Transcript
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We talked about the dominance of the 6040, and
when you can hedge a portfolio with bonds that
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are cheap and understandable, the need for kind
of a defined hedge strategy has been less
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acute.
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And I think we all suffer from recency bias,
and
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when you go through a period
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of underperformance for these strategies as an
institutional investor, you get sick of
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defending the hedge funds that are high fees,
that are complex, that have difficult reporting
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and illiquidity, and it doesn't become worth
the squeeze to own them.
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We expect there to be an illiquidity premium,
meaning if we're gonna lock up capital, remove
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the ability to borrow against these assets,
remove the optionality of selling them
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tomorrow, we want excess return.
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So if you told me there's 2 return streams at
10% each, one has daily liquidity and one is
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illiquid, you're gonna choose the daily
liquidity just because it's an added feature.
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Walk me through how you get knowledgeable in a
new space.
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We have lots of
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Hanson, I've been excited to chat since our
friend Grady Buchanan made the introduction.
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Welcome to Tenex Capital podcast.
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Thank you.
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Glad to be here.
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Appreciate the time.
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What is Cepio Capital?
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Cepio Capital is a a multifamily office and
institutional asset manager.
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We oversee about $6,000,000,000 of capital on
behalf of a limited number of clients.
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We started the business seven and a half years
ago, 2017, in San Francisco.
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And I'm fortunate that we worked with many of
our clients for decades across multiple
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institutions.
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How do you guys differentiate against other
multifamily offices?
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David, the way that we try to differentiate
ourselves is on the investment side.
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We have a a fairly robust investment process,
and we're passionate about that.
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The alternative space is an area that we spend
a lot of time in.
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You mentioned you have a differentiated
investment process.
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Tell me about that.
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The traditional asset allocation framework that
we all know is is equities, fixed income,
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alternatives, and cash.
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And while we invest across all those assets, we
use what we call a role based framework, which
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we think helps us assess kind of the underlying
risks, and really the reason why we hold these
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various assets in the portfolio at a deeper
level.
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So our our role based framework, David, is
really 4 primary buckets.
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We have the growth drivers, which are the the
portion of assets intended to grow the
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portfolio over a long period of time.
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So, really, equities is the primary exposure
there, both private and public equities,
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though.
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And then anything that has that sort of higher
standard deviation would be competing for
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capital in that bucket.
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The the second group of assets is we we call
diversifiers, which is maybe the most complex,
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group that that we'll talk about.
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But diversifiers are assets with with a low
correlation to both stocks and bonds, but have
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return targets more similar to equities over a
full cycle.
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And then the the last 2 are maybe more
understandable inflation sensitive and
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deflation sensitive.
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Inflation sensitive assets tend to be real
assets like real estate and commodities.
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Deflation sensitive tends to be, the balance of
portfolio, core bonds, and cash.
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When it comes to the family offices that you
serve, what are the different ways that family
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offices look at their portfolio
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construction?
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We have a really wide range of of the way that
families look at the asset allocation.
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We use the same framework for all of them, but
we have families that that are are very growth
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focused if you will.
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They want they want high beta portfolios, and
they maybe took companies public.
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And we're managing around, a public position
that that really drives a lot of the the other
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assets that we put in the portfolio.
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We have foundations and institutions that have
defined giving amount of 5% per year where we
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know we we need to manage risk around the
liquidity, constraints that they have.
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What are the different factors affecting
decision making?
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Yeah.
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Quick question.
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So risk profile and liquidity constraints are
the biggest maybe two variables.
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I think time horizon affects that dramatically.
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So if we have a, and we have a number of them,
young entrepreneurs who sold businesses to
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businesses public with very little in the way
of of short term cash needs, they tend to be
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much more aggressive in in the way that they
can allocate to growth assets.
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The inverse is is very much true as well for
folks that have high burn rates, spending
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rates, whether it's giving or business,
interest that are driving a lot of capital
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where we wanna stay very liquid with assets
mitigating that that volatility.
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So today, you have a tale of 2 cities.
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You have private credit that is the hottest
asset.
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Some people think may be approaching, the end
of that cycle.
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And private equity venture capital is, you
know, cold or or not as sought after as it
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typically is.
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As an allocator, how do you look in terms of
portfolio construction relative to the hotness
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or coldness of a specific sector?
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It's a great question, and and and it's
something that we actually focus quite a bit
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on.
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Private credit's been an industry space because
to your point, it's it's very hot now, maybe
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peaking or kind of to to a place that's
unhealthy.
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I I would say it was not that way a decade ago.
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There rates were at 0, there's very little
appetite.
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And it actually to us was was pretty
interesting a few years ago, particularly in a
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world where spreads in the public markets
haven't expanded.
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So high yield spreads are pretty tight.
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But in some areas of the private credit
markets, you actually were getting a decent
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amount of excess return for the for the risk
you were taking or being compensated.
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So on a risk adjusted basis, it was
interesting.
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For example, right now, we still really like
the distressed credit space.
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So there's some areas within distressed credit
that we think are interesting.
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It's a pretty wide ranging, opportunity set as
you know, but things like just like,
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nonperforming loans to us, the the risk return
seems very interesting still too.
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On the flip side, you talked about venture
capital and private equity, the late stage
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growth area of venture to us, I think, to to a
lot of the market seems really overheated for a
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a number of years kind of culminating in the in
the declines of 2021, 2022.
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It looks like we may have an opportunity where
where companies are gonna have to raise it
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either down rounds or there's gonna have to be
a repricing in the market that will make that
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an interesting space again.
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It's challenging to be too tactical for us in
the venture and private equity space given 5
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year investment, right, terms for the funds and
kind of vintage level diversification.
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We don't try to get too cute on that side.
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But certainly, in areas like private credit,
distressed credit, lean in and out, quite
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heavily.
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As a multifamily office, are you more likely to
pull money and time, credit, and hedge funds
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more than private equity in VC?
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How do you look at both the relationship as
well as investment strategy?
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If we go back to our role based framework to
maybe set the stage and and put it into
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practice, with private equity venture capital,
we're really competing for capital there with
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our public equities.
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So when we're looking at the relative
opportunity set for those equity beta
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positions, that's gonna be the comparable.
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Private credit tends to be depending on if it's
performing credit is is really competing with
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your fixed income, if it's distressed credit.
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In many situations, we're looking at at that as
a diversifier.
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So part of the question is is that relative
between each other and then also on an asset
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allocation basis, when we wanna be overweight
growth versus overweight diversifiers.
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We've really liked the diversifiers group
within our portfolios over the last few years
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and on a tactical basis have been overweight
diversifiers.
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And part of that has been through kind of the
last 5 years as being slightly underweight
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fixed income and then some underweight to
growth as well.
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So there there is an interchange between the 2,
but it's not directly between private equity
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and private credit, but rather the role that
they're playing in the portfolio.
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James Langer on the podcast, CEO of Redmont
Wealth Advisors, and he worked with Eugene Fama
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on the whole three factor model and going back
to his University of Chicago days.
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How do you look at the public market?
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Do you expect the magnificent seven to continue
to outperform?
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And how do you look at large cap versus small
cap or however else you dissect the industry?
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Great question.
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We we tend to have a value bias at Cepio kind
of across the board.
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Most of our teams started in in equity research
roles and in in roles that were kind of very
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valuation centric.
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And we we very much ascribed to the data that
you just referenced that that in public
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markets, it's it's hard to have repeatable
alpha.
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And one of the factors over a long period of
time that shown that outperformance is value.
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You couple that with a period of a significant
dislocation between value and growth.
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We think the opportunity set for companies that
produce a strong amount of cash and are priced
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at it at a relatively fair valuation is strong
going forward.
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So I think, you know, I think for us, value
versus growth is sometimes hard because it it
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gets a lot into the subsector and it's like, do
you like financials and energy or do you like
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tech?
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I think for us, we we're more focused on the
relative value of the company.
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And and think right now, to your point on the
Mag 7, we think the other 4 93 companies, in
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the S and P have have a pretty interesting
opportunity to potentially catch up over the
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next 5 to 10 years, over the next cycle.
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And I think part of that's driven by better
earnings expectations for the for the non Mag7
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S and P 500 components and a better starting
valuation.
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If you look at the S and P market cap weighted,
the forward valuation is kind of scary or what
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that might mean for forward returns on an equal
weight basis.
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It's it's more attractive.
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You asked the second question about small cap.
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I think that the same math applies to small cap
in a couple ways.
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Historically, small cap equities, as we all
know, have have done well.
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We're coming to a period of significant
underperformance relative to large cap and
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evaluation gap.
