How I Invest with David Weisburd - E122: How an $80B Asset Manager Seeds the Growth of New GP Talent

Episode Date: December 20, 2024

In this episode of How I Invest, I sit down with Elizabeth Browne, Managing Director and Co-Head, Sponsor Solutions Group & Elevate at GCM Grosvenor. Elizabeth shares her deep expertise in GP seeding—a niche yet growing area in private equity—covering topics such as structuring deals, the challenges of building institutional-grade asset management firms, and how to identify and support future industry leaders. This episode is a must-listen for anyone intrigued by the nuances of private equity, the intersection of investing and firm-building, and the future of the seeding market.

80 plus percent of middle market firms in the U.S. today are still run by the founding or co-founding partners with no succession plan in place. In order to mitigate that phenomenon, meaning that lack of thoughtful succession planning and a reversion to the mean in terms of returns as firms continue to progress over future vintages, you need to be able to have a keen focus on talent promotion retention, refreshing the carry pool for that next generation of partners and a meaningful mechanism in place whereby you can actually transfer that ownership over time. If you can't sustain the business piece of it along the lines of talent and hiring and promotion,

retention, melty relations, and appropriate operations and financial capabilities, you're never going to be able to progress as a firm independently, but you're going to generate good investment. To use a sports analogy, it's the difference between being a really good shooting guard, you're never going to be able to progress as a firm independently or be able to generate good investment returns. To use a sports analogy, it's the difference between being a really good shooting guard, maybe even all-star and being incredibly good at shooting versus owning the team and having to manage a team, having to get a coach and manage the players and everything that comes alongside of it. What is GP seating?

I will do my best to not make this super granular, but at the highest possible level, GP seeding is taking an ownership interest in the management company of an asset management firm. So you could be seeding a fund two or fund three as well. So tell me about how that practically works. The practical impact of having a seed partner is either launch capital so think of that as a true fund one or akin to your world growth equity partner so think about that as catalytic capital support where it's more than just a check meaning that scale capital access preconditioned for being good seed partner

but it's as much about the scale capital access and really the right mix of capital access, meaning a combination of LP capital, co-investment capital, as well as working capital to help build the right talent infrastructure at the outset. That in a launch scenario, I think is pretty clear cut and easy to understand. In a growth capital scenario, it's often about helping to properly capitalize what have been subscalar and undercapitalized firms historically. Most institutional investors are solving for a minimum fund size and private equity of $250 to $300 million plus of AUM as they think about a target fund that they want to allocate to. So let's double click on that a little bit outside of $250 or $300 million being a good number, why is that such a critical point of capital

to raise for private equity fund? A couple of different currents to consider, meaning that I would think about that as a minimum, not a target, meaning that $250 to $300 million threshold typically governs where institutional LPs, so the common pools of capital that you'd be familiar with around the pension plans and sovereign wealth funds, frankly, a fund that size would typically be out of range for most of the public pension plans, most of the sovereign wealth funds, but would be in range for endowments and foundations who have been prolific investors and emerging managers, for example, for single family offices and multifamily offices. Most of the institutional world, though, is solving for

a minimum threshold of scale, meaning use 300 as a, though, is solving for a minimum threshold of scale, meaning use 300 as a proxy here, because they want to be able to write a significant enough check, meaning on order of magnitude, sort of $5 to $25 million checks within that lower to mid-market cohort of institutional investors. But where that $25 million check, for safe example, doesn't get them over their skis in terms of the percentage that they represent in the fund. And so you pretty quickly build to this minimum threshold of AUM that the firm needs. From the GP's perspective, very different calculus, meaning what the GP is solving for, as you might expect, is that they need to be able to 80 plus

percent of the capital that they're spending or an asset manager's P&L as people in the early days. And that shifts over time. But if you look at the operating budget, which we spend a lot of time doing in my seat of an early stage asset management firm, if you're a $300 million firm or endeavoring to be a $300 million of AUM debut fund, you're spending or anticipating spending roughly $3 to $5 million a year just to properly capitalize the fund. And so you need that minimum threshold of fee-paying AUM that's supported by that client base, and in this case, the institutional client base that you're targeting in order to be able to hire and properly incentivize the right people, and as importantly, to be able to get early deals done in that value chain that also show institutional investors how you intend to invest going forward.

