 fund, then they went to 4, then
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they went to 8, certainly, when we had the zerp
period.
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And most LPs, institutional LPs require that
they have a 1, 2, 3% GP commit.
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And the truth is they needed to keep feeding
the beast.
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They need to keep funding deals, and so they
needed actual balance sheet growth capital.
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That's on the primary side.
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Another driver of growth is as these firms want
to scale, a lot of them, they can't just scale
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their mono line private equity buyout business.
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And so what they've done is they've added
strategies.
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They've added either geographic strategies, so
maybe it's a US based manager and they wanna
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scale into LatAm or Europe, or maybe it's a PE
manager that wants to build a credit arm.
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Right?
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And that's expensive.
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It's expensive to buy a team.
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It's expensive to pay talent or, you know,
recruit what they need to do.
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And the third driver is really generational
transfer.
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The private equity industry really scaled, in
the seventies, eighties, and so a lot of those
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founders are now in their eighties nineties.
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As these firms wanna continue growing, they
wanna continue, you know, continuity at the
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leadership level, they needed someone to come
in as a strategic partner and help facilitate
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those transitions.
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And so there are a lot of creative ways that
they've been able to do that on the GB side,
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but those are the 3 drivers.
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On the topic of succession planning, let's say
that I invest a $100,000,000 into you as a
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private equity manager.
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How does that $100,000,000 help with succession
planning?
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Walk me through that.
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The way that these are typically done, there
there are a a variety of ways you can do it.
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Lawyers get pretty creative on these things.
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But, ultimately, what you're doing is you're
tiering out the original founder, so it's a
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secondary transaction.
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So you're not putting that capital on the
balance sheet.
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In most instances, you're buying them out
directly, or when you do that, you're
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facilitating, you know, an equity buy in from
junior partners or, you know, you're you're
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creating some sort of for future incentive
plan, profits interest on future value,
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etcetera, where those junior partners can end
up buying more and more of the equity in the
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overlying business that that, obviously, they
wanna continue running for long periods of
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time.
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That's that's the major reason you see the
secondaries or the way most often they're
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structured, with with the managers, when you
have a founder selling secondary.
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I'll also note that one of the attractive
things about doing them that way that you can
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amortize goodwill.
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And so a lot of these founders take chips off.
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They're they're structured, to be over a couple
years.
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They can maximize the tax savings, so it's
really beneficial to LPs as well when you do
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them that way.
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But, obviously, you do wanna be careful with
the secondary side.
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Right?
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Most most of the capital that goes into these
deals is primary capital for growth.
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One of the biggest misconceptions about the
space is that these firms have done a GP stake.
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You know, they will never do a GP stake again.
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But just like a company that needs to raise
money or a company that does secondary, there's
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oftentimes 2, 3 rounds potentially.
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HIG is a great example of that.
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They've done several transactions with the Blue
Owl.
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They have a very diversified partner base
today.
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They had a big generational transfer there.
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You had 2 founders who founded the firm in the
mid nineties.
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You know, great example where where they've
successfully done that.
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They've successfully brought up a lot of other
partners, and done that over a couple different
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transactions with the GP Stakes firm.
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When you're investing in a GP Stakes, what
determines whether the deal is high quality?
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Obviously, valuation matters like with anything
else.
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We can touch on that in a little bit, how how
you come to valuation here.
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But, you know, beyond that, what you really
want is, you know, do you have a very sticky
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capital base?
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Meaning, do you have a very institutional, very
high quality LP base?
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Because, ultimately, when you're looking at
underwriting management fee revenues, you know,
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what's your counterparty risk here?
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Right?
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Are people gonna pay their management fees?
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And if you've got nothing but, you know, top
tier pensions and endowments, there's a very,
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very high probability that they're they're
gonna take care of that.
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So that's the first thing you look at.
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Obviously, the team, the performance track
record's critical.
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But beyond that, it's can they raise capital?
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So you can have a phenomenal track record, but
if you're not able to scale your funds from 2
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to 4,000,000,000 or whatever it may be, you
know, that that's a really critical component.
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If you can't do that, it's really hard.
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And that's actually one of the key things that
makes people do a GP stake transaction is the
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GP stake managers have a great capital base
behind them.
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They have global networks today, and that's
that's a big driver.
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They can they can really upsize and upgrade
your LP base as a manager.
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But so you definitely have to look at that.
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But, again, the number one driver because of
the management fee income and because of the
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stickiness and contractual nature of that is
can you continue raising funds, you know,
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primarily larger funds on your current
flagships.
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You mentioned underwriting the ability of top
LPs to continue to invest.
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What are some leading indicators of that?
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By the time, typically, a firm hits a stage
where you're in the middle market or upper
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middle market, these are firms with 5
+1000000000 of AUM, and they're probably on
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fund 3 or 4 at a minimum.
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And so what you wanna look at is, you know,
between fund 2, 3, and 4, did your LP based
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turnover?
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What's your reup rate?
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Are you bringing new high quality LPs?
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Do you have a huge network of high net worth
and family offices that may or may not reup in
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large scale?
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So you've gotta underwrite that.
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You've gotta see that quality of your partners
is really critical.
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It's just like any other business when you look
at what's your customer base look like.
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Is it sticky?
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Is it high quality?
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Is it institutional?
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What are the logos?
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So it's just like any other business you're
underwriting.
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What's a customer base look like?
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So one of the ways to look at it is you look at
your customer base being the LPs and you wanna
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look at, a, have they continued to reop in the
fund?
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And, b, what is their historical reop in other
funds?
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You can look at those analyses across the
marketplace, but the primary one is with that
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manager, are those funds continuing to
allocate, you know, that because as you know,
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like, with with pensions and endowments, they
have a bucket for each strategy or asset class,
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and, ultimately, they have their managers they
like.
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And what you want here is they they you know,
if it's HIG as example, a manager I really
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love, are you gonna if if I'm investing in
middle market fund 3, am I gonna also invest in
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fund 4, fund 5, fund 6?
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Because they're great, they're best in class,
they're really generating alpha in that space.
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So you obviously wanna benchmark that firm
against their peer group and then see is their
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LP base continuing to re up over time.
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So that that's a really critical driver here
again because if you want funds to get bigger,
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you can't have a lot of churn in the LP base.
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You want everyone to re up, and you wanna go
find new LPs as well.
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And that's how you go from 2,000,000,000 to
4,000,000,000.
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You mentioned turnover in LP base.
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Is that always a negative signal in fund 2,
fund 3, fund 4?
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Yeah.
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I I'd say most often it it it is, although
there are exceptions.
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Right?
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If fund 1 and fund 2 are effectively friends
and family, family offices, RIAs, which could
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be great LPs.
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We're 1, you know, ourselves.
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You know, that's okay.
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But as you get bigger, if you really wanna
scale, you know, the chunkier check sizes are
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really from institutional investors.
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And so churn's okay if it's churning up and and
you're up you're going up market in terms of
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your LP base and quality base.
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But, obviously, if it's, you know, we had the
biggest pension in the country in fund 2 and
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fund 3 and they quit for fund 4, you know, you
wanna ask why.
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And and sometimes it's not the manager's fault.
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But if it's performance based or if it's, you
know, relationship based, all these firms
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haven't quite institutionalized their investor
relations, their capital formation teams.
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You know, that that's something you wanna dig
in on and and dig a little deeper on.
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00:10:01,959 --> 00:10:07,720
Given that you're investing in the manager and
management fees is the most important part of
223
00:10:07,720 --> 00:10:12,554
derisking the investment, how much access do
you have to existing LPs?
224
00:10:12,615 --> 00:10:17,834
And walk me through how much you're able to
diligence the LP relationships with GPs.
225
00:10:18,054 --> 00:10:18,375
Absolutely.
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00:10:18,375 --> 00:10:22,774
So Legacy Knight, we we typically either invest
as LPs in in GP stakes funds or as co
227
00:10:22,774 --> 00:10:23,254
investors.
228
00:10:23,254 --> 00:10:26,809
But that being said, we do see a lot of the the
work on the co investment side and the
229
00:10:26,809 --> 00:10:27,690
diligence packages.
230
00:10:27,690 --> 00:10:30,970
And, typically, the the best way to do it is
you're interviewing your best LPs.
231
00:10:30,970 --> 00:10:32,730
You're asking why they continue to re up.
232
00:10:32,730 --> 00:10:36,134
You know, you're you're looking at the
geographic diversification of LPs, you know,
233
00:10:36,215 --> 00:10:37,894
because that can be a growth area in the
future.
234
00:10:37,894 --> 00:10:41,274
You know, obviously, you're you're looking at
the continuity, the sizing, etcetera.
235
00:10:41,415 --> 00:10:44,615
And so, yeah, you have full access to the the
underlying LPs.
236
00:10:44,615 --> 00:10:48,855
You you have full access to portfolio companies
for what it's worth on that side as well,
237
00:10:48,855 --> 00:10:52,340
interviewing those teams, asking why they
partner with that team, is the you know, is
238
00:10:52,340 --> 00:10:54,740
their exit assumption realistic at the fund
level?
239
00:10:54,740 --> 00:10:56,360
So it's a pretty granular process.
240
00:10:56,659 --> 00:11:00,360
I'll also say that these transactions are not
they're not done quickly.
241
00:11:00,419 --> 00:11:04,019
A lot of times, these these conversations are
happening over many, many years, and it's a
242
00:11:04,019 --> 00:11:07,000
very, very relationship oriented business
because it's a small industry.
243
00:11:07,115 --> 00:11:10,875
Is there something that would be a good GP
Stakes investment that would not be a good fund
244
00:11:10,875 --> 00:11:11,355
investment?
245
00:11:11,355 --> 00:11:11,434
Yeah.
246
00:11:11,434 --> 00:11:12,074
It's a great question.
