Transcript
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Eighty plus percent of middle market firms in
the US today are still run by the founding or
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cofounding partners with no succession plan in
place.
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In order to mitigate that phenomenon, meaning
that lack of thoughtful succession planning and
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the reversion to the mean in terms of returns
is as firms continue to progress over future
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vintages.
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You need to be able to have a keen focus on
talent, promotional attention, refreshing the
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carry pool for that next generation of partners
and a meaningful mechanism in place where you
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buy, you can actually transfer that ownership
over time.
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If you can't sustain the business piece of it
along the lines of talent and hiring and
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promotion retention, milky relations and
appropriate operations and financial
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capabilities, you're never gonna be able to
progress as a firm independent of your ability
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to generate good investment.
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To use a sports analogy, it's the difference
between being a really good shooting guard,
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maybe even all star and being incredibly good
at shooting versus owning the team and having
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to manage a team, having to get a coach and
manage the players and everything comes
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alongside of it.
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What is GPS Seating?
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I will do my best to not make this super
granular.
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But at at the highest possible level, GP
seeding is taking an ownership interest in the
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management company of an asset management firm.
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So you could be seeding a fund 2, air fund 3 as
well.
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So tell me about how that practically works.
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The practical impact of having a seed partner
is either launch capital, so think of that as a
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true fund 1, or akin to your world, a growth
equity partner.
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So think about that as catalytic capital
support where it's more than just a check,
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meaning that scale capital access precondition
for being a good seed partner.
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But it's as much about the scale capital access
and really the right mix of capital access,
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meaning a combination of LP capital, co
investment capital, as well as working capital
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to help build the the right talent and
infrastructure at the outset.
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That in the launch scenario, I think, is pretty
clear cut and easy to understand.
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In a growth capital scenario, it's often about
helping to properly capitalize what have been
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subscale or undercapitalized firms
historically.
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Most institutional investors are solving for,
minimum fund size and private equity of 250 to
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300,000,000 plus of AUM as they think about a
target fund that they wanna allocate to.
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So let's double click on that a little bit
outside of, you know, 250 or 300,000,000 being
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a good number.
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Why is that such a critical point of capital to
raise for private equity fund?
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A couple of different points to consider.
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Meaning, that I would think about that as a
minimum, not a target.
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Right?
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Meaning that 250 to $300,000,000 threshold
typically governs where institutional LPs, so
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the the common pools of capital that you'd be
familiar with around the pension plans and
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sovereign wealth funds, frankly, a fund that
size would would typically be out of range for
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most of the public pension plans, most of the
sovereign wealth funds, but would be in range
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for endowments and foundations who have been
prolific investors and emerging emerging
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managers, for example, for single family
offices, multifamily offices.
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Most of the institutional world that was
solving for a minimum threshold of scale,
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meaning use 300 as a proxy here because they
wanna be able to write a significant enough
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check, meaning on order of magnitude, sort of 5
to $25,000,000 checks within that lower to mid
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market cohort of institutional investors.
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But where that $25,000,000 check, for say, for
example, doesn't get them over their skis in
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terms of the percentage that they represent the
fund.
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And so you pretty quickly build to this minimum
threshold of AUM that the firm needs.
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From the GP's perspective, very different
calculus.
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Meaning, what the GP is solving for, as you
might expect, is that they need to be able to
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80 plus percent of the capital that they're
spending or an asset manager's p and l is
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people in the early days, and that that shifts
over time.
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But if you look at the operating budget, which
we spend a lot of time doing in my seat of an
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early stage asset management firm, if you're a
$300,000,000 firm or endeavoring to be a
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300,000,000 of AUM debut fund, you're spending
or anticipating spending roughly 3 to
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$5,000,000 a year just to properly capitalize
the firm.
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And so you need that minimum threshold of fee
paying AUM that's supported by that client
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base, and in this case, the institutional
client base that you're targeting in order to
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be able to hire and properly incentivize the
right people, and as importantly, to be able to
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get early deals done in that value chain that
also show institutional investors how you
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intend to invest going forward.
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So there's a minimum quality of talent that you
want and almost a fixed cost to the highest
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level of talent.
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And if you have a $1,000,000,000 fund, it's
fine.
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If you have a $100,000,000 fund, you just don't
have the money to pay them.
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And that that's not all just investment talent.
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I think really critically important actually to
focus on the fact that you you have probably a
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60, 40, 70, 30 split in favor of the cost
equation between the investment talent and
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noninvestment talent.
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But where the noninvestment talent, especially
in the earliest days and vintages of those
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funds, is actually the biggest contributor to
ensuring that that fund is in fact
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institutional quality investing class.
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Said differently, the operations folks, the
finance folks, the regulatory and compliance
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and investor relations cohort that they hire as
critically important as having an established
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and pedigree investment team because that's
what distinguishes between your ability to be a
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good investor and a great firm founder.
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Good investor versus good firm founder.
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What's the difference?
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So you you know very well, the the assessment
that, Sequoia makes in in terms of being able
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to distinguish between those who have a great
idea or in our case, a great established track
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record in history investing versus those who
are gonna be exceptional entrepreneurs.
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And there are many more talented investors than
there are great founders.
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Right?
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That that's true in asset management.
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That's true in venture capital.
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But the the big difference between those who
are successful investors and those who are
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great entrepreneurs has a lot to do with some
of the crossover between what makes for a great
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VC entrepreneur.
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For example, what makes for a great asset
management firm founder, meaning the hustle,
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grit, determination, tolerance for adversity,
the maniacal focus on doing one thing
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exceptionally well, but all of those pieces
really matter.
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In asset management world, though, it's as
critical that you as an exceptional investor,
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if you have a top tier track record, you are
very pedigreed, you're spinning out typically
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of a very well established firm.
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You have almost by definition, if you have been
in the business of generating great investment
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returns, you almost without exception have
never had to focus on a single ounce of the non
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investment infrastructure that's required in
order to create a best in class institution.
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Meaning, because it wasn't your job.
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It wasn't meant to be within the remit of where
you're spending time.
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But the minute that you launch an asset
management firm, you are as on the hook for and
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expected by LPs and appropriately so to pay
attention to all the infrastructure needs of
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being an effective fiduciary who can safeguard
client assets and report on them appropriately
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and be in compliance with SEC regs and treat
your your investors appropriately, all of that
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as critically important and, frankly, table
stakes as is generating best and best returns.
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Meaning LPs give you money because they assume
that you're gonna be able to generate great
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investment returns if you have a great track
record of doing that, but they will not
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continue to give you money if you can't sustain
the non investment infrastructure pieces that
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are required to be a terminal value business
ultimately.
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And so it's that combination of a a necessary
but not sufficient, if you will, meaning table
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stakes that you have to be able to generate
great returns.
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But if you can't sustain the business piece of
it along the lines of talent and hiring and
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promotion retention and LP relations and
appropriate operations and financial
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capabilities, you're never gonna be able to
progress as a firm independent of your ability
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to generate good investment returns.
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To use a sports analogy, it's the difference
between being a really good shooting guard,
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maybe even all star and being incredibly good
at shooting versus owning the team and having
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to manage a team, having to get a coach and
manage the players and everything that comes
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alongside of it.
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Yes.
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And investing is inherently an apprenticeship
business.
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And so you don't have discrete in a private
equity context from a venture context, for
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example.
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You really don't have a solo GP phenomenon in
private equity.
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Meaning that it's not that you don't have lead
partners or more dominant managing partners on
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on whose track record the firm relies in the
early days, but you tend to have much more
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collaborative and larger teams.