So there's a minimum quality of talent that you want and almost a fixed cost to the highest level of talent. And if you have a billion dollar fund, it's fine. If you have a hundred million dollar fund, you just don't have the money to pay them. And that's not all just investment talent. I think really critically important, actually, to focus on the fact that you have probably a 60, 40, 70, 30 split in favor of the cost equation between the investment talent and the non-investment talent. But where the non-investment talent,, the regulatory and compliance and investor relations cohort that they hire as critically important as having an established and pedigree investment

team, because that's what distinguishes between your ability to be a good investor and a great firm founder. Good investor versus good firm founder. What's the difference? So you know very well the assessment that Sequoia makes in terms of being able to distinguish between those who have a great idea or, in our case, a great established track record in history investing versus those who are going to be exceptional entrepreneurs. And there are many more talented investors than there are great founders. That's true in asset management. That's true in venture capital. But the big difference between those who are successful investors and those who are great entrepreneurs has a lot to do with some of the crossover between what makes for a great VC entrepreneur, for example, what makes for a

great asset management firm founder, meaning the hustle, grit, determination, tolerance for adversity, the maniacal focus on doing one thing exceptionally well, but all of those pieces really matter. In asset management world, though, it's as critical that you as an exceptional investor, if you have a top tier track record, you are very pedigreed, you're spinning out typically of a very well established firm, you have almost by definition, if you have been in the business of generating great investment returns, you almost without exception have never had to focus on a single ounce of the non-investment infrastructure that's required in order to create a best-in-class institution, meaning because it wasn't your job.

It wasn't meant to be within the remit of where you were spending time. But the minute that you launch an asset management firm, you are as on the hook for and expected by LPs, and appropriately so, to pay attention to all the non-investment infrastructure needs of being an effective fiduciary who can safeguard client assets and report on them appropriately and be in compliance with SEC regs and treat your investors appropriately. All of that as critically important and frankly table stakes as is generating best and best returns. Meaning LPs give you money because they assume that you're going to be able to generate great investment returns if you have a great track record of doing that, but they will not continue to give you money if you can't

sustain the non-investment infrastructure pieces that are required to be a terminal value business ultimately. And so it's that combination of a necessary but not sufficient, if you will, meaning table six, that you have to be able to generate great returns. But if you can't sustain the business piece of it along the lines of talent and hiring and promotion, retention, LP relations, and appropriate operations and financial capabilities, you're never going to be able to progress as a firm independent of your ability to generate good investment returns.

To use a sports analogy, it's the difference between being a really good shooting guard, maybe even all-star and being incredibly good at shooting versus owning the team and having to manage a team, having to manage a team, having to get a coach and manage the players and everything that comes alongside of it. Yes. And investing is inherently an apprenticeship business. And so you don't have discrete in a private equity context from a venture context, for example, you really don't have a solo GP phenomenon in private equity. Meaning that it's not that you don't have lead partners or more dominant managing partners on whose track record the firm relies in

the early days, but you tend to have much more collaborative and larger teams. And because of that, higher barriers to entry in terms of the P&L associated with starting a private equity firm. But because of that, you have to have a team on whom you're reliant and you have to be able to build real scale and infrastructure and platform capabilities. Just given the nature of our universe, we're focused on all investors who are investing in mid and low market businesses that are cash flowing assets that typically start in single digits. I mean, they're investing in a cohort of businesses where they have to be able to generate good investment returns, but also be really steeped in the operational value they bring. And you can't do that as an individual person. But LPs very appropriately expect that the managing partner who's just founded the firm is going to be attuned to all of the investment mechanics and be involved in that day-to-day investment committee and decision process, but also be equally attuned to what their CFO is doing, what their chief compliance officer is doing, and how the fund administration works for the benefit of their clients.

What are you looking for when it comes to somebody that you think could break out and be the next great institutional manager? As we often joke, our entrepreneurs, our founders are closer to 50 than 25. Very proven investors, meaning that's the precondition. That's the table stakes, that they have to be very proven investors. And in our case, we've been focused on those who have been deep domain expert sector specialists and done the same thing in the same industry for a really long time. But where they bring a unique vantage point on what we have a deep eyes in favor of investor operator pairs, meaning those who have run mid and low market businesses, we think are incredibly valuable as you add that to a traditional pedigree investing skill set and background,

