Peter Lacaillade - Backing The Best Managers In Private Markets - [Invest Like the Best, EP.437]

Transcript from https://podmenti.com/t/8df9f52703aa631d

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Hello and welcome, everyone. I'm Patrick O'Shaughnessy and this is Invest Like the Best.
This show is an open ended exploration of markets, ideas, stories, and strategies that will help you better invest both your time and your money.
If you enjoy these conversations and want to go deeper, check out Colossus Review, our quarterly publication with in-depth profiles of the people shaping business and investing. You can find Colossus Review along with all of our podcasts at joincolosis.com.
Patrick O'Shaughnessy is the CEO of Positive Sum.
All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of Positive Some.
This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions.
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My guest today is Peter Lackley. Peter is the chief investment officer for private investments at SCS Financial and has built one of the most respected private equity allocation platforms in wealth management.
Overseeing fifty billion dollars for ultra high net worth families and earning the same access as top tier endowments to the world's best managers.
He shares how SES's pooled vehicle structure enables them to compete with institutional giants for the best funds.
Avoiding the adverse selection that plagues most wealth platforms.
Peter shares his investment philosophy across lower market buyouts, emerging independent sponsors.
And early bets on category defining managers like Thrive Capital and Shore Capital.
We discussed what separates exceptional private equity managers, the evolution of the industry towards AI powered strategies.
and private markets going mainstream. Please enjoy this conversation with Peter Lackelade.
I really
Enjoy the line, private equity is a force for good.
People are gonna be surprised to hear that.
Why do you think that's true?
I believe it to my core in investing and the alpha that I believe we can generate for our clients, but I also see it firsthand.
having seen multiple private equity owners
as partners with the firm we invest in.
Or that I'm a part of.
I think when done well, and actually I have a family business that was transitioned in a very
Great way.
to a private equity platform. So I've seen it a bunch of different ways. But
If you think about it, I mean private equity has major advantages
to public markets because
you're getting long duration capital.
That can take a
There's not this thinking three to seven plus years. And they're
Thinking strategically.
When done well.
And they just have major advantages over people in public markets that have to manage quarter to quarter and deal with the volatility of that, et cetera.
The returns if you look
twenty five years.
There's a consistent
Call it.
three to five percent alpha that you get.
from investing in the private market, that is probably appropriate.
given the illiquidity. However
One thing I love about private markets relative to public markets is there is the ability to
pick top managers who persist over time.
Or structural things that enable
us to have conviction that we can deliver
Top quartile performance consistently.
And if you do that, you can get another five percent plus on top of
the three to five percent that you expect over public equities, which
Basically equates to high teens, low twenties.
What they're doing is
They're changing
system settings in a way that would be impossible probably
in public markets.
Or without real total control over the business. Is that the reason that it's possible?
To go back to the private equity is a force for good, because when I say that, I'm actually talking more about like the companies themselves and the way it works.
I'll back up. So
S E S
The founder led company.
Founded in two thousand two.
By a guy named Pete Mattoon and a few other
folks who had a vision that the private wealth space had a real gap. You had the investment banks like Goldman Sachs on one side.
that had great brands and investment capabilities but were very conflicted in what they did. And then you had independent shops that were good at
Trust me.
advice.
Line but not
that savvy on the investment side. There was a gap in the market.
They grew it to seven billion at the time I joined in two thousand eleven.
And a few years later we did a deal with a firm here in Greenwich, Stone Point Capital.
'Cause we had a few early founders that were no longer involved, as well as a family or two that put us into business.
We needed a liquidity solution.
So we sold twenty five percent.
of the equity.
to Stone Point.
Stonepoint incredible partners.
And then
I might be a little off in the dates, but two thousand
Seventeen or so, sixteen, seventeen.
SCS, we were transitioning from Gen one to Gen Two.
We needed to do a more holistic solution.
And
Stone Point bought
a firm that was called Focus Financial.
And
Then you fast forward, they took it public.
You fast forward a little more, we're talking it's two thousand twenty one, two thousand twenty two.
And focus at that point in time has grown to about ninety firms.
four hundred billion under management.
But you basically have ninety firms doing ninety different things.
And
Clayton Dublin Rice.
saw the opportunity to take it private.
And to actually integrate.
The
Company bit.
And to really leverage the scale of focus across
Investments, technology
A bunch of different kind of actors.
And not have ninety firms do ninety different things, but
organize it into various kind of divisions or hubs that are best in class. And
The core mission behind Focus is really putting the client at the center.
But these changes really benefit the client first, but then also
the employees of the different
firms and ultimately the investors.
at the private equity firm. So we're about eighteen months into the take private. It was end of January twenty twenty three, the take private was announced.
And then it was delisted around Labor Day of twenty three.
So about eighteen months ago.
And
Of the four hundred billion.
of assets they've
now consolidated from a balance sheet perspective aligned.
Over half of that.
Including myself. So I had independent shares in SES.
So we have the revenue share with focus.
Traded those partner shares.
To be part of the one focus.
Yeah.
And as have the majority of the assets within focus. So we're all rowing, aligned, rowing in the same boat.
I believe that
We'll be able to solve
our clients issues
In much better ways.
And it's been a shot of adrenaline also just it's locked people in.
It's inspired people and it's enabled us to bring in really great talent we couldn't have otherwise brought in.
Lane McDonald, our new CIO.
who had previously run the family office for the Johnson family from Fidelity.
Harvard management company before that and then a career in private equity at three different firms. And actually you're in the Boston area.
He's a bit of a celebrity from his Harvard
than USA hockey days. But literally the best
CIO partner.
I could possibly imagine.
Prior to the focus Take Private by C D and R.
There's no way we get line.
And we also brought in a head of client service, Adrian Penta, who just started a few months ago.
And three or four other really senior awesome hires.
at SES, we wouldn't have been able to do that otherwise because
They're definitely incentivized and inspired by the vision that we're trying to do, which is to really be
the best firm in wealth management period. This is the ultra high net worth end that we serve.
the high net worth that the other firms have focused. So now if I run into a client that is below
Twenty five million.
I'll refer them to my colleagues at focus.
And we're gonna enhance our capabilities just across the board. So
I think private equity when done well.
Can really be
incredible for businesses across all different vectors.
That's not to say they're not bad actors.
But from a first hand experience and of course there's the investment thing.
Talking as a employee of a private equity firm.
What has me so excited for the future. Private equity plays a big role in that.
So one idea that
I think is really interesting.
around this private equity thing and the scope
of your business is to understand your specific platform.
how it is so similar to all the other
institutional allocator platforms in size and sophistication.
And that that then can fuel a better wealth management experience for the families that
Trust us, yes.
And now.
The broader
ecosystem that you're gonna serve the ultra high net worth or whatever.
One of the reasons that wealth management sucks.
Is
There's a horrible adverse selection problem.
And so any alts that they get suck.
Because they eat last.
You've built something different.
Which is
To me, one of the most interesting things about SES.
Which is like oh it's wealth management, but you're in the same breath as these
Important
Bellweather.
L P that other people look to to see
What's interesting and new.
And that's the opposite of
What happens in wealth management?
Something interesting must have happened.
So
What would be the headline stats that you would hold out?
Now we have over fifty billion dollars under management.
And S Yes.
Yes, with
Approximately five hundred clients.
So an average client of about a hundred million dollars.
And
Because of their
wealth they can
have an allocation to private equity or to alternatives and
A lot of private equity.
That resembles what
the top endowments foundation single family offices out. So our typical client
at SES might have thirty percent.
target to private equity another ten percent or so to opportunistic credit and real assets, et cetera.
So you've got
Fifty billion.
Yes.
That's
Sounds like Harvard or Yale or
Any of these very f big famous foundations.
That have been
The
Allocators of choice for the marquee private asset managers.
Yes.
And what's interesting to me is that
Everyone talks about how wealth management as a channel for new capital is gonna be so important as endowments and others are sort of tapped out.
Where fully allocated.
So I am curious about like the ingredients for it seems like there's gonna be more people like you that try to build an institutional grade.
Bellweather.
Allocated.
That's in the same breath as Yale.
But serves the wealth management market.
And the private equity being a force for good.
Concept.
First of all, as I mentioned, the families
themselves.
are very wealthy.
They have enough money to keep in fixed income cash.
to fund their lifestyle and deal with things. So they can have a sizable amount of capital that they lock up.
We have a flexible model, but as I mentioned, the average families
Somewhere around thirty five, forty percent in private.
Some people and myself too.
Personally, yeah, I'm sixty, seventy percent in private.
I'm comfortable with that and I believe in the long term return potential.
There's a huge opportunity in wealth management generally, like if you look at smaller families.
They might have
A typical wealth management client that might have.
five to fifteen million dollars.
They can't have that type of
thirty, forty percent allocation, fifty percent allocation to private, but they can probably do ten to fifteen percent.
And maybe it's too
Or four percent right now.
And often it's in like
multifamily real estate. Or something really that
has an income component and it doesn't have the upside of the buyouts and the venture stuff we do.
But then the other really key component to
And we've seen other
Competitors.
Firms that look like us start to copy the model.
Or just adopt the model that we went with from the beginning.
Is that we use pool vehicles that we set up every two years.