247
00:11:12,074 --> 00:11:17,355
I mean, I I think with the GP Stakes Fund,
unlike with maybe an just a mainline strategy
248
00:11:17,355 --> 00:11:19,454
is the fund's gotta be able to raise capital.
249
00:11:19,690 --> 00:11:23,529
And some of the middle market teams and lower
middle market teams that have wanted to enter
250
00:11:23,529 --> 00:11:26,170
the GP stake space, they've had struggle
raising their fund.
251
00:11:26,170 --> 00:11:30,009
And as an LP, you have to look at that and say,
well, if you can't raise your own fund, how are
252
00:11:30,009 --> 00:11:33,375
you gonna help other firms that you want to buy
a stake in raise their funds?
253
00:11:33,455 --> 00:11:35,215
And, otherwise, they wouldn't wanna sell to
you.
254
00:11:35,215 --> 00:11:38,495
And so that is something that's a little bit
different that you have to underwrite that that
255
00:11:38,575 --> 00:11:39,534
that's somewhat unique.
256
00:11:39,774 --> 00:11:42,174
I'll also say that that, again, it is very
relational.
257
00:11:42,174 --> 00:11:45,294
You wanna look at the support that they're
providing to their underlying portfolios.
258
00:11:45,294 --> 00:11:48,537
Whereas if you're investing in a, you know,
middle market, lower middle market buyout
259
00:11:48,537 --> 00:11:50,972
manager, you don't really have those angles and
dynamics at play.
260
00:11:50,972 --> 00:11:52,301
So it is a bit differentiated.
261
00:11:52,301 --> 00:11:55,843
You have to understand it differently and and
really trust in the team also on the
262
00:11:55,843 --> 00:11:57,171
structuring side and what they're doing.
263
00:11:57,171 --> 00:11:58,942
It's just a different different kind of
investment.
264
00:11:58,942 --> 00:12:00,504
It's very esoteric, very specific.
265
00:12:00,504 --> 00:12:04,345
And so the teams, a lot of them, they they come
out of the space or they come from law firms
266
00:12:04,345 --> 00:12:06,264
that have done deals in the space and things
like that.
267
00:12:06,264 --> 00:12:10,345
So it again, it's a small ecosystem, but but
one that that's highly specialized and highly
268
00:12:10,345 --> 00:12:10,745
structured.
269
00:12:10,745 --> 00:12:14,570
Deconstruct the different revenue streams in a
GP Stakes.
270
00:12:14,709 --> 00:12:16,250
1st off is the manager fee revenue.
271
00:12:16,309 --> 00:12:19,110
And in my opinion, that is the secret sauce of
these deals.
272
00:12:19,110 --> 00:12:23,110
So when you buy into a manager, you know, if
you invest as an LP in a fund, for example,
273
00:12:23,110 --> 00:12:27,110
you're gonna pay your 2% on committed capital
probably through the investment period, then
274
00:12:27,110 --> 00:12:30,294
maybe 2% on invested capital thereafter for the
rest of the fund.
275
00:12:30,294 --> 00:12:30,534
Right?
276
00:12:30,534 --> 00:12:31,735
And so it's very sticky.
277
00:12:31,735 --> 00:12:32,534
You're gonna pay it.
278
00:12:32,534 --> 00:12:33,514
It's very predictable.
279
00:12:33,575 --> 00:12:35,174
And so that's the first one.
280
00:12:35,174 --> 00:12:36,934
And that's really your downside protection.
281
00:12:36,934 --> 00:12:39,434
And that also is what's interesting from a
return standpoint.
282
00:12:39,654 --> 00:12:44,799
It provides a private credit like return
profile on the cash flows because typically,
283
00:12:44,799 --> 00:12:46,639
managers, they assess that fee quarterly.
284
00:12:46,639 --> 00:12:50,639
So if it's a 2% fee, they're assessing, you
know, half a percent a quarter every year.
285
00:12:50,639 --> 00:12:55,440
So on average, not every fund, but for the most
part, the GP Stake funds are making 4
286
00:12:55,440 --> 00:12:58,320
distributions a year and, you know, on a
roughly quarterly basis.
287
00:12:58,320 --> 00:13:01,634
And that's that's at a minimum as a floor
coming from management fee revenue.
288
00:13:01,634 --> 00:13:02,514
So that's number 1.
289
00:13:02,514 --> 00:13:06,754
Number 2 is obviously carried interest, and and
carried interest is a huge part of the
290
00:13:06,754 --> 00:13:07,235
equation.
291
00:13:07,235 --> 00:13:08,615
You've gotta have good performance.
292
00:13:08,754 --> 00:13:13,079
However, in the large cap managers,
increasingly, they become asset gatherers, and
293
00:13:13,079 --> 00:13:17,399
the the fee related income largely management
fee revenues, make up a a really significant
294
00:13:17,399 --> 00:13:18,199
portion of the turns.
295
00:13:18,199 --> 00:13:19,639
The carried interest, it's critical.
296
00:13:19,639 --> 00:13:22,919
It's a really important piece, but it becomes
much more important as you go down to the
297
00:13:22,919 --> 00:13:26,894
middle market funds because they they just
don't have as much margin on their manager
298
00:13:26,894 --> 00:13:27,054
fees.
299
00:13:27,054 --> 00:13:28,574
They're not raising $10,000,000,000 funds.
300
00:13:28,574 --> 00:13:32,095
And, you know, the growth of teams at the large
cap, it's it's linear, not exponential.
301
00:13:32,095 --> 00:13:34,654
And so, you know, they they just have better
margins on the manager fees.
302
00:13:34,654 --> 00:13:36,334
So at the carry level, that's more important.
303
00:13:36,334 --> 00:13:39,509
Performance is much more critical in the middle
market than in the large cap space.
304
00:13:39,750 --> 00:13:41,429
The 3rd is balance sheet returns.
305
00:13:41,429 --> 00:13:45,190
And so, you know, as a manager for some of the
GP commit, you know, we also own our percentage
306
00:13:45,190 --> 00:13:46,470
in that as as an investor.
307
00:13:46,470 --> 00:13:50,870
And so, you know, if they are, you know, your
2% commitment to a bond, if they make a 2 x on
308
00:13:50,870 --> 00:13:52,309
it, you're getting gross returns.
309
00:13:52,309 --> 00:13:55,394
So your your 2% becomes 4%, for example.
310
00:13:55,394 --> 00:13:56,355
And so that's the 3rd.
311
00:13:56,355 --> 00:13:58,915
And then the final one is is enterprise value
growth.
312
00:13:58,915 --> 00:14:00,355
And so that's really on the back end.
313
00:14:00,355 --> 00:14:04,514
And so in the meantime, you're looking at cash
flow focused returns through carried interest,
314
00:14:04,514 --> 00:14:06,090
balance sheet, and management fees.
315
00:14:06,250 --> 00:14:10,570
Now on the back end, obviously, as the GPsex
firm seeks to sell their stake at some point,
316
00:14:10,570 --> 00:14:14,250
you obviously are hoping for multiple expansion
on the back end, particularly if the firm goes
317
00:14:14,250 --> 00:14:14,649
public.
318
00:14:14,649 --> 00:14:19,725
So if they buy in, let's say, 7 times
distributable earnings, and then in 5 years,
319
00:14:19,725 --> 00:14:23,004
they go public at 20 times, obviously, you're
gonna get a multiple expansion there.
320
00:14:23,004 --> 00:14:26,125
And so that's really where the upside MOEC
comes from on these.
321
00:14:26,125 --> 00:14:30,684
But the the real attractive nature again, and,
again, on the return profile is you get private
322
00:14:30,684 --> 00:14:33,870
credit like returns, but you also get asset
appreciation over time.
323
00:14:33,870 --> 00:14:37,710
So you can still get the private equity like
MOEC while also getting the cash flow from p
324
00:14:37,870 --> 00:14:41,070
from, like, a private credit type style
investing where where you get quarterly
325
00:14:41,070 --> 00:14:41,570
distributions.
326
00:14:41,629 --> 00:14:45,629
They tend to range in the sort of high single
digit to low double digit range, and it's gonna
327
00:14:45,629 --> 00:14:47,149
vary a little bit based on the year.
328
00:14:47,149 --> 00:14:50,384
So, like, right now, you're not seeing a lot of
exits, so carried interest is lower.
329
00:14:50,384 --> 00:14:52,384
But the management fees remain pretty stable.
330
00:14:52,384 --> 00:14:56,065
And so so that's that's how you'd primarily
drive returns here, and that's why people like
331
00:14:56,065 --> 00:14:56,865
the the investments.
332
00:14:56,865 --> 00:15:00,384
And we can talk about some of the pair
downsides of these these structures, but that's
333
00:15:00,384 --> 00:15:03,149
that's ultimately what makes them really
attractive from an upside standpoint.
334
00:15:03,309 --> 00:15:09,149
In terms of the base case for investment into
middle market PE, middle market credit, what's
335
00:15:09,149 --> 00:15:11,790
the MOIC that you're targeting in your
investments today?
336
00:15:11,790 --> 00:15:16,455
When GP stakes, you're looking at, again, I'd
say, like, a a 2a half to 3a half x.
337
00:15:16,615 --> 00:15:20,934
And the the difference between the 2a half and
3a half largely depends on on that multiple
338
00:15:20,934 --> 00:15:21,894
expansion on the exit.
339
00:15:21,894 --> 00:15:25,735
So in the interim, the way you underwrite
these, you know, in most cases, particularly
340
00:15:25,735 --> 00:15:30,695
Blueout, you know, you're looking to get your
your basis back in, say, 6 to 8 years just
341
00:15:30,695 --> 00:15:31,769
based on cash flows.
342
00:15:31,850 --> 00:15:35,850
So the distributions alone get you back to your
basis in, say, 6 to 8 years, and then after
343
00:15:35,850 --> 00:15:37,610
that, you're gonna continue getting cash flows.
