Investing Billions - E11: Neil Datta, The Forbes Family Trust’s Approach to VC | Is there Alpha in Due Diligence? How to Signal Strength in Fundraising, and Should LPs be Fee Sensitive?

Starting point is 00:00:00 I have this running joke in the office that the best way to raise money is to tell people you're not taking money. It works, right? Like when you're aggressively fundraising and there's a certain FOMO aspect to a manager where you know that they're going to be oversubscribed and you may not get capacity, there's power in that. As an LP, these types of conversations sometimes are easy, but sometimes they're not, right? You want to understand, hey, you know, give me an example of something that didn't work out

Starting point is 00:00:31 or a losing trade. And you want to understand, you know, kind of a postmortem perspective, you know, what they did wrong, what they learned from. Maybe more importantly than money lost is you want to understand the thought process. You want to understand what they did then and potentially how they would do something differently. Because one thing that's been drilled into me for the last 20 years is that past performance is not indicative of future results. And while that's true, it does de-risk the investment. Neil Dada, Managing Director, Optima Asset Management. You've had a very unique background ranging from working on the public sector, tracking down financial crimes to today working as part of the team that managed the private fortune of the late Queen Elizabeth II.

Starting point is 00:01:21 Welcome to Limited Partner Podcast. Thanks for having me. So tell me how you went through this diverse background of working in the public sector to managing the wealth of some of the most important people on the planet. Yeah. So I've been an institutional investor for 15 years. I've been lucky enough to work with some of the smartest, most impressive, best performing investment managers in the world. Really, my team is responsible for sourcing investment opportunities for the folks we manage capital for. As you noticed, it's a high profile, impressive group. So that keeps us on our toes. And really, my job is to diligence opportunities and de-risk them as much as

Starting point is 00:02:01 possible, such that they fit into our mandate and they have appropriate kind of controls in place and have kind of all the institutional best practice that we expect from our managers. You're head of risk and operational due diligence at Optima. Tell me what you do on a daily basis and explain the alpha or potentially the loss aversion that you're able to capture by doing the right diligence and doing the right risk assessment on your investments? My job is to vet every opportunity that comes through our door. We apply a rigorous review that includes document review, on-site meetings, speaking to both the investment team as well as the operational team.

Starting point is 00:02:43 We take the view that it's almost like a mini SAS 70 assessment. And I think that gives us a good holistic view of not just the investment opportunity, but the management company as a business, because we typically make long-term investments. So it's really important to us that the management company is well-situated and in a position to continue to provide alpha for us as LPs. And when you say you look at it not just as a fund as a management company, what do you mean by that? We assess not just their investment strategy, but the folks that are running the business, what software they use, what their investment process is like. We have the benefit of seeing most well-known institutional investors. So we

Starting point is 00:03:25 kind of from our seat, we could see what's best in class, what folks are doing in terms of process, in terms of software, in terms of, you know, folks that are on the team. And it's like thinking about Alpha, it's super unique because we're in the position to add Alpha as LPs. This is something that I do often and really enjoy, because usually it's emerging and startup managers who, you know, are looking to bring in institutional capital, and just kind of curious what we look for, what type of systems we prefer, what type of reporting do we prefer. And from that perspective, we're able to kind of bring them up the curve and make them kind of more appropriate for institutional allocation. And it becomes kind of a win-win from an investment standpoint to

Starting point is 00:04:10 be able to add value. And generally, these managers appreciate it. So it tends to build some goodwill and allows to be long-term partners with these folks. One thing in 2011, between my first and second year in business school, I interned at a hedge fund of sorts. And I got to meet with a lot of emerging with these hedge fund hotels. One of the things that really stuck to me is that if you want to be a $500 million, billion dollar hedge fund, you have to start working and acting as if you're that level at the early stage. So really, it's kind of a chicken egg. But the way you solve that chicken egg is by starting to act

Starting point is 00:04:45 institutionally early on. We get criticized, me and Eric, that we only bring on very, very bullish VC people. You're our first kind of VC skeptic. What makes you skeptical about venture capital today? I am bullish on venture as an asset class and generally as an opportunity set. I think as an investor that looks at both public and private markets, and you alluded to this just now, that the observation that I've seen personally is that it's gotten much easier to launch a venture fund over the last few years. At the same time, it's gotten much harder, much more expensive to launch a public equity fund. Regulation, compliance requirements, reporting. The byproduct of that