We get the money from our clients.
And then we allocate across
A series of different funds and co investments. And they're committing to those funds. We call them pool vehicles. They
are structured much like fund of funds, although our underlying clients
or wealth management clients SES just pay w a single asset management fee. So we make the same
Fee for them off putting them into
parametric that's doing
Tax efficient.
Indexing. We're not biased to put them in private first. We're just trying to do what's the best from an asset allocation perspective. Yeah. Yeah.
And our approach has been
Where's the alpha?
It's in private, specifically private equity.
That's where we want to
Use our liquidity budget.
And then in the more efficient areas of the market, like public equities.
We are largely doing a lot of passive and and because our underlying clients are largely US taxpayers.
And so the pool vehicle thing, which is like an interesting like structural innovation, maybe.
What does that
unlock it's just it's certainty. So you can then go to the GPs of the world and just feel like Yale or something.
Yeah, exactly. There's a couple of things I would say.
Yes, the pool vehicle enables us and we actually found that you don't want to do it every year.
You wanna do it every two years. But you don't want to do it every three to four years. Two years you get the right mix.
Of
Underlying
buy out growth venture funds.
And co investments.
Because
We want to have diversification across these different
Sniper
laser shot people that might be doing subsectors in
defense like Aline River or
Healthcare
Software, et cetera.
And the venture funds often raise in two year cycles, so it's kinda nice
Thrive or Founders Fund.
are basically in each vintage vehicle we set up, you're gonna have that fund.
But it gives the optionality that if we have a client say they're an entrepreneur, they start with
fifty million with us, then they sell their business and they go up to two hundred fifty million.
They can flex up accordingly.
In their allocation. And each time they are choosing
With you the amount of their marginal allocation to the new pool vehicle?
We're doing cash flow modeling. Do they generally take your recommendation?
Yes.
So in some sense they are committing, but they trust you.
W we're trying to do is let me just run some simple math for you.
Let's say you're a hundred million dollar client of ours.
And we want to have you be thirty five percent private equity.
The rough back of the envelope math. This is a little swag.
is that in order to get to
that nav target that you have, say you want to have thirty five million of nav.
And private equity.
Is you need to commit
A third of that.
Allocation.
per year.
Somewhere between ten to twelve million dollars.
Annually.
We do it every two years.
So you would commit, say, twenty million dollars, somewhere between
Twenty's probably good. So
You're gonna commit twenty million to the vehicle we're setting up right now, which called private equity ten.
And then you're gonna commit.
Hopefully your portfolio's growing a little bit. So you might commit twenty one
Or twenty two million to private equity.
Eleven.
And twenty three, twenty four million to private equity.
twelve.
And then when you get to year six
The modeling would suggest that your nav and hopefully your portfolio's grown a little bit.
You're gonna roughly be at
Forty million.
You're gonna be at that thirty five percent.
Target nav.
You're gonna have an unfunded liability.
You're trying to be thirty five percent private equity, you probably have to have about a fifteen percent unfunded.
But we just kinda manage against that and then if you get divorced, God forbid, I'm sure you won't, but
If life changes, then you can toggle down.
And that's how we do it. So
It's really to think very long term.
I think it's very important to get the vintage diversification.
doing this now fourteen years at S.
We're targeting our bar. If you think of the market generally.
The private equity market generates multiples somewhere between kind of a one point eight and uh two point two X.
IRRs between
say ten and fifteen percent. That's like the average private equity return over the past twenty five years.
Roughly.
Some vintages are better than others. And we're trying to
generate what we're striving to do in our program is generate top quartile returns, which is typically
gonna be an additional, say five percent.
plus of return above that. But so we're targeting kind of
High teens, low twenties, IRRs.
We put in our book sixteen to eighteen percent.
Not error.
multiple roughly around two and a half X. But certain vtages, I think
Will have the potential to be north of three X, but then you get a
Bad vintage.
in the Covid era where you had really inflated multiples out there.
And you have to grow into these.
purchase prices that people paid.
You might end up in the low twos and your IRR might be
Mid teens or low teens.
In the top quartile. So
What's really important is to be consistently
Investing in the asset class because
I think one thing that I saw I worked at Harbour Vest Partners.
And the secondary group between like
Oh seven and and oh nine.
But there was a lot of enthusiasm around large cap buyouts.
Leading up to that.
And when I joined S in eleven.
I looked at a bunch of our clients' portfolios and their legacy wealth managers and they were just
Chock full of large cap
buyout firms from O five to O seven.
That's not a great vintage because the global financial crisis
A lot of people take a pause and they miss oh nine, ten
Eleven twelve.
And then maybe they start getting excited again.
And those were the best vintages.
They get excited again.
when things start to heat up. And I think it's really important to
The
Consistent in your allocation.
So that you capture the really good vintage.
Okay, so through the unique way that you've structured it and maybe the unique capital base that you've
gotten to work with these very high network families.
You've created a situation where
SES is a private heavy allocation.
But it is an allocator that feels like the great institutions out there.
All this thing you just described is like all the means to that end.
What are the biggest risks?
The trend seems to be everyone is saying that wealth management clients seem to go from zero
ish private equity or exposure to like much, much higher.
And the reason is better returns or risk adjusted returns, et cetera.
You've been doing this a while now. What are the big
Ris that you see.
Yeah.
Allocating to private equity now if we're about to get this big wave.
of a new source of capital doing so.
I think you run the risk that a lot of people are gonna have pretty mediocre
Experiences.
in private equity because a lot of the products that are being put together to cater to
The high net worth.
Or even like mass affluent market.
Are
Done by really large cap shops.
In vehicles that have lower cost of capital, and they might be targeting
What they're trying to do is like ten, twelve percent.
And if they undershoot on that.
You might end up you're in private equity. Yeah, exactly. So
I think that's
The risk.
The cost of capital
For some of these
Evergreen.
private equity vehicles.
Is
far lower than the standard players.
I'm talking specifically about a very high profile secondary sale.
that been in the market a lot.
The bids from the sophisticated buyers.
For these assets.
Came in had
Mid eighties pricing.
And then
A couple of the Evergreen vehicles.
Interval funds that have been set up.
That raise capital.
And need to put it to work so then all the cash drag.
bid in the mid nineties.
So there's a ten percent spread between
Folks that candidly like have big funds and want to put the money out, I don't know exactly what they're underrating to, but they were
Blown out of the water.
I
These new sources of capital.
They really need to put money into work. And we executed
A trade.
We sold some of our
Direct lending, private credit.
From the vtages of
eighteen, nineteen.
twenty, you know, stuff where there could be the underlying companies maybe weren't the best vtages of private equity.
We got par.
And the tightest spreads. We got par from an interval fund buyer.
And
I think that
The risk is
Not that there's like a blow up or a catastrophe or something like that.
It's that it's an underwhelming experience'cause you also have the friction
of the various fees involved that are gonna drag things down and then
The other risk, and we saw this with B R
Is
People think that they have quarterly liquidity.
Their dates.
And
Oftentimes
When
things happen in markets, everyone rush for liquidity at the same time. And they can't get it.
I think that people need to be really clear.
About yes.
In normal situation.
You're very likely to be able to get
quarterly liquid after
A two year lock.
But
You have to be prepared for a scenario where
You're actually
Locked up for five, six years.
So really the risk is
That
You get results.
Having given up liquidity.
That
You probably could have gotten for very cheap.
Very liquid.
Alternatives be that.
Public bonds, public stocks, whatever. Yes.
And it also makes me wonder about the duration of the partnerships.
The beautiful thing.
S P Y or whatever is you can buy this morning and sell this afternoon if you want.
in the business that you're focused on and you're getting in bed with
a person or a couple of people leading the firms that you give this money to.
What lessons have you learned that you would coach the next generation of people that want to build a great Sterling wealth management private sallocation platform or something?
About
getting that piece of the equation.
Right.
What are the big lessons learned?
I would say
This is very obvious.
You're getting into a partnership.
That usually is like a ten year
Plus three years, and then there could be extensions beyond that. I mean, this is often these things are lasting 15 plus years, which I think is longer than the average marriage.
You really need to know the character of the partner that you're investing in.
And understand that they're gonna be
Good partners and good times and bad. And
I think that
If you have people who
Are
Very focused on themselves.
Greedy that can cause real disruption with teams, which can cause firm instability and make for
real issues in the underlying stability of the team that you're partnering with for this ten year plus horizon.
Fortunately, we've had
A really great
set of partners generally, but
Where we've had issues
We often back real kinda alphas.
I think that's great, but
Some of the ones
We've had issues with
have had controversy around them and
When they've
faltered, people are ready to kick'em when they're down.
and the team isn't cohesive and things like that. So I think that can be a risk and
In the due diligence, what's really important is
Not to get stuck in the echo chamber.
Uh
doing the on less calls and talking to the other
L Ps that are doing the font.
'Cause you can get a lot of positivity.
If you're just listening to the people that are fans.
One thing I've really
do and continue to I was talking about this with my colleague today, is like
Really making sure that we are trying to find contrary views.
Or people.
We're not doing the fund.
I don't even do many on less reference calls.
I'm generally like just assuming they're all good.
And focusing on
Going off list.