that combination. Is that two different people or is that two different people? We really like to see that history and experience. If you look at heavily regulated sectors like healthcare and education, which are two of the transactions that we've invested in to date in terms of industry sectors. There, we also really like to see a unique experience and background in public policy and or regulatory. Meaning if you're going to be transacting in a heavily regulated industry, we want to know that you have a differentiated ability to underwrite and view that regulatory risk

different from your competitors. And so that means that we spend a lot of time looking at the totality of the team to say, not just have you generated investment returns historically. Again, we don't pretend that's easy to do, but it's table stakes in terms of vetting the criteria for our founders. And the what next is once we get through that first gate of what looks like traditional manager selection in terms of the track record background of the team, team continuity, performance, being able to copy and paste what they've done historically to what they intend to do on a go forward basis. It's really about the firm and business builds underwriting as well as the entrepreneur underwriting, meaning we spend the next 50% more time on that. So you're not looking to take risk on whether they'd be a good investor, or maybe a good operator, you're really trying to figure out

can they build a real firm? Correct. It's the, if you look at your first question around what is seeding, seeding, I would argue, is an assessment of underwriting track record risk paired with new business risk. And the only way to do seeding well is to eliminate the track record risk.

Meaning in order to have predictability and consistency and good outcomes for investors and seed structures, you want to eliminate track record risk or mitigate it to the greatest extent possible and isolate the new business risk, because that's the piece that if you're on an institutional platform, if you can resource founders appropriately, you're in a position to really meaningfully de-risk that piece of it and therefore have your clients benefit from participating in the enterprise value that results from it. But it's exactly what you noted, meaning that new business risk piece is what you have to focus on in terms of distinguishing between those who are great

investors versus those who have the potential to be great firm founders. And there are some core attributes that you'll find that really distinguish those two personality types. I mean, by the way, 80 plus percent of middle market firms in the US today are still run by the founding or co-founding partners with no succession plan in place. So this is a really common phenomenon in private equity. And so in order to mitigate that, what we know has been a series of pain points and frankly spurred a huge series of spin outs that have been a material focus for us over the course of the last few years in order to mitigate that phenomenon, meaning that lack of

thoughtful succession planning and a reversion to the mean in terms of returns as firms continue to progress over future vintages. You need to be able to have a keen focus on talent promotion retention, refreshing the carry pool for that next generation of partners and a meaningful mechanism in place whereby you can actually transfer that ownership over time. And that, frankly, meaning that series of pain points and market phenomena is why you're seeing the evolution of the GP stakes market. It's why you're seeing in the last 10 years, $60 billion of capital raising attached to the GP stakes market that's going to $80 billion this year in terms of firms outstanding. Seeding is in the first inning of that capital formation process,

meaning seeding today is $5 billion of capital raised against that $80 billion in stakes. The stakes liquidity is all attached to that lack of succession for that first generation of founders. Is the investor and the firm founder also two different people? So we require the firm founder to be the investor, meaning we're typically looking at firm founders. I'll give you a concrete example. The first investment that we made, Xplora Equity Partners, the founder, three co-founding partners. The managing partner, Tony Miller, was actually a co-founder of Vistria, another middle market private equity firm in Chicago. So Tony is a second time founder in terms of this next iteration of his career.

His co-founders, one Pete Davis was the president of McGraw Hill Education. So a career operator beloved in the sector, and in this case, focused on education, human capital management. And then their third partner, Marcellus Dickload, a career investor who grew up at Vistria and subsequently joined their team a couple of years ago. In that case, you have Tony, who is the investor, but also is Deputy Secretary of Education for the U.S. before he co-founded Vistria. You have a really unique trifecta of investor, operator, and public policy expertise, but you need to have that managing partner likewise have the investment capabilities, meaning because the track record is, you go back to the risk you're willing to take versus not the track record and experience is so fundamental in being able to de-risk that initial business build. We require at least, and this is not, I wouldn't pretend today that there is a completely efficient market for seeding transactions, meaning it's still quite nascent, but we at least require the firm founders likewise in a position to be the investor. Today's episode is brought to you

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Reed Smith delivers purposeful, highly engaged client service that drives progress for your business. What other mistakes have you seen made in the seating space when it comes to picking managers, investing in managers, or any other critical mistakes? The seed market is, on an institutional basis, roughly three years old. And so I give a lot of

credit. I grew up as a single family office balance sheet investor. And single family offices have been investing in doing seed transactions for 30 years. It's how KKR got started. It's how Carlisle got started. You can go through the origin story of some of the largest, most successful asset management firms and single family offices had a meaningful part in that early origin story. It's a really different world now, meaning the institutionalization of seeding. And we're still, as I alluded to in the early innings of that maturation process.