Starting point is 00:05:26 is that there are a lot of recent entrants into venture who may not necessarily be in the best position to generate alpha. Our job is to really handicap those opportunities and put us in the best position and take the best horses in the race to build portfolios for our clients. Before we went live, you mentioned in passing that some venture funds with a billion dollars under assets have worse infrastructure than some much smaller hedge funds. What did you mean by that? Venture capital, unlike hedge funds, it's an illiquid asset class, right? So when you're thinking about public market investing, hedge funds and mutual funds, there's generally some goalposts that managers have to pass, things like audits and regulatory

Starting point is 00:06:11 reviews, investor diligence sessions. Sometimes you find that venture capital managers, particularly those with size, have gotten to a certain size of AUM and haven't had to go through those growing pains. And a lot of times, they're kind of doing some of this stuff that early stage hedge funds had to do a while ago. And I think that's part of the diligence conversation. And that's why diligence is so important. I think it's really interesting. If you think about the decade between the great financial crisis and the pandemic, by

Starting point is 00:06:45 any metric you choose, whether it's number of deals, size of rounds, new funds launched, venture capital has exploded. And social media has given these folks reach that was previously impossible. But I think that definitely created some FOMO. And folks in my position, that's something we have to deal with and really separate the hype from what's real. So yes, I mean, I've seen cases of large AUM VC shops that don't produce independent NAVs that have really kind of suspicious expense policies, obvious conflicts of interest, or just maybe aren't comfortable being scrutinized.

Starting point is 00:07:29 And that, quite honestly, is something that's super rare when it comes to public market investing. So maybe stemming from the fact that having a redemption window kind of forces you to be on the right side of best practice. That's where diligence comes in. And that's how you separate the institutional, well-managed shops from the folks that maybe had a win early on and are resting their laurels. That's an interesting point. The 10-year fund period in VC leads to different incentives than a hedge fund where you typically have a gate in a year and you could reconsider. It also makes it easier to start to gather the first check into a hedge fund or to get somebody to commit for the first time, but harder to retain them. So there's definitely some trade-offs there. When you do, quote unquote, institutional diligence on VCs, what are you looking for?

Starting point is 00:08:14 It's not that different. What we look for many, investment manager. We look for an edge. We look for the ability to generate alpha that is somewhat repeatable. We look for institutional infrastructure that is commensurate with best practice. And to be clear, that means different things for different strategies. There's a certain expectation we have for a billion-dollar equity manager versus a venture capital manager. And coming from our seat, from seeing all sizes and iterations of these managers over kind of the 30-year history of Optima, we're kind of in the best position to diligence these opportunities. We could say with authority, hey, you're doing this, maybe you should do this a little bit

Starting point is 00:08:56 differently, or maybe have you thought about this in terms of research process? Or going back to our earlier point, investors appreciate that we are LPs that can add value. If you view these as partnerships, then it ends up being a win-win for both parties. We interviewed the co-founder of Tribe, Jonathan Su, and for every portfolio company, they provide a report. And even though they end up passing on the majority, large majority of companies, they're able to produce something of value. I think there's a positive selection there that people that want the feedback and that embrace it are going to be the ones that are at the top, both entrepreneurs as well as fund managers. Despite your criticism of the

Starting point is 00:09:33 not enough diligence in the venture space, you're still are in some of the most storied franchises in venture capital. What made you want to invest into these venture funds? I think it's really easy to forget that venture capital is an asset class where the asset itself has to approve every investor personally. If I want to buy Tesla, I got 300 bucks in a brokerage account. There's not much Elon can do to stop that from happening. And that kind of aspect to it is a powerful motivating factor from a founder's perspective. You know, big name managers, Sandhold Road firms tend to have institutional LPs, they tend to have corporate relationships, they may have investors that are, you know, CEOs of former portfolio companies, that aspect of access and flywheel that is really important in venture,

Starting point is 00:10:27 it's really tough for emerging startup managers to replicate that. From the deal flow perspective, when I speak to smaller managers, they tend to focus on value add. They effectively are proving to us why someone takes their money. But when you're one of the big guys in Sandhold Road, they don't need to have that conversation. That ship's already sailed to a certain extent. So for us, we need to understand, hey, which particular investment is going to add the most value for us? And for somebody like myself, I don't need to focus on business risk. I don't need to focus on going concern risk. I don't need to worry about whether or not they can pay their employees or keep the lights on and be in a position to be in business for fund five and fund 10. So it does de-risk the investment for us to a certain extent. But I also think there's