But also it's really important that you know that you have very trusted relationships with people on the other side of the phone.
There's an example I can think of.
recently with a fund that we passed on where
Another LP had shown it to us, and they had spoken to
This
Group look great on paper.
Great presenters, et cetera. They were very excited about it.
My colleagues brought it to me, I thought it was interesting.
I know one of my good friends works at that firm and I called him and
It was like
Don't walk away, run.
A lot of detailed reasons.
Why we should not do this fund.
Why would she not back this person?
We
pass this along to this other LP and he goes, Oh my gosh.
I just spoke.
To
That person's
Boss.
And they said the most amazing things about them.
And I'm like, Yeah, well
That's the company line.
And so
Just to summarize.
You have to be investing with really great people, but also people who have
Create character, integrity, and are going to be.
Awesome long term partners because
Nothing's a straight line.
And
Really making sure we have both those things.
When we make investments.
What's your
most direct and honest assessment of the wealth management.
Industry.
It's a huge industry.
It's like close to a hundred and sixty trillion globally. I think ninety billion plus. I mean ninety trillion.
plus full of assets in the US and
Generally I think it's pretty crappy.
It's not great.
You have
The banks like Goldman Sachs, Morgan Stanley, JP Morgan, et cetera.
They're great firms. They can do nice things on the lending side, and they will do interesting deals from time to time that they'll offer up with their clients. But in general, I think you get.
Real adverse selection.
doing private investments through those platforms because
They have fee arrangements with these firms.
And they will only put a firm
on the platform if there's some
Fee share.
And
The best funds are heavily oversubscribed.
And don't take wealth management dollars. There are exceptions.
But
In general you have an adverse
Selection of funds on
wealth management platforms.
My advice to my friends who ask me what to do is like
Maybe there's certain credit funds.
If you go plain vanilla on something like that, you can be fine, you not get hurt. But like
I don't think in the areas where there's a lot of alpha in the market.
Small buyouts, venture capital, those are non existent really.
On the large
private wealth platforms at the banks.
And you just don't know.
You're like, why am I being shown this?
There are
ease and incentives and conflicts involved in
most things that are being shown to the clients.
They're showing something because they got a deal, but
If you think of the large cap buyout world.
There's some firms that are oversubscribed in one and done's.
And are really
Great firms with great cultures.
And are very hard to access and they probably don't have much
Dollars, if any.
On the wealth management channels.
That's just a fact.
And then there are others.
They don't
wanna do that because they'd have to pay the bank as like a placement agent fee.
Might be fifty basis points or hundred basis points.

Whereas the folks that often do it
They need to raise that money.
They're not really oversubscribed.
And then sometimes what you'll see too is you might have a really good firm.
They don't have their flagship product that's oversubscribed on the platform. They have the new thing.
That they're starting.
Whether it's a new sector focused fund or geography, it's the upstart thing that they need to launch. So
You might not even get
The best of these large firms.
That's the issue on the banky side. You also don't have
Our f average family is over a hundred million.
A typical wealth advisor is really
not as steeped in trust and estate stuff and like the complexities of larger families.
Like some of the boutiques are.
And there are a bunch of
Boutiques out there.
that are really good in
Helping you with your estate.
doing bill pay or other family office services, but they might not have
a very robust investment platform.
the vision for S
when our founder Pete Matun started the company in two thousand two, was like
He had had a liquidity about himself. He was looking for a solution and he was like, Wow, there's a huge gap in the market.
To bring these two things together, having a world class investment platform that looks like
The best single family offices, the best endowments and foundations.
And
Also is very clean aligned.
and sophisticated on the family office side.
There are a handful. It's probably less than ten.
Uh
firms out there.
In the country who have achieved
Really significant scale.
Like we have and deal with these types of
families because it's hard to get to because scale is really important.
If you're a billion or two billion dollar firm.
You don't have the scale of assets.
To be as relevant on the investment side.
So I was really fortunate.
To join SES when we had seven billion and now we're
Fifty.
But I feel like to have a really attractive
program in the alternative space.
It's difficult to do that sub five billion dollars.
Portfolio.
I understand the banks and their problem and then sub scale is a problem.
Then there's this other middle channel, which is the roll ups.
Other
big collections of RAs or just big individual RAs.
But I don't know of many of those, maybe iconic's an exception.
Where Iconic has seemed to have been able to
develop a alts investing program that's respected and sought after or whatever.
But there's not like I can't name five other ones.
So
Why is that?
Not the case.
There are other places as big as you.
But they're not like a sought after LP.
Yet.
Yeah, and that's an opportunity for them.
I think you need to have coherence.
Across the platform.
It's one of these things where like the best time to start that was in twenty eleven. Because it takes time to build the reputation. It takes a lot of time. There's real luck involved.
Yeah, sure.
I mean, I stumbled into the job I'm in to begin with. I was gonna go and be a lower middle market via growth equity investor.
And it was just through networking.
that this guy was like I can all have a job for you, but
The guys manage my money.
Yeah, I wasn't thinking about private wealth. I wasn't thinking about
I didn't know what a multi family office was.
GPs were really open to taking my call in twenty eleven at other points in the cycle.
It becomes a
harder to get access.
Right now is a good time to be launching a program.
I think it's been a tougher capital raising environment because distributions have slowed down.
And then you layer in the fact that the endowments and foundations
are in a tough spot right now.
And there's a lot of uncertainty around
Funding and taxes.
I think
That there is room for
a number of new players to go into the wealth management area.
But I think the scale.
Is really tough.
If I were to not be at S and
I'm in it to win it here and
Really.
Love the vision of not only SES but the focus platform.
They were part of
If that wasn't the case and I was gonna start something, one of the key things
is I would want to start with an asset base of
Round five billion dollars go into twenty.
Because I think that scale piece, that first couple billion
is really hard because it's the chicken and the egg issue.
One of the things that I think is so cool about where it's all going
Is that you
at SCS now being one of the investment leaders of this much bigger platform.
You get to see everything that's emerging at the frontiers and how things are changing and sort of who is best and what they're doing and
You're a great
person to ask to dispatch from the front.
Say like here's what's happening, here's who's good, here's why.
I thought it'd be fun to do like a round robin almost of
What is changing
at the edge of different asset classes. And maybe we'll start with private equity, since I know that's one that you spend a lot of your time on.
And we can take this in subcategories too. We can talk about independent sponsors, we can talk about the big buyout firms, we can talk about platforms.
What do you think are the most interesting things that are changing
about private equity as it's become a very mature
industry over fifty years or so.
So, by us the large end, I think you have I mean, this has been happening for a long time, but
the bigger buyouts definitely moving towards asset managers.
And one thing.
That a lot of those firms like Blackstone, KGR, Carlisle, Palo are Focused on is
having
Vehicles that cater to the mass market.
interval funds or things like that and really
Also having
more customized solutions for their big sovereigns or whatever it is. They're not
private equity investment firms are asset managers and they're some of the most important asset managers in the world.
And that's not where we spend a lot of time and play.
Why not?
Because
We think that
By going in the smaller end of the markets, we're taking on
Maybe more risk.
But you're able to buy into things at lower prices.
you can do more operationally and improve these businesses and then
They can be sold up the food chain to these larger players into these places.
That have lower cost of capital.
And
That has continued to evolve. I think it's not happening overnight.
But I think one thing that is interesting about those big places is that they have become maybe more like investment banks than private equity firms.
What does that mean bring that point to life?
You go join
Blackstone or
Whatever after your
stint of banking, you're really just cranking through models and you're not really on the front lines with
Entrepreneurs.
It's more about financial engineering than it is
Business building.
I'm making generalizations, but I think the size of what they do But that makes sense with low cost of capital for them. Like they don't need to deliver the same necessarily the same return.
Yeah, I think they are targeting lower cost of
capital, they're really focused on okay, what kind of premium are we gonna get over
public equities.
Is this suitable?
There's a real emphasis on credit.
from these shops because it's very scalable and a lot of their and clients are not taxable.
They're less sensitive to that sort of thing.
But I would say that
The cool thing
At HPS
maybe ten years ago was
to go back to your firm that you'd worked at or go back to Blackstone or Carlisle.
K K R
Now I think
A real trend that has been going on for many years, but is really accelerating.
is actually to not go back to these
big shops, but to actually
Become an independent sponsor.
To do a search fine.
to go do a roll up in a certain industry. And maybe that leads you to building out a your own private equity firm.
Royce Yuckoff teaches a class at HPS, and there's been some real success stories. You had the Garnet Station guys on who we know are both
Good friends with
Yeah, I think they have been inspirational for next generation of leaders.
That is an area that we're spending a ton of time.
So we've been backing lower middle market firms.
for a long time.
Since I started in twenty eleven.
the majority of our buyout investments were in these smaller cap businesses.
or firms that were going after small account businesses.
And when I say that
Maybe just to
Back up for one second.
What's the thesis around why lower middle market versus mid market versus large cap?
lower middle market this varies depending on
The
business model and
industry dynamics and growth, et cetera. But
Say
A typical
small business will trade for
Say five to six
times EBITDA on the low end. Maybe if it's a really great business with high growth, maybe it's say five to eight times EBITDA.
Whereas when you scale that and you take that from
Somewhere in the two to seven of Ibata grows to twenty plus.