But the seed market has changed a lot. And I think for the better, frankly, in terms of the nature of how transactions are being done. But it's still far from uniform institutionalized, meaning you still see from the seeding side, meaning the GP seeder perspective, you still see people doing subscale, quite minor minor adverse selection deals, meaning they're offering often $20 million capital, for example, to a founder raising that $250 million fund and asking for an excess of 20% of the firm's economics. That math equation doesn't work. You end up upside down on the operating budget for the firm and likewise,

and the ability to retain and incentivize the right talent. And candidly said, the only founders typically who are willing to take those deals are those who have either a lackluster track record or an insufficiently long dated track record or history of realizations in their deals in order to be able to attract institutional capital. And so you end up with this downward spiral in terms of both quality of talent as well as quality of performance in the funds where you have that fact pattern. You likewise have, in my view, a lot of structural mistakes still being made in seed transactions, meaning where the seed provider with great intentions take for table stakes that they're putting up enough scale capital, meaning they're properly capitalizing the firm in terms of what the firm and team have access to for the operating

budget day to day. They're often misaligning with respect to other LPs how they structure their participation management company. So it's still very common to see seed providers, for example, tying their participation either to flat, meaning non-performance-based participation. We will just statically own 20% of your business in perpetuity, independent performance. The analogy I will often use is

if VCs showed up in a series A and said, we expect to never be diluted by virtue of your success, and we just want to own this percentage of your business in perpetuity, you'd probably end up with a lot fewer Zuckerbergs in the transactions that you were doing in those early days. It's the exact same concept for our new firm founders, meaning you will still often see the either static participation that's performance independent and or vintage based that's likewise independent performance or AUM based participation that's independent performance. So very common to see a, until you raise a billion dollars of capital, our participation is 15% or in your fund one, we're going to own 20 and fund two will own

15, fund three will own 10. All of two, we'll own 15. Fund three, we'll own 10. All of those detach from the reality of the performance that you're trying to incentivize. And that, to me, is structurally a big mistake, not just because it's fundamentally misaligned with other LPs who you inherently want to be supporting that founder, but because it actually changes the behavior of the founder from day one. Meaning you're telling them that there are things more important than investment performance that you want them to be focused on from day one. And I think that puts you off sides in a way that isn't helpful, ultimately, to enterprise value that you want to create.

You've been in the space almost as long as it's been institutionalized and had a lot of trial and error. What are the types of deals that you think lead to having good relationships with great managers? I think you have to be really broad in your understanding of and sourcing and access to what's available in market, meaning take just the sourcing funnel. We have looked at almost 750 opportunities in the course of the last couple of years since we launched our platform. That doesn't mean that we profess to have seen everything in market, but we have been evangelists about being only focused on private equity. We have very clear views on the benefits of being single asset class focus as opposed to

co-mingling as you'll commonly see other seed providers do. It's really hard to put it simply without seeing a hugely representative swath of the market, it's really hard to distinguish between what was relationship driven or inbound or episodic deal flow from what are the best sides across every industry and sector in which you ultimately want to invest. How many per fund are you looking to do? Eight maximum. Think about these as sort of $75 to $100 million plus equity investments. And so if you have a billion dollar portfolio, you're making eight to nine of these total. Think about these as sort of $75 to $100 million plus equity investments. And so if you have a billion dollar portfolio, you're making eight to nine of these total. So it's by definition.

So it's pretty diversified, but very concentrated in terms of if one of them goes to zero, it's not a good thing. Yes. And because of that, you never want to take binary risk bets. And so that to me is the how do you mitigate? If you go back to, if you'll indulge me on a 30 second tangent on the hedge fund seed industry, the institutional seed market started really in fits and starts with the hedge fund seed market 10 years ago, which quickly became the stakes market focused on private equity instead of hedge funds, because the institutional market realized quite quickly that hedge fund seeding was a binary risk business that they had never underwritten to be a binary risk business,