Starting point is 00:11:16 definitely alpha there to be one of the bigger players in the space. I was speaking to Beezer Clarkson from Sapphire off podcast in real life. That happens once in a while. And she mentioned that there's different strategies, different ways to go after venture. You could, of course, wait until an emerging manager goes to fund four, and there's only about a dozen or so of those kind of funds. Or you could try to whittle through those thousands of funds early on. Her argument was that you're going to be highly adversely selected if you wait for the emerged funds and that by fund four, fund five, you already have the top managers. And of course, you have these large bank platforms which remain unnamed that are putting people into KKR fund 15. Obviously, that's another extreme as well. How do you look at that? Where's the alpha from in terms of a vintage and a stage that you want to go into venture capital? This logic applies to any manager. There's this, you know, kind of human nature conversation of, you know, would you rather invest with somebody who's kind of young and hungry and hasn't made it? Or would you rather invest with somebody who's a little

Starting point is 00:12:19 bit older, who's got more resources, and potentially has had some wins under their belts. I think both have utility. I tend to think that the younger, hungrier, more emerging folks have the strongest incentives to make it work because they haven't had their big win yet. But I think that also potentially leads to suboptimal risk management. But at the same time, to the point earlier, there's this flywheel effect that you get with kind of the storied franchises. Yeah, it reminds me, there was a study that found that the best founders were actually serial entrepreneur founders that had not succeeded in the first one. The one that had succeeded in the first one actually were not as hungry. So

Starting point is 00:13:01 a little bit of experience, but a little bit of hunger seems to be the right combination. You have different clients with different risk return profiles. But if you look at a generic client, let's say the average client, let's just for simplicity's sake, let's say you're managing money for an endowment. What would be your allocation across all asset classes? What would be some rules of thumb in terms of what you would want your portfolio to look like? As you'll appreciate that the conversation is really different based upon the kind of risk return guidelines and liquidity requirements for each investor. But thinking from like a long term perspective, I think what we do is we typically build portfolios that are diverse and have exposure to the areas that we think are not just performing well today, but set to perform well 5 to 10 years out. So we think of areas like technology, healthcare,

Starting point is 00:13:54 obviously mixing both public and private, but focusing on liquidity. From an asset class perspective, it would be a mix of both traditional mutual funds, but also alternatives. We tend to have a kind of a strong bias towards alternatives, kind of given our history and DNA as a firm. Usually that's going to be in the form of a mix of hedge funds, private venture, and more traditional asset classes like fixed income and public equity. What does venture capital as an asset class compete against? What is its nearest comparable? I would put venture in the alts bucket. The challenge in

Starting point is 00:14:29 kind of wealth management universe is that, you know, typically that sleeve may be 10% or less. So you're competing against hedge funds and CTAs and private equity for a piece of the pie, which is significantly smaller than what they do for fixed income. That model may not be the best way to look at it. I mean, that model really relies on kind of the old school 60-40 asset allocation model, which we generally don't believe in. One thing that I'm a proponent of is that diversification protects wealth where concentration builds wealth.

Starting point is 00:15:04 You know, that's kind of a view that we've had for a long time. And we've had the benefit, you know, at Optima of allocating for best performing equity managers over the last 30 years. And we've done a lot of analysis around this. And it's really interesting when you kind of back out their performance and you look at kind of the factors that drive it. And a lot of times you find that the highest conviction names at a manager are typically the, you know, number one, number two,

Starting point is 00:15:33 the top five positions. And usually, you know, if you're using kind of hindsight as a proxy, you find that the highest conviction names tend to perform better than the actual performance of the portfolio. So it kind of solidifies what our thinking is that you want to do your homework, but you want to make concentrated bets with specialists to be in a position to best monetize macro events, whether they're in a specific sector or a specific asset class. Hey, we'll continue our interview in a moment after a word from our sponsors. The Limited Partner Podcast is proudly sponsored by AngelList. If you're a founder investor, you'll know AngelList builds software that powers the startup economy. AngelList has recently rolled

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Starting point is 00:16:59 So if you're ready to level up your startup or fund with AngelList, visit www.angelist.com slash TLP. That's AngelList slash TLP to get started. Back to the show. Yeah, we found that to be the case. Check size is the highest predictor of conviction, which is the highest predictor of return. And I think there's a misnomer in venture capital in general that everybody's spraying and praying. No one knows who's going to be good. I think it's very clear. If you look at some of the most competitive rounds in history, it was Google Series A and Facebook seed round. That is not a coincidence. It's statistically one in a million chance that that would just happen to be a random. You mentioned diversification. What are ways to quantify diversification? What is a diversified portfolio? What is a