Then that is valued by the market.
Somewhere between twelve to
sixteen, eighteen times. The multiple you can sell that business at
is twice as big as what you paid. Or
Significantly ahead.
Now why is that?
You professionalize the business. You put in financial reporting systems. Hard. Yeah, it's really hard work.
And why did it grow? You made different acquisitions, you
expanded into different markets or
built out your sales force, et cetera. I mean, you did a bunch of things that have made a more stable business. You don't have as much customer concentration.
Therefore banks will lend more money to it.
And this is a tale as old as time.
Something that is very repeatable.
And something to go after
When I started this in
twenty eleven.
Most of these emerging firms were people who were spinning out.
Uh
Other
Shops
There were a number of them, but yeah, it would usually be
Mid market firm gets big, three junior partners decide to go off. And that still happens, but now
The rise of these
Independent sponsors.
Search fund people. I mean the the lines kinda blur together in what you

And I think
Part of what can be different.
There is that these things are usually focused on
Very fragmented.
Aggressive roll ups.
H VAC is one that everyone talks about. Love the H VAC roll ups.
With seeing things in uh youth sports.
Accounting is something that's gotten some heat.
We have a landscaping company we're looking to have. I mean, there's goes on and on and on.
If you see the ten people that want to do this
What separates the wheat from the chaf? Like what is the best of those ten
typically look like what are the attributes of somebody
Doing this'cause
Especially if they're very young. It's hard to know.
Not huge track records typically. They haven't run their own thing before.
How do you know which of the independent sponsors to back?
Usually they have some experience.
at a real firm.
where they worked for a couple of years and they learned how to financially model and learned like how transactions work and whatnot.
There's something in them.
They have that bug where they want to be an entrepreneur.
they don't want to go work for some big firm. This is not like a fallback, like they couldn't get the job at their private equity firm. So they decided, Okay, this is the cool thing to do.
They're very passionate about
the strategies that they're pursuing.
and are really gonna run through walls to make it happen. I think the velocity
of acquisitions, the getting the constant
Getting on planes.
Going to
God knows where to find the next
Garage door roll up.
There's this guy who we're backing right now.
Jordan Dubin.
who is actually literally he hasn't graduated yet from HBS, but over the two years
He has been there. He has with two of his
Former partners at Al Catterton.
They have
Done a garage door, guild garage door.
It is
Well north of thirty, maybe north of forty in Ibata. The platform. Yeah.
And we're coming into
He has a new platform he's starting.
That is in a
adjacent area. So it's very correlated. And then a third idea that is
Also kind of in the same
area of you could see how these things all come together.
Yeah, what are his attributes? What's he like?
This is what I'm trying to get at.
Just run through walls.
just going to work harder than anyone he was an athlete.
he has not a chip on his shoulder, he think he's a boulder on his shoulder.
He interned for Matt and Alex to Garnet Station partners.
Mentored by those sorts of folks.
I think
We'll talk about Jake Sloan later, but I mean
Jake Slone does not throw around.
Compliments.
That much. If you know him.
And he thinks that Jordan has the potential to
Be even even better.
Potentially.
Now how do we source these things?
There is a ecosystem of people that are mentoring and inspiring others.
who we know and are close with some of them so the Jordan Duman, for example, was referred
through Royce Young Goff, first of all,'cause he was a student of his. He said, I can't invest but I'm your teacher. But this guy is really exceptional.
on the level of
Matt and Alex.
Jake and Frank.
From ZBS.
And Alex and Ross from Heritage Holding.
When I saw that statement, that introduction, it was like hey, we get on immediately.
I wanna press on what makes you good.
Because
on my screen here, I've got the list of funds that you've invested in and some of the deals that you've done.
And
It is in some ways a who's who of the
category leaders in the different spaces.
And in most cases that I know the details, you've been a partner with them for a long time. Now it's the who's who.
But you were a fun one, two, three, four investor in those funds.
So what does it take to
you mentioned two of the other great allocators that feel more front footed than lots of allocators do.
Literally just what does it take?
To win.
in the same way that you would hope a GP would win finding the best assets.
Is it just the same exact stuff? Is it just hustle and taste and intelligence?
Yeah, it's hustle. So by the way, I absolutely love what I do.
Yeah. I get so much energy from it and I
Work really hard. Over scheduled. And by the way, I'd be very critical of myself and I'm definitely a stretch tooth in, et cetera. But I'm getting so much positive energy meeting
new and emerging groups or spending time talking about direct call investment deals with
established people, et cetera.
That I just I love my job.
And
I think the passion comes through. I think
There's a taste and a gut instinct, I think that is
Intuitive and
I had it when I started
This in two thousand eleven, but it you also grow and learn and refine.
what you're looking for and I'm just very authentic.
I'm very open and transparent.
And real.

Leads to
is very deep trusted partnerships.
Which then refer
Other people to
Do that. And then
When you're known as being a leading backer of different firms.
Then you're sought at for
If Notre Dame is doing something
They might
You know, refer it.
To us, there's a really good
Just feedback loop that happens by being a good partner.
But I think it's finding people
I see this.
Frequently, but track record is important, but we're investing in the next fund. We're trying to go where the puck is going.
And I think
really trying to be intellectually honest and strategic with partners about that and not be overwhelmed by
Okay, well who did this and who did that? And there's a lot of box checking that goes on in the L P world and I think
It's
Actually relative to the GP world, it's less competitive. And I could get into
Those dynamics, but
I will say
What we're doing
is not off the run anymore though. There are a number of folks
That are
moving into the space.
In the public equity world
When you study the factors that drive returns.
most all of the studies come back to three things value, momentum, and quality.
Do you think those three ideas apply to the style of investing that you do?
effectively investing in people and teams in private markets.
I don't really think of it that way, but I would say certainly like value and it's relative value. I mean you could pay
fifteen times for a software business that's growing a lot.
could be a great relative value.
And I think that
you want to be the market leaders. That is a key thing.
I've been disappointed
I don't know at this point,'cause I'm a class hatful type of person, but
there hasn't been more of a correction in Ventureland. I think there's a lot of
businesses out there that
were overvalued and are not the one or two leader in their category. They might be
Number five or ten. And they probably there's not a lot of value there.
But they're being somewhat zombies and
These things take a long time to play out in private markets and the way things are marked.
Think that's one theme you'll get if you get to know me is I'm not really concerned about marks.
the end of the day, I'm trying to have great partnerships that will deliver
distributions in due time. And
If something goes wrong, I'm like
Okay, well maybe that's a learning experience and that creates a situation that can be ad advantageous to us.
Because the fund's smaller, there's more co investment, whatever.
It's not necessarily a bad thing.
In the venture world
the reckoning
was definitely like put off majorly and I don't know how it's gonna play out because
So much capital's coming to AI.
These bigger funds had issues with the later stage stuff and so then they're doing the seed things and the seed hasn't really correct it.
Even though public multiples are
Way down.
That would be another reason why
I really love lower middle market buyouts.
Because I think the ability to
generate.
Alpha by professionalizing businesses, or it could be car outs too.

greatest deals have been
very operationally focused like teams.
that carve out division, they take on a ton of degree difficulty.
Through complexity.
But what's really hard to do
Is to generate
Um
Alpha.
doing consensus trades.
By the way, they can make money.
they're various friends of yours probably in Greenwich here who are gonna be very successful financially.
By
buying businesses that lower middle market firms
Professionalize and then they
generate somewhere between a two to two and a half gross and maybe
High teens.
gets down to net and that's okay. That's okay for a certain pool of capital and that's fine.
I don't want that to go away because I want to have those people be willing to pay.
twelve or fifteen times even dot for a business that our managers create at
Seven times.
And so I'm rooting for it.
And by the way, for those pension
money if we go all the way up to the Apollo's
The K carries Black Jones of the World.
Their major
Clients are the
US pensions
Right.
Have to deliver
Alpha to these various plants.
And that could be
Doing double digits.
And so there's an opportunity across the spectrum.
One thing that frustrated me a lot.
I haven't had the vindication as much as I would have hoped, but
Was
In
twenty eighteen to like twenty twenty one.
was just how silly the numbers were across everything and how everyone looked at it.
And
I have confidence that
With the right.
set of partners.
In time.
Things will play out.
Being with the people that are actually truly adding value.
will deliver differentiated returns.
I think the idea of
size and flexibility without bureaucracy is a very interesting combination.
Literally hit thinking of your top four things and I'm throwing back in there the fact that you serve as a signal for other LPs. Whether you lean into it or not, it's attractive to GPs for sure.
It actually sounds very similar.
If you go up a level from GP to L P to thrive.
It's the same size team.
It can write a tiny C check or a billion dollar check.
You can cover the universe with a team of ten ish people.
And they serve as this signal that other people want to follow. It's an interesting comparison. I mean, that's wonderful compliment. Thank you.
Wow. That's uh
Just being compared to thrive. But I do think there are parallels.
to
One thing I was
Saying
'Cause they came in last week.
To demo.
Some of their tools they're using.
Their AI tools internally.
as well as what they're doing with their accounting platform.
And it was so impressive.
I think that's a firm that has had continuous
Evolution.