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I think part of that can be justified by the
large number of unprofitable companies in the
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small cap space.
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So the way we try to tackle that is being
thoughtful around getting that exposure to
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companies that have attractive values and
produce profits, particularly in the small cap
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space to try to avoid some of the the the the
junk in the indices.
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Let's talk about correlation.
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Last time we spoke, you said that the decade
prior to 2022, stocks and bonds were negatively
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correlated.
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Has that always been the case?
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Yes.
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That that has not always been the case, and
it's something that we focused on internally as
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it sort of became an issue for everyone in
2022.
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So 2022, we all recall the 60 40 portfolio got
hit pretty hard because bonds were down double
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digits and stocks were down double digits.
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You didn't have the negative correlation
between the 2 that we experienced for the
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prior, you know, really 20 years.
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Back back to 1998, over that cycle, you had
this really nice negative correlation between
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stocks and bonds that made the 64 40 portfolio
super efficient.
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But if you look prior to that, really for the
50 years before 2000, so back to the forties,
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you had a period where stocks and bonds for
most of that time were were positively
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correlated.
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And what the data shows you, David, really is
that in periods where inflation is sub 2%, that
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inverse correlation works great and bonds work
as a hedge to stocks.
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In periods where stock where inflation is
higher than 2%, that that hasn't been the case.
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Is that because when there's high inflation,
treasuries are therefore, sucking out capital
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from both stocks and bonds?
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Talk to me about the intuition.
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Yeah.
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It's it's it's a function.
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You're exactly right.
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It's a function of of rates, and in a in a
world where rates are going down.
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So in a in a period like the 1st 20 years, so
from 2000 to 2020, you had essentially a a
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declining rate environment with with slower
growth, and the Fed can lower interest rates
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when you have a shock to the system, which
makes your bonds rally when your stocks are
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probably going down because there's a
recessionary environment.
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If We think about the issues like 2022 or the
seventies, it was not the same.
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You had inflation causing the shocks to the
system.
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Thus, the Federal Reserve couldn't lower rates
to solve the issues.
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They had it, in some cases, raise rates.
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So your bonds were selling off for the same
reason your stocks were selling off.
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And and in some ways, if you think about the
correlation in corporate bonds and stocks is
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that sometimes the same risks are there for for
a corporate bond and a equity position because
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you you have the same position in the company.
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Normally, that's offset by interest rates
coming down in in some periods that that create
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that hedge.
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So when that's not happening, you have that
positive correlation.
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Are there any assets that are just dominated by
other asset classes, whether public or private,
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that just never makes sense to invest?
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Yeah.
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That's a that's a good question.
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Nothing immediately jumps to mind of of a broad
asset class that, that a lot of people invest
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in that you generally shouldn't.
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We've looked at maybe maybe a different way to
to answer this
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question.
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But
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yeah.
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Yeah.
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Potentially, you know, speculative assets, I
guess, is the way to think about it.
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We don't tend to invest in assets that we can't
understand the fundamental case or the
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intrinsic cash flows.
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Some people can, you know, gamble well and and
probably trade those, but it it's not what we
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tend to do.
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We've looked a lot at at the 60 40 portfolio
because it's often the benchmark that we think
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about.
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And, in our framework, it's still a component,
but we talked about having, you know, something
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like diversifiers, which aren't represented in
that 60 40.
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And and when we back test adding 10% in
diversifiers, so 60, 10, 30, 30% bonds, It
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really meaningfully increases the sharp ratio
of a port of a simple portfolio on a on a long
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term back test.
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And in this case, we proxy diversifiers with a
managed futures benchmark.
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So not perfect, but managed futures are are
kind of an interesting diversifier that we like
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to look at.
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And and in that case, you had higher sharp
ratio because you had improved returns with
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with less downside or volatility.
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Tell me more about diversifiers.
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Which diversifies are are you talking about,
and what do you like to invest in?
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When we look at diversifiers, what we're really
looking for is the characteristics of the
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asset, which are principally low to negative
correlation of stocks and bonds with equity
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like returns over a full cycle.
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And and and that opportunity set is is fairly
wide, and there's a lot of esoteric assets
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within that that category.
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And and at different cycles that we've talked
about, different things may be interesting.
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But some of the things that we're focused on at
Sepio in that bucket are things like distressed
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credit.
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We talked about nonperforming loans.
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There's kind of a a group of assets there that
we think exhibit equity like returns,
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particularly now, but don't have a a
correlation to equity market.
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And we would say, in some cases, have a
negative correlation given the the drivers of
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returns there.
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Managed futures are another, sub asset class
within diversifiers.
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I just referenced them.
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But, things like managed futures that can be
trend following trade various underlying
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securities that that have no correlation to
stocks and bonds turn the long and short side
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have historically shown significant benefit to
portfolio by increasing the true
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diversification while having equity like
returns over a full cycle.
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We also look at absolute return focused, multi
strat, hedge funds or partnerships that have a
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similar effect of of targeting equity like
returns with very little correlation about the
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stock and bond market.
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Today's episode is brought to you by Reed
Smith.
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The practice of law has the power to drive
progress to move businesses forward and support
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them in achieving their goals.
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By seizing opportunities and overcoming
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Their deep industry insights and local market
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your needs.
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00:13:43,360 --> 00:13:49,040
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client service that drives progress for your
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business.
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00:13:50,985 --> 00:13:53,004
So you're bullish on diversifiers.
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00:13:53,304 --> 00:13:56,845
Why do you think so many institutional
investors are down on hedge funds today?
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It's a great question.
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I think I think that the commonly cited reasons
would be high fees, illiquidity, complexity,
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and probably, most importantly, a lack of alpha
over the last 10 years.
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And and and I think, we I guess, at a high
level, we agree with with all those things.
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And it's been a challenging time for anything
that's hedged.
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If you think about sort of the last period of
bull market and s and p 500 dominance, if
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you've had any hedge to that equity beta,
you've almost, by definition, underperformed on
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a relative basis.
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00:14:26,014 --> 00:14:27,695
As well, we talked about the dominance of the
6040.
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And when you can hedge a portfolio, with bonds
that are cheap and and understandable, the need
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for kind of a defined hedge strategy has been
less acute.
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00:14:36,940 --> 00:14:39,019
And I think we all suffer from recency bias.
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And when you go through a period of
underperformance for these strategies as an
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institutional investor, you get sick of
defending the hedge funds that are high fees,
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00:14:46,139 --> 00:14:51,965
that are complex, that have difficult reporting
and illiquidity, and it and it doesn't become
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00:14:51,965 --> 00:14:53,825
worth the squeeze to to own them.
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00:14:54,605 --> 00:14:56,365
And and we we agree with all those things.
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00:14:56,365 --> 00:15:00,524
We have a very high bar for any any partnership
vehicle, particularly if you're giving up daily
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00:15:00,524 --> 00:15:03,184
liquidity for something that is less liquid.
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00:15:03,379 --> 00:15:07,620
So when we're looking at a hedge fund vehicle,
we're looking at something that's that's truly
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different.
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00:15:07,860 --> 00:15:12,259
We we don't invest in many of the traditional,
you know, hedge fund sectors where you're
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essentially getting s and p 500 exposure with
some hedges on it at an expensive price.
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00:15:18,125 --> 00:15:22,865
We we would look at things like managed future
structures that truly have or trend following
293
00:15:23,165 --> 00:15:28,445
systematic strategies that have truly negative
correlations with with interesting return
294
00:15:28,445 --> 00:15:28,945
profiles.
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00:15:29,085 --> 00:15:32,879
And then Tushin being that those hedge fund
strategies, whether the market goes up or down,
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00:15:32,879 --> 00:15:37,220
it's it's independent of that because it's just
looking for some kind of other signal or maybe
297
00:15:37,440 --> 00:15:39,839
some futures based on crop cycles or things
like that.
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00:15:39,839 --> 00:15:41,600
What are the futures that you like to invest
in?
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00:15:41,600 --> 00:15:42,480
That's exactly right.
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00:15:42,480 --> 00:15:46,605
Most of our managed futures managed futures
funds that we invest in have a component of
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00:15:46,605 --> 00:15:49,884
trend following in them, and they're trading
really all asset classes.
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00:15:49,884 --> 00:15:54,144
So from equities, fixed income, currencies,
commodities, both on the long and short side.
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00:15:54,365 --> 00:15:58,524
So what that what that equates to is that even
if we have multiple, strategies in that same
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00:15:58,524 --> 00:16:02,350
bucket, they don't tend to move like each other
either because there's it's it's such a wide
305
00:16:02,350 --> 00:16:02,850
market.
