Invest Like the Best with Patrick O'Shaughnessy - Peter Lacaillade - Backing The Best Managers In Private Markets - [Invest Like the Best, EP.437]

Episode Date: August 12, 2025

My guest today is Peter Lacaillade. Peter is the Chief Investment Officer for Private Investments at SCS Financial and has built a notable private equity allocation platform within the wealth management industry. He shares his insights on how SCS's pooled vehicle structure has enabled them to compete with institutional giants, avoiding the adverse selection that plagues most wealth platforms. Peter shares his investment philosophy across lower middle market buyouts, emerging independent sponsors, and investing with what he believes to be category-defining managers. We discuss what separates high-quality private equity managers, the evolution of the industry toward AI-powered strategies, and private markets going mainstream. Please enjoy this conversation with Peter Lacaillade. For the full show notes, transcript, and links to mentioned content, check out the episode page⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠here⁠⁠⁠⁠.⁠⁠⁠⁠⁠⁠⁠⁠ ----- This episode is brought to you by⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Ramp⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Ramp’s mission is to help companies manage their spend in a way that reduces expenses and frees up time for teams to work on more valuable projects. Go to⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Ramp.com/invest⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ to sign up for free and get a $250 welcome bonus. – This episode is brought to you by⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Ridgeline⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Ridgeline has built a complete, real-time, modern operating system for investment managers. It handles trading, portfolio management, compliance, customer reporting, and much more through an all-in-one real-time cloud platform. Head to⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ridgelineapps.com⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ to learn more about the platform. ----- Editing and post-production work for this episode was provided by The Podcast Consultant (⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://thepodcastconsultant.com⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠). -- The views expressed reflect personal views of participants at the time of recording and not necessarily any third party and are subject to change.  The information provided is for informational and illustrative purposes only and does not constitute investment advice or an offer to buy or sell any securities. Assets under management is an estimate that reflects total assets managed and advised on. This recording contains certain forward-looking statements that reflect the participants’ current views. These statements are subject to many risks, uncertainties and factors which may cause future events to be materially different from these statements. Statements that reference past trends or activities should not be taken as a representation that such trends or activities will necessarily continue in the future. The investment strategies and any performance discussed are strictly intended to be for illustrative purposes only and are not meant to be representative of any entire investment program. Investments risk loss of capital and there is no guarantee that an investment will achieve its investment objective. Private investments in particular involve significant risks and are intended for experienced and sophisticated investors. -- Show Notes: (00:00:00) Welcome to Invest Like the Best (00:04:31) Advantages of Private Equity Over Public Markets (00:08:59) Talent Acquisition and Growth at SCS (00:10:28) SCS's Wealth Management Strategy (00:12:42) Trends in Private Equity (00:20:14) Challenges and Risks in Private Equity (00:26:06) The State of the Wealth Management Industry (00:35:07) Lower Middle Market Buyouts and Independent Sponsors (00:49:38) Introduction to Long Lake and Its Innovative Approach (00:54:26) The Rise of Holding Companies (00:57:03) Emerging Trends in Venture Capital 01:05:44) The Role of Endowments and Liquidity Solutions (01:10:40) Jake and Frank's Partnership (01:13:57) The Kindest Thing Anyone Has Ever Done For Peter

Most software companies try to maximize your time on their app to juice engagement. Ramp does the exact opposite. Ramp understands that no one wants to spend hours chasing receipts, reviewing expense reports, and checking for policy violations. So they built their tools to give that time back, using AI to automate 85% of expense reviews with 99% accuracy. And since Ramp saves companies 5%, it's no wonder that Shopify runs on Ramp, Stripe runs on Ramp, and my business does too.

To see what happens when you eliminate the busy work, check out ramp.com slash invest. 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 join colossus.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 sum. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of positive sum may maintain positions in the securities discussed in this podcast. To learn more, visit psum.vc. 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 $50 billion

for ultra-high net worth families and earning the same access as top-tier endowments to the world's best managers. He shares how SCS'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 discuss 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 Lackalade.