Starting point is 00:17:42 not diversified portfolio? So I guess looking at equity land, typically, what we would think of kind of a diversified portfolio would be, you know, call it 30 or less positions. Think of it as, you know, the kind of the top five positions are 30-ish percent or 20-ish percent of the portfolio. And in terms of equity funds, that's fairly concentrated. You know. When you think of venture, that's a little bit of a different conversation. But one thing I find as an LP is that a lot of venture managers don't think about portfolio construction or macro in a thoughtful way. And that's something that we think about as global investors. So it's really our job to kind of put a macro overlay and make sure our clients have appropriate exposure from a liquidity perspective. It's one difficult thing to handicap. In terms of correlation, that's always been kind of the uncorrelated asset that's been the golden

Starting point is 00:18:38 grail. And then we saw in the last market cycle, somehow crypto is totally correlated with growth stocks, which is correlated with anything riskiness. How do you look at correlation diversification moving forward from the learnings from the last crisis? And from a risk perspective, we look at correlation, both correlation to benchmarks, correlation to indices, correlation to kind of their peers. That's something we look at quite closely. And also diversification from a liquidity standpoint in terms of an asset liability mismatch, but also from a top-down perspective, right? And from a correlation perspective, if I have a portfolio that has 20 positions and two of those positions have greater than 85% correlation to

Starting point is 00:19:27 each other, I got to ask myself, do I need both of them? I would prefer to have less relationships and have better relationships than have a bunch of repetitive allocations where managers are providing me similar or like exposure. So really, I think from an LP's perspective, our job is to make sure we have kind of the best horses in the race, but also be in a position where you could have a buy list, but not allocate to everyone, right? So you got to have a kind of a good roster of folks that are on your bench, where there may be opportunities, whether it's a macro opportunity or a specific geo or sector where you believe in it, but you just don't believe in it right now. And I think it's important for us to have a really deep bench of next-up managers that

Starting point is 00:20:22 may not make sense now, but would when kind of the macro environment changes. And just at a high level, venture capital as an asset class has ballooned significantly and gotten larger and larger to the degree where I think you would say that pre-seed is completely different than late stage. Are they the same asset class? Do you want to have some kind of diversification within the different stages? How do you look at that as a whole? I think it's really important to have diversification because we can see a scenario where you invest in an early stage manager that just focuses on tech, and then NASDAQ sells off and impacts everything. I put them all kind of

Starting point is 00:21:01 in the illiquid bucket. So I don't necessarily differentiate a manager that writes safes or seed investments versus somebody who's series A or series B. Yes, there's a different risk return expectation, but from an asset allocation standpoint, they're still 10-year allocations. So I kind of think of them similarly, but have different expectations based upon their strategy. You mentioned having a deep bench for your managers and kind of next one up. What do you look for in your bench? And what are you looking for in the next generation of managers in the venture capital space? One area that, not just venture capital, but as a sector is healthcare, something we're really, really bullish on. And I think there's a lot of alpha there. One thing that I think is really, really interesting is that if you look at the technicals of the industry, if you compare the S&P two-year performance to the XBI over the last rolling 12 months, rolling five years.

Starting point is 00:22:07 Rolling two years, the S&P is flat. Rolling two years, the XBI is down over 40, which is a huge, huge delta if you just back out the biotech stocks from the S&P. So in our view, from a technical perspective, that sector of the market has sold off more aggressively and sooner than the broader market. And from an opportunity standpoint, that's what I'm really excited about. And I think one thing that's interesting is that, you know, people tend to think of technology as being synonymous for like software or cloud competing, but technology is technology. There's a lot of aspects to it. And particularly in biotech, the forefront of science breakthroughs, things like gene

Starting point is 00:22:51 editing and liquid biopsies. Think of weight loss drugs that we view potentially could have a trillion-dollar market cap in the future. Those are some of the things we're really excited about. And from an asset allocation standpoint, and just from the perspective of being able to capture as much of the alpha as possible, we take the view that it's important to have both venture, early stage, late stage, and public exposure in our kind of healthcare sector, and make sure that we're in the best position to capitalize on forward-looking trends. In terms of biotech venture, where are the opportunities set? Where's the alpha in the market as you see it today? Where are you pointing your portfolio?