344
00:15:37,610 --> 00:15:42,410
So over about a 12 year period, you should
expect to get, say, 2 two x on just your cash
345
00:15:42,410 --> 00:15:42,889
flows.
346
00:15:42,889 --> 00:15:45,914
And then beyond that, it's all about multiple
expansion on the exit.
347
00:15:46,074 --> 00:15:49,995
But, historically, the the exits have come at
much higher multiples, and you do see a pretty
348
00:15:49,995 --> 00:15:51,674
good uplift on the back end from that.
349
00:15:51,674 --> 00:15:54,475
Cash flows being both management fee as well as
carry.
350
00:15:54,475 --> 00:15:54,554
Yeah.
351
00:15:54,554 --> 00:15:57,274
Because the way these these management
companies work, and, ultimately, that's what
352
00:15:57,274 --> 00:15:58,350
you're you're buying a stake in.
353
00:15:58,350 --> 00:16:01,470
You're buying a stake in the management company
of the private equity firm.
354
00:16:01,470 --> 00:16:05,169
You know, that entity, every quarter, they may
have carried interest realizations.
355
00:16:05,389 --> 00:16:07,329
They have management fee, you know,
distribution.
356
00:16:07,389 --> 00:16:09,089
So it's typically one distribution.
357
00:16:09,149 --> 00:16:13,125
It just depends on, you know, what what the mix
is that'll make it larger or smaller.
358
00:16:13,125 --> 00:16:16,325
You know, if a cut firm has a really, really
big exit that quarter, obviously, the carried
359
00:16:16,325 --> 00:16:18,164
interest piece of that's gonna be much higher.
360
00:16:18,325 --> 00:16:22,004
And that's also matters for tax reasons because
the management fee income is largely ordinary
361
00:16:22,004 --> 00:16:25,365
income to investors, at least taxable investors
like us, whereas the carried interest is
362
00:16:25,365 --> 00:16:28,024
typically long term gains as as is the balance
sheet returns.
363
00:16:28,245 --> 00:16:32,959
So let's put aside the multiple expansion that
takes you from 2a half to 3 x.
364
00:16:33,100 --> 00:16:36,959
Deconstruct the 2a half x in terms of the
waterfall.
365
00:16:37,100 --> 00:16:41,100
So how much of that is guaranteed from
management fees?
366
00:16:41,100 --> 00:16:43,995
How much of that is from carry from previous
funds?
367
00:16:43,995 --> 00:16:46,075
How much of that is carry future funds?
368
00:16:46,075 --> 00:16:51,434
A good point to clarify here is when you buy a
GP stake, in in almost every case, you're
369
00:16:51,434 --> 00:16:54,815
buying into all the existing funds as well as
future.
370
00:16:54,980 --> 00:16:58,899
So it's not just perspective, and and that's
really critical because day 1, you're gonna get
371
00:16:58,899 --> 00:17:02,580
a lot of cash flow, and that really mitigates
the j curve for these investments as well,
372
00:17:02,580 --> 00:17:03,779
which makes them pretty appealing.
373
00:17:03,779 --> 00:17:06,914
And and how much how much downside protection
are we talking about?
374
00:17:06,994 --> 00:17:07,075
It
375
00:17:07,075 --> 00:17:11,475
obviously depends on the buy in and where you
are, but most of the models I've seen when when
376
00:17:11,475 --> 00:17:16,755
you test them, as long as that firm raises one
more flagship at roughly the same size or
377
00:17:16,755 --> 00:17:21,150
larger to where they are today, you will get
over a 12 year period almost back to your
378
00:17:21,150 --> 00:17:26,509
basis, so say within, you know, 10% of your
basis, just on management fee income alone.
379
00:17:26,509 --> 00:17:28,750
Just on current and one more fund.
380
00:17:28,750 --> 00:17:29,630
Current and one more fund.
381
00:17:29,630 --> 00:17:33,150
Because once you raise one more fund, then
you've got another 10 years of cash flows that
382
00:17:33,150 --> 00:17:34,694
you can depend on, say, 10 plus
383
00:17:35,014 --> 00:17:35,654
1 plus 1.
384
00:17:35,654 --> 00:17:38,294
That would down to 1 x in the base case model.
385
00:17:38,294 --> 00:17:42,934
And what about in the really unfortunate case
where they're not able to raise another fund?
386
00:17:42,934 --> 00:17:44,054
What's the downside protected?
387
00:17:44,054 --> 00:17:47,815
The management fee revenue really is the secret
sauce there as well because look.
388
00:17:47,815 --> 00:17:52,200
If that firm completely, you know, collapses
and goes under, what what typically happens is
389
00:17:52,200 --> 00:17:53,819
they're gonna wind down the fund.
390
00:17:53,960 --> 00:17:56,440
You're gonna get, you know, all the things that
are already in the ground.
391
00:17:56,440 --> 00:17:57,319
They're gonna cash flow.
392
00:17:57,319 --> 00:17:58,460
They're gonna have realizations.
393
00:17:58,519 --> 00:18:02,599
So, you know, if the firm has a a, you know,
corporate shakeup, for example, the partners
394
00:18:02,599 --> 00:18:06,414
have a falling out, whatever it may be, you
know, you have a a, you know, a fraud issue,
395
00:18:06,414 --> 00:18:07,215
something like that.
396
00:18:07,215 --> 00:18:09,715
Obviously, you're still gonna realize what's
there.
397
00:18:09,855 --> 00:18:14,894
Typically, l p LPAs have a provision where, you
know, the l p a the LPs can appoint a a manager
398
00:18:14,894 --> 00:18:16,255
to run the fund and wind it down.
399
00:18:16,255 --> 00:18:18,595
We're still gonna get our our interest in that
economically.
400
00:18:18,654 --> 00:18:23,799
And so in that case, you get sort of a 12 year
wind down, right, on the management fees and
401
00:18:23,799 --> 00:18:27,320
the carry of existing, and you'll get
effectively back to your basis.
402
00:18:27,320 --> 00:18:31,160
Like I said, as long as that firm raises one
more fund, you're probably in the mind.
403
00:18:31,160 --> 00:18:31,400
Right?
404
00:18:31,400 --> 00:18:35,505
Because assuming you still hit carry on all the
funds you're you're in today that are already
405
00:18:35,505 --> 00:18:38,545
in the ground and then one more, you're pretty
much money good.
406
00:18:38,545 --> 00:18:41,825
You mentioned the tax consequences of the asset
class.
407
00:18:41,825 --> 00:18:41,984
Mhmm.
408
00:18:41,984 --> 00:18:45,525
Is there specific LP base that prefers GP
stakes?
409
00:18:45,585 --> 00:18:49,490
And are there certain LP bases that will never
do GP stakes?
410
00:18:49,630 --> 00:18:53,710
My perspective on GP space is a little bit
unique, but I I've seen a very, very high
411
00:18:53,710 --> 00:18:57,549
demand from high net worth and family office
world for this asset class.
412
00:18:57,549 --> 00:18:59,835
So institutional investors love it.
413
00:19:00,075 --> 00:19:01,755
Large family offices love this space.
414
00:19:01,755 --> 00:19:06,234
Some of the biggest mega family offices in the
country, including Sovereign's globally, they
415
00:19:06,234 --> 00:19:07,034
love this asset class.
416
00:19:07,034 --> 00:19:10,554
They invest heavily in this asset class, but
it's also high net worth individuals as well.
417
00:19:10,554 --> 00:19:14,154
So you see it across the board, in in my
opinion, and that and that's why it's scaled
418
00:19:14,154 --> 00:19:14,789
pretty quickly here.
419
00:19:14,869 --> 00:19:18,630
Because, again, you get the the cash flows as
well as the upside appreciation opportunity,
420
00:19:18,630 --> 00:19:21,049
and and people really love that that, that mix.
421
00:19:21,190 --> 00:19:25,769
Everybody loves 2 and a half to 3 x 3 and a
half x returns with downside protection.
422
00:19:26,150 --> 00:19:26,549
Hey.
423
00:19:26,549 --> 00:19:28,730
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424
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That's z.carta.comforward/10xpod.
434
00:20:03,765 --> 00:20:07,044
Tell me about the role of investment bankers in
GP Stakes.
435
00:20:07,044 --> 00:20:09,365
As I mentioned earlier, this is a really small
world.
436
00:20:09,365 --> 00:20:13,845
And I won't name names, but there there's
effectively one bank, maybe 2, that shop all
437
00:20:13,845 --> 00:20:15,180
these deals, if they are bank.
438
00:20:15,340 --> 00:20:18,380
And then there's one law firm that does
effectively all of them.
439
00:20:18,380 --> 00:20:21,980
There may be 2 or 3 others that may be on the
other side when there's a conflict, but it's a
440
00:20:21,980 --> 00:20:23,519
small universe of service providers.
441
00:20:23,580 --> 00:20:27,894
And over time, the structural protections that
they've baked in these have gotten better, and
442
00:20:27,894 --> 00:20:31,575
they've become kind of an industry standard now
because, again, you have the same law firm
443
00:20:31,575 --> 00:20:33,974
doing all the deals, and you have the same bank
shopping in.
444
00:20:33,974 --> 00:20:38,775
But especially at the large cap level, you've
got, you know, Blue Owl is overwhelming, you
445
00:20:38,775 --> 00:20:40,134
know, behemoth in the space.
446
00:20:40,134 --> 00:20:44,309
They've 60% of the deals in this space that
have been done have been done by Blue Owl.
447
00:20:44,309 --> 00:20:46,970
So they're they're overwhelming the 800 pound
grill in the room.
448
00:20:47,109 --> 00:20:51,909
But in in their case, a lot of times, these are
long term conversations going, you know, a
449
00:20:51,909 --> 00:20:53,109
decade or more long.
450
00:20:53,109 --> 00:20:54,884
And so a lot of times, there's no intermediary.
451
00:20:54,884 --> 00:20:55,045
Right?