To start, I really enjoy the line, private equity is a force for good. People are going to 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 wind 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, that'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 the public markets that have to manage quarter to quarter and deal with the volatility of that, et cetera. The returns, if you look 25 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 core performance consistently. And if you do that, you can get another 5% plus on top of the 3% to 5% that you expect over public equities, which basically equates to high teens, a lot 20s. 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 equities of 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, SES, a founder-led company founded in 2002 by a guy named Pete Matune and a few other folks who had a vision that the private wealth space had a real gap. You had the investment banks, 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 in the States advice aligned, but not that savvy on the investment side. There was a gap in the market. They grew it to $7 billion at the time I joined in 2011. And a few years later, we did a deal with a firm here in Greenwich, Stone Point Capital, because 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 25% of the equity to Stone Point. Stone Point, incredible partners. And then it might be a little off the dates, but 2017 or so, 1617, SCS, we were transitioning from Gen 1 to Gen 2. We needed to do a more holistic solution. And Stonepoint 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 2021, 2022. And Focus at that point in time has grown to about 90 firms, 400 billion under management.

But you basically have 90 firms doing 90 different things. And Clayton Dubler and Rice saw the opportunity to take a 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 vectors and not have 90 firms do 90 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 18 months into the take private. It was ended January, 2023. The take private was announced. And then it was delisted around Labor Day at 23, so about 18 months ago. And of the 400 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 SCS.

So we had the revenue share with focus. traded those partner shares to be part of a one focus situation. 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 client's 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 sales, 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 and USA Hockey Days. But literally the best CIO partner I could possibly imagine. Prior to the focus take private by CD&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 are 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 $25 million, I'll refer them to my colleagues at focus. And we're going to 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, it's the investment thing, talking as an 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 SES and now the broader ecosystem that you're going to 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 SCS, which is like, oh, it's wealth management, but you're in the same breath

as these important Bellwether LPs 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 $50 billion under management. at SES. Yes, with approximately 500 clients. So an average client of about $100 million. 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 has. So our typical client at SES might have 30% target to private equity, another 10% or so

to opportunistic credit and real assets, et cetera. So you've got 50 billion. Yes. That sounds like Harvard or Yale or any of these very 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 going to be so important as endowments and others are sort of tapped out

or fully allocated. So I am curious about like the ingredients for, it seems like there's going to be more people like you that try to build an institutional grade bellwether allocator 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 family is somewhere around 35, 40% in privates. Some people and myself, too, personally, I'm 60, 70% in privates. I'm comfortable with that, and I believe in the long-term return potential. There's a huge opportunity in wealth management

generally. If you look at smaller families, they might have a typical wealth management client that might have $5 to $15 million. They can't have that type of 30, 40% allocation, 50% allocation to privates, but they can probably do 10 to 15 percent. And maybe it's two 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 our success 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 pooled 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 pooled vehicles. They are structured much like fund of funds, although our underlying clients, our wealth management clients at SCS, just pay 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 privates 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 in the market,

like public equities, we are largely doing a lot of passive. And because our underlying clients are largely U.S. taxpayers. And so the pool vehicle thing, which is like an interesting, like, structural innovation maybe. What does that unlock? It's just uncertainty 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 of vehicle enables us, and we actually found that you don't want to do it every year. You want to 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 buyout growth venture funds and co-investments because we want to have diversification across these different sniper laser shot people

that might be doing sub-sectors in defense like Elaine River or healthcare software, et cetera. And the venture funds often raise in two-year cycles. So it's kind of nice. Thrive or Founders Fund are basically in each vintage vehicle we set up. You're going to have that fund. But it gives the optionality that if we have a client, say they're an entrepreneur, they start with $50 million with us. then they sell their business, and they go up to $250 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 model. Do they generally take your recommendation? Yes. So in some sense, they are committing, but they trust you. What we're trying to do is, let me just run some simple math for you.

