Investing Billions - E364: $90B Limited Partner: Why We're (Still) Bullish on Large VC Funds

Episode Date: May 7, 2026

What if venture capital isn’t an asset class—but an access game where only a few managers matter? In this episode, I sit down with Nolan Bean, CIO at FEG Investment Advisors, to discuss how institutional investors are adapting to a world where companies stay private longer and AI is reshaping every asset class. Nolan breaks down why access to top-tier managers matters more than allocation, how venture portfolios are evolving to include both early-stage and multi-stage exposure, and why DPI, liquidity, and portfolio construction are becoming more complex. We also explore portable alpha, diversification myths, and how allocators think about risk in a world where everything is increasingly correlated.

Ellen, you're the CIO of FIG investment advisors, which has $90 billion in AUA. Tell me about your approach to venture capital today. Ventures have been changing rapidly. So there are certain core principles that have remained the same. And then there's other aspects that have changed over the last handful of years. It just says the landscape just changed. There's more assets out there today. And then obviously AI has been the epicenter of all things venture.

So the core principles that really haven't changed are viewing it as, An access class, not an asset class. Meaning, if you're not in the best managers, it's really not worth the risk and it's not worth playing the game. And at its core, what has also stayed the same is we're trying to capture entrepreneurialism and innovation. And those are the central tenets in our guiding lights. Where that led us historically was primarily towards earlier stage managers,

early stage, maybe a little bit of seed, where you can capture a bigger piece of the ownership, and you get rewarded for bearing that risk with some outsized returns when it works. when it doesn't work, it's not great. But that was really the playbook that we use for the better part of the last 20 years. And that's primarily in technology. We've also been believers in life sciences, biotechnology, whatever you want to call it. So that was a component as well.

And that was really the playbook. What has changed that we think will continue and we want to at least have some shots on goal is companies are staying private longer. If you look at some of the massive winners from Days Gone By, Amazon, pick your favorite. gigantic publicly traded business. There was a lot of value that accrued in the hands of public shareholders. And today, companies are staying private longer and or growing more quickly and creating a ton of wealth as a private business. So what that's led us to do is take a step back and say, all right, some of these brand name VCs that we would somewhat pejoratively call warehouses where they had one of everything, they were multi-stage, they had 20 different funds, raising multiples of the

capital they had in a prior life, you may actually want some. exposure there to capture some of the growth. If you look at what's gone on with SpaceX, OpenAI, Anthropic, you name it. Stripe is another great example of that you at least want to have some exposure there and not just dismiss it offhand because the greedy venture capitalists are trying to raise $5 billion funds to generate more management fees. There's actually an argument for why you may want to play that game a bit to complement

some of that earlier stage where you're really shooting for that, you know, IPO or bus type of mandate where you can get $50,000 X on some of those companies. It's interesting because it's become, no offense, but almost trite or unoriginal to say companies have been staying private longer. And yet, when you talk to a lot of investors and limited partners, a lot of them aren't actually changing their strategy despite everybody agreeing that this is a factor in the market. Part of it is some of the silos that we've created is allocators, where if you just cover venture, it's like, well, I want to find the cool new thing. I want to scratch and claw to get access to this $300 million urge stage fund. it almost seems boring. Like, am I even doing my job if I just say, hey, let's invest in this $10 billion multi-stage VC fund because we want exposure to these companies. It almost seems too

easy. But there's no points for difficulty in investing. Some of it was just disbelief that some of these companies could grow so quickly, much quicker than we've seen in prior cycles. And I think some people are now changing their minds a bit and saying, all right, there is a little bit of a new world order with AI and just the growth rates. You can see that's been a more recent phenomenon versus the Stripe or the SpaceX example. LPs are essentially grappling with two conflicting ideas of what it means to be investors. One is when managers, all things being equal, when managers grow and grow AUM and turn into what's disparagingly called asset gathers versus investors, you want to cycle out of those managers.

That's been trying true for many decades. On the other hand, if the TAM of total addressable market of a specific category is growing astronomically and sometimes even larger than the size of the AUM, then on a net to net basis, it may still make sense to be investing into these managers that are growing. Our views, you don't want to do a 180 and just completely change course, but recognize that that is a potential, and you probably want some exposure.