306
00:16:04,350 --> 00:16:08,429
It it it also is a very interesting space
because your counterparty isn't always profit
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00:16:08,429 --> 00:16:08,750
seeking.
308
00:16:08,750 --> 00:16:13,309
You could be trading French power contracts and
it's your your counterparty is not looking to
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00:16:13,309 --> 00:16:14,750
to make a profit on that trade.
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00:16:14,750 --> 00:16:20,245
Where if you're a hedge fund shorting Apple,
almost, in all circumstances, your your
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00:16:20,245 --> 00:16:23,205
counterparty is trying to, you know, take the
other side of the trade and make a profit on
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00:16:23,205 --> 00:16:23,705
that.
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00:16:23,845 --> 00:16:26,804
So it's not just 2 really smart people trying
to outsmart each other.
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00:16:26,804 --> 00:16:30,629
Similar to secondaries where somebody act has a
liquidity need, which is why they're they're
315
00:16:30,629 --> 00:16:31,029
selling that.
316
00:16:31,029 --> 00:16:31,910
That's exactly right.
317
00:16:31,910 --> 00:16:32,230
Yeah.
318
00:16:32,230 --> 00:16:32,389
No.
319
00:16:32,389 --> 00:16:35,049
We we like secondaries at times for that same
reason.
320
00:16:35,429 --> 00:16:38,250
Speaking of secondaries, you like GP led
secondaries.
321
00:16:38,309 --> 00:16:39,830
Tell me about that opportunity set.
322
00:16:39,830 --> 00:16:44,035
We like GP led secondaries for a lot of the
reasons that, you know, any secondary his
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00:16:44,154 --> 00:16:47,274
transaction, you know, historically, LP led
secondaries have been interesting, for a
324
00:16:47,274 --> 00:16:47,774
portfolio.
325
00:16:47,914 --> 00:16:50,654
You get a shorter duration asset in the private
markets typically.
326
00:16:50,955 --> 00:16:53,455
You you reduce your j curve by getting invested
quickly.
327
00:16:53,595 --> 00:16:58,095
I think GP led secondaries are interesting in
in this time period because we we've had such a
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00:16:58,299 --> 00:17:03,019
lack of transactions over the last few years
that have led to funds really seeking liquidity
329
00:17:03,019 --> 00:17:06,700
for for some of their best performing assets
that they don't that they don't wanna sell or
330
00:17:06,700 --> 00:17:08,720
or take public at this particular time.
331
00:17:08,779 --> 00:17:13,625
So GPL2nders, you often have really strong
alignment from the from the general partners,
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00:17:14,325 --> 00:17:16,005
that that they still have conviction in their
deal.
333
00:17:16,005 --> 00:17:19,845
You don't have the blind pool risk, and you
have this arbitrary deadline that sometimes can
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00:17:19,845 --> 00:17:24,005
create really interesting opportunities for
great assets near the end of their, hold
335
00:17:24,005 --> 00:17:24,505
period.
336
00:17:25,009 --> 00:17:25,730
Walk me through that.
337
00:17:25,730 --> 00:17:28,629
What happens when a fund is in year 13, year
14?
338
00:17:28,690 --> 00:17:29,990
How have you seen that play out?
339
00:17:30,129 --> 00:17:30,369
Yeah.
340
00:17:30,369 --> 00:17:30,609
Yeah.
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00:17:30,609 --> 00:17:31,809
We we we we're seeing it.
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00:17:31,809 --> 00:17:34,529
I I think as as many institutional investors
are, we're seeing it right now because you've
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00:17:34,529 --> 00:17:38,929
had funds that were sort of banking on getting
liquidity in in 2022, 2023, and then the window
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00:17:39,089 --> 00:17:42,615
the perceived window wasn't open, and they had
to figure out other other ways to do that.
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00:17:42,615 --> 00:17:46,295
So, you know, one one of our one of our
partners had an asset that they have a lot of
346
00:17:46,295 --> 00:17:47,015
conviction in.
347
00:17:47,015 --> 00:17:49,255
It kinda it's been really their winner for the
last decade.
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00:17:49,255 --> 00:17:53,755
We're hoping to take it public that the window
at the time, they didn't feel like was open.
349
00:17:53,869 --> 00:17:57,309
So, ultimately, they went through this this
secondary process where you hire an investment
350
00:17:57,309 --> 00:17:57,809
bank.
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00:17:57,869 --> 00:18:03,950
They come in, value the asset, give all the
existing LPs the opportunity to get bought out
352
00:18:03,950 --> 00:18:04,769
at that price.
353
00:18:05,630 --> 00:18:09,230
If they choose to, that's where the, you know,
the new investor comes in to backfill that
354
00:18:09,230 --> 00:18:09,730
demand.
355
00:18:10,005 --> 00:18:14,404
Otherwise, you you have the opportunity to re
up at that defined valuation for another 5 year
356
00:18:14,404 --> 00:18:17,045
continuation fund or whatever the terms is on
that next continuation fund.
357
00:18:17,045 --> 00:18:20,884
But it tends to be 5 years maybe with another
2, 1 year extensions, and that's kind of a
358
00:18:20,884 --> 00:18:24,029
common way to extend a position that you have a
lot of conviction in.
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00:18:24,029 --> 00:18:27,549
Otherwise, you you have to go and fire sell
your assets and try to wind wind the fund down
360
00:18:27,549 --> 00:18:28,430
as quickly as you can.
361
00:18:28,430 --> 00:18:32,430
As an LP, let's say that your venture fund or
private equity fund has delivered a top
362
00:18:32,430 --> 00:18:35,954
quartile return via DPI in the first 13 years.
363
00:18:36,194 --> 00:18:38,755
How do you look at these continuation funds and
lack of liquidity?
364
00:18:38,755 --> 00:18:41,654
Does that still irk you or is that just kind of
standard practice?
365
00:18:41,954 --> 00:18:42,274
Yeah.
366
00:18:42,274 --> 00:18:46,595
It's not ideal from from our underlying
client's perspective because oftentimes, they
367
00:18:46,595 --> 00:18:48,274
had sort of a fixed timeline in their minds.
368
00:18:48,274 --> 00:18:52,890
I think for us, hopefully, by that year by year
13 of being a partner with this general partner
369
00:18:52,890 --> 00:18:58,009
and understanding their the assets they own, we
hopefully have a pretty good understanding and
370
00:18:58,009 --> 00:19:01,869
and agreement and alignment with them on
whether these assets are worth a continuation
371
00:19:02,090 --> 00:19:03,049
fund or not.
372
00:19:03,049 --> 00:19:07,154
And most of the times, we we've been very
aligned with the general partners we work with
373
00:19:07,394 --> 00:19:08,674
on the decisions on that end.
374
00:19:08,674 --> 00:19:12,914
So and and for us, if you have a if you have a
defined well thought out private equity
375
00:19:12,914 --> 00:19:17,555
allocation that's that's perpetual and self
funding, ultimately, if you've gotten DPI
376
00:19:17,555 --> 00:19:21,394
throughout the period, you should be okay to
potentially extend that last piece if it's
377
00:19:21,394 --> 00:19:25,279
gonna be the highest potential IRR on that that
investment.
378
00:19:25,339 --> 00:19:27,740
So we we've generally been okay with it.
379
00:19:27,740 --> 00:19:32,539
While it's not ideal and, you know, in some
cases, continues to drag down an IRR even with
380
00:19:32,539 --> 00:19:36,555
a good multiple as you extend that out, We
agree that you should try to get the best price
381
00:19:36,555 --> 00:19:37,914
for the the assets you have.
382
00:19:37,914 --> 00:19:41,755
In many cases, it tends to be kind of the crown
jewel of your fund that's the one that you're
383
00:19:41,755 --> 00:19:45,434
extending because if you're an earlier stage
manager, it's the company that's continued to
384
00:19:45,434 --> 00:19:48,869
raise capital and move toward, you know, the
public markets, and that's taken some time.
385
00:19:48,950 --> 00:19:52,890
It's the Stripe or the SpaceX that has stayed
private for so long and compounded.
386
00:19:53,269 --> 00:19:54,950
There's other structures in the market.
387
00:19:54,950 --> 00:19:59,589
How do you look at evergreen funds,
specifically something like GP Stakes that is
388
00:19:59,589 --> 00:20:01,875
providing income, you know, starting in year 1?
389
00:20:02,275 --> 00:20:08,134
We like evergreen structures, on the margin
particularly for things that have the liquidity
390
00:20:08,595 --> 00:20:10,674
matching the underlying fund structure.
391
00:20:10,674 --> 00:20:14,940
And what I mean by that is sometimes we we have
concerns about a private credit fund that's
392
00:20:14,940 --> 00:20:17,019
evergreen that offers monthly or quarterly
liquidity.