Let's say you're $100 million client of ours, and we want to have you be 35% 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 35 million of NAV and private equity, is you need to commit a third of that allocation per year, somewhere between $10 to $12 million annually. We do it every two years. So you would commit, say, $20 million. Somewhere between $20 is probably good. So you're going to commit $20 million to the vehicle we're set in right now, which is called private

equity 10. And then you're going to commit, hopefully your portfolio is growing a little bit. So you might commit 21 or 22 million to private equity 11 and 23, 24 million to private equity 12. And then when you get to year six, the modeling would suggest that your nav and hopefully your portfolio is grown a little bit, you're going to roughly be at 40 million. You're going to be at that 35 percent target nav. You're going to have an unfunded liability. You're trying to be 35 percent private equity. You probably have to have about a 15% unfunded, but we just kind of 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 14 years at SCS. We're targeting our bar. If you think of the market generally, the private equity market generates multiple somewhere between kind of a 1.8 and 2.2x. IIR is between, say, 10 and 15%. That's like the average private act we return over the past 25 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 going to be an additional, say, 5% plus of return above that. But so we're targeting kind of high teens, low 20s, IRAs. We put in our book 16 to 18%. net IRA, multiple roughly around 2NFX. But certain vintages, I think, will have the potential to be north of 3x. 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 IRA 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 HarborVest partners in the secondary group between, like, 07 and 2009, but there was a lot of enthusiasm around large-cap buyouts leading up to that, Blackson. And when I joined SCS in 11, 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 05 to 07. That's not a great vintage. Because the global financial crisis, a lot of of people take a pause and they miss 09, 10, 11, 12, and then maybe they start getting excited again. And those were the best vintages.

And they get excited again when things start heat up. And I think it's really important to be consistent in your allocation so that you capture the really good ventiges. 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-knit-worth families, you've created a situation where SES is a privates, 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 need to go from zero-ish private equity exposure to like much, much higher. And the reason is better returns or risk-adjuster returns, et cetera. You've been doing this a while now. What are the big risks that you see in 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 going to have pretty mediocre experiences in the 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 10, 12%. And if they undershoot on that, you might end up. T-bills plus. 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's been in the market a lot. The bids from the sophisticated buyers for these assets came in at mid-80s 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 in all the cash drag bid in the mid-90s. So there's a 10% spread between folks that candidly have big funds and want to put the money out. I don't know exactly what they're underwriting to, but they were blown out of the water by these new sources of capital that really need to put money into work. And we executed a trade. We sold some of our direct lending private credit from the vintages of 18, 19, 20, you know, stuff where there could be the underlying companies, maybe weren't the best vintages 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 blowup or catastrophe or something like that. It's that it's an underwhelming experience

because you also have the friction of the various fees involved that are going to drag things down. And then the other risk, and we sell this would B-Re, is people think that they have quarterly liquidity. They're gates. And oftentimes when things happen in markets, everyone rushes 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 about SPY 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 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 privates allocation 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 10 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 going to 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 10-year-plus horizon. Fortunately, we've had a really great set of partners generally, but where we've had issues, we often back real kind of 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 them 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 of doing the onless calls and talking to the other LPs that are doing the fund because 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 who are not doing the fund. I don't even do many on-list 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 them and it was like, don't walk away, run. a lot of detailed reasons why we should not do this fund, why we should not back this person.

We passed us along with 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 great 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 close to 160 trillion globally, I think 90 billion plus, I mean 90 trillion plus pool of assets in the U.S. And generally, I think it's pretty crappy. It's not great.

You have the banks like Goldman Sachs, Morgan Stanley, J.P. 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 fees 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 a large-cap buyout world, there's some firms that are oversubscribed in One and Duns and are really great firms with great cultures and are rare hard access. And they probably don't have much dollars, if any, from the wealth management channels. That's just the fact.

