Investing Billions - E104: How to Start a Single Family Office w/Justinas Milašauskas

Starting point is 00:00:00 Public markets taught me to develop conviction quickly, act fast, and this is what we have here at WillGrow. We're happy to commit into the first close. We're happy to speed up our process if needed. It's a great time to be investing. We see fundraising data. We see how many months it takes to close a fund. So this gives us an emerging of LPG, an opportunity to start building relationships with the top managers around the world. And if we look at the statistics, the best vintages have been post-GFC 2011, 2012. This resembles to some extent these times, and we are actually actively investing. The family office is three and a half years old. You've invested into 60 managers. What are some of the biggest lessons that you've had from investing venture private markets so far? Ticket sizing in the first few deals also is a lesson for us.

Starting point is 00:00:48 What do you wish you knew before investing into emerging managers? So you're an investment manager for Willgrow. What is Willgrow? Willgrow is a first-generation single-family office based in the Baltics in Vilnius, Lithuania. It started eight years ago on the back of a successful logistics business called Gyrteca. Gyrteca nowadays is the largest real estate developer and asset manager in the Baltics on the industrial side. WillGrow itself is one of the most active private markets investors in Europe. These days, we have 60 managers across asset classes. You have an active logistics company and real estate development company. Does that affect how you allocate the rest of your funds within the family office? Having operating businesses allows us to

Starting point is 00:01:49 be more aggressive on liquids. So we are heavily private markets skewed on our asset allocation, currently running close to 70%. What else makes you unique from other single family offices? We are emerging LP based outside of a typical financial center. So I guess that makes us a little bit less hype cycle prone investor. Then on top of that, we are actively investing in fund of funds next to our primary fund investment practice. Moreover, being first generation, a single family office, we have entrepreneurial DNA. When we last chatted, you used a football analogy to describe the different assets that you invest in venture by private credit. Tell me about

Starting point is 00:02:30 that. Every asset class has its certain role in our portfolio. And probably one of the better analogies could be with European football. So venture, for example, has a role of delivering outsized returns, delivering alpha to the portfolio comparable to what strikers do on the football team. They take measure risks and score goals. Then the buyouts, I would say, sort of represents a midfielder analogy in European football. So they have a great opportunity to be a strong performance, but provide some stability to the overall portfolio. Hence, we have this represent the largest allocation to our portfolio. And real assets, private credit, this more like

Starting point is 00:03:12 defender, steady income generating type of investment approach. So tell me about how you went about building your venture capital portfolio. We take a three-year vintage-based investing cadence. So we just started the second cycle. In each cycle, which consists of three years, we try to build a portfolio of 15 to 17 managers, well-diversified. When you were having this discussion about venture capital, did you think about potentially doing all small funds or all seed funds? Probably 80% of our time we're spending on small pre-seed, seed managers in terms of sourcing and diligencing because this is probably the most fragmented part of venture ecosystem. Our ticket sizing is risk-based.

Starting point is 00:03:55 So for highest risk seed pre-seed, we write a bit smaller checks. For a bit later stage and sort of less risky part, we write a bit bigger checks. So on a dollar basis, we are rather well diversified. But in terms of line items, most of manager relationships come from precedency space. We spoke last time that one of your constraints is you are in Lithuania and you're self-aware to understand that you have to use a slightly different strategy given you're outside of the financial hubs. Tell me about that.

Starting point is 00:04:25 In order to think about one's strength, you have to realize your weaknesses. So this is obviously something that we've been discussing a lot internally. We decided not to build a team in London or the US. And fund-to-funds across both venture buyouts and other asset classes help us a lot. We build our networks with the help of them. We collaborate on diligence and data and systems. What percentage of your funds are sourced through your fund-to-fund relationships versus directly or through other warm introductions? I would say half comes from fund of funds.