393
00:20:17,019 --> 00:20:21,740
But if you understand the underlying assets in
the portfolio, they may not be that liquid.
394
00:20:21,740 --> 00:20:26,220
So the concern is always how do you message
that that constraint where it says quarterly
395
00:20:26,220 --> 00:20:30,275
liquidity, but we all understand that there's
there's gonna be gates or or delays if everyone
396
00:20:30,275 --> 00:20:31,714
runs to the the gate at the same time.
397
00:20:31,714 --> 00:20:35,255
It's a tool chasing a solution, but it's not
inherently part of the strategy.
398
00:20:35,474 --> 00:20:35,954
Exactly.
399
00:20:35,954 --> 00:20:38,914
So I think, you know, when we think about it
from ourselves, if we're allocated, I think the
400
00:20:38,914 --> 00:20:41,954
evergreen structure provides a lot of
flexibility that should be able to be helpful
401
00:20:41,954 --> 00:20:44,369
as you're thinking about investing kind of over
periods of time.
402
00:20:44,369 --> 00:20:48,450
You don't have arbitrary investment deadlines
that constrain you or or periods of time where
403
00:20:48,450 --> 00:20:50,070
you don't have capital to put to work.
404
00:20:50,130 --> 00:20:54,369
On the limited partner side, we just have
concerns sometimes about the mechanisms for for
405
00:20:54,369 --> 00:20:56,384
getting liquidity with no fixed term.
406
00:20:56,384 --> 00:21:00,625
So you see it in the real estate space where
they're they provide liquidity on some basis,
407
00:21:00,625 --> 00:21:04,545
and it works in in the periods of time where
you're able to refinance and keep, you know,
408
00:21:04,545 --> 00:21:07,105
bringing capital back to the portfolio, and you
have new investors who wanna come in.
409
00:21:07,105 --> 00:21:08,964
And there's these mechanisms that create
liquidity.
410
00:21:09,505 --> 00:21:12,670
In periods where that dries up and you're not
selling buildings, you just have to understand
411
00:21:12,670 --> 00:21:16,910
that in an evergreen fund, there's no defined
term, and you might be in there for years.
412
00:21:16,910 --> 00:21:19,630
And I think if you if you understand that
constraint and you're comfortable with that, it
413
00:21:19,630 --> 00:21:21,490
can be interesting from an investment
perspective.
414
00:21:21,884 --> 00:21:26,765
On the topic of liquidity, is it fair to say
that the liquid strategies compete against each
415
00:21:26,765 --> 00:21:28,845
other and the liquid compete against the
liquid?
416
00:21:28,845 --> 00:21:35,404
In other words, by being a liquid manager, are
you in essence competing against lower expected
417
00:21:35,404 --> 00:21:37,265
returns from an opportunity cost basis?
418
00:21:37,619 --> 00:21:39,799
We expect there to be an illiquidity premium.
419
00:21:39,859 --> 00:21:43,779
Meaning, if if we're gonna lock up capital,
remove the ability to borrow against these
420
00:21:43,779 --> 00:21:48,579
assets, remove the the optionality of selling
them tomorrow, we want excess return.
421
00:21:48,579 --> 00:21:54,054
So if you told me there's 2 return streams at
10% each, one has daily liquidity and one is
422
00:21:54,054 --> 00:21:57,035
illiquid, you're gonna choose the daily
liquidity just because it's an added feature.
423
00:21:58,214 --> 00:22:03,255
That being said, you know, we don't think of
the same we don't think of the risks in a daily
424
00:22:03,255 --> 00:22:07,359
liquid public equity like we would in maybe a
illiquid private credit where you're hiring the
425
00:22:07,359 --> 00:22:07,679
capital stack.
426
00:22:07,679 --> 00:22:10,559
So we may have a different return bar across
different asset taps.
427
00:22:10,559 --> 00:22:14,399
But if we're thinking about, to keep it simple,
private equity versus public equity, we do
428
00:22:14,399 --> 00:22:17,139
think of there being a different hurdle rate
for the different assets.
429
00:22:17,599 --> 00:22:20,159
So let's talk about private equity and venture
capital.
430
00:22:20,159 --> 00:22:23,139
What's your breakdown in your portfolio between
private equity and venture
431
00:22:23,735 --> 00:22:28,695
We tend to be at a target of of roughly 2
thirds to private equity and growth equity, if
432
00:22:28,695 --> 00:22:28,934
you will.
433
00:22:28,934 --> 00:22:34,455
So maybe later stage venture or or or growth
equity checks to 1 third more true venture
434
00:22:34,455 --> 00:22:34,955
capital.
435
00:22:35,750 --> 00:22:40,470
Obviously, these terms we know the nomenclature
can change over time, but we think about it as
436
00:22:40,470 --> 00:22:45,750
sort of, that that first bucket, in private
equity being cash flowing businesses that
437
00:22:45,750 --> 00:22:47,589
you're potentially buying, majority of.
438
00:22:47,589 --> 00:22:51,815
Then the next bucket being growth companies
that are large stabilized businesses where
439
00:22:51,815 --> 00:22:55,815
you're buying a minority check and then venture
capital being, you know, I think the way we all
440
00:22:55,815 --> 00:23:00,695
think about ventures, earlier stage with a lot
of upside, but and and kind of an unproven
441
00:23:00,695 --> 00:23:01,755
outcome at this point.
442
00:23:01,894 --> 00:23:03,355
Talk to me about growth equity.
443
00:23:03,575 --> 00:23:08,160
A lot of people are very down on that asset
class even more than private equity and
444
00:23:08,160 --> 00:23:09,140
traditional venture.
445
00:23:09,440 --> 00:23:11,700
Tell me about the opportunities you're seeing
in growth equity.
446
00:23:11,759 --> 00:23:15,359
This is where the nomenclature is interesting
because I think when when I hear growth equity
447
00:23:15,359 --> 00:23:18,799
and I think most people, I I sort of jump to
late stage ventures.
448
00:23:18,799 --> 00:23:24,505
So series c, d, e, f, you know, in in this
environment of funding, but really kind of
449
00:23:24,505 --> 00:23:27,945
venture like companies and and venture firms
doing those later stage rounds.
450
00:23:27,945 --> 00:23:29,705
And I think that's a component of growth
equity.
451
00:23:29,705 --> 00:23:33,039
That's an area that that I maybe I mentioned
earlier that that we've been that we had
452
00:23:33,039 --> 00:23:36,339
challenging investing in earlier in this decade
when when things were very expensive.
453
00:23:36,480 --> 00:23:39,839
There there's also a form of growth equity
where you're investing in profitable companies
454
00:23:39,839 --> 00:23:43,599
that are maybe more old line growing companies,
but you're not buying the majority of the
455
00:23:43,599 --> 00:23:43,920
business.
456
00:23:43,920 --> 00:23:46,305
You're providing a growth check, and you're not
using financial leverage.
457
00:23:46,465 --> 00:23:48,705
And we think that's an interesting area of the
growth equity market.
458
00:23:48,705 --> 00:23:50,625
Meaning, it's it's not a sort of late stage
venture.
459
00:23:50,625 --> 00:23:53,105
It's it's more the businesses look more like
private equity.
460
00:23:53,105 --> 00:23:57,744
But as opposed to doing a a buyout and using a
lot of leverage to try to generate extra
461
00:23:57,744 --> 00:24:01,220
returns, you're looking at those types of
businesses that are growing quickly, and you're
462
00:24:01,220 --> 00:24:04,900
taking a minority check and you're you're
looking to, you know, get a rate of return
463
00:24:04,900 --> 00:24:08,900
based on the growth of the underlying earnings
as opposed to reducing costs using leverage and
464
00:24:08,900 --> 00:24:10,200
and doing some financial engineering.
465
00:24:10,259 --> 00:24:14,980
Oftentimes, in asset classes like growth equity
or secondaries, the money is made on the
466
00:24:14,980 --> 00:24:16,279
purchase and on the structuring.
467
00:24:17,065 --> 00:24:17,945
Talk to me about that.
468
00:24:17,945 --> 00:24:21,065
And where's their room in a portfolio for
family office for something like that?
469
00:24:21,065 --> 00:24:26,184
It's been interesting to us to see over the
last, couple years to see, structured terms
470
00:24:26,184 --> 00:24:28,105
coming back to to rounds of financing.
471
00:24:28,105 --> 00:24:32,539
So liquidation preferences and, you know, notes
that carry interest rates and some of these
472
00:24:32,539 --> 00:24:32,700
things.