And then there are others. They don't want to do that because they'd have to pay the bank as like a placement agent fee. It might be 50 basis points or 100 basis points of management fee, something like that. 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 banking side. You also don't have our average families over 100 million. A typical wealth advisor is really not as steeped in trust in 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 SCS, when our founder Pete Mattoon started the company in 2002, 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 single-family offices, the best endowments and foundations, and also is very client-aligned and sophisticated on the family office side. There are a handful, it's probably less than 10 of 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 SCS when we had $7 billion and now we're $50 billion. But I feel like to have a really attractive program in

the alternative space, it's difficult to do that sub $5 billion portfolio. I understand the banks and their problem and then subscale is a problem. Then there's this other middle channel, which is the roll-ups, other big collections of RIAs or just big individual RIAs. but I don't know of many of those, maybe Iconics, 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 2011. 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 going to go and be a lower middle market by a growth equity investor. And it was just through networking that this guy was like, I can only have a job for you, but the guys who managed my money. I wasn't thinking about private wealth. I wasn't thinking about I didn't know what a multifamily office was. GPs were really open to taking my call in 2011. At other points in the cycle, it becomes 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 to the wealth management area,

but I think the scale is really tough. If I were to not be at SCS and I'm in it to win it here and really love the vision of not only SCS, but the focus platform that we're a part of. If that wasn't the case and I was going to start something, one of the key things is I would want to start with an asset base of around $5 billion going to $20 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. 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 50 years or so? So buyouts at the large end, I think you have, I mean, this has happened me for a long time, but the bigger buyouts, definitely moving towards asset managers. And one thing that a lot of those firms like Blackstone, KKR, Carlisle Apollo 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, they're 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 then 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 stinted 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. 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 going to 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 HBS, maybe 10 years ago, was to go back to your firm that you'd worked at or go back to Blackstone or Carlisle, KKR. 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 fund, to go do a roll up in a certain industry. And maybe that leads you to building out your own private equity firm. Royce Yodkhov teaches a class at HPS, and there's been some real success stories. You had the Garnet Station guys on who we know we're both good friends with. I think they have been inspirational for a 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 2011, the majority of our buyout investments were in these smaller cap businesses or firms that were going after smaller cap businesses. And when I say that, maybe just to back up for one second, what's the thesis around why lower middle market versus midmarket 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 EBITDA grows to 20 plus, then that is valued by the market somewhere between 12 to 16, 18 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 professionalized the business. You put in financial reporting system. It's 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 2011, most of these emerging firms were people who were spinning out of 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. We need to do the same thing. And that still happens. But now the rise of these independent sponsors' searches, search. fund people. I mean, the lines kind of blur together in what you call these things. And I think

part of what can be different there is that these things are usually focused on very fragmented, aggressive roll-ups. H-FAC is one that everyone talks about. Love the H-FAC roll-ups. We're seeing things in youth sports. Accounting is something that's gotten some heat. We have a landscaping company we're looking to have it. I mean, there's goes on and on and on. If you see the 10 people that want to do this. What separates the wheat from the chafe? What does the best of those 10 typically look like? What are the attributes of somebody doing this? Because 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've worked for a couple years and they learned how to financially model and learn 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 going to run through walls to make it happen.

I think the velocity of acquisitions, the constant getting on planes, going to God knows where to find the next garage door roll. 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 30, maybe north of 40 in EBITDA.

The platform. Yeah. And we're coming into, he has a new platform he's starting that is in an adjacent area. So it's very related. 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. I think he's a boulder on his

shoulder. He interned for Matt and Alex Cagarnet Station partners, mentored by those sorts of folks. I think we'll talk about Jake Sloan later, but I mean, Jake Sloan does not throw around compliments that much if you know him, and he thinks that Jordan has the potential to be 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 Dubin, for example, was referred through Roosio Guff, first of all, because he was a student of his. He said, I can't invest. Yeah, 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 Herodilene.