Starting point is 00:05:05 Another half comes from other networks. But again, if you would look at the managers that we backed outside of fund of fund sourcing channel, their cap tables look pretty strong with some other fund of funds or flagship institutional investors. So you're able to piggyback on other institutional signals in the

Starting point is 00:05:25 market. The strength of the cap table of a fund manager acts as a strong signal. It's not the only factor that goes into underwriting equation, but this is a strong signal for us indeed. There's some nuance for LPs when they look at other signals from other institutional LPs. Where are cases where you would not follow a signal from a top institutional LP? At the beginning of our venture investing, we more emphasized the brand of the firm. With that, obviously, you have underneath some strong institutional LPs, but we paid less attention. And maybe the strength of the brand and the name of the firm was more important. Later, we've decided to focus much more on emerging managers. So with that, the brand is

Starting point is 00:06:14 still a little bit unclear. And then you have to extract the signal elsewhere. And the strength of the cap table of the manager acts as a strong signal for us these days. Hey, we'll be right back after a word from our sponsor. Our sponsor for today's episode is Carta, the end-to-end accounting platform purposely built for fund CFOs. For the first time ever, private fund operators can leverage their very own bespoke software that's designed from the ground up to bring their whole portfolio together. This enables formations, transactions, and distributions to flow seamlessly and accurately to limited partners. The end result is a remarkably fast and precise platform that empowers better strategic decision-making and delivers

Starting point is 00:06:53 transformational insights on demand. Come see the new standard in private fund management at z.carta.com forward slash 10xpod. That's z.carta.com forward slash 10xpod. Me and you both share an affinity for spinouts. Why do you like spinouts so much? The spinouts typically have learned the craft of venture at a bigger firm. They made a good amount of investments, you know, successfully and unsuccessfully. They learned on someone else's dollars. And probably there is a time when they feel they need to go solo.

Starting point is 00:07:25 They're also essentially making a bet on themselves. They're saying that they're going to outperform their previous manager and they have a lot of skin in the game. On the contrary, what are some of the risks that come with investing in spin-offs? Sure. There are a few risks that we have to be mindful. First is a GP market fit. The question is whether the manager has done similar or the same strategy actually at the previous firm. So that's important to validate the track record. Also, there is a certain element of risk in fundraising.

Starting point is 00:07:57 Probably, they had the investor relation people arranging, talking to LPs. Now they have to do that themselves, being stretched in time and make sure that fundraising does not drag out for too long. The third one would be, yeah, I think it's ambition to scale AUM.

Starting point is 00:08:14 That's one of the risks we want to discuss practically and understand how, you know, fund three, fund four would look like for the emerging manager. Just to play devil's advocate there, let's say you had a top GP spinning out of one of these very large funds and you assume that they're going to scale you on fund two and fund three, but fund one was right size. Would you ever invest into a manager

Starting point is 00:08:35 knowing that you probably wouldn't invest in the next vintage? We haven't done that yet. I just recently had a case where we clearly understood that it's a one vintage play for us and we passed. And I think overall, it would be highly unlikely, given that our approach is to underwrite typically two vintages. Yeah, I think there's essentially it's like option value. If you hit the next Sequoia or the next benchmark, you have that you could have that allocation for 10, 20, 30 years, which is incredibly valuable, especially from a compounding aspect. The other one is relationships. You get into those top brands and now you're able to use that both as a track record and oftentimes the most kind of LP-friendly GPs will also introduce you to other GPs, whether they invest before them or even sometimes competitors in extreme cases. The question is, do you want all of your emerging managers to become

Starting point is 00:09:25 these large platforms? That's, I guess, the question. If the strategy remains to be seen, but if the strategy is to focus on precedency the 80% of the time, this might also provide some proper churn in the portfolio. Yeah, I think there's probably a nuance there. You want some of them to graduate. So you could say I was in fund one of benchmark or fund one of Lightspeed. And I think you also want some of them to stay the same size for kind of returns and everything. So I think they all have value in the marketplace. The family office is three and a half years old. You've invested into 60 managers. What are some of the biggest lessons that you've had from investing in venture or private markets so far?

Starting point is 00:10:06 Ticket sizing in the first few deals also is a lesson for us. So I guess this combination to work on sourcing, just wait for the best opportunities. And again, as a family office, we don't have this pressure to put dollars to work. So this is a good place to take these learnings and move forward. What are you guys modeling in terms of DPI, in terms of getting your capital back to continue your venture program?