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And because of that higher barriers to entry in
terms of P and L associated with starting a
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private equity firm.
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But because of that, you have to have a team on
whom you're reliant, and you have to be able to
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build real scale and infrastructure and
platform capabilities, just given the the
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nature of, you know, our our universe, we're
focused on all investors who are investing in
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mid and low market buyout businesses that are
cash flowing assets.
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But typically starting single digits, we have a
dummy.
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They're they're investing in a cohort of
businesses where they have to be able to
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generate returns, but also be really steeped in
the operational value they bring, and you can't
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do that as as an individual person.
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But LPs very appropriately expect that the
managing partner who's just founded the firm is
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going to be attuned to all of the investment
mechanics and be involved in that day to day
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investment committee and decision process, but
also be equally attuned to what their CFO is
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doing, what their chief compliance officer is
doing, and how the fund administration works
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with benefit of their clients.
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What are you looking for when it comes to
somebody that you think could break out and be
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the next great institutional manager?
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As we often joke, our our entrepreneurs, our
founders are closer to 50 than 25.
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Very proven investors, meaning that's the
precondition.
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That's the table stakes that they have to be
very proven investors.
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And in our case, we've been focused on those
who have been deep domain expert sector
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specialists and done the same thing in the same
industry for a really long time, but we are
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they bring a unique vantage point on what we
have a deep bias in favor of investor operator
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peers, meaning those who have run mid and low
market businesses, we we think are incredibly
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valuable as you add that to a traditional
pedigree investing skill set and background,
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that combination.
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Is that 2 different people or is that within
people.
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2 different people.
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Mhmm.
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We we really like to see that history and
experience.
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If you look at heavily regulated sectors like
health care and education, which are due to the
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transactions that we've invested in to date in
in terms of industry sectors, there, we also
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really like to see a unique experience and
background in public policy and or regulatory.
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Meaning, if you're gonna be transacting a
heavily regulated industry, you wanna know that
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you have a differentiadability to underwrite
and view that regulatory risk different from
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your competitors.
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And so that means that we spend a lot of time
looking at the totality of the team to say, not
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just have you generated investment returns
historically.
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Again, we we don't pretend that's easy to do,
but it's table stakes in terms of vetting the
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criteria for our founders.
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And the what next is once we get through that
first gate of what looks like traditional
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manager selection in terms of the track record
background of the team, team continuity,
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performance, being able to copy and paste what
they've done historically to what they intend
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to do on a go forward basis, it's really about
the firm and business builds underwriting as
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well as the entrepreneur underwriting, meaning
we spend the next 50% of our time on that.
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So you're not looking to take risk on whether
they'd be a good investor or maybe a good
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operator.
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You're really trying to figure out, can they
build a real firm?
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Correct.
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It's the if if you look at the your first
question around what is seeding, seeding, I
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would argue, is an assessment of underwriting,
track record risk paired with new business
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risk.
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And the only way to do seeding well is to
eliminate the track record risk.
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Meaning Mhmm.
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In order to have predictability and consistency
and good outcomes for investors and seed
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structures, you wanna eliminate track record
risk or mitigate it to the greatest extent
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possible and isolate the new business risk
because that's the piece that if you're on an
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institutional platform, if you can resource
founders appropriately, you're in a position to
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really meaningfully derisk that piece of it and
therefore have your clients benefit from
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participating in the enterprise value that
results from it.
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But it's exactly what you what you noted.
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Meaning that new business risk piece is what
you have to focus on in terms of distinguishing
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between those who are great investors versus
those who have the potential to be great firm
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founders.
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And there are some core attributes that you'll
find that really distinguish those two
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personality types.
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I mean, by the way, 80 plus percent of middle
market firms in the US today are still run by
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the founding or cofounding partners with no
succession plan in place.
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So that's 0 80.
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80.
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This is a really common phenomenon in private
equity.
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And so in order to mitigate that, what we know
has been a series of pain points and frankly
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spurred huge series of spinouts that that have
been a material focus for us over the course of
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the last few years in order to mitigate that
phenomenon, meaning that lack of thoughtful
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succession planning and a reversion to the mean
in terms of returns as as firms continue to
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progress over future vintages.
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You need to be able to have a keen focus on
talent promotion retention, refreshing the
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carry pool for that next generation of
partners, and a meaningful mechanism in place
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whereby you can actually transfer that
ownership over time.
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And that, frankly, meaning that series of pain
points and market phenomena is why you're
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seeing the evolution of GP Stakes Market.
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It's why you're seeing in the last 10 years,
$60,000,000,000 capital raising attached to the
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GP stakes market that's going to 80,000,000,000
this year in terms of firms outstanding.
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Seeding is in the first inning of that capital
formation process, meaning seeding today is
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5,000,000,000 of capital raised against that or
80,000,000,000 of stakes.
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The stakes liquidity is all attached to that
lack of succession for that first generation of
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founders.
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Is the investor and the firm founder also 2
different people?
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So we require the firm founder to be the
investor.
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Meaning, we're we're typically looking at firm
founders.
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I'll I'll give you a concrete example.
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The the first investment that we made, Explora
Equity Partners, the founder there are 3
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cofounding partners.
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The managing partner, Tony Miller, was actually
a cofounder of, another middle market private
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equity from Chicago.
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So Tony is a second time founder in terms of
this next iteration of his career.
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His cofounders, Juan p Davis, was the president
of McGraw Hill Education, so a career operator
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loved in the sector and in this case, focused
on education, human capital management.
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And then their third partner, Marcellus
Dickulode, a career investor who grew up at
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Vistria and and subsequently joined their team
a couple of years ago.
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In that case, you have Tony who is the
investor, but also is deputy secretary of
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education for the US before he cofounded
Vestria.
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You have a really unique trifecta of investor,
operator, and public policy expertise, but you
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need to have that managing partner likewise
have the investment capabilities, meaning
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because the track record is you go back to the
risk you're willing to take for.
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It's not the track record and experience is so
fundamental in being able to derisk the initial
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business builds.
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We require at least, and this is not I I
wouldn't pretend today that there is a
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completely efficient market for seeding
transactions, meaning it's still quite nascent,
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but, we at least require the the firm founders
likewise in a position to be the investor.
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Today's episode is brought to you by Reed
Smith.
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00:14:51,879 --> 00:14:56,440
The practice of law has the power to drive
progress, to move businesses forward, and
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00:14:56,440 --> 00:14:58,459
support them in achieving their goals.
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knowledge allows them to anticipate and address
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client service that drives progress for your
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business.
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00:15:21,090 --> 00:15:25,970
What other mistakes have you seen made in the
seating space when it comes to picking
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00:15:25,970 --> 00:15:29,990
managers, investing in managers, or any other
critical mistakes?
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The seed market is, on an institutional basis,
roughly 3 years old.
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And so I I give a lot of credit.
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I I grew up as a single family office balance
sheet investor, and single family offices have
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been investing and doing seed transactions for
30 years.
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It's how KKR got started.
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It's how Carlyle got started.
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You can go through the origin story of some of
the largest and most successful asset
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management firms and single family offices had
a meaningful part in that early origin story.
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00:15:58,230 --> 00:16:02,710
It's a really different world now, meaning the
institutionalization of of seeding, and we're
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still as as I alluded to in the early innings
of of that maturation process.
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But the seed market has changed a lot and I
think for the better, frankly, in terms of the
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nature of how transactions are being done, but
it's still far from uniform and
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institutionalized.