452
00:20:55,045 --> 00:20:58,085
And so, eventually, once the deal gets done,
they'll bring in the banks, but these are
453
00:20:58,085 --> 00:20:59,865
typically not auction processes.
454
00:21:00,164 --> 00:21:04,085
Now today, you're seeing more of that, but,
historically, they're very relationship based.
455
00:21:04,085 --> 00:21:07,845
And it's, again, it's a small universe where
even if there is an auction, you probably got 2
456
00:21:07,845 --> 00:21:11,619
or 3 major players bidding on these these, you
know, stakes.
457
00:21:11,680 --> 00:21:15,759
What are the main mistakes that investors make
when investing to GP Stakes today?
458
00:21:15,759 --> 00:21:15,920
Yeah.
459
00:21:15,920 --> 00:21:16,820
That's a great question.
460
00:21:17,119 --> 00:21:21,039
When I talk to our investor base, I always try
to really emphasize these are unique
461
00:21:21,039 --> 00:21:23,934
investments, and and they are not like other
things you invest in.
462
00:21:23,934 --> 00:21:27,875
The the number one thing you have to understand
is they are structured as perpetual
463
00:21:27,934 --> 00:21:28,434
investments.
464
00:21:28,494 --> 00:21:29,375
They have no in life.
465
00:21:29,375 --> 00:21:30,575
They're not 10 year funds.
466
00:21:30,575 --> 00:21:32,095
They're not 10 plus 1 plus 1.
467
00:21:32,095 --> 00:21:33,875
They're they're technically perpetual.
468
00:21:33,934 --> 00:21:38,609
Now Blue Isle in particular and others have
have gotten very innovative in ways to provide
469
00:21:38,609 --> 00:21:40,930
liquidity without actually exiting the
positions.
470
00:21:41,009 --> 00:21:44,049
But that being said, you need to understand
that their structure is perpetual.
471
00:21:44,049 --> 00:21:48,210
The reality is a private equity firm, very
sophisticated financial investor, is not gonna
472
00:21:48,210 --> 00:21:52,825
sell a stake in their business that they know
or they think you may go flip in 5 years to
473
00:21:52,825 --> 00:21:54,984
someone that that they didn't, you know, choose
themselves.
474
00:21:54,984 --> 00:21:58,924
And so for that reason, the industry standard
has become perpetual type vehicles.
475
00:21:59,304 --> 00:22:02,744
Although, again, they've gotten very creative
with certain securitizations and things of that
476
00:22:02,744 --> 00:22:04,470
nature to provide liquidity in the interim.
477
00:22:04,630 --> 00:22:09,509
What are the valuation metrics that you see
used to value stakes today?
478
00:22:09,509 --> 00:22:14,230
So private equity as an asset class
historically has been undervalued in the public
479
00:22:14,230 --> 00:22:16,994
markets, and the main reason that is carried
interest.
480
00:22:16,994 --> 00:22:19,474
A lot of public investors don't understand
carried interest.
481
00:22:19,474 --> 00:22:21,394
They don't understand unrealized carried
interest.
482
00:22:21,394 --> 00:22:24,914
And as you and I know, like, at Blackstone,
they're gonna have a lot of realizations every
483
00:22:24,914 --> 00:22:25,154
year.
484
00:22:25,154 --> 00:22:26,595
They have a very diversified business.
485
00:22:26,595 --> 00:22:27,555
They're gonna see a lot of that.
486
00:22:27,555 --> 00:22:34,450
And so in 2017, when there was tax reform, a
lot of the public PE firms converted to c corps
487
00:22:34,450 --> 00:22:35,990
from publicly traded partnerships.
488
00:22:36,049 --> 00:22:39,890
And so the the metrics have changed as a result
of that, but but that was a very advantageous
489
00:22:39,890 --> 00:22:43,970
to those firms, and the private markets have
effectively started reporting the same way.
490
00:22:43,970 --> 00:22:47,845
And so the multiple you you tend to see used to
be economic net income, now it's distributable
491
00:22:47,845 --> 00:22:49,444
earnings, and that's a non GAAP measure.
492
00:22:49,444 --> 00:22:53,044
But, effectively, it's the cash realization,
you know, in that year.
493
00:22:53,044 --> 00:22:56,484
And so that's management fees, carried
interest, you know, etcetera.
494
00:22:56,484 --> 00:22:57,605
And there are some offsets to that.
495
00:22:57,605 --> 00:22:59,044
I won't I won't get too in the weeds on that.
496
00:22:59,044 --> 00:23:00,984
But, effectively, it's a multiple on DE.
497
00:23:01,125 --> 00:23:04,690
And what's amazing is as long as I've been
investing in this space, the multiples have
498
00:23:04,690 --> 00:23:05,970
stayed remarkably consistent.
499
00:23:05,970 --> 00:23:10,210
They range from, say, 6 times DE all the way up
to, say, 9 times.
500
00:23:10,210 --> 00:23:14,615
In the public markets, those firms are today
trading, you know, anywhere in the sort of high
501
00:23:14,615 --> 00:23:16,695
teens to to mid twenties on a DI basis.
502
00:23:16,695 --> 00:23:20,455
So there there's a pretty big amount of
arbitrage to be had here, particularly if these
503
00:23:20,455 --> 00:23:23,815
firms end up going public like a CVC, did last
year.
504
00:23:23,815 --> 00:23:28,615
I I was speaking with somebody in the space
previously, and he mentioned that every GP
505
00:23:28,615 --> 00:23:31,789
needs to either sell a stake or go public at
some point.
506
00:23:31,789 --> 00:23:33,809
I think it depends on what the GP wants.
507
00:23:34,109 --> 00:23:38,430
In today's world, the reality is the biggest
trend you've seen is the big get bigger, and
508
00:23:38,430 --> 00:23:40,450
more capital is going to the bigger firms.
509
00:23:40,509 --> 00:23:46,029
Since the pullback from, say, 2022 forward,
that has been an exacerbated trend.
510
00:23:46,029 --> 00:23:50,214
So So the biggest managers have been able to
continue raising big funds, and a lot of the
511
00:23:50,214 --> 00:23:51,335
other managers have struggled.
512
00:23:51,335 --> 00:23:56,154
So if you're a $5,000,000,000 AUM manager, you
really need to get to 10 quickly.
513
00:23:56,214 --> 00:24:00,534
That that 5 space is tough to play in because
more capital, more LP capital is going to
514
00:24:00,534 --> 00:24:02,730
bigger firms, and so you wanna get bigger.
515
00:24:02,730 --> 00:24:05,230
So the bigger getting bigger, that's driving a
lot of this.
516
00:24:05,609 --> 00:24:07,769
That's why Blue Isles had so much success.
517
00:24:07,769 --> 00:24:09,690
They primarily played in the large cap space.
518
00:24:09,690 --> 00:24:14,650
Now that being said, now the middle market
space in the GP stakes landscape is really
519
00:24:14,650 --> 00:24:15,404
widening a lot.
520
00:24:15,404 --> 00:24:17,724
You have more firms coming in there buying more
stakes.
521
00:24:17,724 --> 00:24:20,845
And so I do think you're gonna see a little bit
different story with those.
522
00:24:20,845 --> 00:24:24,205
We can touch on group middle markets GP stakes
versus large cap because they are quite
523
00:24:24,205 --> 00:24:24,705
different.
524
00:24:24,765 --> 00:24:28,445
The reality is there's more capital flowing in
the space, and so I think more people are
525
00:24:28,445 --> 00:24:30,450
needing to do deals, wanting to do deals.
526
00:24:30,609 --> 00:24:34,210
And the reality is they have to do that to
compete, especially if you're above about a
527
00:24:34,210 --> 00:24:37,889
5,000,000,000 AUM range because you're just
gonna get eaten alive by the other firms that
528
00:24:37,889 --> 00:24:41,649
are adding credit arms, that are raising bigger
funds, that may and they have a large cap fund.
529
00:24:41,649 --> 00:24:43,275
They're launching a mid middle market fund.
530
00:24:43,275 --> 00:24:45,515
They're launching a small cap fund, for
example.
531
00:24:45,515 --> 00:24:47,755
So in order to compete, you've gotta be there.
532
00:24:47,755 --> 00:24:51,914
Are middle market GP Stakes deals structured
differently than large cap?
533
00:24:51,914 --> 00:24:52,075
No.
534
00:24:52,075 --> 00:24:52,474
They're not.
535
00:24:52,474 --> 00:24:55,275
But I think the risks are different and the
return profiles are different.
536
00:24:55,275 --> 00:24:59,730
So as I mentioned earlier, the management fee
revenues in the large cap space are are are a
537
00:24:59,730 --> 00:25:00,849
huge part of the equation.
538
00:25:00,849 --> 00:25:01,890
They're super sticky.
539
00:25:01,890 --> 00:25:06,369
They have very institutional LP basis, and so
you can really underwrite that well, and it's
540
00:25:06,369 --> 00:25:07,029
very dependable.
541
00:25:07,089 --> 00:25:09,650
It's also a bigger portion of the returns on
average.
542
00:25:09,650 --> 00:25:13,845
Whereas in the middle market space, the firms
don't have as much margin, much leverage on
543
00:25:13,845 --> 00:25:14,325
that end.
544
00:25:14,325 --> 00:25:17,365
And so, you know, the management fees are a
really important component, but they're not
545
00:25:17,365 --> 00:25:22,085
gonna make up for example, in the large cap
space, it may be a 10% annual yield, cash on
546
00:25:22,085 --> 00:25:25,230
cash, whereas in the middle market space, it
may be 6 to 7, for example.
547
00:25:25,309 --> 00:25:28,910
And so the performance in the middle market is
more important, not only because it's a bigger
548
00:25:28,910 --> 00:25:33,789
driver of of the return makeup of the firm,
but, additionally, because those firms are less
549
00:25:33,789 --> 00:25:37,710
established, they have less, they're they're
they're just not named brands yet in a lot of
550
00:25:37,710 --> 00:25:38,204
instances.