Starting point is 00:10:35 How many years out do you think that you're going to have a perpetuating program that doesn't require external funding? On venture side, DPI should be one X, seven, eight years out, we believe, maybe even longer. But one and a half year ago, we actually set up our all investment activities in order not to depend on operating businesses. Even though venture is the longest, longest one, and it will require funding from other asset classes on a firm level. We are running independently. What other strategies do you implement in a bear market as of today versus a bull market? It's just a great time to be investing. We see fundraising data. We see how many months it takes to close a fund. So this gives us an emerging LPG and opportunity to

Starting point is 00:11:26 start building relationships with the top managers around the world. And if we look at statistics, best vintages have been post-GFC 2011-2012. 2009 vintage is also pretty decent. So this resembles to some extent these times, and we are actually very actively investing. Congratulations, 10X Capital podcast listeners. We have officially cracked the top 10 rankings in the United States for investing. Please help this podcast continue climbing up in the rankings by clicking the follow button above. This helps our podcast rank higher, which brings more revenue to the show and helps us bring in the very highest quality guests and to produce the very highest quality content. Thank you for your support. You had a long career in the public markets before you came over to Will Grow. What lessons

Starting point is 00:12:14 do you take from your public markets investing? Investing is very similar across asset classes. So you just have to make sure that every deal that you do is a great deal. You don't need to chase every opportunity. So that's what we try to focus, be very selective and build conviction quickly. So public markets taught me to develop conviction quickly, act fast. And this is what we have here at Wellgrow. We're happy to commit into the first close. We're happy to speed up our process if needed.

Starting point is 00:12:47 Venture capital is known as an access class, where it's very difficult to get in the very top funds. How do you differentiate yourself against other top LPs? We typically commit for two vintages. Of course, things might change, strategies might change, teams might change at the manager. Again, our budgets can fluctuate, but this is the modus operandi. So we were there for two vintages as we are active, you know, three quarters in the US. This gives a great opportunity for US managers to diversify their LP base. Also, we're happy to be, you know, decisive, quick and commit to the first closing, as I mentioned. And maybe finally, so we are

Starting point is 00:13:21 pretty well connected with another family offices and LPs in Europe. So we made a bunch of intros to our managers and actually in some cases brought other LPs alongside. Should GPs in the United States look at Europe as essentially one geography or one country when it comes to connectivity and strategies? Yeah, it's hard. I think no. So it's very fragmented market for sure. Different languages, different regulations. I think first step for US is naturally London. So it's closer culturally and language wise, and it's the most established financial center in Europe. So this

Starting point is 00:13:59 is a natural bridge. But then if you look at continent, it's very fragmented. And for us, this fragmentation, I guess, played to some disadvantage in the sense that we committed less to European managers and more to the US because in many cases, European managers, they run localized strategies bounded by geographies, which we think is not ideal. What do you wish you knew before investing into emerging managers? When we started, emerging managers were a category with a dedicated target of allocation in our portfolio. And at the moment, it evolved in our strategy that being emerging manager is just one of the features that we like about the managers, but without any dedicated bucket. And we benchmark emerging managers to establish managers in the same domain.

Starting point is 00:14:45 So that would be, I guess, the key learning and adjustment on our side. What would you like our audience to know about you, about WillGrow, about anything else you'd like to shine a light on? WillGrow is a small, professionally run family office who does not have a pressure to put dollars to work. So we are very much focused on top quality GPs and patiently investing in venture, lower bid market, buyouts and other strategies. And again, so we,

Starting point is 00:15:12 although we're on generalist approach, we spend a lot of time on cyber, deep tech, life sciences, tech bio. So happy to meet folks from these areas. What is the main advantage of taking money from a large single family office

Starting point is 00:15:24 versus an institutional investor? What are the pros and cons? money from a large single family office versus an institutional investor? What are the pros and cons? You're in Lithuania. How often do you go to New York or San Francisco in the US? And tell me about your strategy in terms of face time. Given our base far away from the financial centers, we have to travel a lot. So spending give or take six weeks per year in the US, or roughly equally split between East Coast and West Coast, where we meet our existing relationships and new relationships. Building new relationships is very important

Starting point is 00:15:52 for our future pipeline. Well, thank you for sharing this masterclass on single family office. Thanks, David. Thanks for listening to the audio version of this podcast. Come on over to 10xCabell Podcast on YouTube by typing in 10xCabell Podcasts on YouTube by typing in 10xCabell Podcasts into youtube.com and clicking the subscribe button. On the YouTube version of

Starting point is 00:16:09 this podcast, you could see the graphs, visuals, and key takeaways that accompany every episode.

Investing Billions - E104: How to Start a Single Family Office w/Justinas Milašauskas

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