I still think you want some of that early stage where you can capture that classic playbook, but recognizing that just because someone's become an asset gather in air quotes, there may be a rationale, so it's understanding who's doing it for the right reason, who has the right strategy, who can play that game, which is a little bit different. If you think about what a business needs to go from zero to 100 million of revenue, it's a really different game than going from 100 million of revenue to a billion.

So who are the companies and who are the VCs that have the skill set and the aptitude to do both, or just different players, different courses? Double click on the different skill sets that a VC needs to go from zero to 100 versus 100 million to Billy. Well, I'm doing this from the cheap seats. I was an intern at a venture firm for six months when I still had hair. So you may have some thoughts or disagree with some of what I say. Early stage is just cult of personality, sheer hard work, hopefully a good idea of like the original business plan may be wrong.

You just pivot, change quickly, fail fast, do whatever you can, scratch and claw. It's not building out organizational charts. So it's a little bit of the Wild West, grind it out, and just make it happen through sheer force and a good idea and a good product. Once you're at $100 billion, now there's organizational management. and who's a good operator and delegator, not just I'm the entrepreneur and I'm the head of sales, the head of marketing, the head of product, the head of everything. Now you're delegating,

you're building a team, you know, HR management, getting, building an organization is very different than building something on your own on nights and weekends in your garage. So some people are good at one, not the other. There's a lot of big personalities in venture and from entrepreneurs. Do people have the humility to admit, what are they good at, what are they not? And can they hire and delegate some of the things they're not good at that maybe they did on that first leg of the journey. The way that I look at it is at the early stage, the number one, number two things that a venture capitalist could do. One is be a good thought partner because there's so much evolving in the business, having the right people around you and giving you feedback on what you should and should

not be doing from a strategy standpoint is extremely valuable. As your company gets larger and larger, there becomes less degrees of freedom on the strategy on the platforms and all these decisions matter less and that are more on the margins than they do early stage. And then really getting those first true believers into the company. So recruiting the very top kind of employees number one through number 10. That's the highest leverage thing. As you grow as a company, you're able to recruit now people with maybe slightly lower risk tolerance. So the first 10 employees, it's built on personal relationships and built on really believing the business. And then as you grow, there's lower risk tolerance. So these employees need actually signal. What works at the series A, series B, a lot of times

is the brand that the employee needs to get comfortable around the founders, around joining the startup, and what that employee's spouse also needs to be comfortable around that. So I see seed, thought leadership, and personal network, series A and series B, brand and signal to the market, and of course with customers as well. And as you do that, and now you have different personality types, risk profiles, can you still marry that into a cohesive culture and organizational culture, where there's not culture clash of the early belief?

levers, butting heads continually with maybe the slightly more structured I needed, I needed signal that this is a real business, maybe a little bit more process-oriented folks, is not the easiest thing in the world to do. So how do you do that successfully, where you have a cohesive culture all rowing in the same direction? Everybody's worried about DPI in venture capital, getting capital back to their LPs and to their underlying investors. Do you worry about DPI and if so, how much? allocators just need to go into venture with a mentality that it may just take longer. DPI is going to take longer if certain companies, not all, are just going to be private longer.

So how do you balance your overall portfolio and the strategy mix? So again, for us, having that venture component, you can get some of this huge outsized returns. It's one of the few places where at a fun level, you will see some five and 10x funds net. You're also going to see some 1X net that stick around for 15 years, maybe even a little bit less. But I think all in, if you can get maybe a 3x net with your winners and losers, the good, the bad, the ugly, get 20s, maybe get into 30s IRA.

And then what we've done to balance it out to, one, shrink the range of outcomes and then two, get DPI a little bit earlier, complement venture with what I call small growth equity managers, where you're still capturing that growth and innovation. characteristics aren't wildly dissimilar of those businesses. You know, think revenue of $3 to $10 million, growing 50 to 100% a year, but running it closer to break-even revenue in the early days, not selling rocket fuel where you're just burning cash,

and the exit plan from the jump for the business is sale to a strategic. So you're never going to get these huge outcomes, but you get proof of concept earlier, you get DPI earlier, and I still think you can get done right, something similar as far as returns, on TdPI and RR, but you get DPI back quicker if your goal from the get-go is build this to be a big enough business, 100, 200 million revenue and just sell it to a strategic. That doesn't take as long

as building the next world-class business that's going to IPO it maybe a trillion dollars. You're just not going to see DPI for a long, long time. When I think about the DPI crisis, there are essentially two different components of it. One is literal, which is endowment, spend, funds, foundations, family offices. they're not getting their capital back. That obviously is very problematic. The Swenson model, which was created in the 1980s, modeled roughly a 24% return on capital on a yearly basis.