551
00:25:38,204 --> 00:25:41,904
And so the performance in order for them to
raise new funds is really critical.
552
00:25:42,044 --> 00:25:45,644
So the management fee is is important, just not
quite as important for those firms.
553
00:25:45,644 --> 00:25:50,144
The other thing too is in the large cap space,
those firms, by and large, now have diversified
554
00:25:50,204 --> 00:25:54,480
partner bases, where in the middle market, you
may have one key man, you know, founder led
555
00:25:54,480 --> 00:25:56,640
business, and so you have a lot more business
risk.
556
00:25:56,640 --> 00:26:00,480
You know, a lot more key man risk, whereas, you
know, large cap fund may have 50 managing
557
00:26:00,480 --> 00:26:03,680
directors, right, that that are all really
capable, and and, ultimately, they have a
558
00:26:03,680 --> 00:26:05,025
management committee and things like
559
00:26:05,184 --> 00:26:10,144
Have you seen any preferred equity deals or any
other types of downside protections in the
560
00:26:10,144 --> 00:26:11,845
middle market GP Stakes deals?
561
00:26:11,984 --> 00:26:14,785
That that's a new trend you're seeing, and I
think it's gonna be really interesting.
562
00:26:14,785 --> 00:26:19,759
So what what's happened over the last, we'll
say, 3, 4 years is a lot of firms, they started
563
00:26:19,759 --> 00:26:24,660
as GP stakes firms, and now they're moving into
what a lot of them are calling GP Solutions
564
00:26:24,799 --> 00:26:25,279
funds.
565
00:26:25,279 --> 00:26:30,559
And I view this as the evolution of just the
securitization of the GPs and private equity,
566
00:26:30,559 --> 00:26:31,680
which makes a ton of sense.
567
00:26:31,680 --> 00:26:35,424
It's one of the most sophisticated financial
markets, you know, in the world.
568
00:26:35,424 --> 00:26:39,825
And yet, like, for the 1st 40 years of its
existence or, say, 30, the GPs were pretty
569
00:26:39,825 --> 00:26:40,325
straightforward.
570
00:26:40,384 --> 00:26:40,625
Right?
571
00:26:40,625 --> 00:26:42,785
They didn't have a lot of complexity in their
GPs.
572
00:26:42,785 --> 00:26:43,345
That's changing.
573
00:26:43,345 --> 00:26:47,069
And so today now with these solutions funds
that you are seeing in the middle market,
574
00:26:47,069 --> 00:26:48,029
Hunter Point has a fund.
575
00:26:48,029 --> 00:26:49,309
I think Bon Accord has 1.
576
00:26:49,309 --> 00:26:53,389
Their the firm, Arktos, has 1 in that space,
and then Blue Isle has 1 as well now.
577
00:26:53,389 --> 00:26:55,149
They they do NAV lending.
578
00:26:55,149 --> 00:26:57,950
They're doing structured preferred equity type
type deals.
579
00:26:57,950 --> 00:27:01,630
And so what they're all trying to be now is not
just a GP equity solution.
580
00:27:01,630 --> 00:27:07,095
They're trying to be a one stop GP solution
firm for every private equity, private credit
581
00:27:07,095 --> 00:27:10,455
manager, then go to them for for debt, equity,
preferred, whatever it may be.
582
00:27:10,455 --> 00:27:14,055
So that's that's the evolution you're seeing in
the market, both at the large cap level and in
583
00:27:14,055 --> 00:27:14,775
the middle market.
584
00:27:14,775 --> 00:27:18,375
How much hand holding do the GP Stakes funds do
to these GPs?
585
00:27:18,375 --> 00:27:19,470
Are they sitting on boards?
586
00:27:19,470 --> 00:27:20,750
Are they helping with governance?
587
00:27:20,750 --> 00:27:21,630
Talk to me about that.
588
00:27:21,630 --> 00:27:23,650
They they add a ton of value, we'll say.
589
00:27:23,710 --> 00:27:25,410
They don't have a lot of of governance.
590
00:27:25,630 --> 00:27:28,109
They do have structural protections in place.
591
00:27:28,109 --> 00:27:32,744
A lot of them, they have they have put rights,
negotiated in in the instance of, you know,
592
00:27:32,744 --> 00:27:34,904
fraud, key man events, things of that nature.
593
00:27:34,904 --> 00:27:37,085
So that that that's a big protection we have.
594
00:27:37,545 --> 00:27:41,305
Additionally, you know, when when you look at
the management company, expenses are a big part
595
00:27:41,305 --> 00:27:41,545
of this.
596
00:27:41,545 --> 00:27:44,265
And so in a lot of ways, they have structural
protections that, hey.
597
00:27:44,265 --> 00:27:48,779
Like, you know, if you wanna, you know, fly
around on corporate jets all over the world and
598
00:27:48,839 --> 00:27:52,039
spend a fortune on, you know, huge parties for
the firm, that's fine.
599
00:27:52,039 --> 00:27:54,679
That comes out of your bucket, not ours from an
expense load standpoint.
600
00:27:54,679 --> 00:27:57,880
So a lot of times they have margin struck you
know, margin protections baked in there.
601
00:27:57,880 --> 00:27:58,919
So you do things like that.
602
00:27:58,919 --> 00:28:01,515
But other than that, they're passive economic
partners.
603
00:28:01,595 --> 00:28:06,154
I'd say that they add a lot of value, though,
in areas like, like Blue Isle has what they
604
00:28:06,154 --> 00:28:07,775
call their business services platform.
605
00:28:07,994 --> 00:28:09,855
The middle market teams have them as well.
606
00:28:09,914 --> 00:28:15,515
So, you know, you really have a bird's eye view
of the the industry when you own 20, 30, 40
607
00:28:15,515 --> 00:28:15,914
stakes.
608
00:28:15,914 --> 00:28:22,330
You can see, you know, comp trends, HR trends,
ESG trends, strategic trends, or people adding
609
00:28:22,330 --> 00:28:22,890
credit arms.
610
00:28:22,890 --> 00:28:24,570
Are they you know, what are they doing in their
firms?
611
00:28:24,570 --> 00:28:29,210
And so for a lot of reasons, they they add a
lot of value, in addition to providing us as
612
00:28:29,210 --> 00:28:31,845
LPs in these vehicles with a lot of structural
protections as well.
613
00:28:31,845 --> 00:28:32,244
I've had
614
00:28:32,244 --> 00:28:37,845
multiple people tell me that the key value add
that GP Stakes Fund does, say, 90 plus percent
615
00:28:37,845 --> 00:28:39,544
is its fundraising assistance.
616
00:28:39,845 --> 00:28:40,884
How do you feel about that?
617
00:28:40,884 --> 00:28:42,244
I think that's a huge part of it.
618
00:28:42,404 --> 00:28:45,210
And and we at Legacy 9 benefit greatly from
that.
619
00:28:45,289 --> 00:28:50,089
So for example, a lot of times, if a manager's
doing a large co investment that they need more
620
00:28:50,089 --> 00:28:54,250
capital that that than maybe, you know,
available to them in their traditional LP base,
621
00:28:54,250 --> 00:28:56,250
they may call it Blue Owl or a Hunter Point and
say, hey.
622
00:28:56,250 --> 00:28:58,125
Do you have any LPs that do a lot of co invest?
623
00:28:58,125 --> 00:28:59,644
And we get calls like that all the time.
624
00:28:59,644 --> 00:29:01,724
And and, again, I'm not talking about a GP take
co invest.
625
00:29:01,724 --> 00:29:04,444
I'm talking about, you know, a deal level co
invest in one of their funds.
626
00:29:04,444 --> 00:29:08,684
You know, additionally, I'll give an example
where, you know, there was a portfolio firm of
627
00:29:08,684 --> 00:29:12,820
of 100 points in the middle market space, and
they were launching a very unique strategy.
628
00:29:12,960 --> 00:29:13,940
It was a JV.
629
00:29:14,000 --> 00:29:17,600
It wasn't a a a full new strategy, and it was a
small LP base.
630
00:29:17,600 --> 00:29:21,519
And even though we weren't an LP of that fund,
you know, 100 Point directed them to us as a
631
00:29:21,519 --> 00:29:25,644
prospective investor because they knew that we
had, you know, a taste for that kind of
632
00:29:25,644 --> 00:29:28,205
investments, and we have some internal
expertise in that space.
633
00:29:28,205 --> 00:29:32,525
And so, you know, we get lots of good cap and
show lots of good deal flow from the underlying
634
00:29:32,525 --> 00:29:35,105
managers, and and it just creates a much warmer
relationship.
635
00:29:35,404 --> 00:29:40,150
And so one of the primary motivators that I
have as an LP in GP Stakes is I just get to
636
00:29:40,150 --> 00:29:42,230
know a much larger universe of managers.
637
00:29:42,230 --> 00:29:46,710
And, historically, I've ended up doing the vast
majority of our allocations through those
638
00:29:46,710 --> 00:29:49,670
networks because you get a lot a lot better
diligence protection.
639
00:29:49,670 --> 00:29:50,549
You know you know the team.
640
00:29:50,549 --> 00:29:53,525
You know that, you know, know, whether it's
Blue Isle, a 100 point, Bonicore, whatever it
641
00:29:53,525 --> 00:29:55,605
is, they've done really good work in the GP
side.
642
00:29:55,605 --> 00:29:58,164
They've taken care of a lot of the business
risk concerns, things like that.
643
00:29:58,164 --> 00:30:01,445
So it gives you a little bit of an advantage
and a little bit of a head start when you're
644
00:30:01,445 --> 00:30:03,305
conducting due diligence on these managers.
645
00:30:03,365 --> 00:30:08,490
Speaking of due diligence, how long are these
diligence process on the GPs that these funds
646
00:30:08,490 --> 00:30:08,889
do?