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Meaning, you still see from the seeding side,
meaning the GP cedar perspective, you still see
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00:16:22,419 --> 00:16:28,659
people doing subscale quite admired in adverse
selection deals, meaning they're offering often
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$20,000,000 capital, for example, to a founder
raising that $250,000,000 fund and asking for
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an excess of 20% of the firm's economics.
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00:16:36,904 --> 00:16:38,504
That math equation doesn't work.
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You you end up upside down on the operating
budget for the firm and likewise in the ability
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to retain and incentivize the right talent.
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And candidly said, the only founders typically
who are willing to take those deals are those
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who have either lackluster track record or an
insufficiently long dated track record or a
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history of realizations in their deals in order
to be able to attract institutional capital.
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00:16:59,129 --> 00:17:03,235
And so you end up with this downward spiral in
terms of both quality of talent as well as
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quality of performance in the funds where you
have that fact pattern.
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You likewise have, in my view, a lot of
structural mistakes still being made in seed
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transactions, meaning where the seed provider
with great intentions take for table stakes
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that they're putting up enough scale capital,
meaning they're properly capitalizing the firm
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00:17:20,019 --> 00:17:23,720
in terms of what the firm and team have access
to for the operating budget day to day.
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They're often misaligning with respect to other
LPs, how they structure their participation in
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00:17:28,340 --> 00:17:29,140
management company.
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So it's still very common to cc providers, for
example, tying their participation, either to
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00:17:35,355 --> 00:17:37,674
flat, meaning nonperformance based
participation.
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00:17:37,674 --> 00:17:41,695
We will just statically own 20% of your
business in perpetuity, independent
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00:17:41,755 --> 00:17:42,255
performance.
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00:17:42,634 --> 00:17:47,819
The analogy I will often use is if VCs showed
up in a series a and said, we expect to never
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00:17:47,819 --> 00:17:51,500
be diluted by virtue of your success and we
just wanna own this percentage of your business
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00:17:51,500 --> 00:17:55,980
in perpetuity, you'd probably end up with a lot
fewer Zuckerbergs in the transactions that you
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00:17:55,980 --> 00:17:57,464
were doing in those early days.
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00:17:57,544 --> 00:18:03,704
It's the exact same concept for our new firm
founders, meaning you will still often see the
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00:18:03,704 --> 00:18:09,384
either static participation that's performance
independent and or vintage based, that's
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likewise independent of performance or AUM
based participation that's independent
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performance.
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So very common to see a until you raise a
$1,000,000,000 of capital, our our
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participation is 15%.
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Or in your fund 1, we're gonna own 20, and fund
2 will own 15, fund 3 will own 10.
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00:18:25,960 --> 00:18:29,964
All of those detached from the reality of
performance that you're trying to incentivize.
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00:18:30,424 --> 00:18:35,644
And that to me is structurally a big mistake,
not just because it's fundamentally misaligned
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00:18:35,784 --> 00:18:39,704
with other LPs who you inherently wanna be
supporting that founder, but because it
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00:18:39,704 --> 00:18:43,730
actually changes the behavior of the founder
from day 1.
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Meaning, you're telling them that there are
things more important than investment
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performance that you want them to be focused on
from day 1.
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And I think that puts you off sides in a way
that isn't helpful, ultimately, the enterprise
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value that you wanna create.
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00:18:54,835 --> 00:18:59,555
You've been the space almost as long as it's
been institutionalized and had a lot of trial
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00:18:59,555 --> 00:19:00,295
and error.
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00:19:00,434 --> 00:19:04,835
What are the types of deals that you think lead
to having good relationships with great
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00:19:04,835 --> 00:19:05,335
managers?
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00:19:05,715 --> 00:19:11,789
I think you have to be really broad in your
understanding of and sourcing and access to
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00:19:11,789 --> 00:19:15,250
what's available in market, meaning take just
the sourcing funnel.
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00:19:15,390 --> 00:19:21,390
We have looked at almost 750 opportunities in
the course of the last couple of years since we
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launched our platform.
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00:19:22,744 --> 00:19:26,265
That doesn't mean we profess to have seen
everything in market, but we have been
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00:19:26,265 --> 00:19:28,664
evangelists about being only focused on private
equity.
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We have very clear views on the benefits of
being single asset class focus as opposed to
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commingling as you'll commonly see other seed
providers do.
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It's really hard, to put it simply, without
seeing a hugely representative spot of the
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market.
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00:19:44,650 --> 00:19:49,769
It's really hard to distinguish between what
was relationship driven or inbound or episodic
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deal flow, from what are the best subs across
every industry and sector in which you
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ultimately want to invest.
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How many per fund are you looking to do?
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8 maximum.
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Think think think about these as sort of 75 to
a $100,000,000 plus equity investments.
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And so if you have a $1,000,000,000 portfolio,
you're making 8 to 9 of these total.
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Right?
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So so it's by definition.
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So it's pretty diversified, but very
concentrated in terms of if one of them goes to
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0, you have it's not a good thing.
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Yes.
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And because of that, you never wanna take
binary risk bets.
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And so that that to me is the how how do you
mitigate if you go back to if you'll you'll
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indulge me on a a 32nd tangent on the hedge
fund seed industry, the institutional seed
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market started really in fits and starts with
the hedge fund seed market 10 years ago, which
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00:20:37,080 --> 00:20:41,500
quickly became the stakes market focused on
private equity instead of hedge funds because
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the institutional market realized quite quickly
that hedge fund seeding was a binary risk
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00:20:46,039 --> 00:20:48,914
business that they had never underwritten to be
a binary risk business.
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00:20:49,295 --> 00:20:56,174
Meaning, they they were happy to have the sole
LP structure or a 5 to 7 year buyout structure
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in these hedge fund seed deals, but never
anticipated that if they had 8 core positions
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that half of them would go to 0.
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00:21:01,839 --> 00:21:04,399
If you were a venture investor, you would have
fully anticipated that.
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You would have portfolio constructed
appropriately.
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00:21:06,720 --> 00:21:11,119
But the early seed or stocks on Hedge Fund
World were not anticipating that same risk
346
00:21:11,119 --> 00:21:11,919
reward assessment.
347
00:21:11,919 --> 00:21:17,764
And so, you've ended up now in a paradigm where
with the benefit of that information in private
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00:21:17,764 --> 00:21:22,085
equity seed in particular, and the reason that
I'm such curious about ensuring that we're only
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00:21:22,085 --> 00:21:26,325
investing in private equity as an asset class
and these underlying cash flowing assets, is
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00:21:26,325 --> 00:21:29,880
that in my view, you should never be taking
binary risk in private equity as an asset
351
00:21:30,039 --> 00:21:30,359
class.
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00:21:30,359 --> 00:21:34,759
That it's contrary to the nature of what you
promised to investors in in that asset class.
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00:21:34,759 --> 00:21:39,799
And so the only way to ensure that you're not
taking binary risk is, a, to do away with the
354
00:21:39,799 --> 00:21:45,305
track record risk as we talked about, but, b,
to also be able to say very confidently across
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00:21:45,305 --> 00:21:49,244
the range of industries and sectors, not just
that you have portfolio level diversification,
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00:21:49,465 --> 00:21:54,904
so those 70 to 90 businesses directionally to
which you have exposure, but that you're also
357
00:21:54,904 --> 00:21:58,329
not inadvertently taking correlated risk in
your portfolio.
358
00:21:58,549 --> 00:22:03,109
Said differently, if you have 8 core positions
in this example, that you're not having 6 of
359
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those 8 core positions be in health care.
360
00:22:05,269 --> 00:22:05,509
Right?