2024 was 9%, 2025 was also 9% according to the allocator training institute. So there is this cash flow issue where you need to have the cash flow come back to fund your unfunded liabilities and your commitments into funds. That's a real issue. That's nothing to sneeze on. The second issue, I would categorize it is whether people are trust their marks or not. So it's one thing to have a 5x TVPI with a low DPI, and you are certain that it's a 5x, that lends itself to being more patient versus if you're not sure. And one of the most

interesting studies that I've seen is from Verdes, which is the family office of the DuPont family at the CIO Jamie Biddle and the head of venture, Steve Kemp. And they actually found, I was surprised by this, but very high correlation between TVPI and DPI in the long run. So they did not see too much gamification on the long run. Now, of course, there's a lot of gamification when it comes before fundraisers and going out to markets. We all know about this. But all things being equal, the TVPI proved to be more or less accurate in the long term. Directionally agree. I think there's a couple of nuances that might be worthwhile digging into. So on the first point, yeah, there's just a literal cash flow of you got to pay some bills. You got to be able to rebalance. So if you're not

getting distributions, you lose degrees of freedom of managing a long-term pool of capital. It's harder to pace commitments. It's harder to do a lot of things. So reassessing in particular in venture, how much you should be deploying and what is a reasonable expectation for cash to come back to manage the total portfolio is important. So that's point one. Point two, the secondary market has evolved and matured where it can be a tool. When I started over 20 years ago, it was kind of a pox upon your house. If you sold, it was almost an admission of guilt that you did something wrong. It is a tool.

In venture, you still have to take some tough discounts, but it's an option that is helpful. it's a much more liquid market than it was 20 years ago. On the second point, which I think is super interesting of in the long run DPI and TVPI being correlated, I think that's an aggregate likely true. If you find there's not that many amazing businesses that just compound capital. So it's in many ways foolish to sell it just because or be sad that you're not getting cash back. Because if they do sell and you get DPI, now you've got to go find another world class business. and there ain't that many of them around.

So why not hold on to it in compound capital and let, it's kind of like the classic Charlie Munger line of sit on your new what, you know what investing. Just sit there and get rich. This is a great business. It's got a mode.

It's doing something different. It doesn't have a lot of competition. Just own it. And you'll likely generate higher returns on invested capital than going out and trying to find the next amazing business. The asterisk on that is that's the average, but there will be some exceptions where that is not the case. And the biggest question,

question mark around that, we've already seen some of this play out in the current environment is SaaS businesses that can't pivot to AI. So whether it's market fears re-rating the multiple or real competition stealing their customers, you could have a business with an amazing TVPI or a venture fund. And one or two of their big winners was a SaaS model that is now being disrupted and can't figure out how to pivot and integrate AI. There, I think that correlation breaks down and that's not going to be good for the VC. It's not going to be for the good for the LPs that are invested in those types of situations. Expert calls have always been one of the most powerful ways to build conviction. But today, investors are asked to cover more companies,

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Take advantage of AlphaSense AI-led expert calls now. The first to see wins. The rest follow. Learn more at Alpha-sense.com slash how I invest. You mentioned Charlie Munger. he also has this quote that when you graduate college, you should have a punch card of 20 investments, 20 great ideas throughout your entire career,

just to show you how few truly great investments are. This especially is compounded if you are a taxable investor. So if you're a taxable investor and you have a 3x, if you sell it, not only do you have to find another great investment, you're now paying sometimes 38% of your New York resident, and then you have to reinvest on a net basis, so you destroy your compounding in a way that institutional investors don't have to worry about.

that's that's very true we're we're fortunate we work primarily with non-profits and tax exempts that defy the two certainties in life death and taxes so we don't worry about that we can we punch our card with another great idea and it's not that easy so if you if you find a couple hold on and write it one other nuance to sprinkle in there on dvpi and dpi professor steve gopplin previous guest did a entire study on marks and whether they're believable and he found a very interesting distinction is that managers on their fourth fund and above, an emerged manager

has much more conservative marks than an emerging manager. And then tuition there is if you're on your second fund, it might be existential. You might be more aggressive, hoping to raise the third fund. But if you're in your fifth fund, then you want to make sure

that you're conservative so that you don't disappoint your LPs because the one reason LPs will withdraw from a fund is if they don't trust the manager or if the manager didn't do what they said they were going to do. So there is this, I guess,

gamification, whether conscious or subconscious that takes place between emerging managers and their marks. It makes sense. People respond to incentives. And if you're on fund two or three, you probably haven't sold a lot of things yet.