473
00:24:32,700 --> 00:24:38,080
And for us, at a high level, we're we're we're
always looking at risk adjusted returns.
474
00:24:38,380 --> 00:24:41,660
So we've we've actually done some sort of
structured deals in the in the private equity
475
00:24:41,660 --> 00:24:44,694
and venture space where, you know, we're
collateralizing shares or doing different
476
00:24:44,694 --> 00:24:47,355
things to try to generate those those risk
adjusted returns.
477
00:24:47,494 --> 00:24:51,255
Goes back to this principle of if we're gonna
get 10% private equity or private credit, we'd
478
00:24:51,255 --> 00:24:52,875
rather be higher in the capital stack.
479
00:24:52,934 --> 00:24:56,829
And if if you can make private equity have some
downsides constraints and, you know, maybe your
480
00:24:56,829 --> 00:24:58,929
return target is the same, we're gonna choose
that all day long.
481
00:24:59,149 --> 00:25:04,349
Of course, there's this component of of not
being predatory in the financing and being
482
00:25:04,349 --> 00:25:08,349
founder friendly and and and and we certainly
ascribe to all those notions, but we we've
483
00:25:08,349 --> 00:25:11,730
tried to do things to to protect the downside
and look at more structured opportunities.
484
00:25:12,214 --> 00:25:15,894
When we last chatted, you talked about
Cambridge data on venture capital.
485
00:25:15,894 --> 00:25:16,775
Tell me about that.
486
00:25:16,775 --> 00:25:17,015
Yeah.
487
00:25:17,015 --> 00:25:21,494
So so Cambridge sort of famously, compiles
vintage level data for private equity, venture
488
00:25:21,494 --> 00:25:26,509
capital, various sub asset classes that that
help us all assess if our individual checks are
489
00:25:26,509 --> 00:25:29,309
top decile, top quartile, quartile, bottom
quartile, etcetera.
490
00:25:29,309 --> 00:25:33,230
They they benchmark against the other,
opportunities in that specific vintage and
491
00:25:33,230 --> 00:25:34,670
these specific sub asset classes.
492
00:25:34,670 --> 00:25:37,890
And that that's a really helpful tool for us to
see how we're doing on our commitments.
493
00:25:38,444 --> 00:25:44,044
One of the takeaways that Cambridge, I think,
has popularized is is around, around what types
494
00:25:44,044 --> 00:25:46,065
of funds and what fund sizes tend to
outperform.
495
00:25:46,284 --> 00:25:50,284
And this is an area that that we that we agree
with them on in in in a few areas.
496
00:25:50,284 --> 00:25:56,599
So we we look at earlier, fund vintages in this
firm's life, meaning, the data would show that
497
00:25:56,599 --> 00:25:59,179
that funds kind of 2 through 5 tend to do very
well.
498
00:26:00,359 --> 00:26:02,140
And part of that is is structural.
499
00:26:02,200 --> 00:26:02,440
Right?
500
00:26:02,440 --> 00:26:08,505
If if you have done very well in your early
funds, you get the right to raise larger funds
501
00:26:08,884 --> 00:26:11,304
and generate higher asset management fees.
502
00:26:11,444 --> 00:26:16,484
And that's good for the business, but can often
lead to strategy drift and, reduced alpha as
503
00:26:16,484 --> 00:26:20,585
you continues to succeed and grow out of what
made you successful just structurally.
504
00:26:20,950 --> 00:26:23,430
So, we couple that with fund size.
505
00:26:23,430 --> 00:26:29,029
We're very deliberate about the the size of the
fund being raised, and we want that target fund
506
00:26:29,029 --> 00:26:30,630
size to match the underlying strategy.
507
00:26:30,630 --> 00:26:35,404
And that varies dramatically from early stage
venture to, you know, private equity, but we
508
00:26:35,404 --> 00:26:36,765
want there to be alignment with that.
509
00:26:36,765 --> 00:26:39,984
And Cambridge data would show, I think, that
oftentimes smaller funds outperform.
510
00:26:40,125 --> 00:26:43,644
And I think that's just a function of funds
getting larger and losing alpha and maybe
511
00:26:43,644 --> 00:26:45,325
getting some strategy drift along the way.
512
00:26:45,325 --> 00:26:49,490
When you look at private equity managers,
they're in a fund 3, fund 4, fund 5.
513
00:26:49,490 --> 00:26:51,829
Let's say they've had top quartile performance.
514
00:26:52,690 --> 00:26:54,049
What else are you looking for?
515
00:26:54,049 --> 00:26:56,950
Like, what would get you not to invest in a top
quartile fund?
516
00:26:57,009 --> 00:27:00,134
It's a great question because what's so
interesting for us that that I think everyone
517
00:27:00,134 --> 00:27:03,575
thinks about when you're making a commitment
here on as an LP is that you're signing up
518
00:27:03,575 --> 00:27:05,654
really for a partnership for a decade plus.
519
00:27:05,654 --> 00:27:11,255
And so historical performance is important, but
it can sometimes be irrelevant when you look at
520
00:27:11,255 --> 00:27:13,815
a new vintage and and see the people deploying
the fund.
521
00:27:13,815 --> 00:27:19,179
So for us, making sure the track record of the
firm matches the current investors.
522
00:27:19,720 --> 00:27:24,440
Oftentimes, if you've had a few great funds,
you were very successful, and it can lead to a
523
00:27:24,440 --> 00:27:25,559
succession and change of hands.
524
00:27:25,559 --> 00:27:30,434
So making sure that there's continuity in the
team and that that, structure is set up to to
525
00:27:30,434 --> 00:27:30,755
last.
526
00:27:30,755 --> 00:27:34,355
And you've got succession plan, and you can
look at firm ownership and make sure that
527
00:27:34,355 --> 00:27:39,255
there's, the right alignment for the team
members to succeed for the next 10 years.
528
00:27:39,555 --> 00:27:41,849
The other thing, I guess, is related to what I
last mentioned.
529
00:27:41,849 --> 00:27:46,890
If the firm did great in funds 2, 3, 4, and 5
at $250,000,000 funds and then are raising a
530
00:27:46,890 --> 00:27:52,009
$5,000,000,000 fund and are gonna be, you know,
focused on very different, a very different
531
00:27:52,009 --> 00:27:56,490
strategy, then it for us, it's it's kind of a a
a totally new underwriting process, and we
532
00:27:56,490 --> 00:27:59,625
might not give a lot of credence to the prior
track record.
533
00:27:59,924 --> 00:28:05,845
Outside of team continuity and fund size, what
are other red or yellow flags for you to reop
534
00:28:05,845 --> 00:28:06,904
an existing manager?
535
00:28:07,285 --> 00:28:08,404
Concentration of returns.
536
00:28:08,404 --> 00:28:12,480
So if there's been a low hit rate, that could
potentially be a concern across these assets.
537
00:28:12,480 --> 00:28:16,559
I think in private equity, you're not likely to
see the outsized return of 1 company over time
538
00:28:16,559 --> 00:28:17,599
like you do in venture.
539
00:28:17,599 --> 00:28:19,460
So we'd wanna see those returns distributed.
540
00:28:19,919 --> 00:28:24,480
We'd also wanna see generally the ability to
produce, returns in different interest rate
541
00:28:24,480 --> 00:28:24,960
environments.
542
00:28:24,960 --> 00:28:28,664
I talked about financial engineering, but I
think some private equity firms' strategies
543
00:28:28,664 --> 00:28:31,384
have been more heavily predicated on on lower
interest rates.
544
00:28:31,384 --> 00:28:35,944
So we'd wanna see the ability to produce these
types of returns in a world where the cost of
545
00:28:35,944 --> 00:28:37,805
capital is not close to 0.
546
00:28:38,759 --> 00:28:39,160
Hey.
547
00:28:39,160 --> 00:28:41,259
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548
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549
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557
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That's z.carta.comforward/10xpod.
558
00:29:17,000 --> 00:29:18,539
Talk to me about benchmarking.
559
00:29:19,159 --> 00:29:23,240
What data are you using, and how do you bring
benchmarking to your decision making when it
560
00:29:23,240 --> 00:29:24,299
comes to asset allocation?
561
00:29:24,634 --> 00:29:28,154
We use benchmarks in a pretty material way
across all asset classes.
562
00:29:28,154 --> 00:29:32,394
So we in our reporting software, we look at our
assets, each of our individual line items
563
00:29:32,394 --> 00:29:35,754
relative to the benchmark that that best is the
best proxy for what they're trying to
564
00:29:35,754 --> 00:29:36,234
accomplish.