361
00:22:05,509 --> 00:22:09,750
You you have now created much more correlation
in your portfolio than you ever would have
362
00:22:09,750 --> 00:22:13,644
naturally tried to achieve and therefore
created much more, in my view, binary risk than
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00:22:13,644 --> 00:22:16,845
should otherwise ever be justifiably in a
private equity portfolio.
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And so you have to be able to then to go back
to the aggregate or the sourcing or funnel
365
00:22:21,644 --> 00:22:21,964
question.
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00:22:21,964 --> 00:22:28,490
If you can say that we target having a maximum
of 2 positions of that 8 to mirror in health
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00:22:28,490 --> 00:22:31,789
care, what is a 20% contributor to US GDP
today.
368
00:22:31,930 --> 00:22:35,930
If 2 of those positions of the 8 are in health
care, that's calibrated appropriately with the
369
00:22:35,930 --> 00:22:37,772
composition of the market in which we're
investing.
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00:22:37,772 --> 00:22:38,174
You investing.
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00:22:38,174 --> 00:22:41,775
You have to be able to see hundreds of
positions in health care in order to say these
372
00:22:41,775 --> 00:22:42,595
are the 2.
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00:22:42,815 --> 00:22:43,055
Right?
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Of all of the ones that we've seen, the these
are the 2 that are most worthwhile and and
375
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worth doing.
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00:22:48,414 --> 00:22:51,715
I I think it's really hard to make that
assessment on the basis of seeing 10.
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00:22:51,919 --> 00:22:56,480
Private equity already in a way is quite
generalist, so you really have to stay
378
00:22:56,480 --> 00:23:00,099
disciplined to that in order to get enough reps
at what you'd like to see.
379
00:23:00,159 --> 00:23:00,400
Yeah.
380
00:23:00,400 --> 00:23:03,944
It's also the the return state has been clear
in private equity.
381
00:23:03,944 --> 00:23:08,105
Equity, meaning we have the benefit of a quite
mature market in private equity in terms of how
382
00:23:08,105 --> 00:23:12,044
long the business has has been around and the
proliferation of firms and sector specialists
383
00:23:12,105 --> 00:23:15,085
have continued to outperform generalists on on
that basis.
384
00:23:15,304 --> 00:23:21,019
That depending on the the industry sector,
subsector can be as high as 6 to 7% net and as
385
00:23:21,019 --> 00:23:22,380
low as 2 to 3% net.
386
00:23:22,380 --> 00:23:27,500
And when you're you're looking at sort of mid
range of 5 to 6% net outperformance of sector
387
00:23:27,500 --> 00:23:29,200
specialist, that becomes really meaningful.
388
00:23:29,394 --> 00:23:32,835
So we we have been focused on that sector
specialized cohort.
389
00:23:32,835 --> 00:23:37,394
But, again, to say at a portfolio construction
level, the aggregate you want to be in broad
390
00:23:37,394 --> 00:23:41,554
strokes representative of the US GDP, if you
will, but the underliers, you wanna be the best
391
00:23:41,554 --> 00:23:44,069
of that sector competition that you're solving
for.
392
00:23:44,309 --> 00:23:49,190
You mentioned you don't wanna take binary risk,
but you're putting in $75,000,000 sometimes in
393
00:23:49,190 --> 00:23:50,009
a new manager.
394
00:23:50,549 --> 00:23:53,049
How do you hedge yourself in these
transactions?
395
00:23:53,109 --> 00:23:56,950
Like, what structures are available to you and
how do you make sure you're not taking binary
396
00:23:56,950 --> 00:23:57,450
risk?
397
00:23:57,924 --> 00:23:58,005
Yeah.
398
00:23:58,005 --> 00:24:02,964
So this where structure is the only thing that
matters in the seed transaction, meaning when
399
00:24:03,125 --> 00:24:06,644
if you go back to the question of what you
asked prior in terms of some of the mistakes
400
00:24:06,644 --> 00:24:08,565
that we've seen seeders make.
401
00:24:08,565 --> 00:24:12,920
And, again, we don't pretend to have perfected
the mouse trap, and I'm sure we'll we'll
402
00:24:12,920 --> 00:24:14,440
continue to learn a lot along the way.
403
00:24:14,440 --> 00:24:19,480
But one of the core things to the point of not
taking binary risks that I've seen other seed
404
00:24:19,480 --> 00:24:24,299
providers do that I I think is misinformed in
terms of trying to create long term alignment
405
00:24:25,005 --> 00:24:27,005
is valuing the management company day 1.
406
00:24:27,005 --> 00:24:32,125
So to your point, to to use the example of if
you're writing a $20,000,000 check, the
407
00:24:32,125 --> 00:24:36,605
traditional seed deal would have been, I will
give you $20,000,000 for 20% of your business,
408
00:24:36,605 --> 00:24:39,025
and you are now worth new GP a $100,000,000.
409
00:24:39,960 --> 00:24:40,200
Right?
410
00:24:40,200 --> 00:24:42,059
The basic faculty on blood math.
411
00:24:42,279 --> 00:24:48,359
By definition, in that structure, you have put
attached a 100% binary risk, the success or
412
00:24:48,359 --> 00:24:49,799
failure of that management company.
413
00:24:49,799 --> 00:24:54,535
So you've said, I now need to recoup minimum
that $20,000,000 to see whether the investment
414
00:24:54,535 --> 00:24:58,855
succeeded or failed, but that investment is
only levered to their performance or lack
415
00:24:58,855 --> 00:25:03,734
thereof of that management company or base
business as opposed to saying, what now a lot
416
00:25:03,734 --> 00:25:08,134
of the seed market is done and why you see this
revenue share construct or this profit sharing
417
00:25:08,134 --> 00:25:10,609
construct that's emerging a lot of seed deals.
418
00:25:10,830 --> 00:25:15,470
You instead have the ability to lever your
downside, if you will, or attach your downside
419
00:25:15,470 --> 00:25:19,869
to instead the performance of the base assets
in which the investor is investing.
420
00:25:19,869 --> 00:25:24,644
Said differently, if you're writing a
$100,000,000 check and you're saying 6 to your
421
00:25:24,644 --> 00:25:30,884
$70,000,000 of that is going to be an LP form,
that LP dollar is gonna be like any other LP's
422
00:25:30,884 --> 00:25:31,285
dollar.
423
00:25:31,285 --> 00:25:35,125
Meaning, I'm going to be leveraged performance
of the businesses in which you choose to
424
00:25:35,125 --> 00:25:35,625
invest.
425
00:25:36,099 --> 00:25:41,379
You have the ability to reserve a portion of
that incremental capital, meaning outside of
426
00:25:41,379 --> 00:25:46,179
BLP commitment for co investment capital that
allows you to invest alongside, in particular,
427
00:25:46,179 --> 00:25:47,940
the early deals that GPs are doing.
428
00:25:47,940 --> 00:25:52,945
And then the only binary risk capital structure
at least that we're attaching is the working
429
00:25:52,945 --> 00:25:57,845
capital piece, which is a de minimis portion of
the transactions, but allows us to explicitly
430
00:25:58,065 --> 00:26:00,865
incentivize the building of the non investment
infrastructure pieces.
431
00:26:00,865 --> 00:26:04,820
And as we were talking about prior are critical
in our view to getting an enduring firm.
432
00:26:04,820 --> 00:26:05,940
Operations and
433
00:26:06,180 --> 00:26:06,500
Correct.
434
00:26:06,500 --> 00:26:12,500
That's the that's the finance operations, third
party administration, the nuts and bolts of
435
00:26:12,500 --> 00:26:14,920
being effective and successful fiduciary.