So you kind of have to lean on what is the TVPI and the unrealized gain. So there is an incentive, as you mentioned. And then once you've already on fund four or five, you can at least point to fund one and two, like the story's fully written, returns are fully baked. We're doing what we said we did. So I think as LPs,

I think it's helpful to dig a layer deeper in the re-underwriting to see on the unrealized portfolio companies, how much of the markup is from organic revenue growth and how much is a change in the multiple. If a GP buys a business for 10 times revenue and then there's market up to 20 times and say they've got a 2x on that deal, that's very different than if they bought it at 10 times or holding it at 10 times and they've just doubled revenue. So that is that is the gamification and it's just math. You can actually, you can look at the math. And that's assuming that company is not dramatically increased in revenue. In other words, there's no legitimate multiple there expansion. Exactly. So what was the revenue at purchase? What was the price paid and how much

has revenue gone up? Hopefully you're down. And then they changed the multiple. So if they didn't change the multiple in revenue, just doubled or tripled and you write it up, that's fair mark. If it's flat or up a little bit, but most of the markup is just, well, we think it's worth 20 now because we own it and we're really smart and we're going to do great things. That's harder to believe. So F.EG, as I mentioned, you have 70 billion assets under advisement and you manage 30 people on your investment team and you have both a public side and a private side, given that these two asset classes, I would argue, are almost converging or evolving at the very least. How do you go about managing your team and how do you go about adjusting to this new reality in the market? And depending on what the market's doing today,

we did cross 100 billion in assets under advisement, but that's a tweet away from going back down. So it has become more complex as you grow because if you are good people, you want to give them something they can own and lead. So you end up, by definition, creating smaller universes with which people are experts in a smaller niche. So the one, and this ties back to the beginning of the conversation

that we've been grappling with more is within equities, the delineation between our public equity team, our private venture team, and really our hedge fund team or what we call diversifying strategies. Because as companies stay private longer, again, if you're a venture person and it's like, well, that's like the easy button, just invest in this late stage fund.

I don't really want to do it. But maybe it's a good investment. If you're a public equity manager, it's like, all right, I'm worried about the Fang stocks, but I don't have to think about anthropic or open AI or SpaceX because our managers can't buy it. But now you're saying you have some crossover funds that do that. How do you get the knowledge share to have an intellectually honest view of what is that business worth that looks and feels and from a size of. and revenue standpoint is akin, is really a comp to a publicly traded business, but it's still in private hands and venture backed hands.

So how do you, one, encourage people to collaborate, to have an informed view, and then three, which bucket do you put it in? Is it in your venture bucket? Is it in your public equity bucket? If it's a long short equity hedge fund, is going your hedge fund bucket? Are we tripling up on it if all of them like it at the same time?

So it's forced more collaboration and have an informed view and a thought process of If we're locking up capital in an illiquid strategy on venture, we want to beat the public markets by a widespread for that risk. They don't want to work. So you'd have a great large venture back company that might look good on that metric of, we still think we can substantially trounce what's available in public markets and you would put it in that bucket. If it's like, I don't know if it's worth the illiquidity,

but I still think it's a better business when we want to own it and it can beat the S&P by two or three percent than maybe it's in the public bucket. So you have to start thinking through, what are we trying to achieve? Does it meet our return underwriting thresholds? And how do we force folks to collaborate? That historically, you know, if it was levered buyout of a manufacturing business in Indiana, it doesn't really have a big impact on the overall macro economy of what the Meg 7 is doing. And there was less to talk about. Now there's a lot of collaboration and things to talk about if you have a team,

one focused on public equity and one on private venture. especially now given that AI is disrupting everything. With previous technological disruptions, whether it's mobile or internet, it had a profound effect, mostly in the technology space. Obviously, the internet impacted everything, but not like AI. AI is disrupting every single part of the market, almost without exception. One of the biggest things that we think about and kind of a weird, I guess, dichotomy in our head of ultimately, I think you want to own AI, but you also need to think