Starting point is 00:23:35 Yeah, we're really, really excited about the opportunities in healthcare. One thing I like to talk about is kind of spatial biology was really interesting. It's a new kind of technology where they're using kind of AI to physically map in the 3D way how these drugs interact, like not just cells, but within the cell, how different parts of the cell are interacting. That's unlimited commercial applications for something like that. Another kind of tidbit I'd like to mention is that, you know, the human genome project was approximately 20 years ago and cost approximately $3 billion. Now the cost to map one genome has gone from hundreds of thousands of dollars to approximately $100. And, you know,

Starting point is 00:24:17 the commercial applications of that are really kind of tip of the iceberg in terms of what's next. I think that the space, it's definitely had its challenges over the last year or two. But if you have the patience, if you have an appropriate time horizon and appropriate risk tolerance, it's a really impressive place to be. And actually, talking about venture capital and biotech, if you look at the last five years, there were a lot of really early stage companies that maybe were pushed to go public earlier than they should have. So it's created a really interesting dynamic where there's kind of a lot of binary investment opportunities that I think is perfectly primed for active management. VC's two favorite words are power laws. It's generally seen as in general

Starting point is 00:25:06 technology by the biotech, given the, as you mentioned, binary outcomes, and the massive TAMs, we've taken a look at some biotech companies, they're $3 trillion TAM. And you say, that sounds like a ludicrous number. And then you just do the math. And it's just a math equation. Let's move on to advice for general partners. Specifically, we have a lot of emerging managers. What are some points of advice that you would give emerging managers on how to better themselves? Honestly, being kind of transparent is probably the best piece of advice I can give. There's this kind of diligence aspect to they're trying to put on their best face and obviously win the business. And your job is to understand and really make sure that you have a good appreciation for what's going on behind the covers.

Starting point is 00:25:51 And I think that from an LP's perspective, having these conversations over and over again, you tend to hear a lot of the same things over and over again. And some of these managers may be not as unique as they think they are. It's helpful from an LP perspective to be able to say, hey, this is what we do. This is how we do it. Yes, we could do these things differently from a best practice perspective, things like independent administrator, independent valuation, auditors, having all these kind of controls in place that investors appreciate. The other thing is the open to being scrutinized. I think one big difference between typical kind of smaller venture manager and smaller

Starting point is 00:26:31 kind of public manager is that most public equity managers are expected to be scrutinized and they welcome it to a certain extent, where I think the venture capital industry still has to get over this lack of transparency. And more recently, the private funds announcement from the SEC is going to go a long way towards that in terms of forcing folks to be a little bit more transparent about their fees, be a little bit more transparent about their fair value portfolio holdings. I think we're moving in the right direction. But in terms of advice, I would say that realize that, you know, obviously, they're vetting you, but ultimately, you know, it's a partnership and, you know,

Starting point is 00:27:11 we want you to succeed and it's in our best interest that, you know, you do the right thing. So, you know, kind of view us as a resource and make it as non-contentious as possible. Yeah, an odd thing happened in the last couple of years. One of my funds was oversubscribed. I was basically vetting. I was trying to get the LP. I was telling them everything. I took them through case studies of when I lost money. And of course, the LP was like, how could I subscribe? And I could feel that it was this style of selling essentially unintentionally that was very effective, just the hyper-transparency.

Starting point is 00:27:48 How do you look at that? I have this running joke in the office that the best way to raise money is to tell people you're not taking money. It works, right? Like when you're aggressively fundraising and maybe desperate is not the right word, but it does come off. There's a certain FOMO aspect to a manager where you know that they're going to be oversubscribed and you may not get capacity.

Starting point is 00:28:12 There's power in that. As an LP, these types of conversations sometimes are easy, but sometimes they're not. You want to understand, hey, give me an example of something that didn't work out or a losing trade. And you want to understand, you know, kind of a post-mortem perspective, you know, what they did wrong, what they learned from. Maybe more importantly than money lost is you want to understand the thought process. You want to understand what they did then and potentially how they would do something differently. Because one thing that's been drilled into me for the last 20 years is that past performance is not indicative of future results. And while that's true, it does de-risk the investment somewhat.