436
00:26:15,140 --> 00:26:19,734
That that piece that you can isolate to
typically single digit millions of investment
437
00:26:19,795 --> 00:26:25,234
versus that entirely binary risk trade of
saying, here's $20,000,000 in exchange for 20%
438
00:26:25,234 --> 00:26:27,015
of your business and value in the GP.
439
00:26:27,075 --> 00:26:28,355
You have the co invest.
440
00:26:28,355 --> 00:26:32,214
You have the de minimis portion going towards
the actual working capital.
441
00:26:32,509 --> 00:26:34,190
What is the what's the rest of it, Keh?
442
00:26:34,190 --> 00:26:34,430
No.
443
00:26:34,430 --> 00:26:37,090
Think think of that as anchor LP capital.
444
00:26:37,150 --> 00:26:39,309
So that's the help the fund get off the ground.
445
00:26:39,309 --> 00:26:41,150
So in a a launch fund context.
446
00:26:41,150 --> 00:26:42,529
GP GP commit.
447
00:26:42,910 --> 00:26:47,535
You have the ability to be their anchor LP
meaningful co investor, as well as a working
448
00:26:47,535 --> 00:26:48,434
capital provider.
449
00:26:48,734 --> 00:26:48,974
Right?
450
00:26:48,974 --> 00:26:52,894
In exchange for which you participate either on
a revenue share basis depending on how you
451
00:26:52,894 --> 00:26:57,615
structure it on a revenue share basis or on an
explicit equity basis in their management
452
00:26:57,615 --> 00:26:58,115
company.
453
00:26:58,359 --> 00:27:02,359
Our strong preference for a whole host of
reasons has been not to be an equity
454
00:27:02,359 --> 00:27:07,319
participant principally because we've
structured our participation such that again,
455
00:27:07,319 --> 00:27:11,480
to to go back to a venture capital analogy,
we've structured our participation such that
456
00:27:11,480 --> 00:27:15,875
our management company economic interest steps
down over time on a success basis.
457
00:27:16,255 --> 00:27:16,495
Right?
458
00:27:16,495 --> 00:27:21,695
And you can't do that if you've renegotiated in
equity value day 1, or I should say it becomes
459
00:27:21,695 --> 00:27:25,980
much more cumbersome to try to negotiate or
renegotiate that equity value along the way.
460
00:27:26,460 --> 00:27:31,339
And you're looking to own 20, 25 percent on the
onset that somehow steps down?
461
00:27:31,339 --> 00:27:36,299
Our view, you never want to participate in more
than 20% of the economics, which doesn't mean
462
00:27:36,299 --> 00:27:38,059
you have to participate in 20 day 1.
463
00:27:38,059 --> 00:27:42,765
You that's an absolute ceiling in our view on
the level of economic participation that a
464
00:27:42,765 --> 00:27:47,244
third party should participate in or that a
firm can sustain, especially in those early
465
00:27:47,244 --> 00:27:47,744
days.
466
00:27:47,884 --> 00:27:52,365
You would typically see in our structure
without giving away some of the the secret
467
00:27:52,365 --> 00:27:53,565
sauce that we've we've created
468
00:27:53,804 --> 00:27:55,164
give away half of your secret sauce.
469
00:27:55,325 --> 00:27:56,609
And learns along the way.
470
00:27:57,009 --> 00:28:02,049
We we have the ability to if you take this
example, if we have a starting dissipation of
471
00:28:02,049 --> 00:28:08,609
20%, that dissipation steps down as realized
returns are generated in line with how every
472
00:28:08,609 --> 00:28:10,069
other LP gets distributions.
473
00:28:10,934 --> 00:28:13,815
So said differently, we're only incentivizing
performance.
474
00:28:13,815 --> 00:28:18,554
We're saying we're happy to come in and be your
day 1 or pre inception investor.
475
00:28:18,774 --> 00:28:22,375
In exchange for that early enterprise risk,
we're gonna retain the ability to participate
476
00:28:22,375 --> 00:28:26,454
in management company economics over time, but
we are very happy to be diluted by virtue of
477
00:28:26,454 --> 00:28:29,880
your success, and that success should only be
calibrated to realized returns.
478
00:28:30,579 --> 00:28:37,539
And I get the value of not putting evaluation,
but this 20% ceiling, you've obviously thought
479
00:28:37,539 --> 00:28:38,419
a lot about it.
480
00:28:38,419 --> 00:28:40,365
Why is it such a rule that you've come up with?
481
00:28:40,605 --> 00:28:46,525
I would give you more signs of cancer, but I I
think it's it's a bit of the, you know, NDC.
482
00:28:46,525 --> 00:28:52,845
Part part of it is the the literal 80 20 rule,
meaning you you wanna be able to to ensure that
483
00:28:52,845 --> 00:28:57,730
80 plus percent of the firm economics in this
case are returned by are are retained by those
484
00:28:57,730 --> 00:28:59,350
who are running the firm day to day.
485
00:28:59,490 --> 00:29:04,470
I mean, we take pride and and and can provide a
huge degree of strategic value to our founders,
486
00:29:04,610 --> 00:29:09,005
but over time, we should not own 20% or
anywhere close to that of our founders'
487
00:29:09,005 --> 00:29:09,964
businesses in our view.
488
00:29:09,964 --> 00:29:13,804
And and, again, we we take a different view
than than a lot of the historic seed
489
00:29:13,804 --> 00:29:17,724
transactions, but it's fundamental with any
entrepreneur, whether you're an asset
490
00:29:17,724 --> 00:29:22,349
management firm founder or a traditional
business founder to be able to appropriately
491
00:29:22,569 --> 00:29:26,809
incentivize and motivate that entrepreneur over
time because it is excruciatingly hard to build
492
00:29:26,809 --> 00:29:27,789
success in a business.
493
00:29:28,009 --> 00:29:32,329
And so we wanna ensure that they own enough of
it, that not just their motivation type, but
494
00:29:32,329 --> 00:29:36,474
their psychology is completely embedded in in
being appropriately motivated over time, that
495
00:29:36,474 --> 00:29:38,315
their team is appropriately motivated over
time.
496
00:29:38,315 --> 00:29:40,815
That that's where the table stakes as we think
about it.
497
00:29:41,034 --> 00:29:45,595
But it's also the case that if you look at that
20% ceiling and compare it against the
498
00:29:45,595 --> 00:29:50,130
operating budget of the business, if they're
take if you have any third party that's taking
499
00:29:50,130 --> 00:29:54,690
more than 20% of those receipts, it becomes
really hard to not start the operating budget
500
00:29:54,690 --> 00:29:58,609
of the basic functions that are required to
make them successful on the investing side as
501
00:29:58,609 --> 00:30:00,070
well as the operation side.
502
00:30:00,289 --> 00:30:06,255
So it's also in the context of it being a fund
1 to fund 3 where you don't necessarily have
503
00:30:06,255 --> 00:30:09,214
1,000,000,000 of dollars under assets where the
management fees are actually going towards
504
00:30:09,214 --> 00:30:09,714
management.
505
00:30:10,174 --> 00:30:10,674
Correct.
506
00:30:10,815 --> 00:30:15,455
Most emerging managers are running their
management company at a loss to breakeven for
507
00:30:15,455 --> 00:30:16,710
the 1st 6 to 8 years.
508
00:30:16,789 --> 00:30:20,970
And they have to compete in the talent
marketplace against the established managers,
509
00:30:21,029 --> 00:30:25,849
which pay more and it becomes cumbersome if if
a lot of that is coming off the table.