meaning they were happy to have the sole LP structure or a five to seven year buyout structure in these hedge fund seed deals, but never anticipated that if they had eight core positions, that half of them would go to zero. If you were a venture investor, you would have fully anticipated that you would have portfolio constructed appropriately. But the early seeders focused on hedge fund world were not anticipating that same risk reward assessment. And so you've ended up now in a paradigm where with the benefit of that information

in private equity seeding in particular, and the reason that I'm such a purist about ensuring that we're only investing in private equity as an asset class and these underlying cash flowing assets is that in my view, you should never be taking binary risk in private equity as an asset class. It's contrary to the nature of what you promised to investors in that asset class. And so the only way to ensure that you're not taking binary risk is A, to do away with the track record risk, as we talked about, but B, to also be able to

save very confidently across the range of industries and sectors, not just that you have portfolio level diversification, so those 70 to 90 businesses directionally to which you have exposure, but that you're also not inadvertently taking correlated risk in your portfolio. Said differently, if you have eight core positions in this example, that you're not having six of those eight core positions be in healthcare, right? You have now created much more correlation in your portfolio than you ever would have naturally tried to achieve and therefore created much more, in my view, binary risk than should otherwise ever be justifiably in a private equity portfolio. And so you have to be able to then to go back to the aggregate sort of source in your funnel question. if you can say that we target having a maximum of two positions

of that eight to mirror in healthcare, what is a 20% contributor to USGP today, if two of those positions of the eight are in healthcare, that's calibrated appropriately with the composition of the market in which we're investing. You have to be able to see hundreds of positions in healthcare to say, these are the two, right? Of all of the ones that we've seen, these are the two that are most worthwhile and worth doing. I think it's really hard to make that assessment on the basis of seeing 10. Private equity already in a way is quite generalist. So you really have to stay disciplined to that in order to get enough reps at what you'd like to see. It's also the return state has been clear in private equity, meaning we have the benefit of a quite mature market in private equity in terms of how long the business has been around and the proliferation of firms.

And sector specialists have continued to outperform generalists on a net basis. That, depending on the industry sector subsector, can be as high as 6% to 7% net and as low as 2% to 3% net. And when you're looking at a sort of mid-range of 5% to 6% net outperformance with sector specialists, that becomes really meaningful. So we have been focused on that sector specialized cohort. But again, to say at a portfolio construction level, the aggregate you want to be in broad strokes representative of the US GDP, if you will, but the underliers, you want to be the best size that sector composition that you're solving for. You mentioned you don't want to take binary risk, but you're putting in $75 million,

sometimes in a new manager. How do you hedge yourself in these transactions? Like what structures are available to you? And how do you make sure you're not taking binary risk? Yeah, so that's where structure is the only thing that matters in the seed transaction, meaning when if you go back to the question of what you asked prior in terms of some of the mistakes that we've seen seeders make, and again, we don't pretend to have perfected the match trap, and I'm sure we'll continue to learn a lot along the way. But one of the core things to the point

of not taking binary risks that I've seen other seed providers do that I think is misinformed in terms of trying to create long-term alignment is valuing the management company day one. So to your point, to use the example of if you're writing a $20 million check, the traditional seed deal would have been,

I will give you $20 million for 20% of your business and you are now worth new GP, $100 million. The basic faculty envelope math. By definition in that structure, you have attached 100% binary risk to the success or failure of that management company. So you've said, I now need to recoup minimum that $20 million to see whether the investment succeeded or failed. But that investment is only levered to the performance or lack thereof of that management company

or base business, as opposed to saying what now a lot of the seed market has done and why you see this revenue share construct or this profit sharing construct that's emerging a lot of seed deals. You instead have the ability to lever your downside, if you will, or attach your downside to instead the performance of the base assets in which the investor is investing. So differently, if you're writing $100 million check and you're saying $60 or $70 million of that is going to be in LP form, that LP dollar is going to be like any other LP's dollar, meaning I'm going to be leveraged performance of the businesses in which you choose to invest. You have the ability to reserve a portion of that incremental capital, meaning outside of the LP commitment for co-investment capital that allows you to invest alongside, in particular, the early deals that GPs are doing. And then the only binary

risk capital in our structure, at least, that we're attaching is the working capital piece, which is a de minimis portion of the transactions, but allows us to explicitly incentivize the building of the non-investment infrastructure pieces that we were talking about prior are critical in our view to getting enduring firm firm operations and correct that's the that's the finance operations third-party administration the nuts and bolts of being effective and successful fiduciary that that piece that you can isolate to typically single-digit millions of investment versus that entirely binary risk trade of saying here's 20 million million in exchange for 20% of your business and valuing the GP.