565
00:29:36,234 --> 00:29:40,599
So when we're looking at returns, we're looking
at risk adjusted returns relative to a a policy
566
00:29:40,599 --> 00:29:43,019
benchmark that represents the risk in their
portfolio.
567
00:29:43,720 --> 00:29:48,440
And some of our clients tend to be very
benchmark agnostic, meaning they don't they
568
00:29:48,440 --> 00:29:51,880
don't care, what the S and P did necessarily if
it was up or down.
569
00:29:51,880 --> 00:29:55,964
What they care about is sort of the risk return
of their portfolio and and tends to be more
570
00:29:55,964 --> 00:29:57,105
absolute return focused.
571
00:29:57,164 --> 00:30:01,244
On the flip side, we have institutional clients
that have an investment committee that that are
572
00:30:01,244 --> 00:30:04,384
very much oriented toward relative performance
versus the benchmark.
573
00:30:04,605 --> 00:30:07,169
In US large cap, it tends to be hard.
574
00:30:07,169 --> 00:30:08,130
It's an efficient market.
575
00:30:08,130 --> 00:30:11,650
It doesn't mean that we don't try to lean into
value and be systematic, particularly when
576
00:30:11,650 --> 00:30:14,150
there's excesses like we're seeing now that we
talked about earlier.
577
00:30:14,210 --> 00:30:18,929
But but on on margin, it's harder to have alpha
numerically in US large cap because of the
578
00:30:18,929 --> 00:30:19,429
efficiency.
579
00:30:19,945 --> 00:30:23,144
In some of the areas in diversifiers that we
talked about, there's not great benchmarks.
580
00:30:23,144 --> 00:30:27,644
And we think taking that benchmark risk, if you
will, is valuable to the portfolio.
581
00:30:28,184 --> 00:30:33,164
So we we we look at it on a sub asset class
basis, on an asset class basis, even within
582
00:30:33,580 --> 00:30:36,299
equities, small cap, equities tend to be less
efficient.
583
00:30:36,299 --> 00:30:39,340
There's more room for alpha and active
management in small cap than there is in large
584
00:30:39,340 --> 00:30:40,240
cap, for example.
585
00:30:40,299 --> 00:30:44,460
And the reason the benchmarks don't really make
sense in the hedge fund strategy is because so
586
00:30:44,460 --> 00:30:46,160
many of those are idiosyncratic.
587
00:30:46,299 --> 00:30:51,054
It's like the price of corn or the weather or
some global event, and they're almost by de
588
00:30:51,054 --> 00:30:52,414
facto by not being correlated.
589
00:30:52,414 --> 00:30:55,454
The benchmark is almost nonsensical in those
cases.
590
00:30:55,454 --> 00:30:55,855
That's right.
591
00:30:55,855 --> 00:30:59,615
And then from a from a client perspective, the
benchmarks are also irrelevant.
592
00:30:59,615 --> 00:31:02,940
I think most of our clients have mental
benchmarks of what the S and P has done, what
593
00:31:03,019 --> 00:31:05,119
fixed income has done, you know, maybe treasury
market.
594
00:31:05,579 --> 00:31:09,179
And and those those become mental benchmarks
for how their portfolio is doing.
595
00:31:09,179 --> 00:31:12,619
Some of these esoteric areas, you could show a
benchmark.
596
00:31:12,619 --> 00:31:15,980
But if you don't even understand what the
benchmark is, it becomes less meaningful as
597
00:31:15,980 --> 00:31:16,934
you're working through that.
598
00:31:17,015 --> 00:31:17,174
And
599
00:31:17,174 --> 00:31:21,654
those diversifiers are essentially just a way
to get higher than treasury returns in a
600
00:31:21,654 --> 00:31:22,535
noncorrelated way.
601
00:31:22,535 --> 00:31:27,095
So taken to extreme, you could just have the
money in cash or treasuries, but you wanna have
602
00:31:27,095 --> 00:31:30,235
a higher return without increasing the
volatility of the portfolio.
603
00:31:30,380 --> 00:31:30,779
That's correct.
604
00:31:30,779 --> 00:31:35,820
And I think to our correlation, point earlier
in a world where stocks and bonds may be
605
00:31:35,820 --> 00:31:39,180
positively correlated for some periods of time,
it's an asset class that can provide
606
00:31:39,180 --> 00:31:40,380
diversification against that.
607
00:31:40,380 --> 00:31:43,900
So if you look at 2022 as the example, most of
these strategies that we have in our
608
00:31:43,900 --> 00:31:47,955
diversifiers bucket did very well despite a
year when both stocks and bonds really
609
00:31:47,955 --> 00:31:48,455
struggle.
610
00:31:48,755 --> 00:31:52,674
Outside of a concern for liquidity, is there
ever reason to own treasuries or cash?
611
00:31:52,674 --> 00:31:57,234
There certainly could be periods of time where
the the risk free rate of a treasury relative
612
00:31:57,234 --> 00:31:58,674
to a public equity looks attractive.
613
00:31:58,674 --> 00:32:01,859
I mean, I think if you look back to the
seventies and understand where rates were for
614
00:32:01,859 --> 00:32:05,779
some of those periods of time, and if you could
have locked in, again, better than equity like
615
00:32:05,779 --> 00:32:10,660
returns, 10 plus percent in a treasury bond,
with hindsight, you you'd probably say that's a
616
00:32:10,660 --> 00:32:11,539
pretty good trade.
617
00:32:11,539 --> 00:32:15,140
And then over that period, you also had rates
coming down steadily and, you know, improving
618
00:32:15,140 --> 00:32:17,954
prices on your on your underlying, fixed income
instrument.
619
00:32:17,954 --> 00:32:22,275
So I I do think there are times where, your
risk adjusted returns can be better.
620
00:32:22,275 --> 00:32:27,714
In the times of high interest rates, in the
times when treasuries are at high numbers, does
621
00:32:27,714 --> 00:32:30,150
it ever make sense to lock in those rates over
long times?
622
00:32:30,309 --> 00:32:30,549
Yes.
623
00:32:30,549 --> 00:32:31,509
We we think so.
624
00:32:31,509 --> 00:32:32,070
We think so.
625
00:32:32,070 --> 00:32:35,029
Even over intermediate or or or short ish time
frames.
626
00:32:35,029 --> 00:32:36,549
I mean, we think back to a year ago.
627
00:32:36,549 --> 00:32:40,549
You could get slightly higher rates in money
market funds than you could in a 1 year or 2
628
00:32:40,549 --> 00:32:41,289
year treasury.
629
00:32:41,509 --> 00:32:46,115
But the reinvestment risk, to us in a in a
treasury or 3 month t bill looked fairly high
630
00:32:46,115 --> 00:32:48,195
given the probability of rate cuts at some
point.
631
00:32:48,195 --> 00:32:50,134
And the market prices that into some extent.
632
00:32:50,674 --> 00:32:53,015
Obviously, it's it's a it's a relatively
efficient market.
633
00:32:53,154 --> 00:32:57,075
But we we we like to with our clients, we are
looking at kind of a barbell strategy work
634
00:32:57,075 --> 00:33:02,140
within the treasury space where you're locking
in some higher yielding short term, T bills
635
00:33:02,140 --> 00:33:07,339
from kind of 6 month, 1 year, 2 year to then
going out and locking in, some some yield at 20
636
00:33:07,339 --> 00:33:07,740
years.
637
00:33:07,740 --> 00:33:10,299
And so far, I think it won't always work.
638
00:33:10,299 --> 00:33:13,680
It's played out over this period as rates have
come down more recently, and the expectation
639
00:33:13,740 --> 00:33:15,119
for rate cuts has increased.
640
00:33:15,335 --> 00:33:18,295
We've gotten some price appreciation
importantly locked in rates that felt
641
00:33:18,295 --> 00:33:19,335
attractive at the time.
642
00:33:19,335 --> 00:33:21,894
You've been at CEPIO Capital for seven and a
half years.
643
00:33:21,894 --> 00:33:24,154
What do you wish you knew when you first
started at CEPIO?
644
00:33:24,375 --> 00:33:31,420
I don't think, I fully understood at CEPIO how
how vast the the investment universe would be
645
00:33:31,420 --> 00:33:31,900
for us.
646
00:33:31,900 --> 00:33:35,900
Prior to this, I had been at various investment
banks and and institutions with a walled
647
00:33:35,900 --> 00:33:38,079
garden, and you saw the same types of
strategies.
648
00:33:38,299 --> 00:33:42,220
And I think our hope at Sepio was gonna be that
we we'd have the opportunity to look at more
649
00:33:42,220 --> 00:33:43,039
niche opportunities.