about if there's a hiccup in AI, do I own something at all that's not being impacted that can make money? Step one is just measurement. So how much do you own of AI related assets and businesses? So you're never going to get a perfect. There's a handful of folks that have tried to create AI baskets if you're just looking at publicly traded stocks. So we went through the exercise of looking at how much do we own of companies that are at least deemed to be AI AI winners? And how does that compare to the market to ensure we're not wildly overweight, but also not wildly underweight. So I think that's step one is the measurement

and then trying to extend that into your venture portfolio and your private equity portfolio, but also extended into we and a lot of folks have a real asset bucket. Well, in that bucket, you probably own a lot of energy that is now being consumed and tied in some ways to AI. You own some real estate that probably has a lot of data centers that's now tied into AI. Within fixed income, now you're seeing a lot of debt issuance

tied to SaaS and AI companies. So it's everywhere. Understanding what you own is step one. and then the next cut, and I'll give a shout out to Kai Wu with Sparkland Capital, wrote a piece on this. You then need to delineate, are you owning AI infrastructure or AI adopters? Because the risk return profile may be different. If it's someone that's adopting AI for either productivity enhancements or revenue growth versus building the infrastructure. And then who are the AI laggards or losers that are just going to go out of business or have a rough go the next handful of years is the inverse of that.

So all of that is at play. anyone that tells you they haven't all figured out is lying to you. But if you're not thinking about it, you're behind the eight ball because it has such a massive implications on the global economy growth, markets, and ultimately performance. If you are in venturing, you are in a lot of these ask classes, it'd be silly and unwise not to try to, quote unquote, ride the AI wave. But if you have discretionary capital in real estate and infrastructure and you have the choice, maybe I go into traditional office space or I go into multifamily versus the, data warehousing and storage and energy for AI at the margins, I can make my portfolio

more diversified without giving up the alpha in the venture capital part of the portfolio. Exactly right. So if you're thinking about where do I get the most bank for my buck for AI, it's you want that upside optionality for capturing that growth and innovation. Again, not to say that you don't want to make some of those other plays and real assets or fixed, but the range of upside optionality is not as much. So in that spirit of diversification, if you're doing it, should likely have, if you're doing things in data centers or the like, you should command a higher return than you would otherwise for a similar real estate asset because you're giving up diversification in the current market environment is the way we're thinking about it, at least.

You better have a higher upside because we're just seeing AI creep in every asset class and markets in the U.S. and increasingly globally. One of the most seemingly dumb or simple questions that are actually very difficult to answer is, are you diversified? And I'll give you an example of why you mentioned my home state Indiana, so I'll just use that an example. So if you are invested in an Indiana-based widget company, Indiana-based real estate company, an Indiana-based oil energy producer, you might be pretty diversified. How is that? They might have almost no correlation to each other, despite them being geographically. They might even be in the same town in Indiana and still be very lowly diversified. But the opposite

is not necessarily true. You could be an energy producer in Texas. You could be in a data warehouse in Pennsylvania and you could be in an AI startup in San Francisco and you could be completely correlated or 80% correlation. So this question of are you diversify sounds incredibly simple and sounds like you should be able to plug that into your computer. But it's actually a very difficult question. A lot of people have this false sense of safety around diversation. A lot of people have this all sense of safety in their portfolios and they saw this in 2022 where even the most basic thing, stocks and bonds are correlated. So having a first principled approach and also a humble approach to figuring

out the diversification in your in your portfolio is a very underrated exercise. And it's very hard. It's very hard. So the things that are obvious, capital markets and investors are very good at fighting the last battle. So, you know, we have a lot of different systems where you can analyze your portfolio a million different ways by sectors, by geography, by styles, right? Large cap, small cap, growth value. So I can pull that up and a click at a button and tell you anything I want to know about that. you can't type in, am I diversified away from AI because it doesn't exist yet? But that's usually where the alpha or the magic is, is trying to figure out what hasn't been

classified, well understood by every marketplace and everyone has software where they can look at it and measure it. But I know it's important and make a qualitative assessment of, I need to be banking intentional decisions around that. And then it gets down to human judgment and who uses that information, right? But if you're not thinking about it, you're just going to be at the whims of randomness, which is not a great place to be. So we're just trying to spend a lot of time to, number one, not screw up. Don't do anything stupid.

And then number two, maybe we can do something slightly thoughtful at the margins. If we're saying we know this is critically important and we need to be very intentional and we know it's a risk factor. And again, risk is not necessarily a four-letter word. It could be a good thing. You need to bear risk a giant returns. But we need to be taking risk intentionally.