You have the co-invest, you have the de minimis portion going towards the actual working capital. What is the, what's the rest of it? No, think of that as anchor LP capital. So that's the fund get off the ground. So in a launch fund context. GP commit.

You have the ability to be their anchor LP, meaningful co-investor, as well as a working capital provider, right? In exchange for which you participate either on a revenue share basis, depending on how you structure it on a revenue share basis or on explicit equity basis in their management company. Our strong preference for a whole host of reasons has been not to be an equity participant, principally, because we've structured our participation such that, again, to go back to a venture capital analogy, we've structured our participation such that our management company economic interest steps down over time on a success basis, right? And you can't do that if you've renegotiated an equity value day one, or I should say it becomes much more cumbersome to try to negotiate or renegotiate that equity value along the way. And you're looking to own 20, 25% on the onset and that

somehow steps down? Our view, you never want to participate in more than 20% of the economics, which doesn't mean you have to participate in 20 day one. That's an absolute ceiling in our view on the level of economic participation that a third party should participate in or that a firm can sustain, especially in those early days. You would typically see in our structure without giving away some of the secret sauce that we've created. Only give away half of your secret sauce.

And learned along the way. We have the ability to, if you take this example, if we have a starting participation of 20%, that participation steps down as realized returns are generated in line with how every other LP gets distributions. So said differently, we're only incentivizing performance. We're saying we're happy to come in and be your day one or pre-inception investor. In exchange for that early enterprise risk, we're going to retain the ability to participate in management company economics over time, but we are very happy to be diluted by virtue of your success. And that success should

only be calibrated to realized returns. And I get the value of not putting evaluation, but this 20% ceiling, you've obviously thought a lot about it. Why is it such a rule that you've come up with? I would give you a more scientific answer, but I think it's a bit of the, you know, and you see it. Part of it is the literal 80-20 rule, meaning you want to be able to ensure that 80 plus percent of the firm economics in this case are retained by those who are running the firm day to day. I mean, we take pride in and can provide a huge degree of strategic value to our founders. But over time, we should not own 20% or anywhere close to that of our founders' businesses in our view. And again, we take a different view than a lot of the historic seed transactions, but it's fundamental

with any entrepreneur, whether you're an asset management firm founder or a traditional business founder to be able to appropriately incentivize and motivate that entrepreneur over time, because it is excruciatingly hard to build a successful business. And so we want to ensure that they own enough of it, that not just their motivation set, but their psychology is completely embedded in being appropriately motivated over time, that their team is appropriately motivated over time. That's sort of table stakes as we think about it. But it's also the case that if you look at that 20% ceiling and compare it against

the operating budget of the business, if you have any third party that's taking more than 20% of those receipts, it becomes really hard to not starve the operating budget of the basic functions that are required to make them successful on the investing side, as well as the operation side. So it's also in the context of it being a fund one to fund three, where you don't necessarily have billions of dollars under assets, where the management fees are actually going towards management. Correct. Most emerging managers are running their management company at a loss to break even for the first six to eight years. And they have to compete in the talent marketplace against the established managers, which pay more and it becomes cumbersome if a lot of that is coming off the table. Exactly. And LPs, I think, ask the right questions around it, which is how can you be appropriately incentivized if you have, in a lot of the seed transactions that were done with some

famous examples, founders were giving away 20 to 40% of the business they won in perpetuity. That's a distressed trade. It's really hard for an LP to say that that is consistent with their emblematic of top tier performance because no top tier founder would give away that much of their business. And you said something that I think we should send to our friend Elizabeth Warren. You said most private equity managers are operating their company at a loss. So they're not sitting in their Hamptons mansions kind of swimming in their money. At which point does that not become the case? It's about the required scale of investment.

And again, all of this heavily caveated within institutional private equity world, meaning subject to that threshold of raising an institutional scale, a $300 million firm as a starting point. Of course, if you have a six-person team and managed to raise a $2 billion firm, you're in a different world, but there are a few to no examples of private equity firms doing that at the gate. So it's really about being able in those early years to properly capitalize the firm, 80% of which, as we talked about, is the right talent in order to staff. And then you have the incremental and ancillary, your office space and your office supplies and the things that can help you to run a business day to day. But the absolute lion's share of that cost equation is people. In order to appropriately be at market and retain, if you're a top tier talent, you've had a top quartile track record of returns, you're now setting up your own shop.