647
00:30:08,889 --> 00:30:11,849
Like I said, some of these can be years years
long processes.
648
00:30:11,849 --> 00:30:16,490
I know one manager that that has been talking
with one of the shops for a decade now, for
649
00:30:16,490 --> 00:30:16,889
example.
650
00:30:16,889 --> 00:30:19,450
So a lot of times, it's it's we know we wanna
do one.
651
00:30:19,450 --> 00:30:21,130
We know that it's gonna make sense for our
business.
652
00:30:21,130 --> 00:30:22,315
It just has to be the right time.
653
00:30:22,315 --> 00:30:24,154
And so that that's typically what drives it.
654
00:30:24,154 --> 00:30:27,434
I'd say once you get going on them, the
diligence process could be 6 months
655
00:30:27,434 --> 00:30:27,994
to a year.
656
00:30:27,994 --> 00:30:28,955
Why is it that long?
657
00:30:28,955 --> 00:30:29,674
Unpack that.
658
00:30:29,674 --> 00:30:33,755
You know, when you're when you're looking at a
a business like that, not only are you
659
00:30:33,755 --> 00:30:36,269
diligencing the manager, but you're also
looking at the funds.
660
00:30:36,269 --> 00:30:39,869
If you're if you're, you know, trying to get
come to evaluation, you obviously have to look
661
00:30:39,869 --> 00:30:41,150
at, well, what's the carry gonna be?
662
00:30:41,150 --> 00:30:44,109
And if you wanna know what the carry is gonna
be, you have to look at all the underlying
663
00:30:44,109 --> 00:30:45,549
companies that are gonna generate carry.
664
00:30:45,549 --> 00:30:49,575
And so, you know, it gets pretty granular in
there to to build back up to evaluation, and
665
00:30:49,575 --> 00:30:53,414
that just takes a lot more time than, say,
you're looking at 1 manager or or, you know,
666
00:30:53,414 --> 00:30:54,615
one fund or one company.
667
00:30:54,615 --> 00:30:55,575
It's just a different process.
668
00:30:55,575 --> 00:31:00,134
And so there's just an an additional layer of
complexity that comes along with that in order
669
00:31:00,134 --> 00:31:01,755
to get to a really sound valuation.
670
00:31:01,815 --> 00:31:04,154
When do banks get involved in these long
processes?
671
00:31:04,369 --> 00:31:07,730
A lot of times, the firms are all talking in
advance, and, obviously, they're they're very
672
00:31:07,730 --> 00:31:11,890
sophisticated financial sponsors that they're
gonna hire good counsel both on the the
673
00:31:11,890 --> 00:31:13,650
advisory banking side and the legal side.
674
00:31:13,650 --> 00:31:16,210
But, you know, they're involved throughout the
process.
675
00:31:16,210 --> 00:31:18,765
Again, a lot of times, they'll you know, a
process will happen.
676
00:31:18,765 --> 00:31:20,365
It's just a very small universe.
677
00:31:20,365 --> 00:31:24,525
It may be 2, 3, 4 bidders, you know, and it's
all the GP Stake's names.
678
00:31:24,525 --> 00:31:28,285
Occasionally, you'll get a sovereign that plays
in the space, maybe an insurance company here
679
00:31:28,285 --> 00:31:31,920
and there, but it's a pretty small universe
that you're gonna see bidding on these deals.
680
00:31:32,000 --> 00:31:32,200
What are
681
00:31:32,200 --> 00:31:35,680
the main mistakes that investors make when
investing into GP Stakes?
682
00:31:35,680 --> 00:31:39,840
I think the primary drivers is people think
that these are uncorrelated to public markets.
683
00:31:39,840 --> 00:31:43,759
They are lowly correlated in some ways,
particularly management fees because those are
684
00:31:43,759 --> 00:31:44,259
contractual.
685
00:31:44,400 --> 00:31:45,644
They have to be paid out.
686
00:31:45,884 --> 00:31:49,244
The only way they're really gonna be correlated
is if you have, like, an o eight type scenario
687
00:31:49,244 --> 00:31:52,525
where your LP base is really, really illiquid
or they're having crises.
688
00:31:52,684 --> 00:31:55,325
But that being said, you know, carried interest
is very cyclical.
689
00:31:55,325 --> 00:31:59,404
So as we've seen in 2023 and 2024, carried
interest is way, way down.
690
00:31:59,404 --> 00:32:02,430
DPI across the alternative asset world is way,
way down.
691
00:32:02,430 --> 00:32:04,289
And, obviously, that's gonna drive down
distributions.
692
00:32:04,509 --> 00:32:08,509
I'll say, though, the benefit of private equity
doesn't mean necessarily that those returns are
693
00:32:08,509 --> 00:32:09,009
bad.
694
00:32:09,150 --> 00:32:10,269
It just means they're delayed.
695
00:32:10,269 --> 00:32:13,549
And so as long as, you know, that private
equity firm is gonna sell that company in a
696
00:32:13,549 --> 00:32:17,684
year or 2, maybe, you know, a lower IRR, but,
ultimately, the MOIC, which is gonna drive the
697
00:32:17,684 --> 00:32:20,804
carry as long as they're above the benchmark,
you know, that's still gonna be there.
698
00:32:20,804 --> 00:32:24,565
And so there is a there is a low, a level of
optionality there, but it does have
699
00:32:24,565 --> 00:32:25,065
correlation.
700
00:32:25,125 --> 00:32:27,845
I think a lot of people, they they overlook
that aspect of it.
701
00:32:27,845 --> 00:32:31,829
And, obviously, some people underestimate the
long term perpetual nature of it as well.
702
00:32:31,909 --> 00:32:34,069
How fragmented is the LP base?
703
00:32:34,069 --> 00:32:39,589
Is it also a very club type deal where a few
LPs gobble up a lot of these GP stakes?
704
00:32:39,589 --> 00:32:43,029
There are definitely some huge players,
particularly on the coinvest side.
705
00:32:43,029 --> 00:32:47,615
And so we've we've been active coinvestors
alongside GP Sticks firms, both at Legacy Knide
706
00:32:47,615 --> 00:32:49,295
and and prior at CAS.
707
00:32:49,295 --> 00:32:51,855
And, ultimately, you do see the same faces
there.
708
00:32:52,015 --> 00:32:55,134
You have some some pensions from other parts of
the world that get engaged here.
709
00:32:55,134 --> 00:32:57,775
There are a couple of mega family offices that
get engaged here.
710
00:32:57,775 --> 00:33:01,039
Couple state funds are are very active in this
space.
711
00:33:01,039 --> 00:33:02,640
So you do see some of the same players.
712
00:33:02,640 --> 00:33:07,200
And what's interesting is, again, considering,
you know, how large the asset class has become,
713
00:33:07,200 --> 00:33:09,279
it still is a very, very small ecosystem.
714
00:33:09,279 --> 00:33:13,484
And so as a result, you know, Legacy Knight, we
see deal flow in the space that, you know, in
715
00:33:13,484 --> 00:33:17,244
any other asset class, a firm of our size and
and maturity is not gonna see.
716
00:33:17,244 --> 00:33:20,045
But it's just because a lot of LPs don't know
how to diligence these deals.
717
00:33:20,045 --> 00:33:21,005
You know, they've never done them.
718
00:33:21,005 --> 00:33:25,565
And so so I think there is a a level of
advantage by by having expertise in this space,
719
00:33:25,565 --> 00:33:27,450
and that's why the universe has stayed pretty
small.
720
00:33:27,450 --> 00:33:28,990
It's q 4 2024.
721
00:33:29,609 --> 00:33:31,769
What's the arb in GP Stakes today?
722
00:33:31,769 --> 00:33:34,669
What's the best opportunity to invest into GP
Stakes?
723
00:33:34,730 --> 00:33:35,470
Great question.
724
00:33:35,690 --> 00:33:39,230
I am really excited about the we'll call it the
upper middle market firms.
725
00:33:39,369 --> 00:33:41,789
Because what's happened, you've seen the large
cap managers.
726
00:33:41,849 --> 00:33:42,615
They've all scaled.
727
00:33:42,615 --> 00:33:45,815
You've seen these firms grow tremendously over
the last decade.
728
00:33:45,815 --> 00:33:47,654
A lot of that was zerp driven, of course.
729
00:33:47,654 --> 00:33:51,494
But I think the days of you seeing, like, a
Clear Lake Capital where they were at
730
00:33:51,494 --> 00:33:54,375
7,000,000,000 when they did a state
transaction, now they're at 70.
731
00:33:54,375 --> 00:33:58,490
You're not gonna see a ton of those, in my
opinion, at least if interest rates remain
732
00:33:58,490 --> 00:33:59,210
pretty high.
733
00:33:59,210 --> 00:34:01,549
I mean, the asset classes become a bit more
saturated.
734
00:34:01,609 --> 00:34:05,369
But that being said, I think you are gonna see
a real good growth story with some of these
735
00:34:05,369 --> 00:34:07,529
middle market managers that are that are
scaling.
736
00:34:07,529 --> 00:34:08,570
And so let me define that.
737
00:34:08,570 --> 00:34:12,670
I'm not talking about a middle market manager
or lower middle market doing, you know, buyouts
738
00:34:12,785 --> 00:34:16,465
in the sort of 6, 7 times EBITDA, 50 to a
$100,000,000 inch.
739
00:34:16,465 --> 00:34:16,704
Right?
740
00:34:16,704 --> 00:34:17,684
That's not that scalable.
741
00:34:17,744 --> 00:34:19,985
It's firms that are on fund 1, fund 2.
742
00:34:19,985 --> 00:34:23,585
They're they're raising multibillion dollar
funds at that stage, but they haven't hit that
743
00:34:23,585 --> 00:34:26,164
AUM level to where they're truly global
institutional.
744
00:34:26,545 --> 00:34:28,619
So I think that's really interesting play.