510
00:30:26,069 --> 00:30:26,569
Exactly.
511
00:30:26,630 --> 00:30:26,950
Exactly.
512
00:30:26,950 --> 00:30:30,950
And LPs, I I think, ask the right questions
around it, which is how can you be really
513
00:30:30,950 --> 00:30:35,965
incentivized if you have in in a lot of the c
transactions that were done with some famous
514
00:30:35,965 --> 00:30:40,545
examples, founders were giving away 20 to 40%
of the business day 1 in perpetuity.
515
00:30:40,684 --> 00:30:42,045
That's a distressed trade.
516
00:30:42,045 --> 00:30:47,400
It's really hard for an LP to say that that is
consistent with or emblematic of top tier
517
00:30:47,400 --> 00:30:50,859
performance because no top tier founder would
give away that much of their business.
518
00:30:51,160 --> 00:30:54,840
And you said something that I I think, we
should we should send to our friend Elizabeth
519
00:30:54,840 --> 00:30:55,160
Warren.
520
00:30:55,160 --> 00:30:59,400
You said most private equity managers are
operating their company at a loss.
521
00:30:59,400 --> 00:31:04,055
So they're not they're not sitting in their
Hamptons Hamptons mansions kind of, you know,
522
00:31:04,055 --> 00:31:05,115
swimming in their money.
523
00:31:05,255 --> 00:31:07,674
At which point does that not become the case?
524
00:31:07,815 --> 00:31:07,975
Yeah.
525
00:31:07,975 --> 00:31:10,615
So it it's about the required scale of
investment.
526
00:31:10,615 --> 00:31:15,589
And again, all of this heavily caveated within
institutional private equity world, meaning
527
00:31:15,650 --> 00:31:20,849
subject to that threshold of raising an
institutional scale of $300,000,000 firm as as
528
00:31:20,849 --> 00:31:21,490
a starting point.
529
00:31:21,490 --> 00:31:25,650
Of course, if you have a 6 person team and
manage to raise a $2,000,000,000 firm, you're
530
00:31:25,650 --> 00:31:30,325
in a different world, but there are a few to
know examples of private equity firms doing
531
00:31:30,325 --> 00:31:31,305
that at the gate.
532
00:31:31,445 --> 00:31:36,184
So it's really about being able in those early
years to properly capitalize the firm.
533
00:31:36,244 --> 00:31:40,725
80% of which as we talked about is the right
talent in order to staff, and then you you have
534
00:31:40,725 --> 00:31:45,769
the the incremental and ancillary your office
space and your office supplies and the things
535
00:31:45,769 --> 00:31:47,849
that that help you run business day to day.
536
00:31:47,849 --> 00:31:50,829
But the absolute lion's share of that cost
equation is people.
537
00:31:51,210 --> 00:31:57,914
In order to appropriately be at market and
retain, if you're a top tier talent, you've had
538
00:31:57,914 --> 00:31:59,835
a top quartile track record of returns.
539
00:31:59,835 --> 00:32:01,355
You're now setting up your own shop.
540
00:32:01,355 --> 00:32:03,674
You wanna be able to hire a team talent.
541
00:32:03,674 --> 00:32:06,734
You wanna be able to hire the best possible
third party advisors.
542
00:32:06,794 --> 00:32:07,035
Right?
543
00:32:07,035 --> 00:32:10,619
Your vendor selection, meaning what you
outsource versus your end source.
544
00:32:10,700 --> 00:32:15,660
LPs view as a proxy for quality and and blue
chip nature of the firm who you hire for your
545
00:32:15,660 --> 00:32:18,619
legal counsel, for your tax counsel, for your
accounting counsel.
546
00:32:18,619 --> 00:32:23,500
Those vendor decisions really matter in terms
of the operational due diligence process and
547
00:32:23,500 --> 00:32:27,325
underwriting, and all of that implies a
different cost equation than going with much
548
00:32:27,325 --> 00:32:28,285
lower cost providers.
549
00:32:28,285 --> 00:32:33,964
And so all that to say, if you're a
$300,000,000 firm founder or endeavoring to
550
00:32:33,964 --> 00:32:39,724
raise a $300,000,000 fund and you're spending
conservatively 3 to $5,000,000 a year just on
551
00:32:39,724 --> 00:32:43,110
the basic blocking and tackling of keeping the
firm up and running.
552
00:32:43,110 --> 00:32:48,470
You yourself then have a 2% GP commit, right,
independent of that that operating budget that
553
00:32:48,470 --> 00:32:49,130
you're running.
554
00:32:49,190 --> 00:32:53,830
It takes on average in this market an emerging
manager, so that fund 1, 3, 3, 2 and a half
555
00:32:53,830 --> 00:32:55,424
years to raise that fund.
556
00:32:55,585 --> 00:32:58,625
And so think about underwriting just for simple
math purposes.
557
00:32:58,625 --> 00:33:05,265
You're underwriting 10 to $15,000,000 of p and
l independent of your 6 to $8,000,000 GP
558
00:33:05,265 --> 00:33:10,080
commit, which contractually typically is funded
in cash at the, severe anchor LP.
559
00:33:10,080 --> 00:33:11,279
They're spending money.
560
00:33:11,279 --> 00:33:14,420
They're getting the top providers, and they're
deferring their salary.
561
00:33:14,640 --> 00:33:16,019
Typically for multi years.
562
00:33:16,240 --> 00:33:16,559
Right?
563
00:33:16,559 --> 00:33:23,644
So if if you're then an implied $20,000,000 in
deficit by the time that you have raised your
564
00:33:23,644 --> 00:33:28,764
fund, there are very few exceptions of those
who are able to dig out of that sooner within 6
565
00:33:28,764 --> 00:33:30,865
to 8 years into the life cycle of their fund.
566
00:33:31,484 --> 00:33:33,105
So they're in their 3rd year.
567
00:33:33,164 --> 00:33:34,259
They need to call you.
568
00:33:35,460 --> 00:33:37,320
They they have no other choice.
569
00:33:37,619 --> 00:33:40,680
At one point or another, they they come to the
same realization.
570
00:33:41,140 --> 00:33:43,619
Looking back, where have your best deals come
from?
571
00:33:43,619 --> 00:33:45,240
Is it always from introductions?
572
00:33:45,380 --> 00:33:46,934
And unpack that for me.
573
00:33:47,095 --> 00:33:51,914
We as a team are huge believers in the
proactive outbound hustle.
574
00:33:52,295 --> 00:33:56,695
Meaning, I I think there there is, outside of
the adverse selection discussion we've had,
575
00:33:56,695 --> 00:34:00,455
there's a lot of adverse selection assuming
that your own market or platform is gonna
576
00:34:00,455 --> 00:34:01,414
deliver the best sense.
577
00:34:01,414 --> 00:34:03,650
I I think it has to be a combination of both.
578
00:34:03,950 --> 00:34:09,230
Our firm has a long and high performing history
of having invested in emerging managers, and so
579
00:34:09,230 --> 00:34:13,329
we we benefit certainly from that brand equity,
from that sourcing capability.
580
00:34:14,110 --> 00:34:18,190
We we have a large annual emerging manager
focused investment conference, and that has
581
00:34:18,190 --> 00:34:21,844
been a prolific source of opportunities and
introductions for us.
582
00:34:21,844 --> 00:34:26,184
I'd say the biggest upside surprise for us has
been referrals from other GPs.
583
00:34:26,405 --> 00:34:30,885
And maybe not surprisingly, meaning they're
most likely to get that phone or friend call,
584
00:34:30,885 --> 00:34:32,005
if you will, at the point that
585
00:34:32,420 --> 00:34:33,619
they get the honest take.