650
00:33:43,494 --> 00:33:48,054
And I I don't think we understood at inception
just how wide that universe is for better or
651
00:33:48,054 --> 00:33:48,375
for worse.
652
00:33:48,375 --> 00:33:52,774
There's there's a lot of, you know, very
unattractive opportunities that shown to to us
653
00:33:52,774 --> 00:33:53,595
and to clients.
654
00:33:53,734 --> 00:33:59,279
But the the the the amount of interesting
things that you can invest in across the space
655
00:33:59,339 --> 00:34:02,859
if you truly have an open architecture is
broad, and it takes a lot of team capacity.
656
00:34:02,859 --> 00:34:06,779
So we've we've staffed up and tried to get in a
place where we can diligence really anything,
657
00:34:07,019 --> 00:34:08,144
in the investment landscape.
658
00:34:08,385 --> 00:34:12,625
Talk to me about how you've improved your skill
set and your knowledge base over your seven and
659
00:34:12,625 --> 00:34:13,364
a half years.
660
00:34:13,505 --> 00:34:17,505
I've been fortunate to have really sharp and
impressive colleagues that I've been able to
661
00:34:17,505 --> 00:34:17,824
learn from.
662
00:34:17,824 --> 00:34:22,144
I I've tried to to really lean in and and work
on kind of everything in a team oriented way.
663
00:34:22,144 --> 00:34:26,750
So at Sepio, we don't have a sharp elbowed
culture where, you know, one individual owns
664
00:34:26,750 --> 00:34:32,030
something and and takes all the revenues from
that, strategy or or or workflow, but rather a
665
00:34:32,030 --> 00:34:32,989
team oriented process.
666
00:34:32,989 --> 00:34:35,469
So we have team members that that's focused on
real estate.
667
00:34:35,469 --> 00:34:36,989
We have team members that focus on private
equity.
668
00:34:36,989 --> 00:34:39,605
On the direct side, I focus on more on the LP
side.
669
00:34:39,605 --> 00:34:43,364
And and for me, working a collaborative way
across our Alts platform, working as investment
670
00:34:43,364 --> 00:34:49,364
community to really understand, what's
attractive without sort of any any bias for our
671
00:34:49,364 --> 00:34:51,444
own coverage area has been really helpful for
me.
672
00:34:51,444 --> 00:34:55,980
And I think as as a firm as well to be able to
be nimble and and look at different areas, it
673
00:34:55,980 --> 00:34:58,160
may become more attractive based on the macro
environment.
674
00:34:58,380 --> 00:35:02,539
Talk to me how you would get comfortable or how
you would accelerate your learning growth in
675
00:35:02,539 --> 00:35:04,160
new space like GP Stakes.
676
00:35:04,619 --> 00:35:04,860
Yeah.
677
00:35:04,860 --> 00:35:07,660
We we, we're very comfortable diving into new
spaces.
678
00:35:07,660 --> 00:35:08,505
We we've done it often.
679
00:35:08,505 --> 00:35:12,505
I think for us, it's it's a time in resource
management and and and really what we think
680
00:35:12,505 --> 00:35:13,385
makes sense to our clients.
681
00:35:13,385 --> 00:35:17,464
So where we have client demand or or we think
it's it's a need for a client, we'll kind of
682
00:35:17,464 --> 00:35:20,344
put whatever resources necessary to dive in and
understand that.
683
00:35:20,344 --> 00:35:24,519
GP led stakes have been, I think, from that
client perspective, sometimes challenging to
684
00:35:24,519 --> 00:35:28,760
understand who's gonna benefit from the the
economics of a GP stake given that our it's our
685
00:35:28,760 --> 00:35:32,599
client's capital, but maybe we'd be aggregating
capital on behalf of them as a firm and making
686
00:35:32,599 --> 00:35:34,280
sure that they get those underlying benefits.
687
00:35:34,280 --> 00:35:36,440
At times hasn't been overly clear to us.
688
00:35:36,440 --> 00:35:40,574
So it's not an area that we we spent a lot of
time on, but if the opportunity presented or if
689
00:35:40,574 --> 00:35:42,775
it felt like it was a need, we we'd certainly
dive in.
690
00:35:42,775 --> 00:35:45,994
Walk me through how you get knowledgeable on on
a new space.
691
00:35:46,454 --> 00:35:47,755
Do you bring in advisers?
692
00:35:47,815 --> 00:35:49,594
Do you talk to prospective GPs?
693
00:35:50,019 --> 00:35:50,180
Yeah.
694
00:35:50,180 --> 00:35:51,539
We we've done all of those things.
695
00:35:51,539 --> 00:35:55,059
We've had investment consultants in the past,
particularly when we had a leaner team that we
696
00:35:55,059 --> 00:35:57,619
could lean on for, kind of high level
diligence.
697
00:35:57,619 --> 00:36:02,579
We we we, of course, have access to all of the
major research platforms that provide good data
698
00:36:02,579 --> 00:36:06,344
and then the, you know, the software systems
like Bloomberg and PitchBook and, you know, all
699
00:36:06,344 --> 00:36:08,905
of those, underlying opportunities to get data.
700
00:36:08,905 --> 00:36:14,045
So part part of it becomes a a a quantitative
process of understanding in a certain space
701
00:36:14,425 --> 00:36:18,025
what investment partners have the best track
record, and and that's not overly difficult to
702
00:36:18,025 --> 00:36:19,380
try to screen for those things.
703
00:36:19,380 --> 00:36:22,679
And then to your point, we have lots of
discussions with general partners.
704
00:36:22,819 --> 00:36:26,500
So when we're exploring an area like distressed
credit that we referenced before that maybe was
705
00:36:26,500 --> 00:36:30,179
less interesting to us before, became very
interesting to us, we're gonna end up talking
706
00:36:30,179 --> 00:36:35,505
to 50 plus underlying firms, understanding the
market as well as we can, diving in on track
707
00:36:35,505 --> 00:36:38,704
records, the quantitative process, and
ultimately getting comfortable with with
708
00:36:38,704 --> 00:36:39,525
various partners.
709
00:36:40,144 --> 00:36:44,465
What is the minimum amount of GPs you would
want to talk to before investing in new
710
00:36:44,465 --> 00:36:44,965
strategy?
711
00:36:45,380 --> 00:36:49,699
I think the minimum number of GPs we'd wanna
talk to, before investing in the strategy is
712
00:36:49,699 --> 00:36:54,660
probably 20 if we felt like that we had a if we
felt like we had a curated list of 20 of the
713
00:36:54,660 --> 00:36:56,440
best GPs in a certain subsector.
714
00:36:56,980 --> 00:37:01,304
In a space like venture, I probably end up
talking to a 100 plus GPs a year.
715
00:37:01,304 --> 00:37:05,224
It's very referral based, and there's lots of
new entrants and smaller funds.
716
00:37:05,224 --> 00:37:09,304
And it's a little bit different than certain
areas of the the the investment landscape, so
717
00:37:09,304 --> 00:37:10,684
maybe warrants more conversations.
718
00:37:10,985 --> 00:37:12,525
Those 20 being warm introductions?
719
00:37:13,110 --> 00:37:13,349
Correct.
720
00:37:13,349 --> 00:37:13,849
Yeah.
721
00:37:14,150 --> 00:37:19,030
So potentially, spanning up from hundreds of
firms, those are the 20 that you were told to
722
00:37:19,030 --> 00:37:19,510
to speak to.
723
00:37:19,510 --> 00:37:23,590
And then from those 20 conversations, you you
you start to getting good sense of the space.
724
00:37:23,590 --> 00:37:23,829
Yeah.
725
00:37:23,829 --> 00:37:26,869
If you think about the additional funnel in
every investment deck, we're probably gonna
726
00:37:26,869 --> 00:37:32,014
look at, you know, a 100 plus GPs in any one of
these areas and try to funnel it down to kind
727
00:37:32,014 --> 00:37:36,255
of a smaller group that we do initial screen
call with, and then, you know, get down to some
728
00:37:36,255 --> 00:37:40,094
amount of, call it, 20 where you're gonna
really do some some diligence and have multiple
729
00:37:40,094 --> 00:37:44,359
calls with the team and and and and multiple
constituents internally and externally to try
730
00:37:44,359 --> 00:37:46,260
to understand, the opportunity set.
731
00:37:46,400 --> 00:37:50,179
As an LP, what mistakes have you made in terms
of investing in GPs?
732
00:37:50,239 --> 00:37:53,380
What has looked good that's actually not good?
733
00:37:53,920 --> 00:37:58,175
Some challenges we've had on on initial LP
checks is understanding how good partnership
734
00:37:58,175 --> 00:37:59,235
dynamics are internally.