745
00:34:29,019 --> 00:34:31,980
And and the other one the reason why I think
the middle market is really compelling,
746
00:34:31,980 --> 00:34:35,900
particularly on the private credit side, I'll
say, is because one of the growth trends here
747
00:34:35,900 --> 00:34:38,699
has been private equity managers buying private
credit teams.
748
00:34:38,699 --> 00:34:41,980
General Atlantic bought one last year from 100
Point, for example.
749
00:34:41,980 --> 00:34:43,039
That was a good transaction.
750
00:34:43,099 --> 00:34:47,394
And you're seeing this because as as large cap
managers wanna diversify their asset base, the
751
00:34:47,394 --> 00:34:51,875
middle market firms have an exit strategy that
that the large caps don't, which is selling to
752
00:34:51,875 --> 00:34:53,795
strategics, you know, and selling to other
managers.
753
00:34:53,795 --> 00:34:57,715
And so you don't see as much m and a at the
large cap space between themselves, but you are
754
00:34:57,715 --> 00:35:00,900
seeing large cap managers buying smaller credit
manager.
755
00:35:00,900 --> 00:35:05,300
Maybe it's a large cap buyout shop buying, a
middle market team if they integrate well, and
756
00:35:05,300 --> 00:35:06,019
things like that.
757
00:35:06,019 --> 00:35:09,219
So I think the middle market's a really
attractive opportunity, you know, not only
758
00:35:09,219 --> 00:35:13,619
because it's just so huge, probably about 4,000
firms, but also because I think they have a
759
00:35:13,619 --> 00:35:14,864
much clearer picture.
760
00:35:14,864 --> 00:35:18,465
Unlike at the at the large cap space, it's
still not super clearly defined.
761
00:35:18,465 --> 00:35:21,184
At a large cap is basically go public or hold.
762
00:35:21,184 --> 00:35:21,425
Yeah.
763
00:35:21,425 --> 00:35:24,545
And, I mean, the the they've done some creative
things, and we can touch on that whenever you
764
00:35:24,545 --> 00:35:25,025
want to.
765
00:35:25,025 --> 00:35:29,369
But, you know, for example, like, Blue Isle
Fund 3, we have all of our capital back in
766
00:35:29,369 --> 00:35:30,570
distributions at this point.
767
00:35:30,570 --> 00:35:34,730
They've done, securitization, where they issue,
you know, collateralized notes.
768
00:35:34,730 --> 00:35:39,449
Insurance buyers love that product, and that
can be a 20 or 30% distribution on invested
769
00:35:39,449 --> 00:35:39,849
capital.
770
00:35:39,849 --> 00:35:41,204
So that's a pretty chunky deal.
771
00:35:41,204 --> 00:35:43,045
You can sell portions of of a firm.
772
00:35:43,045 --> 00:35:47,765
Blue House sold, half of their stake in Silver
Lake to Mubadala, for example, a couple years
773
00:35:47,765 --> 00:35:48,005
ago.
774
00:35:48,005 --> 00:35:49,285
That was a good partial exit.
775
00:35:49,285 --> 00:35:54,425
So there there are some transactions happening,
but, again, the the public market has
776
00:35:54,485 --> 00:35:57,199
historically not been that great.
777
00:35:57,659 --> 00:36:02,539
Peters Hill, most prominently, the Goldman
Sachs GP Sake strategy, that has not traded
778
00:36:02,539 --> 00:36:04,539
particularly well in London over the last
couple of years.
779
00:36:04,539 --> 00:36:08,059
And I think that that poor trading, although it
it has some hedge funds and some things that
780
00:36:08,059 --> 00:36:10,664
make it a little bit different, but it hasn't
traded particularly well.
781
00:36:10,664 --> 00:36:13,864
I think that has limited the other firms from
wanting to do something like that.
782
00:36:13,864 --> 00:36:18,025
When I say go public, I'm talking about taking
the portfolio public, not a single name.
783
00:36:18,025 --> 00:36:19,164
You do see IPOs.
784
00:36:19,864 --> 00:36:21,545
CBC is the most recent example.
785
00:36:21,545 --> 00:36:25,960
You probably got some other ones coming up soon
where blew out a stake, and then that firm went
786
00:36:25,960 --> 00:36:28,519
public, thus creating liquidity for the stake.
787
00:36:28,519 --> 00:36:31,719
GP stakes, you could theoretically invest into
any type of GPs.
788
00:36:31,719 --> 00:36:35,239
How would you rank the opportunity set today
between the different asset classes?
789
00:36:35,239 --> 00:36:40,335
I think the larger you go, the more attractive
credit can be because it just cash flows so
790
00:36:40,335 --> 00:36:40,655
well.
791
00:36:40,655 --> 00:36:40,815
Right?
792
00:36:40,815 --> 00:36:42,914
And the carried interest is much more
predictable.
793
00:36:42,974 --> 00:36:45,534
It's it's it's a smaller percentage, but it's
highly predictable.
794
00:36:45,534 --> 00:36:49,295
And so, obviously, we all know private credit
has just ballooned as an asset class over the
795
00:36:49,295 --> 00:36:49,934
last decade.
796
00:36:49,934 --> 00:36:51,454
I think there's tons of opportunity there.
797
00:36:51,454 --> 00:36:53,074
They have a lot of options for liquidity.
798
00:36:53,135 --> 00:36:55,440
You know, I I think that's a very dynamic
market today.
799
00:36:55,440 --> 00:36:58,159
Maybe right now, there's a little bit too much
dry powder sloshing around.
800
00:36:58,159 --> 00:37:00,480
We're seeing that in in sort of covenants and
deal terms.
801
00:37:00,480 --> 00:37:04,480
But that being said, I think I think long term,
it's just such a great asset class to play in.
802
00:37:04,480 --> 00:37:06,739
Again, in the buyout space, there's a lot of
competition.
803
00:37:07,039 --> 00:37:10,585
There's some great names, and and there's gonna
be some great growth stories coming out of the
804
00:37:10,585 --> 00:37:11,224
middle market there.
805
00:37:11,224 --> 00:37:14,204
But by and large, I think the credit shops can
aggregate a lot of capital.
806
00:37:14,264 --> 00:37:18,824
And from a return standpoint, between the fees
and a much more predictable incentive fee carry
807
00:37:18,824 --> 00:37:22,070
structure from their returns, it just creates a
really attractive investment.
808
00:37:22,070 --> 00:37:25,429
What about real estate, growth equity, venture
capital?
809
00:37:25,429 --> 00:37:25,670
Yeah.
810
00:37:25,670 --> 00:37:29,670
You know, Infra is an interesting one, that I
think is attractive right now.
811
00:37:29,670 --> 00:37:33,369
Blue Owl bought a big stake in Stonepeak, which
was a huge transaction.
812
00:37:33,429 --> 00:37:35,829
It's their largest transaction in Fund Fund 5.
813
00:37:35,829 --> 00:37:39,235
And then, obviously, we saw BlackRock bought a
huge stake in GIC.
814
00:37:39,235 --> 00:37:41,635
I mean, the these these are huge funds.
815
00:37:41,635 --> 00:37:44,055
People are really wanting infra exposure.
816
00:37:44,114 --> 00:37:48,355
They generate a ton of fee related income in
the management fee space because they they
817
00:37:48,355 --> 00:37:52,809
raise huge funds, 15, $20,000,000,000 funds,
and and their carry is really big and chunky.
818
00:37:52,809 --> 00:37:54,329
The returns aren't aren't massive.
819
00:37:54,329 --> 00:37:58,329
You know, they make 1 fives, 1 sixes, 1 sevens,
but the quantum of capital is so large that
820
00:37:58,329 --> 00:38:00,570
that the they're they're just highly profitable
businesses.
821
00:38:00,570 --> 00:38:02,090
So that's an attractive space.
822
00:38:02,090 --> 00:38:05,945
I'll also say, I haven't touched on this, I I
think that a lot of strategies, and Inpro is a
823
00:38:05,945 --> 00:38:10,025
great example of this, from an LP standpoint,
going through a GP stake is a much more
824
00:38:10,025 --> 00:38:12,985
attractive way to get exposure to the asset
class than just an LP stake.
825
00:38:12,985 --> 00:38:18,025
So, for example, you know, using Stonepeak, the
GP deal is a much more attractive return
826
00:38:18,025 --> 00:38:23,440
profile, call it, like, a 2, 2a half, 3 x with
a bunch of cash flow than, you know, in their
827
00:38:23,440 --> 00:38:26,320
flagship funds, which, you know, by infra
standards are really good.
828
00:38:26,320 --> 00:38:30,400
You're you're probably talking about a 1617
MOA, and you're only in that fund with those
829
00:38:30,400 --> 00:38:34,405
assets, whereas if you're at the GP level,
you've got diversification exposure to all of
830
00:38:34,405 --> 00:38:35,764
their funds and all of their assets.
831
00:38:35,764 --> 00:38:39,764
And so their their asset classes where I think
it's much more advantageous to get exposure
832
00:38:39,764 --> 00:38:41,045
through a GP stake than others.
833
00:38:41,045 --> 00:38:42,244
So Impris is a great example of that.
834
00:38:42,244 --> 00:38:43,364
I think it's exciting space.
835
00:38:43,445 --> 00:38:44,244
Real estate as well.
836
00:38:44,244 --> 00:38:47,989
I mean, they can aggregate assets a ton, and so
they can grow AUM pretty dramatically.
837
00:38:47,989 --> 00:38:52,322
But as we saw in the last couple years, there's
some real estate managers and some of the few
838
00:38:52,322 --> 00:38:55,514
managers that I've seen GP stakes deals get
done in that haven't performed particularly
839
00:38:55,514 --> 00:38:57,855
well, and it's in real estate because of the
last few years.
840
00:38:57,855 --> 00:39:00,494
What else excites you about the GP Stakes
market today?
841
00:39:00,494 --> 00:39:02,275
You know, the reality is they're new entrants.