When I saw that statement, that introduction, it was like, hey, we get on immediately. I want to 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, the 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. 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. You're over-sheduled. And by the way, I be very critical of myself and I'm definitely stretched to thin, et cetera. But I'm getting so much positive energy meeting new and emerging groups or spending time talking about direct co-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 in a gut instinct. I think that is intuitive and I had it when I started this in 2011, but 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. And what that 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. 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, let's say 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 LP 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 15 times for a software business that's growing a lot. It could be a great relative value. And I think that you want to be in the market leaders. That is a key thing. I've been disappointed.

I don't know not at this point. I'm a class half-fold 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 10. 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. I think that's one thing you'll get if you get to know me is I'm not really concerned about

marks. At 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 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 going to play out because so much capital is coming to AI. These bigger funds had issues of the later stage stuff, and so then they're doing the seed things, and the seed hasn't really corrected, 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 carbouts, too. Some of our greatest deals have been very operationally focused like teams that carve out division. They take on a ton of degree of difficulty through complexity. But what's really hard to do is to generate alpha doing consensus trades.

By the way, they can make money. They're various friends of yours probably in Greenwich here who are going to 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 that gets down the 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 12 or 15 times EBITDA 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.

Gare's Blacksons of the world, their major clients are the U.S. pensions that have to deliver alpha to these various plans. 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 2018 to like 2021 was just how silly the numbers were across everything and how everyone looked good. 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 LP to thrive. It's the same size team. It can write a tiny seed check or a billion dollar check. You can cover the universe with a team of 10ish people and they serve as this signal that other people want to follow. It's an interesting comparison. I mean, that's a wonderful compliment. Thank you. Wow. That's just being compared to Thrizzan But I do think there are parallels to one thing I was saying to Nabila Thrive. I think it was yesterday because 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. It was like $7 or $8 million. But then $40 million, we came in a year later when he raised $150. 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

fundraise in 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 $8 million on a $40 million 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 named Alex Taubman, who had been an oak tree and another guy named 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 seated Long Lake. Kudos to Haymont on really believing in them and pushing this. 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 is been homeowners associations, which is a very large and fragmented area. It 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, has to 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 dock and then get sources from like five different areas and populate it and then put it together and it takes 10 hours. By building various AI powered tools to pull in data in certain ways and put it all together, what was taking 10 hours is now, less than an hour, even with checking and a much better, more thorough, customized, standardized way. So you just saved 90% 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

HOA roll up. And then you have Long Lake, who's going to be like, this is what we can do. And you can roll and however it might be. That's going to be very powerful and not to give away trade secret, but on the accounting side, what Thrive and ZBS are doing with CRE. 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 way they're coding the different transaction. They're reducing these things by over 90%. And it's not sexy. It's really about going five layers deep. And that's creating real modes. I think there's going to be a lot of noise out there. People claiming this same narrative.

Claiming they're doing this. But I remember seeing there were a bunch of companies back when I was first starting SES like in 2011, 12, 13, 14. They would have websites and they would say that they did like real estate online. 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 90%

and therefore you can pay a little bit more, and therefore you can have much higher margins. 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 funds. What are the tradeoffs 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 client's perspective, what are the tradeoffs that you care most about between a drawdown fund and the whole? Sure. We're flexible in our mindset. We have ourselves, a lot of our capital invests out of a 12-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 BS 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 storing the different areas they can go into. And we might have the opportunity to get liquidity. Whatever you want it. Yeah, well, they might IPO in your six, seven, eight, whereas if you're in the typical fund structure, we're actually... You're 20. You might still be holding some of this 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 Longer Lake is very focused on having real moats because there's going to 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 then other holding company, your guest, is you're on a role, Patrick, with some of my favorite people. But Darren Farber, we helped anchor his holding company, Allie and 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 sell 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 L3 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. It was considering doing a holding company structure and the question that we're going to have to work on with this manager because we definitely want to back them. I love the fact 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 or sell a larger stake to a larger private equity firm or someone who will take things to 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. 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 Ventureland. 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 SCS in 2011, 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 Fund, Andruson Horowitz, and 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 the Union Square Ventures and a handful of other more boutique Krasaka, 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 at Green Oaks a couple of years later and Andresen Horowitz, those are really helpful. Having the good partners in venture has been a really good run. And I think as Josh has scaled up thrive, Neil has 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