And if we don't think we're getting paid and it's highly correlated, we need to be reducing that risk that come out well and maybe not so well in returns over the next cycle. I think this is going to be one of the big decisions that in determining factors of who comes out looking better than others. You alluded to this earlier in the conversation, 90% of your clients are taxable versus non-taxical.

How do those portfolios differ? And how do you build a taxable portfolio versus a non-taxable? What are some key distinctions? And just to clarify, so 90% is non-taxable for us. We're living primarily in the non-taxable world. It just gives you more degrees of freedom is the punchline.

You don't have that tax burden and that additional hurdle to sell. and redeploy capital when you have tax exempt assets. So I call it investing nirvana. You just get to figure out how do I compound capital over the long run and not having to worry about what is the income tax rate? What's the difference between capital gains versus dividends? Is it different in different states?

It just adds a lot more complexity that's incredibly important. And some of the folks that focus in that space, I think, do it incredibly well and thoughtfully. But it's a different skill set that you need to then pour it on top of the investing skill set. which just gives you more degrees of freedom. You can change your mind a little bit more quickly. You don't have to worry about does this strategy generate a lot of good returns pre-tax, but post-tax, it looks kind of mediocre. So I think it's a lot of fun.

Taxable, it's a higher bar, and you may make some investing decisions occasionally where it's, this is a coin flip from an investing standpoint, but I can realize some losses when I know I'm going to have some big gains or realize some gains a year where I know I had some losses somewhere else. So you'll do some things that would look non-economic to a tax exam. but make a lot of sense, even if it kind of looks on the surface like you're trading Coke for Pepsi, but you just avoid paying Uncle Sam in those taxable asset pools. One of the hottest trends right now in Publix are these extensions,

these 130, 50, and these 150, 50 extensions. Why are they so popular and maybe you could describe what the exact strategy is? I'm a very mediocre golfer, but I use a golfing analogy. If your goal is, I want to beat the public markets. So that's the goal because you can buy an index funds. we're investing in public markets, how do I do better? The game historically had been played of you pick a handful of stocks that you think you're going to beat the market.

If you don't like them, you don't own them. It's kind of like playing golf and you go out to the course and you've got a driver, a seven iron, and a putter. If you're really good, you can still probably put up a decent score. But if you go out and you have every single club in your bag, you just have a lot more tools at your disposal to try to win and play the game better. And that's what, in my view, why the extension strategies makes some intuitive sense. because now if you're in the S&P 500 is an example,

there's 500 stocks. If you have a view on every single one of them, if you think it's going to be average, you own it a market weight. If you like it, you overweight it. If you don't like it, you underweight it. If it's a small weight in the index, now you can go short and express your view.

They think it's a really bad stock, that you just don't have that tool if you're just saying, I have two decisions, own it or not own it. So that position sizing, that ability to fine-tune gives you more tools in your toolkit. Or said another way,

it's using all the, all the tools that a hedge fund has, but staying fully invested in the market at lower fees and better liquidity. It's another Charlie Mungerism, which is inversion, which is it may be hard to find the stock that's undervalued, but you sure as hell it's easy to find bad companies as a consumer. I'm constantly within business and I'm like, this is going to be,

I should short this business. And it's just an easier thought exercise to go into like, what is a bad business sometimes than what is a undervalued business. And being able to monetize it. You just don't have that option if you can just own it or not own it. Now, the trick is you actually have to have a view of what is fundamental value of every single stock in the market to do that. And some asset managers and some approaches are better equipped to do that than others. So it's not a layup, but if you have that infrastructure where you can have an informed view on all of the stocks in the market, I don't know why you wouldn't want that ability to express it on each individual stock.

So you have all the tools of your disposal. And these 130, 30, 150, 50, 50, are they, you're not paying an interest rate on that because you're essentially long and short. There's no, there's no capital you're borrowing. You do have to borrow for that. So the 130 means if you invested $100, they're investing $130 long and then shorting $30. So you do have to go out and borrow for that 30% your shorting. So you do have the, what sounds a short rebate. So there is a little bit of friction there.

So you have to be able to use that in a way that overcomes that. It's pretty minimal in this day and age for most big liquid stocks. There's a pretty robust market. The nice benefit for investors at least is a lot of hedge funds have rolled these out. And hedge funds used to charge two and 20. And that 20% carry was just on an absolute return. Almost all these strategies, the management fees way lower, you know, maybe a half percent, sometimes lower, sometimes higher.