Starting point is 00:28:53 Has it been in your experience that top LPs are comfortable with losing money in the correct way where more mediocre LPs are really focused on downside protection versus really making sure you get good returns in venture. I think that's fair. I do think that, you know, obviously sophisticated LPs understand market dynamics a little bit better. You know, things like the last 18 months in venture down rounds and what's been happening in the industry broadly, there may be a, you know, high net worth or somebody who's less exposed to the market who just expects an absolute return profile. But if you're not in the weeds and not seeing what's going on in the broader market, you may miss that.

Starting point is 00:29:35 So I do think, going back to liquidity and capacity, it's an interesting conversation because there have been multiple times where I've spoken to managers who intentionally make their liquidity more onerous than it needs to be. For example, an equity manager who could do weekly liquidity but chooses to do semi-annual. And it makes you wonder why. And really, what they're doing is they're protecting the fund from their investors. And there's obviously an aspect to that in venture. But in venture, you understand like, hey, you're putting

Starting point is 00:30:10 your money on a boat, you're pushing it out to sea, and you're hoping at some point the boat comes back bigger. One of my favorite tweets in VC is VC is 99% saying no and 1% begging, especially the case in the last bull market. And you saw rounds go from 60 days to 60 hours in terms of closing. And it created this pressure that a lot of VCs don't want to talk about, which is this pressure to be overly founder-friendly. I'm, of course, a two-time founder myself. I value founder-friendliness probably more than most VCs, but you have to say, I still have to do my diligence. How do you balance your reputation as an LP with your need to be diligent and to be a good fiduciary for your clients? I mean, I would argue that my reputation as an LP is in my diligence. So the fact that they know

Starting point is 00:30:55 I'm going to be a pain in the ass is kind of the reputation I want, to be honest. And I think they appreciate that. And just kind of as evidence of that, I've been asked to be a reference for multiple head managers because when I speak to another LP and I say, hey, I didn't love this. This is what they did. This is how they answer these questions. I try to take a friendly approach as possible, but they recognize that we're not pushovers. We have the benefit of having best-in-class terms almost everywhere we go. So that is our expectation, generally speaking, for most relationships. And we're additive LPs and we do believe that a relationship with us is going to add value to them as well.

Starting point is 00:31:37 And you're talking best in class in terms of MFN? That's going to be a little bit more difficult going forward, right? MFNs are going to be a little bit challenged and not allowed going forward. But I do think that there are certain things that institutional investors have grown accustomed to, even not from an MFN perspective, but maybe in terms of access and relationships and just kind of softer, more subtle type data points. And you can make the argument that that's really where kind of the nuance is, where the secret sauce is, like being able to decipher and differentiate one investment versus another. That's where ultimately the 30 years of

Starting point is 00:32:17 experience of doing this as a firm, that is where I think ultimately the value is and what our investors, our expectables. We have a lawyer coming on soon to unpack the new SEC guidelines. Have you had a chance to take a look at them and any thoughts on how, without giving legal advice, how that might change the industry at a high level? We're clear, I'm not a lawyer and not in a position to comment legally, but just reviewing the bullet points, it seems as though they backtracked on the big kind of negligence difference, which I think had a lot of people worried in terms of, you know, legal liability. So that was probably a positive walkback. The changes to kind of transparency and fees and, you know, kind of administrator standard, which, you know, I would argue everyone should be on an

Starting point is 00:33:05 administrator, but not every VC fund is. I think those are all positive. You know, like the expense piece specifically is something that I, for years, I've had an issue with and a lot of, you know, uncomfortable conversations that I've had with managers. So like the fact that the US now is kind of, you know, on the right page and the Europeans have been a little bit far ahead of this, I think it's a good thing for the industry. You mentioned expenses. One LP told me that LPs love to gossip and complain, for lack of a better word. But another funny thing that he told me is that a lot of LPs will complain about funds and continue to invest because of the performance. What are your views on that? Do you have to take a dogmatic view and say, hey,

Starting point is 00:33:49 you know, this guy is expensing his private jet, even though he's returning 5x, I'm not going to invest? How do you navigate that? And how do you kind of socialize this with your own clients? It's an interesting conversation. And I've definitely some debates I've had around this. And, you know, I think the kind of the best example is, you know, SAC, where they had in maybe one of the best track records that you've seen, but also a really onerous fee structure. And I don't think any of their investors complained about it, right? Because net net, they were better off. It's something that I don't really think about a whole lot in terms of right and wrong aspect to it. I think of it in terms of run rate, right?