whether they were doing what they're doing. But then what that led to was us thinking we wanted more early stage, but then there was this emergence of these solo capitalists and these early stage investors. And so we basically carved out about a third of our venture budget to invest in these emerging solo capitalists. 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, Gil, Orrinzev, Ray Tonzing are some that are well known, but also people like Jack Altman, Nico Winneborn, Rampton at Abstract. There's been a whole host of Next Gen. and 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 Andrewsson Horowitz's Founders Fund, the connectivity around our network or the case of Jack Altman, we get introduced to Jack Altman through Thrive. Then Jack connects us to Zach Gray and the team at mischief. Sometimes there's a thing that goes that way. Deals be get deals. Deals, we get deals. I'd be remiss. There's also like Locky 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 Tishabox 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 has started to happen more recently has been the rise of Andrescent 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 GC. I have a lot of respect for Hayman. I mean, I think there's certain deals, like the Long Lake deal, the Hayman's the CEO 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 were invested in firms. There's so many new faces there. I don't know them. 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 Meta has actually gone the opposite way, the typical way that people go is a 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 kneel at the tip of the spear for almost all first meetings. So 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 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 capitalist anyway, and that is what it is. But what I would say,

a few things that worry me is that the game that the big players that we're talking about, Andrews and Lightspeed, GC are playing. Doing 10 on 50 to put a chip down might make sense for them. So they blow away. Maybe the company needed to raise, or needed to raise three or four million. They could have done that, done four on 20, whatever might be. And instead, they're doing 10 on 50. And that could 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, it's going to be interesting. I think there's the opportunity for your seed fund, probably, though, you can probably sell into some of these rounds. If you're a big fund that's a lead, it's 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 or something. 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 in the masses is something that I think is great. I'm more like it because it feels to me like it's an avenue where we can exit things to. 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 asset class. People talk about like, 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 minimal 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 sponsor, lower middle market space where we're seeing teams that we view as BV 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 $150 million.

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 3x return, 25% carry. Over a 5x net return, you can get a 30% carry. That might be what we would feel would be appropriate. And instead, you have a group come in who caps them at $400 million. 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, you make more money. That can be more money on the carry. And then you have 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 going to persist for a long time. You mentioned the on streaming of new liquidity solutions for some of this big illiquid 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 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 poll. These budgets are tight to begin with. I was speaking to a really great manager. They are going to raise $60 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 story that happened 10 days ago or whatever. And I think 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 want to have diversity of LPs. 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 will be worked through, but definitely is going to put pressure on people. It's going to be interesting to see how all the sovereign dollars approach these markets because they have huge amounts of capital to play. I think they should barbell it and they probably need partners to help them barbell it, but there's, I think, a bias from what I understand for a lot of them that try to do it themselves and do it with teams that are off based in the Middle East or elsewhere. I think that's going to 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 were doing very good work. If you think of the evolution of certain kind of funds, they were providing access to people who then in the U.S. who built out their own teams and then they moved abroad to do that, same thing. Really, everyone needs to continue to evolve their strategy and just be continuous improvement. So I give this advice to you. The best managers can have their cake and eat it to. You solve for, you want to 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 overburden some box checkers, because we certainly see that a lot, because there's 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 checklist stuff. So you want to 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 their alumni, the Notre Dame guys in South Bend are a great example. They're very passionate