And they started off
with friends and family was like seven or eight million, but then
Forty million. We came in a year later when he raised one fifty.
They were known for doing seed in series A.
There's a lot of consumer in there.
But from the beginning, Thrive was very clear saying we're stage agnostic, industry agnostic.
They didn't want to be put in a box.
And I think that's good. I think some people
probably say too much in their fundraising the early days, they maybe box themselves in too much. Josh did the opposite. He was very open on that.
But they've continued to evolve and they've
I think emerged as one of the most important growth investors in the world.
what they're doing right now with their holding company doing buyouts.
utilizing AI to
really enhance some of these fragmented industries.
And there's a lot of folks out there.
There's hype around oh okay, use AI to do like roll ups.
You see deals getting done where a couple of engineers from
a top company might get eight million dollars on a forty million dollar valuation to go do a roll up.
They don't have a broad set of skills.
No private equity experience.
They also don't have enough capital. They can do like one deal.
In order to do this right, I think
You need to have
a significant amount of capital and a really large
Maybe not too large, but a substantial team that has skill sets from both.
the finance industry
And the AI engineering side.
And I think nothing embodies this more.
than what Long Lake's doing.
Long Lake for reference is a holding company that was founded
A couple of years ago by a guy Alex Taubin, who had been an oak tree, and I think I knew Zach Frankel.
who was
Co founder of Ramp and co founder of Cognition.
One of the
smartest human beings either of us would probably come across. I think you would agree with that.
General catalysts initially seeded Long Lake.
Kudos to Haymont on really
believing in them.
And pushing us and then
They've gotten capital from
thrive and others at different stages and we're looking at an investment right now. But you look at what they're
Doing.
They have a team of
Call it.
eight private equity folks who come from great
places like
Top vice president or director level at really great firms who have great experience working under Alex on the private equity side. And then
You have engineers who've had senior positions at scale AI, Palantir, et cetera, that are top of their class.
The best schools.
And
They're building tools.
That
It's not about the shiny UI or about something you want to sell.
They're going into the workflows.
their first major area they're focused on has been homeowners associations, which is a very
large and fragmented area. The trades at a pretty high multiple.
And they demoed a tool for us.
They sit down with the manager who has to put together this monthly report.
I should do this every month.
And probably has a few different associations he or she has to do this for.
What they do is they
Open up a clean Excel doc.
And then get sources from like five different areas and populate it and then put it together and it takes ten hours.
By building various AI powered tools to pull in data in certain ways and put it all together.
Well, it was taking ten hours.
Is now
less than an hour, even with checking in and a much better, more thorough, customized, standardized way. So you just save ninety percent plus.
And made a better experience.
For everyone involved.
Do that times every part of the business. Totally.
That is also going to be very
Compelling on the acquisition side.
So you have a regular way private equity firm.
That's going in and trying to
Do uh
H O A Roll Up.
And then you have Long Lake, who is going to
Be like, this is what we can do. And you can roll and however it might be.
That's gonna be very powerful.
And not to give away traitsing, but like
on the accounting side, with Rive and ZBS are doing with Cree.
It's some of that same stuff where they're going in, they're looking at the workflows and they're taking accounting's time.
The the way they're coding the different transactions.
They're reducing these things by
Over ninety percent.
And
It's not sexy.
It's really about going five lay deep.
And that's creating real modes.
I think there's gonna be a lot of noise out there. People claiming this same claiming they're doing this.
But
I remember
seen there were a bunch of companies back when I was first starting SES like in two thousand.
Eleven.
twelve, thirteen, fourteen.
They would have websites and they would say that they did like
Real estate online and all it was was like a shiny website.
There was no substance. It was just all maybe trying to make your user experience look cool.
It's a very good narrative to say you're using AI to reduce costs and time by ninety percent and therefore you can pay a little bit more and therefore you can have much higher margins and all that. It's a very simple idea that's
The devil's in the details. Yeah, and it's like
Having
A plus teams go extremely deep and build something.
You're specifically trying to solve
problem versus
sell a product.
It's a really interesting trend.
I'm curious about the structure though.
From your perspective for your clients.
Two of these examples are permanent capital holding company structures.
versus drawdown.
What are the trade offs there?
I think
The trend has been towards more people trying to raise permanent capital vehicles.
Which obviously confers certain benefits.
But from the LP's perspective, from your clients perspective, what are the trade offs that you care most about?
Between a drawdown phone and a whole bunch of
We're flexible.
In our mindset, we have ourselves
A lot of our capital invests out of a twelve year vehicle that has three year extensions.
We need to have some sort of understanding around
Exit rights.
when you get out towards the end life of the fund and
Have those things built in.
And in reality, I think
Probably if Long Lake is successful at doing what they want to do.
They will take it public.
They're like a private equity firm in some ways.
But there's a very substantive
technology story here.
I'm sure there will continue to be lots of VS stuff out there.
But they will have real substance and so maybe instead of trading
teens multiple, it will trade north of that because of the AI story in the different areas it can go into.
And we might have the opportunity to get liquidity.
Whatever you want.
Yeah, well they might IPO and
year six, seven, eight. Whereas if you're in the typical fund structure, we're actually twenty you might still be holding some of those stuff. Yeah. So I think we'll have more flexibility.
I think for Long Lake
And for Thrive, I think what's really important
is that these are really durable lasting businesses that you want to own for a long time.
Because that's the beauty of the compounding. And so
Long Lake is very focused on having real motes.
Because there's gonna be quick wins that can happen that don't have
the long term modes. And so
being very discerning around those things is important. And another holding company
Your guest is.
You're on a roll, Patrick.
With some of my favorite people, but Darren Farber.
We helped anchor.
his holding company Alley River and
I mean that's another one where it makes a lot of sense.
in terms of like there's real rationale behind
Why do it in that structure?
I mean, first of all, there's a lot of cash flow that comes off these businesses that can be recycled to drive more acquisitions. So there's an efficiency from the holding company structure that Darren gets.
But there's also just synergies across cross cell or customer a lot of these businesses are
selling into the Department of Defense, Government
There's definitely
overlap in these companies and if you look at
Whether it's a trans dime or L three Harris.
There is a market for
A publicly traded
conglomerate of
businesses that have
certain characteristics. So I think that is what Darren is trying to do.
I think maybe
I'm sure
There will be other people that do holding companies where it doesn't make a lot of sense.
But I think we're trying to be intellectually honest around the things that do make the most sense. The best version of anything is probably pretty good. So try to find the best ones. Yeah. With very talented people behind them.
In real time, there's another manager we think extremely highly of who's considering doing a holding company structure. And the question that
we're gonna have to work on with this manager because we definitely wanna back them.
I love the fact that
that he's thinking this way. Because he doesn't want to be like
regular way private equity.
But like
Is this
helping him and his partner get to the optimal structure for their strategy.
Because
Their strategy historically has been
to aggregate, like roll up a bunch of businesses.
loosely integrate them to a certain extent, but then punch out and move on.
Mm.
Cell uh
larger stake to
uh larger private equity firm or someone who will
take things to the next level while they then they find the next area.
to consolidate. So that strategy might not be as conducive to a holding company structure and
What we try to do
This gets back to what I was saying earlier is really just be like
Open minded supportive partners like a
If in our business we're really focused on what's best for the client.
If you had that as like your North Star.
With managers it's maybe like
How can we all win together?
having that ability to put kind of agendas at the door and just have a
supportive, intellectually honest conversation.
That's helpful.
So we've got
Two really interesting things. The emergence of independent sponsors, lower market, the evolution of buyout firms to be the buyers
the people that are buying the businesses from you that earn your return, which is really interesting.
This evolution towards holding companies even from some traditional
Venture type players or something.
What about old school Venture Land? What are you seeing? Who is emerging as the most interesting best managers that do
the original style of very early stage bets into companies.
How is their strategy changing?
What interests you most in that category?
I'll back up for a second.
When I started at S in Thousand Eleven.
Really great timing. Financial crisis had really kind of shaken things out a bit.
had a firm that had a sticky growing capital base and was able to
start relationships with a number of emerging up and coming firms.
Like thrive.
But Founders Fine. Andrewson Horowitz.
A few others.
At that point in time you had Sequoia
Sequoia Kleiner Perkins, Greylock, Excel.
The benchmark would be kind of the top five and then the emergence of
Union Square Ventures and
A handful of other more boutique, Crasaka boutique firms.
And we made the decision to back.
Some of the emerging leaders.
So we're early checks into founders fund, early checks into Thrive.
early checking green oaks a couple years later.
And Andreessen Horowitz, those are really helpful.
Having the
Good partners and venture has been a really good run and
I think as Josh has scaled up Thrive.
Neal is scaled up green oaks.
at each step of the way, just being like, does this make sense from a bottoms up perspective, given the flow, given what you're trying to do?
That's great.
What we noticed though was our dollars were going more and more towards growth.
as those firms I think they made a lot of sense why they were doing what they're doing.
But then what that led to was us thinking we want a more early stage, but then there was this emergence of these solo capitalists and these um early stage investors.
And so we basically carved out about a third of our
venture budget to invest in these emerging
Solo capitalist.
You had some very credible people.
deciding not to join firms, but be their own kind of firm.
And get access to the best companies. Really a lot, Gail Horns have.