842
00:39:02,655 --> 00:39:06,894
And and so I think new entrants in terms of
funds playing in the GP Stakes space, I think
843
00:39:06,894 --> 00:39:09,315
that's exciting because they have different
different strategies.
844
00:39:09,534 --> 00:39:11,460
They have different ways of doing things.
845
00:39:11,460 --> 00:39:15,860
Blue Owl has been the the overwhelming, you
know, winner in this space over its history,
846
00:39:15,860 --> 00:39:17,380
and and they've also been very innovative.
847
00:39:17,380 --> 00:39:22,659
And so, you know, I gotta give a ton of kudos
to to Michael Reese and and, Sean Ward and
848
00:39:22,659 --> 00:39:23,139
their team.
849
00:39:23,139 --> 00:39:28,865
But the reality is these these up and comers
and Hunter Point, Bon Accord, Wafers in the
850
00:39:28,865 --> 00:39:29,825
market with a fund.
851
00:39:29,825 --> 00:39:33,744
And so I think they're gonna be really exciting
because they're they're playing in a space that
852
00:39:33,825 --> 00:39:35,664
it's a bigger market, the middle market.
853
00:39:35,664 --> 00:39:38,989
You're gonna see some some interesting winners
that grow out of that space.
854
00:39:38,989 --> 00:39:40,030
And so I'm really excited about it.
855
00:39:40,030 --> 00:39:42,269
Even Blueout now is finally moving in the
middle market.
856
00:39:42,269 --> 00:39:46,909
They got anchored by by a partner in Abu Dhabi
to launch a middle market fund for their
857
00:39:46,909 --> 00:39:47,549
strategy too.
858
00:39:47,549 --> 00:39:50,289
So now that's a $2,000,000,000 fund, for
example.
859
00:39:50,349 --> 00:39:54,795
They're buying maybe 100 to 250, $300,000,000
stakes in these funds.
860
00:39:54,795 --> 00:39:55,954
So that's a really exciting space.
861
00:39:55,954 --> 00:39:57,275
I think you're gonna have more players.
862
00:39:57,275 --> 00:39:59,675
You have a much bigger universe to play in.
863
00:39:59,675 --> 00:40:03,355
And I think learning about these new firms that
are growing and scaling that you've never heard
864
00:40:03,355 --> 00:40:06,510
of, I think, is a really exciting time,
especially as an allocator because it just
865
00:40:06,510 --> 00:40:08,829
creates a bigger universe of deal flow that
you're gonna get.
866
00:40:08,829 --> 00:40:10,989
Has there been evolution in portfolio
construction?
867
00:40:10,989 --> 00:40:15,469
I noticed a lot of the early funds had 4
positions, and now it sounds like Lulu Owl is
868
00:40:15,469 --> 00:40:16,449
doing 10 positions.
869
00:40:16,510 --> 00:40:17,389
Talk to me about that.
870
00:40:17,389 --> 00:40:17,630
Yeah.
871
00:40:17,630 --> 00:40:18,829
And and they're even doing more than that.
872
00:40:18,829 --> 00:40:22,025
I think the fund 5, which was their largest to
date, it was over 13,000,000,000.
873
00:40:22,085 --> 00:40:23,844
I think they have 17 now.
874
00:40:23,844 --> 00:40:25,385
And so they're getting bigger.
875
00:40:25,925 --> 00:40:28,085
They're also having a better better mix of
private credit.
876
00:40:28,085 --> 00:40:32,025
And as I mentioned earlier, private credit GP
stake is a lot more dependable.
877
00:40:32,484 --> 00:40:36,349
The cash flows, you know, it's just very sticky
and dependable because, you know, they're gonna
878
00:40:36,349 --> 00:40:39,069
make that 9 to 11 unless they really, really
mess up.
879
00:40:39,069 --> 00:40:42,429
And, obviously, the incentive fee on that,
although it's the quantum of capital is lower,
880
00:40:42,429 --> 00:40:43,150
it's real predictable.
881
00:40:43,150 --> 00:40:47,230
And so I I think blending, you know, a
portfolio with with some upside equity
882
00:40:47,230 --> 00:40:51,244
positions and then some really sticky high cash
flow and credit positions is a really
883
00:40:51,244 --> 00:40:53,644
attractive portfolio on the GP stake side.
884
00:40:53,644 --> 00:40:55,565
So, you know, I I think that's an interesting
way to do it.
885
00:40:55,565 --> 00:40:59,804
You've also seen as venture has grown so much,
you know, space that obviously you and I are
886
00:40:59,804 --> 00:41:00,764
particularly passionate about.
887
00:41:00,764 --> 00:41:04,260
You know, you have players like NEA selling
stakes and ICONIC selling the stake.
888
00:41:04,260 --> 00:41:08,099
And so I think that space will be interesting
as you've seen growth stage venture scale.
889
00:41:08,099 --> 00:41:10,099
That's a different return profile altogether
too.
890
00:41:10,099 --> 00:41:13,699
It was very carry heavy, very return and
carried less management fee heavy.
891
00:41:13,699 --> 00:41:17,300
But, you know, that's gonna be an interesting
phenomenon seeing how that that develops over
892
00:41:17,300 --> 00:41:18,135
the next years too.
893
00:41:18,135 --> 00:41:21,175
You mentioned Blue Owl's doing a 150,
$200,000,000 deals.
894
00:41:21,175 --> 00:41:23,275
How does that relate to AUM?
895
00:41:23,335 --> 00:41:25,015
And give me a general framework for that.
896
00:41:25,015 --> 00:41:29,335
It's gonna depend on the manager and what their
management fee is, you know, what their margins
897
00:41:29,335 --> 00:41:30,215
are, things like that.
898
00:41:30,215 --> 00:41:35,650
But but, typically, you know, again, if you're
talking about a a 20% stake in a firm or a 15%
899
00:41:35,789 --> 00:41:39,789
stake, so we'll say 20 to keep it easy, you
know, $200,000,000,000,000 valuation.
900
00:41:39,789 --> 00:41:45,150
So that's probably a 5 to $10,000,000,000 AUM
firm with a 2 and 20 type structure.
901
00:41:45,150 --> 00:41:49,505
So Blue Isles are really going into how what
you identified as the upper middle market.
902
00:41:49,505 --> 00:41:50,224
Upper middle market.
903
00:41:50,224 --> 00:41:50,385
Yeah.
904
00:41:50,385 --> 00:41:54,085
So I'd say upper middle market meaning
4,000,000,000 plus.
905
00:41:54,224 --> 00:41:55,585
Say 4,000,000,000 to 10,000,000,000.
906
00:41:55,585 --> 00:41:58,144
Above 10,000,000,000, that's kind of what you
classify as large cap.
907
00:41:58,144 --> 00:42:01,160
So just to give you some perspective here,
10,000,000,000 plus, you're probably talking
908
00:42:01,160 --> 00:42:05,400
about a 125 to a 150 managers depending on
who's in market right now.
909
00:42:05,400 --> 00:42:08,219
Whereas in the middle market, we'll call it
2,000,000,000 to 10,000,000,000.
910
00:42:08,599 --> 00:42:10,619
That's several 1,000 managers.
911
00:42:10,680 --> 00:42:12,219
So, like, say, 3,000.
912
00:42:12,360 --> 00:42:14,119
And then you have obviously smaller than that.
913
00:42:14,119 --> 00:42:15,565
That's another several 1,000.
914
00:42:15,565 --> 00:42:16,844
So it's a huge universe.
915
00:42:16,844 --> 00:42:19,005
It's I mean, again, the large cap is super
tiny.
916
00:42:19,005 --> 00:42:19,965
Everyone knows everyone.
917
00:42:19,965 --> 00:42:21,885
Everyone knows who's talking to who about a
deal.
918
00:42:21,885 --> 00:42:26,204
Whereas in the middle market, there's a lot
more room to uncover some some gems under rocks
919
00:42:26,204 --> 00:42:27,005
and things like that.
920
00:42:27,005 --> 00:42:29,565
David, this has been a master class on GP
stakes.
921
00:42:29,565 --> 00:42:31,230
What would you like to share with our
listeners?
922
00:42:31,289 --> 00:42:35,610
As I said, it's a great asset class, private
credit like yield with with private equity like
923
00:42:35,610 --> 00:42:36,730
upside, so it's really appealing.
924
00:42:36,730 --> 00:42:37,930
You just need to know what you're doing.
925
00:42:37,930 --> 00:42:40,329
You need to understand that you're gonna be in
a long time.
926
00:42:40,329 --> 00:42:42,090
But other than that, it's a fantastic space.
927
00:42:42,090 --> 00:42:44,114
You rarely see something with that kind of
downside protection.
928
00:42:44,114 --> 00:42:47,635
So I would encourage everyone to, at a minimum,
take a look at the space, because it's only
929
00:42:47,635 --> 00:42:48,114
gonna grow.
930
00:42:48,114 --> 00:42:48,994
It's only gonna get bigger.
931
00:42:48,994 --> 00:42:50,434
I really appreciate you having me, David.
932
00:42:50,434 --> 00:42:50,835
Absolutely.
933
00:42:50,835 --> 00:42:52,275
Well, I took a lot of notes.
934
00:42:52,835 --> 00:42:56,355
I appreciate you jumping on the podcast, and I
look forward to singing down soon.
935
00:42:56,355 --> 00:42:57,315
Always happy to be with you.
936
00:42:57,315 --> 00:42:57,795
Thanks a lot.
937
00:42:57,795 --> 00:42:58,559
Thanks, David.
938
00:42:58,640 --> 00:42:59,699
Thank you for listening.
939
00:42:59,920 --> 00:43:04,980
The 10X Capital podcast now receives more than
a 170,000 downloads per month.
940
00:43:05,119 --> 00:43:08,340
If you are interested in sponsoring, please
email me at david@10xcapital.com.