about Notre Dame, and they've had a lot of consistency on their team. Because 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, my hot take has been that the fund of funds actually get a bad rap. However, they often have agendas, whether it's looking good with a seated 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 going to wait until the final close. I was 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, their consistency, the likelihood they're going to 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 at 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 different strategies or whatever might be. 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 changed 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 Justin Ishbia, who is also an end of one, has built a true machine, whereas I think ZBS 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 going to have a very high volume acquisitions. He's extremely personal, et cetera. But he's also definitely out there. kind of risk orientation. And then he's like the Jake and Frank, they're both co-ce CEOs. He's going to be on the acquisition and the front end of things. Frank is going to be more of the finance and the operation side. Jake will take 95% of the air in a meeting. But Frank is very, very crucial of their success. But he's probably more risk oriented. He's like the quiet guy at the poker table who's going to 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 basically, they're going after, started with veterinary. Then it was H-FAC 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, I'm just so confident in the trajectory of what Jake and Frank will 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 are reasonably well off, but clearly a little bit of a renegade. His mom and dad dropped him off in Orange County in eighth grade. Irvine, California, Irvine is the Valley, bought a house and left Frank in California and flew back to China. This is in the mid-2000s. There wasn't Zoom. This is not legal.

He basically raised himself from eighth grade, I think through high school, went on to. to a great educational career, met Jake Sloan doing investment banking at Blackstone. They both have had 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 21 years old, 22 years old, working 100 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 Ispia. So is Darren Farber. I think it's been the key for me 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 as they try 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 GPs. 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. half to the core LPs in that ecosystem and the only higher placement agent. But if you're a buyout firm, you might want to 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 100 different LPs globally, but to really be deliberate about

picking the 10 to 25 you want to talk to to get to with a 30 to 60% hit rate. That is the way to do it. You have to understand, okay, what is this LPs 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 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 to GPs. Because what I really hate, too, is when people are on the road, if we're talking about some of the GPs I'm upset with right now,

they raised $5.50 million from their existing, but they're trying to push it to their 700 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 LPs of roughly similar setup 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?

That's a great question. Well, I definitely give it to Kevin Kelly at Sequoia Arditch. Maybe this is a catalyst. Definitely, you're not in meet their minimum, but maybe it is a favor. It's probably less than five. But I think that there's... I'm interested in that. 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 I practically says, you should probably, at least if you're committing, let's just for a number of numbers, say, 300 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 a 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 fund of 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, those 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 client's 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 counter example to that? Yeah, well said. I would agree. Normally you see these things. There's not the logical strategic sense other than like, you're doing it because you can. You're doing it because 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. Sure capital is the exception to that,

I would say because Justin Ishbia and team, and we've been investors with Shore since the first investor in Fund 1, and it's been incredible to watch the evolution. But they started off doing microcap 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, that might be a little off the numbers, but say 100, 110 million in Fund 1 to 220 and Fund 2. And for that 220, I think they might have had $2 billion in demand. So a lot of demand. Then they've raised maybe in the $3 or $400 million range for their microcap health care funds on a go-forward basis, which is enabling them to stay in the, say, 1 to 5 EBITDA startup platform. But then they've continued to build out their organization with all sorts of areas that can help business.

is professionalize and grow. And you can apply that across microcap investing in other sectors. So they built out teams in the food and beverage space, in industrials, in 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 the Shore organization where all the different strategy funds are benefiting from the organization of Shore, which is, I think it's 180, maybe 200 people. is bringing in Gundu and I 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 health care 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 merged that with another veterinary platform. 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 Veterinary and 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 CV space get, I would say, arguably abused by some

managers where you're 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 health care fund to then go into a different vertical and become principal or partner. And the last thing, very excited about the Sure 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 to the original kind of investment partners alongside Justin and Ryan Kelly. And Justin Isbia is just beyond driven. He's that

maniac on a mission that we talk about. His engagement and his drive is next level, and he's going to be, he just sat actually his fourth child. He has promised to Zelpac that he is fully engaged for at least the next 18, 19 years until the baby goes to college. I was waiting for the last one. He's 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 Nettigan, you know, I wondered they've been very successful. Like, are they going to 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 very high quality at every single area. If I put 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 for capital. Be very cautious about most of the... The exceptions that define the rule. Beyond the exception of the rule. Is there anything else that you feel it's most interesting to your perspective returns or the job that you're going to do that we haven't talked about? An area that we've talked about. But I think it's super attractive is the bootstrapped growth equity area.