You want to be able to hire a team talent. You want to be able to hire the best possible third-party advisors or your vendor selection, meaning what you outsource for a student source. LP's view is a proxy for quality and blue-chip nature of the firm, who you hire for your legal counsel, for your tax counsel, for your accounting counsel. Those vendor decisions really matter in terms of the operational due diligence process and underwriting. And all of that implies a different cost equation than going with much lower cost providers. And so all that say, if you're a $300 million firm founder or endeavoring to raise a $300 million fund, and you're spending conservatively $3 to $5 million a year just on the basic blocking and tackling of keeping the firm up and running. You yourself then have a 2% GP commit, right? Independent of that operating budget that you're running. It takes on average

in this market and emerging managers. So that fund went through three, two and a half years to raise that fund. And so think about underwriting just for simple math purposes, you're underwriting 10 to $15 million of P&L of your $6 to $8 million GP commit, which contractually typically is funded in cash at the best of your anchor LP. They're spending money, they're getting the top providers, and they're deferring their salary. Typically for multi-years, right? So if you're then an implied $20 million in deficit by the time that you have raised

your fund, there are very few exceptions of those who are able to dig out of that sooner than six to eight years into the life cycle of their fund. So they're in their third year, they need to call you. They have no other choice. At one point or another,

they come to the same realization. Looking back, where have your best deals come from? Is it always from introductions? And unpack that for me. We as a team are huge believers in the proactive outbound hustle. Meaning I think there is outside of the adverse selection discussion we've had, there's a lot of adverse selection, assuming that your own market or platform is going to deliver the best of. So I think it has to be a combination of both. Our firm has a long and high performing history of having invested in emerging managers.

And so we benefit certainly from that brand equity, from that sourcing capability. We have a large annual emerging manager focused investment conference, and that has been a prolific source of opportunities and introductions for us. I'd say the biggest upside surprise for us has been referrals from

other GPs. And maybe not surprisingly, I mean, they're most likely to get that phone a friend call, if you will, at the point that... They get the honest take, I'm $20 million in the hole, like, how have you solved this problem? Correct. How would you solve this? And or how did you do it most impactfully? How did you do it when you were sitting in my equivalent seat at your old firm? How did you think about it? How much did it cost? How did you do it when you were sitting in my equivalent seat at your old firm? How did you think about it? How much did it cost? Who did you hire first? Who gave you the best advice? How hard was it actually to get going? That founder game of telephone, if you will, has been incredibly powerful because there was no equivalent YPO for founders, right? That doesn't

exist. And so we have really been, as part of our own value to our founders, we've been endeavoring not just to build that YPO for founders cohort, but to be their Y Combinator. To be able to resource them across all of the core functions that have nothing to do with investing, but everything to do with being a successful founder so that they can connect with one another and also get the benefit of continuing to pay it forward on that phone chain because for us, it's been an invaluable source. If we look at where our first three transactions came from, two of three came from other GPs. You provide a lot of value-add outside of the capital that you bring in, which is critical. What value-add do GPs value the most? And what value-add do you think is most valuable to them in retrospect? So I think fortunately, or at least a few years into this exercise now to be able to say confidently that those two things are the same, which I wouldn't necessarily have anticipated. What we anticipate will be the hardest and most cumbersome and most foreign pieces of the firm building process to them,

or in fact, the hardest and most cumbersome and most foreign pieces of the firm building process. And inherently, that's what they value the most. And it's what we're in position to be the most strategic with them around, meaning the best investors, right? Not withstanding the conversation we were having about founders discovering a few years and how hard and how expensive it is. The best founders typically have the ability to go and raise a bunch of money without us, meaning we are not the binary, which is why I say it's about so much more than the capital. The strategic piece of this is

saying, here is the, from nine months pre-launch, we have a lot of analogies about dating to get married. These are eight to nine month deal processes for us and by design intention, such that by the time that we've gotten to the start line, we've already spent typically six to nine months getting to the point of saying, here's the Gantt chart of evolution of all the pieces of the non-investment infrastructure that are going to be required for you to be successful. And here's how we would recommend

you purpose build each of these pieces. Here are the people you should go talk to. Here are the vendor recommendations. Here's how you can go about the co-investment syndication and capital formation process. Here are the best LPs market we think you should be getting to know. It's that comprehensive bear hug, if you will, around all of the resourcing that founders say to a person, independent of how idiosyncratic these personalities are, our founders get to the end of this firm build and or pre-launch process with us and say to a person,