Ray Ton Zing are some that are well known, but also people like
Jack Altman.
Anika Winnenborn.
Rampton at Abstract.
There's been a whole host of
Next gen
VCs, a lot of them operators, not all of them, that have emerged, and we've backed a lot of them and anchored a lot of them.
often introduced through
Thrive has been the most prolific
Introduction.
For us, but
Andrew Sinharowitz Founders Fund.
the connectivity around our network, or the case of Jack Altman.
We get introduced to Jack Alman through Thrive.
Then
Jack connects us to Zach Ray and the team at Mischief.
Sometimes there's a
Thing that goes that way.
Deals beget deals.
I don't be remiss. There's also like Lockheed Groom, Josh Buckley. There's a whole host of
very credible players. There was a blooming of that.
And now I feel like that slowed down a little bit, but there's definitely a next gen of people that are very competitive.
David Tisha Box group, like
that have really kind of emerged as real players.
Okay.
Now
moving forward, that has been true for the past six, seven years.
What is started to happen more recently has been the rise of
Andreessen Horowitz.
Sequoia, lightspeed, general catalysts have just grown.
Massively.
In size.
And are at least from a size perspective.
And a team perspective.
Are really
Looking more like asset managers.
than traditional venture firms. And I think
We're not invested with G C. I have a lot of respect for Hamont. I mean, I think there's certain deals like the long lake deal.
Heyman's the CO of that firm.
That was the type of deal.
That's a CEO deal and that's an awesome deal.
But I don't know how involved he is in all the different things that are going on. They got a lot of money to deploy. Now
The capital needs are huge.
But I will just say, I mean you think of the army of people of GPs at some of these firms, I mean, a lot of them
We're invested in firms that
There's so many new faces there.
I don't know then, but I think the entrepreneurs feel that way too, or I think some of them do. And actually
The approach that Green Oaks takes, for example.
Where Neil
That it has actually gone the opposite way.
The typical way that people go
Is uh hire more people.
Delegate more down.
cover more of the waterfront. That's great. That's a strategy.
Green Oaks has shifted
to being having Neil at the tip of the spear for almost all first meetings. Said short of being having himself or one of his wife or kid in surgery, he'll be there for the first meeting.
Be a prepared mind.
truly try to add value to the entrepreneurs and be available to negotiate
A deal on the spot if it needs to.
That's a much different client experience than when you talk to
The principal who then kicks you to the junior partner.
who then elevates it to senior partner.
If I'm an entrepreneur as well, I worry
Okay, wait, and maybe there's a bait and switch. I mean there's just it's
dynamic. And maybe the best entrepreneurs
They don't feel like they need the help from the venture capitalists anyway and
That is what it is. But what I would say
Few things that worry me.
is that the game that the big
players that we're talking about.
Andrews and lightspeed.
G C
Our plane.
Doing ten on fifty.
To put a chip down.
might make sense for them.
So they blow away. Maybe the company n wanted to raise
Or needed to raise three or four million.
They could have done that.
Done four on
twenty whatever might be, and instead they're doing
Ten on fifty.
And
Could be bad for that can be bad for the company.
Probably bad for the seed stage firms that don't have enough money to play.
So not everyone's aligned. They're playing different games.
This is happening in real time. I think it makes sense in a lot of circumstances.
It'll probably be problematic in others.
So how people navigate it's gonna be interesting.
I think there's the opportunity for seed fund.
Probably though.
You can probably sell into some of these rounds.
If you're a big find
That's a lead is bad signaling, but if you're like a
Small
person that we back and say, Oh, you know, they say, Okay, my LPs are pushing us for liquidity.
You know, maybe you can sell into the big series B that's oversubscribed and
It's a dynamic thing.
My high level feeling is we still really believe in venture
It's so important to be with the best people.
And it's changing real time.
Any other categories that you think are especially interesting with the same question behind it of like what is newly interesting or changing?
Bringing private equity to the masses.
Is
something that I think is great.
I more like it because it
Feels to me like
It's an avenue.
Where we can exit.
Things too. It's a lower cost of capital.
Avenue
For the private markets.
We've seen this the evolution of continuation vehicles and the secondary market, all that. I think these are really positive because they're creating
Liquidity options.
in an illiquid acid class.
People talk about like oh put things on the blockchain or
I don't know. We'll see where
Things go over time.
But
The core thing that is I think really
Interesting.
right now that we see is the stuff going on in the lower middle market buyout end of the market and where it intersects with
Some of these circumstances with AI. Many it doesn't.
But that professionalization of the small businesses, like I think that continues and continues.
What worries me is that that secret has been out for many years, but like there appears to be
Similar to maybe some of the hype in what we see in the AI world, there appears to be arguably too much
Hype.
in the independent sponsored lower middle market space.
Where we're seeing teams that we view as
V V pluses.
maybe A minuses that would have struggled to raise capital.
seven years ago, even in like a hotter market.
now raised because of a few different
actors who
have a lot of money and have identified this as a great
area to invest. And so I think they're loosening
their standards
I don't know, loosening their standards, but they're doing things that we wouldn't do.
And then you worry similar to like the venture valuations.
We think that this firm should raise a hundred and fifty million dollars.
Maybe we do a budget based management fee.
They can offset
We can be creative to make sure they can cover their budget and we'll say, Okay, you can get over a
Three X return.
twenty five percent carry over five X net return you can get a
Thirty percent carry.
That might be what we would feel would be appropriate.
And instead you have a group come in
H
Caps them at four hundred.
Million dollars.
We see this sometimes where you have LPs that have lots of capital and are like
Trying to push it on GPs.
That's tricky because for a GP turtles all the way down. Yeah. For a GP
If you make a lower return on a bigger amount of capital
Make more money. That can be more money on the carry.
And then you have a definitely a bigger management fee that's contractual. So
It's dynamic, but I think if you kiss enough frogs and you meet enough people
We really feel like
We have way more great opportunities than we do
Capital at the moment.
And I think that's gonna persist for a long time.
You mentioned the on streaming of new liquidity solutions for some of this
bigger liquid asset class, continuation funds, secondaries, et cetera.
What do you think about everything that's going on with the endowments, which were for a long time
the pioneers of this style of investing. They were the first ones to do it in size
Put a lot of these firms in business.
Now it seems like we've reached the other end of that cycle where
They have huge allocations to privates and in some cases have sold big chunks of that to create some liquidity.
What is the changing role of endowments? What do you make of all that recent news?
I mean it's happening in real time. It's a big deal.
I mean you have the
pullback in funding.
that will have a lot of impacts on these budgets, but
The tax thing seems like a bigger hole.
These budgets are tight to begin with.
I was speaking to a really great manager.
They
Are gonna raise
sixty million from new LPs, they probably have a billion of interest.
One of the prominent endowments
had worked for like two years to get that spot.
And then just told them, said
We love you. We have to be on pause.
We might want to do it.
I would invest personally. We're so sorry.
That is just a real
Storing.
That happened ten days ago or whatever.
And that's probably happening a lot.
So
I think it just underlies
A point that I've made for many years that's a little self serving, which is
You wanna have diversity of
L P.
I think that having a mix of single and multifamily office LPs can be great, but I mean there's limitations
In the single family office world
Entrepreneurs who make that type of money
Can be a little crazy, I mean they can die.
Single family offices are not necessarily the most stable base of capital either.
No one's perfect.
The endowments and foundations have been very steady.
But sometimes when teams change.
you can have a real rethinking of the program.
And then this liquidity shock.
I did not fully see this coming.
I think it's a surprise and it's a dynamic situation that'll be work through but
Definitely is gonna put pressure on people.
It's gonna be interesting to see how all the sovereign dollars approach these markets.
'Cause they have huge amounts of capital to play.
I think they should barbell it and they probably need partners to help them.
Barbellet.
But there's I think a bias from what I understand for a lot of them to try to do it themselves and do it
With teams
That are off base in the Middle East or elsewhere.
I think that's gonna be harder to get.
on the ground, like some of the smaller stuff we do.
But I think they're getting more and more sophisticated. There's some really good people.
At those places.
I think there's a number of fund of funds who are doing very good work. I mean, if you think of the evolution of certain kind of funni funds, they were providing access to people who then
in the US, we've built out their own teams in the so then they moved abroad to do that same thing.
really everyone needs to continue to
of all their strategy.
And just be continuous improvement.
So I give this advice for you. The best managers can have their cake and eat it too.
You solve for you wanna have a group that has stable
And growing capital base.
With a team.
That are smart.
That you enjoy interacting with that can be strategic and add value where they need to, but also they're not overburdensome box checkers, because we certainly see that.
A lot.
Because
a lot of LPs that can really detract value or be a pain in the butt because the requirements that they have in terms of
Check ins and all these different things.
they're not actually asking the right questions. They're just doing their check list stuff. So
You wanna have
the personality of those people and also an understanding of
Are these people going to be there?
what is the economic situation or the personal ties if it's an endowment or foundation that this team has to
They were alumni.
The Notre Dame guys in South Bend are a great example.
they're very passionate about in Notre Dame and they've had a lot of consistency on their team.
'Cause when you have either changes in capital
Or team.
That's where you get the instability that can
be distracting for GPs.