We've backed a number of firms where people have been trained at the summits, TAAs, excels, sequoias, and then decided to, as those firms, now the people there generally are trying to write $50 to $100 million plus checks. Some really talented professionals have launched their own smaller firms that are addressing that kind of $5 to $25 million equity area. This is not venture capital. This is bootstrapped software companies generally. But Jeremiah Daly at Elephant Partners and his partner, Andy Hunt, Jeremiah was previously

at Summit Partners, Excel, and then Highland. Andy Hunt was the co-founder of Warby Parker and then was at Highland. And they founded Elephant. That's been an incredibly successful investment for us. That we came into Fund One. They had a company know before, which is a very big, was a public company now taken private, but outstanding returns. But then Jordan, Batman, Westing Gaddy have this firm called Radiant.

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-xes. They're trying to get really... Invidia. Yeah, they're trying to get, so it was not the right fit for him at Sequoia. The lowly three-x. Yeah, there's a story. Yeah, he tells when, like, one of his deals made like three-x and like, no one congratulated him. But I guess that's like typical. That's not unusual. He founded telescope. He's done really well. And these funds, I mean, Mickey's telescope one was 70, 80 million. Then we came into the 150 fund. You're staying way below the radar, then 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 best risk-adjusted returns we get. It's called Growth Street Partners. It's Steve Wolfe and Nate Grossman, who were at Main Sale partners together. They founded it together. It was a $70 million first-time fund, we anchored it. They're finding that founder in Kansas City. They're looking for minority capital, but a little bit of money on the balance sheet expertise to help them go from, say, $5 million in ARR to $15 or $20. 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 rolled does a three X, then you're talking 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 basically break even. 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. That goes without saying, but when you think about who are the truly kind of just 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 mentored me and been very kind over the years. But when I started at SCS, I was 30 years old, I hadn't really done this.

We were building out the program from scratch. and Steve Rastaglio, who is our CIO, Pete Mattoon, who is our CEO founder, Tony Abiotti, Doug Ederley, who were co-founders and Pete leading the client service. She's extremely supportive of going to do the Shore Capitals, the Thrives, the Founders Funds, that edge yourself. It was from the beginning I got as much pushback doing Bain as I did Shore. So there was a really supportive, very kind in Pete specifically, who's an amazing guy. He was like a therapist. I would have a monthly sit down and mentoring session.

He was great. And Steve Rastaglia was an 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 Kushner, 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 2012. I'd been a basically year on the job. I'd gotten to know Josh Kushner that winner.

He decided he'd just invested Fund 2. And rather than exercise as accordion on Fund 2 to go from like 40 to 100, he decided to just raise Fund 3 at 150. And he was bringing in SCS and I believe it was like Rothschild were the two LPs coming on top of Prince and Duke and Wilhelm Trust and a few others. And it was a very targeted raise. We were in for an amount. And then one of our families, through an idiosyncratic thing, there was anger, it was two-thirds of the commitment we were going to make. We had our vehicle. We had a 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 Weinstein, who was C-O at the time. And it was like, this is pretty baked. And I remember I was in Palo Alto on the phone with my colleagues. And basically, how can we solve this?

How we figure this out? And we actually put, it was 10 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 50 million and this 27 year old on proven person. But everyone had total conviction in decision that myself and Stivo were making and thrive. And there was never like, oh, why are we backing this Josh Kushner 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, we've invested $400,500 million to thrive across a lot of funds, had incredible returns. That investment that we made was a 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 Altman or Kirsten They have been one of our top comel of us and partners, but definitely our top intro. And that doesn't happen if I don't have the support of Steveau, Pete, et cetera. And what was so kind about it was there's never any questioning. 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 much for your time. Thank you. If you enjoyed this episode, visit join colossus.com where you'll find every episode of podcast complete with hand-edited transcripts. You can also subscribe to Colossus Review, our quarterly print, digital, and private audio publication featuring in-depth profiles of the founders, investors, and companies that we admire most. Learn more at join colossus.com slash subscribe.