586
00:34:33,619 --> 00:34:35,300
I'm $20,000,000 in the hole.
587
00:34:35,300 --> 00:34:36,920
Like, how would you solve this problem?
588
00:34:37,219 --> 00:34:37,539
Correct.
589
00:34:37,539 --> 00:34:41,400
How how would you solve this and or how did you
do it most impactfully?
590
00:34:41,539 --> 00:34:45,559
How did you do it when you were sitting in my
equivalent seat at your old firm?
591
00:34:45,755 --> 00:34:46,795
How did you think about it?
592
00:34:46,795 --> 00:34:47,835
How much did it cost?
593
00:34:47,835 --> 00:34:49,675
Who did you hire first?
594
00:34:49,675 --> 00:34:50,954
Who gave you the best advice?
595
00:34:50,954 --> 00:34:53,515
How hard was it actually to get going?
596
00:34:53,515 --> 00:34:57,594
That founder game of telephone, if you will,
has been incredibly powerful because there is
597
00:34:57,594 --> 00:34:59,454
no equivalent YPO for founders.
598
00:35:00,000 --> 00:35:00,159
Right?
599
00:35:00,159 --> 00:35:01,360
That that doesn't exist.
600
00:35:01,360 --> 00:35:06,239
And so we have really been as part of our own
value of our founders, we've been endeavoring
601
00:35:06,239 --> 00:35:09,940
not just to build that YPO for founders cohort,
but to be their y combinator.
602
00:35:10,079 --> 00:35:10,239
Right?
603
00:35:10,239 --> 00:35:14,714
To be able to resource them across all of the
core functions that have nothing to do with
604
00:35:14,714 --> 00:35:18,954
investing, but everything to do with being a
successful founder so that they can connect
605
00:35:18,954 --> 00:35:22,714
with one another and also get the benefit of
continuing to pay it forward on that phone
606
00:35:22,714 --> 00:35:26,900
chain because for us, it's been an invaluable
source of we if we look at where our first
607
00:35:26,900 --> 00:35:31,159
three transactions came from, 2 of 3 came from
other GPs.
608
00:35:31,619 --> 00:35:36,599
You provide a lot of value add outside of the
capital that you bring in, which is critical.
609
00:35:37,139 --> 00:35:42,484
What value add do GPs value the most and what
value add do you think is most valuable to them
610
00:35:42,484 --> 00:35:43,224
in retrospect?
611
00:35:43,764 --> 00:35:44,005
Sorry.
612
00:35:44,005 --> 00:35:48,244
I I think fortunately, or at least a few years
into this exercise now to be able to say
613
00:35:48,244 --> 00:35:52,105
confidently that those two things are the same,
which I wouldn't necessarily have anticipated.
614
00:35:52,299 --> 00:35:58,219
What we anticipate will be the hardest and most
cumbersome and most foreign pieces of the firm
615
00:35:58,219 --> 00:36:01,819
building process to them are in fact the
hardest and most cumbersome and most foreign
616
00:36:01,819 --> 00:36:03,279
piece of the firm building process.
617
00:36:03,579 --> 00:36:06,940
And, inherently, that's what they value the
most, and it's what we're in position to be the
618
00:36:06,940 --> 00:36:12,914
most strategic with them around, meaning the
best investors, right, not notwithstanding the
619
00:36:12,914 --> 00:36:17,235
the conversation we're having about founders
discovering a few years and how hard and how
620
00:36:17,235 --> 00:36:18,375
expensive it is.
621
00:36:18,514 --> 00:36:22,195
The the best founders typically have the
ability to go and raise a bunch of money
622
00:36:22,195 --> 00:36:26,920
without us, meaning we are not the binary,
which is why I say it's about so much more than
623
00:36:26,920 --> 00:36:27,579
the capital.
624
00:36:28,039 --> 00:36:34,039
The strategic piece of this is saying, here is
the from 9 months prelaunch, whether we have a
625
00:36:34,039 --> 00:36:35,960
lot of analogies about dating to get married.
626
00:36:35,960 --> 00:36:40,164
These are 8 to 9 month deal processes for us
and by design intention.
627
00:36:40,784 --> 00:36:46,224
Such that by the time that we've gotten to the
start line, we've already spent typically 6 to
628
00:36:46,224 --> 00:36:50,545
9 months getting to the point of saying, here's
the Gantt chart of evolution of all the pieces
629
00:36:50,545 --> 00:36:54,530
of the noninvestment structure that are gonna
be required for you to be successful, and
630
00:36:54,530 --> 00:36:57,329
here's how we would recommend you purpose build
each of these pieces.
631
00:36:57,329 --> 00:36:59,090
Here are the people you you should go talk to.
632
00:36:59,090 --> 00:37:00,390
Here are the vendor recommendations.
633
00:37:00,930 --> 00:37:04,755
Here's how you can go about the co investments
indication and capital formation process.
634
00:37:04,835 --> 00:37:06,275
Here are the best LPs market.
635
00:37:06,275 --> 00:37:07,714
We think you should be getting to know.
636
00:37:07,714 --> 00:37:12,755
It's it's that comprehensive bear hug, if you
will, around all of the resourcing that
637
00:37:12,755 --> 00:37:18,514
founders say and to a person, independent of of
how, idiosyncratic these personalities are.
638
00:37:18,514 --> 00:37:23,569
Our founders get to the end of this firm build
and or prelaunch process with us and say to a
639
00:37:23,569 --> 00:37:26,389
person, I always knew this was gonna be hard.
640
00:37:26,929 --> 00:37:30,690
The investing part was the part that I know
best, and that's the part that I'm most excited
641
00:37:30,690 --> 00:37:32,769
to spend my time and attention on.
642
00:37:32,769 --> 00:37:34,985
And I had absolutely no idea.
643
00:37:34,985 --> 00:37:36,425
I sort of could conceptualize it.
644
00:37:36,425 --> 00:37:41,224
Another founders had told me, but I had no idea
how much work was required and how little of it
645
00:37:41,224 --> 00:37:45,315
I knew how to do until I was in the seat of
having to figure out how to do all of it
646
00:37:45,315 --> 00:37:45,719
myself.
647
00:37:45,800 --> 00:37:45,960
Right?
648
00:37:45,960 --> 00:37:51,000
It's that we we can be the huge augment and
real day to day partner.
649
00:37:51,000 --> 00:37:55,079
I mean, we're not contracting for you need to
call us 5 times a week, but we're often talking
650
00:37:55,079 --> 00:37:59,474
to our founders 5 times a week in the process
of and nature of that firm build.
651
00:37:59,635 --> 00:38:03,255
How do you scale that model, and is it just
inherently unscalable?
652
00:38:03,635 --> 00:38:03,875
Yeah.
653
00:38:03,875 --> 00:38:06,375
It's it's inherently and intent intentionally
unscalable.
654
00:38:06,675 --> 00:38:10,055
Meaning, that's why we will have 8 core
positions in a portfolio.
655
00:38:10,355 --> 00:38:10,835
It's why we
656
00:38:11,394 --> 00:38:12,454
have 30 positions.
657
00:38:12,940 --> 00:38:13,260
Correct.
658
00:38:13,260 --> 00:38:16,699
Nor would you want to because you would never
be able to deliver the value that we're
659
00:38:16,699 --> 00:38:17,900
promising to our founders.
660
00:38:17,900 --> 00:38:23,980
Meaning, we have a huge internal team across
operations of finance and compliance who are
661
00:38:23,980 --> 00:38:28,445
helping to advise our founders on this cohort
of different issues as and when they arise.