735
00:37:59,614 --> 00:38:03,635
We we've we've invested in folks before where
we felt like their partnership was very stable.
736
00:38:03,775 --> 00:38:08,655
And then you get a few years into a fund, and
you and and you start to understand that that
737
00:38:08,655 --> 00:38:12,710
maybe the the underlying, chemistry of the
partners wasn't as good as you thought, and you
738
00:38:12,710 --> 00:38:15,369
have to deal with the with the GP breakup mid
fund.
739
00:38:15,510 --> 00:38:19,349
And I think that sometimes coincides with
investing earlier in a firm's life cycle.
740
00:38:19,349 --> 00:38:22,869
So if you're investing in fund 2 or 3,
sometimes there's still some kinks to be worked
741
00:38:22,869 --> 00:38:25,485
out, and you hit a more challenging period, and
you have general partner splitting.
742
00:38:25,485 --> 00:38:26,565
So that's been that's been a challenge.
743
00:38:26,565 --> 00:38:29,805
It's something we spend a lot of time trying to
assess and make sure that the partnership's in
744
00:38:29,805 --> 00:38:32,704
a good space before, you know, we engage as a
limited partner.
745
00:38:33,005 --> 00:38:37,325
You suss that out by taking them to drinks,
taking them to coffee, seeing how they are with
746
00:38:37,325 --> 00:38:37,985
their families.
747
00:38:38,285 --> 00:38:39,885
How do you how do you suss out that risk?
748
00:38:39,885 --> 00:38:43,590
How do you become better at understanding the
partnership dynamics at a GP?
749
00:38:43,890 --> 00:38:47,090
Extending the diligence period, so really
getting to know people, not necessarily in
750
00:38:47,090 --> 00:38:49,829
time, but in in the amount of time spent with
the GPs.
751
00:38:50,050 --> 00:38:52,150
I think reference calls can be very helpful.
752
00:38:52,289 --> 00:38:55,914
And and maybe more than anything, not everyone,
but but many of the folks we work with are
753
00:38:55,914 --> 00:38:57,755
driven by the economics at some point.
754
00:38:57,755 --> 00:39:03,835
So some of the situations we've seen that
haven't worked out, were in part potentially
755
00:39:03,835 --> 00:39:08,474
driven by, one general partner owning more of
the firm and potentially doing an equal amount
756
00:39:08,474 --> 00:39:11,440
or less of the work, and no mechanism for that
changing over time.
757
00:39:11,440 --> 00:39:16,079
So I think on a, you know, if you're on a
quantitative basis, really making sure that
758
00:39:16,079 --> 00:39:20,559
that we've got a good understanding for the
underlying economics of the business and and
759
00:39:20,559 --> 00:39:23,655
making sure that they feel sustainable through
the life of a fund.
760
00:39:24,135 --> 00:39:27,735
How do you make sure that your reference calls
get to ground truth?
761
00:39:27,735 --> 00:39:29,494
And what are some non obvious signs?
762
00:39:29,494 --> 00:39:32,934
I'm sure it's unlikely that the person says
it's a terrible person, never give money to
763
00:39:32,934 --> 00:39:33,094
them.
764
00:39:33,094 --> 00:39:37,815
But what are some things that you look for that
would indicate that the person might not be a
765
00:39:37,815 --> 00:39:39,380
GP that you wanna invest in?
766
00:39:39,380 --> 00:39:39,539
Yeah.
767
00:39:39,539 --> 00:39:43,940
For on on list references, for references that
were provided, you you sort of have to assume
768
00:39:43,940 --> 00:39:46,980
that they were curated because they've got a
good relationship, and they're gonna tell you
769
00:39:46,980 --> 00:39:48,519
that they are a great fund manager.
770
00:39:48,579 --> 00:39:53,140
I think the common advice that that I've gotten
and read in books about references for whether
771
00:39:53,140 --> 00:39:56,684
it's hiring or or these sorts of things is
asking open ended questions and asking
772
00:39:56,684 --> 00:39:57,324
follow-up questions.
773
00:39:57,324 --> 00:40:02,125
I think when you ask, you know, how if you're
talking to an entrepreneur, how were they, you
774
00:40:02,125 --> 00:40:03,884
know, through this process, they're gonna say
good.
775
00:40:03,884 --> 00:40:07,324
And then if you say, tell me about that, and
they'll tell you, you know, how they did well
776
00:40:07,324 --> 00:40:09,005
and then, you know, what was one of the
struggles you've had.
777
00:40:09,005 --> 00:40:12,099
I think at that point, they tend to be a little
bit more open to telling you about some of the
778
00:40:12,099 --> 00:40:13,880
challenges they've had throughout that process.
779
00:40:14,099 --> 00:40:17,940
So I think I found if if I have a list of 10
questions and I go through and just let the
780
00:40:17,940 --> 00:40:21,460
reference answer kind of yes or no or or the
first question, and it was someone that was
781
00:40:21,460 --> 00:40:23,204
provided, you're just gonna get great answers.
782
00:40:23,285 --> 00:40:28,405
If you ask 1 layer, 2 layer, 3 layers down, in
a way that doesn't feel threatening and you
783
00:40:28,405 --> 00:40:31,605
agree with the initial premise that they're
great, you you tend to get some some open
784
00:40:31,605 --> 00:40:32,985
feedback from the referencee.
785
00:40:33,204 --> 00:40:37,359
I think the to my point of off list references,
if you can find folks that can speak freely
786
00:40:37,359 --> 00:40:40,559
knowing that that's more anonymous because they
weren't provided as a reference, it becomes
787
00:40:40,559 --> 00:40:42,960
much easier to to get at the the truth, if you
will.
788
00:40:42,960 --> 00:40:48,159
And even them unwilling to jump on a call after
opening your email is a pretty strong signal
789
00:40:48,159 --> 00:40:48,480
itself.
790
00:40:48,480 --> 00:40:48,974
Correct?
791
00:40:49,055 --> 00:40:49,375
Correct.
792
00:40:49,375 --> 00:40:49,614
Yeah.
793
00:40:49,614 --> 00:40:50,015
Totally.
794
00:40:50,015 --> 00:40:51,934
And and I think you you've probably seen this.
795
00:40:51,934 --> 00:40:53,155
We've we've all felt this.
796
00:40:53,215 --> 00:40:59,215
It's it's a small world, and, most in general
partners are, you know, one degree of
797
00:40:59,215 --> 00:41:01,295
separation through another GP or through a
company.
798
00:41:01,295 --> 00:41:05,650
It hasn't been too challenging for us to find
someone, that we can connect with off list.
799
00:41:05,710 --> 00:41:10,429
One thing that I try to do in my reference
calls is to get to the truth while providing
800
00:41:10,429 --> 00:41:13,409
plausible deniability to the inner interviewee.
801
00:41:13,549 --> 00:41:18,734
In other words, not making them say this person
is a terrible person, but perhaps seeing, you
802
00:41:18,734 --> 00:41:23,775
know, how they answer, the enthusiasm, what
they say, what they say without being prompted.
803
00:41:23,775 --> 00:41:28,674
Those are all very, very strong signals,
especially, on on a live call.
804
00:41:28,734 --> 00:41:29,534
Totally agree.
805
00:41:29,534 --> 00:41:33,214
What would you like our audience to know about
you, about Cepio Capital, or anything else
806
00:41:33,214 --> 00:41:34,230
you'd like to shine a light
807
00:41:34,389 --> 00:41:38,150
Hopefully, this has been illustrated throughout
our conversation, but we have a a flexible wide
808
00:41:38,150 --> 00:41:39,510
mandate on the investment side.
809
00:41:39,510 --> 00:41:43,449
So we we welcome any opportunities to look at
interesting strategies.
810
00:41:43,670 --> 00:41:47,750
We're also more than happy to dive in and talk
further about our asset allocation, our high
811
00:41:47,750 --> 00:41:50,054
conviction investment opportunities, and what
we're looking at now.
812
00:41:50,375 --> 00:41:50,614
Excellent.
813
00:41:50,614 --> 00:41:53,815
Well, I appreciate you jumping on the podcast
and look forward to sitting down soon.
814
00:41:53,815 --> 00:41:54,934
David, really appreciate the time.
815
00:41:54,934 --> 00:41:55,675
Thanks so much.
816
00:41:56,135 --> 00:41:57,275
Thank you for listening.
817
00:41:57,494 --> 00:42:02,300
The 10X Capital podcast now receives more than
a 170,000 downloads per month.
818
00:42:02,701 --> 00:42:05,840
If you are interested in sponsoring, please
email me at david@10xcapital.com.