And then on the fund of funds I
My hot take has been that the funded funds actually are get a bad rap. However
They often have agendas.
Whether it's looking good with a seeded portfolio and
special co investment rights or whatever, they can be more transactional.
So
Just understanding
Those things.
People that say, Okay, well we don't come into first closes.
We're gonna wait till the final cloud. It's like well.
I thought we're like in a long time partnership. It'd be helpful for you to come in.
It's feeling out the softer side of those different partnerships, the people involved.
There's a
Consistency
the likelihood they're gonna be there for a while.
Because
Even though there's
a lot of different firms and entities out there, it is still
A pretty small community.
of both managers and LPs out there.
And it's really important for GPs not to just raise the money the fastest.
particularly when they're starting off or at an inflection point in a firm, if you set the table with the right folks, you set yourself up not only for this fund, but for
The next
two three four funds as well as co investments and if you want to launch a different strategies or whatever might be.
Similarly, if you don't do that.
Then you might have explained you to do and it's just distracting.
Can you
Let's use Jake as the example since his name has come up a few times.
sort of soup to nuts describe why
He and ZBS are so special relative to the field.
Just as like a case study.
In everything we've talked about.
I've obviously itching to talk about
Jake and Frank.
Because I just think they're truly exceptional.
What's actually
A little bit.
Different with a ZBS versus a shore is just Nishbia, who is also an of one, has built a true machine.
Whereas I think Z B S is really the partnership of Jake and Frank and
There's a real key man risk with both of them and
How much it scales, but
I mean that is really a yin yang situation where Jake
is the most
aggressive, high energy.
Guy, but he's also super neurotic.
He's talking a mile a minute.
And he's gonna have uh very high volume acquisitions, he's extremely personable.
Excera.
But he's also definitely got that kind of risk orientation. And then
He's like the Jake and Frank, they're both co CEOs.
He's gonna be on the acquisition on the front end of things.
Frankie's gonna be more of the finance and the operation side. Jake will take
Ninety five percent of the year in a meeting.
But
Frank is
very, very crucial to their success.
But he's probably more risk oriented. He's like the quiet guy at the poker table.
Who's gonna be more risk on than
Jake, who
I joke with the guys at Radcliffe, he's like a neurotic tornado of energy.
And Frank is really an exceptional partner.
To Jake.
It's that yin yang compliment of them and they're basic they're going after started with veterinary
Then it was H VAC commercial side and residential.
Now they've done accounting.
Which we helped anchor them in and
our good friend Josh and Karima Thrive of the Best More folks have partnered in their accounting platform.
Gone in youth sports.
Yeah, just so
Confident.
In
The trajectory of what Jake and Frank
We'll do together. Do you know the story of Frank?
Tell us.
So
Frank, he wasn't like a princeling or anything in China, I think, but middle class or reasonably well off, but
Clearly a little bit of a renegade.
Human
Dad.
dropped him off in Oran County in eighth grade.
Irvine, California.
Urbanos is the valley. Like bought a house.
And left
Frank in California and flew back to China. This is in the mid two thousands. There wasn't Zoom.
This is not legal.
he basically raised himself from eighth grade, I think through
High school
went on to a great educational career, met Jake Sloan doing investment banking at Blackstone.
They both have had a
great career together, but it's so funny when he was at Blackstone, his parents clearly renegades.
I'm not sure if this was violating the one child policy. I think it was. He had a younger brother.
And they're like, Oh, we had so much success with Frank.
They sent his brother.
To New York.
And he was living his brother was going to high school in New York.
So Frank's like twenty one years old, twenty two years old, working a hundred hours a week. Not only doing that, but also having to be a father. So he not only had to raise himself.
He had to help raise his brother in his teenage years.
That is a very unique
He's a very unique person.
So is his partner Jake. And
I think it's finding those outliers. So is Justin Ishbia, so is Darren Farber. I think it's been the key
For me is is identifying those outliers, embracing them, trying to make them
the best people they can be.
What should GPs that are listening
Try to do more of the
As they tried to court
the best LPs out there.
What do the best GPs do?
That
Increase the odds.
Of partnership with you.
I give this advice to a number of buyout G Bs. I mean, I think in the venture world you basically it's a network thing.
And you want to have various
people that are very highly respected.
who make introductions on your behalf to the core LPs in that ecosystem.
You don't hire a placement agent.
But if you're a biote firm, you might
Wanna consider.
Hiring a
fundraiser, but I prefer
boutiques generally that are very targeted. So my view is
To really
Focus on a smaller number of higher quality meetings.
not doing spray shot across a hundred different LPs globally, but
to really be deliberate about picking
The
ten to twenty five you want to talk to to get to with a
thirty to sixty percent hit rate.
That is the way to do it.
You have to understand, okay.
What is this?
L P's capital situation.
What are they looking for right now?
If you
Either through a third party placement agent, fundraiser.
Or just your network. People
say, Oh yeah, you should talk to uh Liberty Mutual. They're looking to do this or you should talk to
Notre Dame or
Whoever might be.
And then when you get the introduction from those people, that's super powerful.
That's my advice.
The GPs.
'Cause what I really hate too is when people are on the road.
When I was in the GP's on.
upset with right now.
They raised five fifty.
million from their existing, but they're trying to push it to their like seven hundred hard cap and
do that for six to nine months and do a ton of meetings.
What is the point of this?
They're distracting themselves from investing.
How many L Ps of roughly similar
set up to what you have a pool of capital that's invested in a variety of managers and some co invest, whatever.
would you personally give your own money to?
It's a great question.
Well, I definitely give it to Kevin Kelly at Sequoia Heritage.
Maybe this is a catalyst. Definitely you're not meet their minimum, but
Maybe as a favor. It's probably
Lesson five.
But I think that there's a lot of things.
There's a number of people that are really credible. And so I'm pretty outspoken about this.
There's a lot of folks
that are trying to do things
Internally.
I've been on a whole host of reference calls recently.
With
various institutions.
And in many cases they're trying to go
directly, but they don't really know what they're doing.
And my advice to them
They don't ask me and then
Proactively says you should probably at least if you're
committing let's just for our numbers say
three hundred million bucks a year or whatever it might be. You should put
a third of that into a fund of funds and maybe or split that across a small buyout fund of funds and uh venture fund of funds and then build on top of that, but not try to do it all internally working with a consultant.
So
I think a number of the funded funds are doing thoughtful work. I think people need to be
intellectually honest about
what they're doing, why they have a reason to source the best, get access to the best, do the best diligence.
I'd also say the single family office world, I mean, these people are very wealthy, they have their own prerogative.
But I think a lot of the stuff they're doing has adverse selection and not the right
Portfolio construction.
the families will be generally fine, but
Maybe a hot take is I think that
Fund of funds are probably underrated.
You've mentioned a few times that a natural progression for very successful investors is to become asset managers. We started talking about Blackstone incredible business.
But that your interest in terms of your
clients dollars tends to be to recycle them back into people that are building new innovative strategies, earn higher returns that way, and so on.
This is a natural tendency at firms like this that with success comes the opportunity to expand.
into new products, new business lines, new teams, et cetera.
You've given lots of examples of both sides of that choice.
I'm curious if there's an example of it being a good thing in your mind.
to expand into adjacent spaces.
And still be able to earn
really high returns because in general it seems like your take would be the transition to become an asset manager is the point at which maybe your interest goes down and you might want to recycle that dollar.
back into something.
Fresher and newer.
Is there a good counterexample to that?
Yeah, well said.
I would agree.
Normally you see these things, there's not the logical strategic sense other than You're doing it'cause you can. You're doing it'cause you can and you want more assets. Good for you.
God bless capitalism, but
It's really for the sake of
I guess more money. The strategic rationale
If there is one doesn't
hold as much water as it could. Shore capital is the exception
to that, I would say, because Justin Ishby uh
and team and we've been investors with sure since the first investor in Fun One. And it's been incredible to watch the evolution, but they started off doing micro cap.
Healthcare
Buyouts.
And have been incredibly successful at doing that.
But then over the years
They have been
Very disciplined.
in keeping the microcap healthcare side small.
So they went from
I might be a little off the numbers, but say a hundred, hundred and ten million in f on one
To two twenty and
Fun two, and
For that two twenty, I think they might have had two billion in demand. So a lot of demand.
then they've raised maybe in the three or four hundred million dollar range for their micro cap healthcare funds.
On a go for basis.
Which is enabling them to stay in the say one to
five EBITDA startup platform.
But then
they've continued to build out their organization with all sorts of areas that can help businesses professionalize and grow.
And you can apply that across micro cap investing.
in other sectors.
So they built out teams in the food and beverage space.
In industrials.
Business services.
And also in real estate. And the real estate team has a tie in to their veterinary practices.
There's strategic synergies.
of this your organization where all the different strategy funds
Our
benefiting from the organization of Shore, which is I think it's a hundred and eighty, maybe two hundred people.
It's bringing a night fight.
The returns for sure are
Exceptional.
But what they've also done is delivered
really high quality businesses to their sellers.
Which is not something you can say for every single
healthcare roll up.
So I think there's a durability
to that.
as they've evolved, there's a few businesses that they have loved and wanted to stay in longer.