662
00:38:28,445 --> 00:38:32,925
We've structured a curriculum that's
modularized across all of the non investment
663
00:38:32,925 --> 00:38:33,985
infrastructure areas.
664
00:38:34,285 --> 00:38:36,765
We're doing a maximum 2 to 3 transactions a
year.
665
00:38:36,765 --> 00:38:40,525
And the only way that that we can credibly
deliver on that value, not just our founders
666
00:38:40,525 --> 00:38:44,989
but also our underlying clients is to make sure
that we're maniacally focused on just that
667
00:38:44,989 --> 00:38:45,710
founder cohort.
668
00:38:45,710 --> 00:38:50,530
I think it becomes untenable to try to have 2
dozen these are 10, 15 year marriages.
669
00:38:51,070 --> 00:38:56,905
So we the initial investment period, right, is
is the 1st few years is that we're getting off
670
00:38:56,905 --> 00:39:01,625
the ground, but we can be equally strategic
down the path in thinking about new strategy
671
00:39:01,625 --> 00:39:04,744
launches or refreshing the carry pool for that
class of new partners.
672
00:39:04,744 --> 00:39:09,900
They wanna go most firms will over time evolve
from any of the successful private equity
673
00:39:09,900 --> 00:39:14,619
platforms will evolve from a single strategy or
single flagship entity to having multiple
674
00:39:14,619 --> 00:39:17,579
strategies or flagship products over time.
675
00:39:17,579 --> 00:39:22,815
Somebody at Sequoia Andresen, maybe by very
construct might not actually have access to LPs
676
00:39:23,514 --> 00:39:24,255
by design.
677
00:39:24,474 --> 00:39:28,554
Do you not come across parties that are just
looking to partner with you that, you know,
678
00:39:28,554 --> 00:39:33,619
maybe are able to poach a head of operations
and and have all the non investing aspect and
679
00:39:33,619 --> 00:39:36,119
just come to you to open up the Rolodex of LPs.
680
00:39:36,660 --> 00:39:41,780
It's we certainly had that happen and we are
the wrong person for it.
681
00:39:41,780 --> 00:39:42,660
Meaning that
682
00:39:42,739 --> 00:39:47,844
Is that because that's an egotistical view on
the problem set, or is that just because you
683
00:39:47,844 --> 00:39:51,545
don't feel like you provide enough value that
way or unpack that?
684
00:39:51,605 --> 00:39:57,284
It's less the the value than we can provide
than it is the founder mentality around that's
685
00:39:57,284 --> 00:39:57,764
a trade.
686
00:39:57,764 --> 00:39:59,364
Meaning they're looking for a placement agent.
687
00:39:59,364 --> 00:39:59,764
They're not
688
00:39:59,764 --> 00:40:00,085
looking for
689
00:40:00,085 --> 00:40:00,420
a partner.
690
00:40:00,739 --> 00:40:04,519
And there there are literally hundreds of
placement agents that they can go speak to.
691
00:40:04,579 --> 00:40:07,960
It's not worth your 6 to 9 months of
relationship building.
692
00:40:08,019 --> 00:40:08,339
Correct.
693
00:40:08,339 --> 00:40:14,119
If if they're not looking for a true partner,
if they're not saying, I am looking day 1 to
694
00:40:14,260 --> 00:40:18,315
create an enterprise that by definition
outlasts me that's gonna have real staying
695
00:40:18,315 --> 00:40:23,434
power that's gonna be meaningful differentiated
in market, and I'm all ears as to how to do
696
00:40:23,434 --> 00:40:25,355
that in the most strategic way possible.
697
00:40:25,355 --> 00:40:26,954
Like, that's the wiring of our founders.
698
00:40:26,954 --> 00:40:31,030
They're all if you look at the composition of
our founders and portfolios, they're all very
699
00:40:31,030 --> 00:40:35,510
different people, equally sort of awe inspiring
in terms of what they've done quality of human
700
00:40:35,510 --> 00:40:36,889
being very different people.
701
00:40:36,949 --> 00:40:41,909
But to a person, they all have that wiring and
saying, this is better done as a team sport.
702
00:40:41,909 --> 00:40:44,114
I wanna be able to build a best in class firm.
703
00:40:44,114 --> 00:40:48,454
I want access to every conceivable best
practice and source advice in doing that.
704
00:40:48,594 --> 00:40:52,434
The founder in our experience who's coming to
us, quote, only for the money or saying, can
705
00:40:52,434 --> 00:40:56,295
you just open up the rolodex is transactionally
wired, not relationship driven?
706
00:40:56,355 --> 00:40:58,934
And I think investing at its core is a
relationship business.
707
00:40:59,170 --> 00:41:04,449
And also the managers that you're looking for
invariably are also not inherently non zero sum
708
00:41:04,449 --> 00:41:04,949
thinking.
709
00:41:05,170 --> 00:41:10,150
They wanna build best in class or world class
managers, you know, 5, $10,000,000,000
710
00:41:10,610 --> 00:41:11,110
managers.
711
00:41:11,614 --> 00:41:16,594
And they're willing to own 80% of it than a
100% of a $500,000,000 manager.
712
00:41:17,054 --> 00:41:17,454
Yes.
713
00:41:17,454 --> 00:41:17,934
Correct.
714
00:41:17,934 --> 00:41:22,574
And over time, by the way, they they should own
close to, if not a 100% of it.
715
00:41:22,574 --> 00:41:22,815
Right?
716
00:41:22,815 --> 00:41:24,255
Like, that that's the performance incentive.
717
00:41:24,255 --> 00:41:25,554
They're taking a bet on themselves.
718
00:41:26,019 --> 00:41:26,500
Correct.
719
00:41:26,500 --> 00:41:27,539
That's the founder bet.
720
00:41:27,539 --> 00:41:32,099
If you distill it down to what are the core
attributes outside of really talented investors
721
00:41:32,099 --> 00:41:36,340
that we're solving for, it's that founder who
is unequivocally willing to bet on themselves
722
00:41:36,340 --> 00:41:37,880
and really excited to do it.
723
00:41:38,099 --> 00:41:40,340
Well, Elizabeth, this has been a master class
on seating.
724
00:41:40,340 --> 00:41:41,320
You did not disappoint.
725
00:41:41,835 --> 00:41:43,594
How should people follow you?
726
00:41:43,594 --> 00:41:47,514
How do they get in contact with you or any
other way that they could get in touch with
727
00:41:47,514 --> 00:41:47,994
you?
728
00:41:47,994 --> 00:41:53,994
We have a, we hope, very helpful website,
attached to UCM Brogner sponsor solution site,
729
00:41:54,234 --> 00:41:58,280
where you can find a bunch more information
about what we're doing, which includes contact
730
00:41:58,280 --> 00:42:01,579
information for us and and the team at
Sponsored Solutions at gcmlp.com.
731
00:42:02,679 --> 00:42:02,920
Great.
732
00:42:02,920 --> 00:42:04,380
And you also have a conference?
733
00:42:04,599 --> 00:42:05,000
We do.
734
00:42:05,000 --> 00:42:07,989
Our SCM Consortium Conference every fall in New
York.
735
00:42:08,148 --> 00:42:13,748
Well, thank you, Elizabeth, for sharing so much
wisdom, and, look forward to to sitting down in
736
00:42:13,748 --> 00:42:14,568
person soon.
737
00:42:14,708 --> 00:42:15,748
Thank you so much for this.
738
00:42:15,748 --> 00:42:16,943
Really appreciate your time.