I always knew this was going to be hard. The investing part was the part that I know best. And that's the part that I'm most excited to spend my time and attention on. And I had absolutely no idea. I sort of conceptualized it and other founders had told me, but I had no idea how much work was required and how little of it I knew how to do until I was in the seat of having to figure out how to do all of it myself. It's that we can be the huge augment and real day-to-day partner. I mean, we're not contracting for,

you need to call us five times a week, but we're often talking to our founders five times a week in the process and nature of that firm build. How do you scale that model? And is it just inherently unscalable? Yeah, it's inherently and intentionally unscalable. Meaning that's why we will have eight core positions in a portfolio. It's why we can have 30 positions. Correct. Nor would you want to because you would never be able

to deliver the value that we're promising to our founders. Meaning we have a huge internal team across operations of finance and compliance who are helping to advise our founders on this cohort of different issues as and when they arise. We've structured a curriculum that's modularized across all of the non-investment infrastructure areas. We're doing a maximum of two to three transactions a year. And the only way that we can credibly deliver on that value, not just our founders, but also to our underlying clients, is to make sure that we're maniacally focused on just that founder cohort. I think it becomes untenable to try to have two dozen.

These are 10, 15 year marriages. So the initial investment period is the first few years as they're getting off the ground. But we can be equally strategic down the path and thinking about new strategy launches or refreshing the carry pool for that class of new partners. They want to go. Most firms will over time evolve from any of the successful private equity platforms will evolve from a single strategy

or single flagship entity to having multiple strategies or flagship products over time. Somebody at Sequoia Andreessen, maybe by very construct, might not actually have access to LPs by design. Do you not come across parties that are just looking to partner with you that maybe are able to poach a head of operations and

have all the non-investing aspect and just come to you to open up the Rolodex of LPs? We've certainly had that happen and we are the wrong partner for it. Meaning that... Is that because that's an egotistical view on the problem set? Or is that just because you don't feel like you provide enough value that way? Or unpack that? It's less the value that we can provide than it is the founder mentality around

that's a trade. Meaning they're looking for a placement agent. They're not looking for a partner. And there are literally hundreds of placement agents that they can go speak to. It's not worth your six to nine months of relationship building. Correct. If they're not looking for a true partner, if they're not saying, I am looking day one to create an enterprise that by definition outlasts me,

that's going to have real staying power, that's going to be meaningful, differentiated in market. And I'm all ears as to how to do that in the most strategic way possible. That's the wiring of our founders. They're all, if you look at the composition of our founders and portfolio today, they're all very different people, equally awe-inspiring in terms of what they've done, quality of human being, very different people. But to a person, they all have that wiring of saying, this is better done as a team sport. I want to be able to build a best-in-class firm. I want access to every conceivable best practice and source of advice in doing that. The founder, in our experience, who's coming to us, quote, only for the money, or saying,

can you just open up the Rolodex? This trend's actually wired, not relationship-driven. And I think investing at its core is a relationship business. And also, the managers that you're looking for, invariably, are also inherently non-zero-sum thinking. They want to build best-in-class or world-class managers, you know, $5-10 billion managers, and they're willing to own 80% of it than 100% of a $500 million manager. Yes, correct. And over time, by the way, they should own close to, if not 100% of it, right?

Like that's the performance. They're taking a bet on themselves. Correct. That's the founder bet. If you distilled it down to what are the core attributes outside of really talented investors that we're solving for, it's that founder who is unequivocally willing to bet on themselves and really excited to do it partner. Well, Elizabeth, this has been a masterclass on seeding. You did not disappoint. How should people follow you? How do they get in contact with you or any other way that they could get in touch with you? We have a, we hope, very helpful website

attached to GCM Grosvenor's Sponsor Solutions site, where you can find a bunch more information about what we're doing, which includes contact information for us and the team at Sponsor Solutions at GCMLP.com. Great. And you also have a conference? We do. Our SCM Consortium Conference every fall in New York. Well, thank you, Elizabeth, for sharing so much wisdom and I look forward to sitting down in person soon. Thank you so much for this. Really appreciate your time.