The first was Southern Veterinary Partners.
That is one where they established a continuation vehicle or an SPV, gave their LPs the opportunity to roll into it.
And then recently actually
merge that with another veterinary platform. Then it's the second time. They've grown this into a really, really big business.
But they haven't done that with the majority of their assets.
when they've gone really deep in something like that.
They've done that in
Southern Veterinarian now mission.
Bringing it together.
as well as Brightview, but the rest of them they've sold to other private equity sponsors or things like that.
We do see the C V space get I would say
arguably abused by some managers where like, wow, you're selling everything to yourself. What's going on here?
sure I think has a lot of third party validation around their stuff.
But then if you think of the evolution of team, they've grown a lot of great investment professionals. And these different strategies are places for someone who might be an associate or VP.
on the healthcare fund to then go into a different vertical and become principal or partner.
And the last thing
Very excited about the shore advantage fund, which is
Essentially going to be picking some of their
Best companies from their health care fund.
led by Mike Cooper and John Hennigan, who were two of the original kind of investment partners, alongside Justin and Ryan Kelly.
And
Justin Ishbia.

beyond driven. He's that maniac on a mission that we talk about.
His engagement and his drive is
Next level and he's gonna be
He just had actually his fourth child.
He has promised to Zelpak that he is
fulgaged for at least the next eighteen, nineteen years till the baby goes to college.
I was waiting for the last one. He said this like four years ago. He's like when we have our fourth kid.
Add on to that.
But people like Mike Cooper and John Hannigan, you know, I wondered they've been very successful. Like are they gonna have that same drive when they make real money.
And I think
For them
the ability to invest in the mid market
in their best businesses and then maybe
some non shore companies where they have real expertise.
We think it will be a really attractive fund. So that's one that's really evolved and I think it's a very high quality every single area.
If I play that back to you, it's something like don't expand because you can. Expand where you can press an advantage and where the new thing actually benefits the old things or the other things.
That's exactly right.
It's helpful both ways.
organizationally, company wise, et cetera.
I think that's a great example, but
There's only one sure capital.
Be very
Cautious about most of the exceptions that define the exception to the rule.
Is there anything else that
you feel it's most interesting to
your prospective returns or the job that you're gonna do that we haven't talked about?
An area that
We've talked about button.
I think is super attractive is the bootstrapped growth equity area.
We've backed a number of firms where people have been trained at the summits, TAs, Excel, Sequoia's.
And then
decided to
As those firms
Now the people there generally are trying to write fifty to a hundred million dollar plus checks.
Some really talented professionals have
launch their own.
Smaller firms that
are addressing that kind of five to twenty five million dollar equity area.
This is not venture capital, this is bootstrapped software companies generally.
But Jeremiah at Elephant Partners.
And his partner Andy Hine. Jeremiah was previously
at summit partners, Excel and then Highland.
Andy Hunt was the
co founder of Warby Parker and then was it Highland and
They found an elephant. That's been an incredibly successful investment for us.
That we came into fun one.
They had a company No Before, which is a very big
was a public company now taken private.
But outstanding returns. But then Jordan, Batman, West and Gaddy have this firm called Radian.
They were both at being capital ventures, were very bullish on them.
Mickey who was at Summit with Jeremiah Daly and then was recruited to go to Sequoia.
When he was at Sequoia, he did some good deals, but he was like, Sequoia is not trying to get three X's.
They're trying to get really NVIDIA. Yeah, they're trying to get so it was not the right fit for him at Sequoia.
The lowly three X Yeah, there's the story, yeah, he tells me like
one of his deals may have like three X and like now I congratulated him. But I guess that's like typical
That's not unusual.
He found a telescope. He's done really well. And these funds, I mean, Mickey's telescope one was
Seventy, eighty million. Then we came into the one fifty fund.
You're staying way below the radar than a firm that we've had really great returns.
This is under the radar firm, but I think.
I would argue maybe some of our
That's risk.
adjusted returns we get.
It's called Growth Street Partners. It's Steve Wolf and Nate Grossman who were at main sale.
Partners together.
They founded it together.
It's a seventy million dollar first
Time fund. We anchored it.
They're finding that founder in Kansas City.
They're looking for minority capital.
But
you know, a little bit of money on the balance sheet, expertise to help them go from, say, five million an Air R to fifteen or twenty.
They're able to buy in at a reasonable price.
accelerate professionalized business and then those larger firms
Whether it's summit, spectrum
Insight.
Excel, I mean, it goes on, are really interested in these assets. So there's a large group of buyers that will pay
They would love to invest in these businesses once they've
Scaled up more.
directionally, they've had a number of businesses where
They sell half their stake.
Get a multiple of money.
And then are rolling
Half their stake.
with a great sponsor into the next transaction. So if you just do the math
You might make
Two and a half times your money back in two years.
And then roll.
If that two and a half that you roll does a three X
then you're talking, you know, returns that can be kind of in the range of
Six to ten times your money.
On the downside.
you're in a business that's basically breakeven. These are bootstrap businesses.
that can be profitable. They want to be
Your
minority preferred security. So you have really good downside protection, the ability to get interim liquidity.
and get really differentiated returns on the upside.
It's a really good profile.
A number of people try to do this, I think that are not that good. So
We're always on the lookout.
If you think of new things we do, it's like often it's either something that we do not have that we strategically want to add, or it's something that we absolutely love.
And we want more of.
What animates me is people who are
Totally and completely obsessed.
via some curiosity in the thing that they do.
Probably the nicest thing I could say about you is you're one of those people I would call if I had a question about who's got the juice in the investing world.
It's obvious from our interactions how much you love
the core thing here, the core craft.
And it's so fun to have an excuse to talk to you about it.
On the record.
You know my closing question for everybody, what is the kindest thing that anyone's ever done for you?
I'll start by saying
My wife
Being married to me and my kids are so kind and lovely.
when you think about w who are the truly kinda is like my son and my daughter. But
Investment wise, to answer your question, I would say
It's been a lot of people that have mentor me and been very kind over the years, but
When I started at SES
I was thirty years old. I hadn't really done this. We were building out the program from scratch.
And Steve Rastaglio, who was our CIO.
Pete Mattoon, who is our CEO founder.
Tony Abiati, Doug Adderley, who are co founders and Pete.
Leading the client service.
She's extremely supportive.
Uh
Going to do the shore capitals, the Thrives, the Founders Funds.
the edgy yourself. It was from the beginning I got as much pushback doing Bane as I did
Sure. So there was a really supportive, very kind and Pete specifically, who's an amazing guy.
He was like a therapist.
I would have a monthly sit down and mentoring session and he was great and Steve Stag was
Incredible.
incredible guy. Truly like a father figure. But there's one story I'll tell that stands out to me. And it's our mutual friend Josh Cushner and Thrive that when I think of support and kindness.
Remember when you have certain phone calls.
And when they happen. And so
It was the summer of two thousand twelve.
I'd been a basically year on the job. I'd gotten to know Josh Kushner.
That winter.
He decided he'd
Just invested.
fun two and rather than exercise as accordion on fun two to go from like forty to a hundred.
He decided to just raise fund three at one fifty.
And he was bringing in S C S and I believe it was like Rothschild.
were the two LPs coming on top of Prince and Duke.
And Welcome Trust and a few others.
And
It was a very targeted race. We were in.
For
An amount and then
One of our family's
Through a idiosyncratic
thing that was anger. It was two thirds of the commitment we were gonna make.
We had our vehicle, we had our small vehicle that was making our commitment, and then we had the family.
They backed out really last minute.
And it was
Very surprising. It was
upsetting and I remember talking with Jared Winsteen, who was COO at Thrive the Time, and he was like, this is pretty big.
And I remember I was in Palo Alto on the phone with my colleagues and basically how can we solve this?
And we actually put it.
It was ten million from our public
equity sleeve and then five million from our very small this is like early days SES small private equity thing to do fifty million and twenty seven year old onproven person but everyone had total conviction.
In decision that myself and Stevo
We're making and thrive and there was never like oh why why are we backing
This Josh Cushner guy. It was just like how can we solve this issue?
And that's important. You look back on it.
And it's like wow, they were really forward leaning.
really supportive, and I'm just so lucky to be a part of
Such a
supportive kind group of partners who really gave me a lot of leash early days. So
If you fast forward, I mean we've invested four or five hundred million dollars to Thrive.
across a lot of funds had incredible returns. That investment that we made was
Huge returner for us.
It was things like that that were the foundation of what's continuing to
Drive us forward.
Today and actually.
You've seen that bubble chart where I show the different
Co investments that we do
The core firms and the managers
And the co investments and how they intersect in the venture and growth world thrive.
Is
been a very prolific co investment partner for us, but the most important thing for Thrive.
has been the fact I think we've backed
Seven eight.
groups that have been introductions.
Through Thrive, whether it's Jack Alman
Kirsten Green.
They have been one of our top co investment partners, but definitely our top
Intro and that doesn't happen.
If I don't have
the support of Steve O Pete, et cetera.
And what was so kind about it was there's never any question, it really was just from day one.
super supportive. So just very fortunate to be a part of this firm and really excited for the future. What a cool story. Never heard it before. I love hearing it in closing. Thanks so much for your time.
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