Starting point is 00:34:32 So this is a manager's management fee, performance fee. Here's a run rate. So here's everything we're paying above that. And is it commensurate with our expectations, particularly with the asset class and the strategy, right? So like, for example, your multi-managers, your millennials, 0.72s, citadels, they're kind of in one bucket and they work a certain way. But if a long-street equity or a venture manager had a fee structure similar to them, I'd have

Starting point is 00:35:00 an issue with that, right? So I think this is where the experience comes in. As an investor, you should be mindful that some strategies are inherently more expensive to run. For example, activist strategies, like your Bill Ackman's of the world who are taking public views against companies and proxy battles. These are super expensive, like legal bills. So someone like that may have a massive legal bill that another firm wouldn't. So I think, yes, there's definitely a lot of shadiness, if you will, within expenses. And that's part of my job to managers may pass through that if they're annualizing at 20 versus 10, they may have a little bit more leeway for it. How much more stomachable are the quote-unquote fees when they're as carry? I had Samir Khaji

Starting point is 00:35:58 and Apoorva, and I just spoke to Michael at Sundana Capital, Michael Kim, and they state that half to two-thirds of their managers are doing kind of tiered carry structures over certain hurdles, like a 3X and a 5X. How do you look at that in the venture capital space? I do think terms are trending towards more investor-friendly, and they'll continue to do that, particularly in this fundraising environment. Unless you're one of a handful of firms, you're facing fee pressure. I think philosophically, the carry piece is more investor-friendly than the 2 and 20 traditional piece because you're not paying a fee and losing money, right? You've de-risked

Starting point is 00:36:40 that aspect to it such that you're only paying a carry after you've seen a profit. And that is a little bit more difficult in other markets. The way we think about it is, at the end of the day, it's a net cost, right? So if you can stomach the fees and they're not doing anything crazy and it's kind of well within expectation of reasonableness, we deal with it. Thank you for your transparency. And thank you for answering these hardball questions. I want to give you a chance to share what you'd like our listeners to know about yourself, about Optima. You're working on a lot of interesting projects. So anything you'd like our listeners to know about Optima? Yeah, we mentioned the healthcare strategy. That's something we're really bullish on and can continue to do a lot of work on. The other thing that I think is interesting

Starting point is 00:37:30 to me specifically as an investor is that I think a few years ago, we launched the STAR program where we kind of did some analysis and realized that if you think of investment managers, and particularly like the best of the best, the folks that have annualized at the highest numbers over the last 20 years, even those folks, their alpha tends to be at the top of the portfolio, meaning the top three to five names. So we ran an analysis where we backed out the performance of the top three to five names, and compared that performance with the actual performance we received as investors. And the numbers were quite compelling such that something like 75% of the time,

Starting point is 00:38:11 the track record that was the concentrated portfolio that was purely their best ideas outperformed the actual commercial product that they were in market selling. We took that analysis and built an algorithm around it. And we call it the STAR program. And it was really interesting where we took our history of allocating to managers and figured out who was good at what and built a portfolio around the best ideas of the best folks in each space. That is something we launched and really bullish on and look forward to continuing to expand that program. Is the implicit assumption there is that every manager only has a few good ideas,

Starting point is 00:38:48 but is that essentially the assumption in the STAR program? The assumption is that the folks that are in the best position in each individual strategy, just by human nature, they're going to make their highest conviction ideas at the top of their portfolio, right? Unlike venture where names grow against your will, you can size up and size down at will. If you have a position that's a 10% of your portfolio, you better believe in it. The answer really is kind of top three to five names are where the alpha is. If you look at statistics and a large data set, that's typically where it is. So that's what we did. We backed out the top three to five names of really impressive track record hedge funds and built a 40 to 50 stock portfolio directly on those names. And that's effectively what it is. And I'm really,

Starting point is 00:39:37 really bullish on it. Thank you very much. We got to take a look at the venture world and the larger asset management world through the lens of risk and through somebody that's really had really rich experience across different asset classes. So this is invaluable for myself and for the audience. Thank you for taking the time. Thank you, David. Thanks for having me. Thanks for listening to Limited Partner Podcast. If you like this conversation, please like, subscribe, and review on YouTube, Spotify, or Apple.

Starting point is 00:40:08 Thank you for your support.

Investing Billions - E11: Neil Datta, The Forbes Family Trust’s Approach to VC | Is there Alpha in Due Diligence? How to Signal Strength in Fundraising, and Should LPs be Fee Sensitive?

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