And then the carry is over the market. So if the S&P is up 20, you've got to be at more than 20 or you're not getting paid a dime. So the fees and the alignment with the LP is much better in these strategies while still using some of the tools that hedge funds have used in the past. Another even haughtier and more buzzier thing is portable alpha. First of all, how do you define portable alpha and are you investing into portable alpha strategies today? We are selectively. And to take a quick step back and then dive in, I think why I think extension strategies and portable offer gaining traction is the fundamental, fundamental law of active management is half the managers outperform, half underperform,

net of fees, most underperform. So long-only managers did a horrible job. You have an alternative in indexing. People are getting a little nervous that the indexes are getting highly concentrated in the Meg 7. So it's like, is there a different game I can play where I can still try to outperform the market when a lot of my traditional long-only managers weren't doing it? So a lot of people moved into extension strategies where you are using some leverage. It was kind of the gateway drug.

And then if you like those, then it's like, right, portable alpha is kind of the next step. And I love analogies. This isn't perfect, but I think it's directionally accurate, and then we'll get into the weeds. So I played baseball in college. And if you've seen the movie Moneyball, when Jeremy Giambi, who was this amazing first baseman, leaves for a bigger paycheck,

and they're all debating with the scouts and Brad Pitt, who's the Billy Bean, the GM of the A's. They're throwing all these names. He's like, no, these are terrible. These are terrible. He's like, I don't think you understand what we're trying to do. It's like, we're not trying to find the next first baseman. It's like, we're trying to recreate them in the aggregate.

And I think that's what Portable Alpha does. It's like, all right, we're not just going to go out and try to find the next, you know, whoever, amazing stock picker that's going to own 20 stocks long and beat the market. But if we're trying to beat the market, can we recreate that outcome in aggregate? Which is what Portable Alpha does. So it's, it's there's some moving pieces, but again, if you say you want exposure to U.S. large cap stocks, you had $100 by $100 of S&P futures. And you can do that pretty capitally efficient. You only have to put up about $5 of margin. So now you have $95.

of excess capital to do whatever you want with. If you keep those $95 in cash, the combination of those futures contracts in cash, you'll get the exact same return as if you bought an S&P 500 index. If you want to do better, invest those $95 in something that can beat cash. Tends to be a hedge fund strategy.

And if you can find a hedge fund that beats cash by 3%, you'll outperform by a little less than 3% once you kind of figure in the friction of margin and borrowing costs and the like. And it's a heck of a lot easier to find a hedge fund strategy that can beat cash than it is to find a long-only stock picker that can beat the S&P 500. So it's just counting cards, putting the odds in your favor of how do I do better than the

market by recreating it in the aggregate with a better mousetrap. There are a lot of tradeoffs that I'm sure we'll get into. It's not quite that simple, but that's the appeal. It's a great analogy. So if the SMP futures, if the SMP is down 10%, now you essentially have a margin call and you could take from the hedge fund capital and put it into the S&P. futures. That's right. So the risk, there's some assembly required and people have blown these up somewhat spectacular in the past. So it's not a total free lunch. You're using leverage. So you're

using leverage. So if you have $100, you're buying $100 of, you know, you're investing $200, 100 in the futures, and 100 in a hedge fund and that hedge fund's leverage. So now you have to be able to risk manage the use of leverage and the margin call that you mentioned, you need a hedge fund strategy that is liquid enough that they can actually meet that margin call. So it doesn't work for every asset class or strategy. You need some of that is very good at risk management and liquidity management. And I think, you know, for us at least, do it in small size. Don't go whole hog. So, you know, you can own some active managers. You can own some index funds, own some extension, and some portable alpha. Because you never know when these are going to hit an air pocket or things don't go quite right.

And you can take any good idea too far. If you pile on too much leverage into your portfolio through extensions and portable alpha and then levered buyouts on the private equity side and then real estate that's levered. Like you just have a lot of leverage in your portfolio. If you trade spike two or 300 basis points here in a world are heard across the board. And this competes with your public equities portfolio. Essentially, it's a replacement for some of your long exposure. Exactly right.

Yeah. Replacement for a traditional active manager. In our view, you should require a higher excess return potential, at least in theory, because of the degrees of complexity, the introduction of leverage, and it's not like it's daily liquid like a mutual fund. So for all those factors, you should mentally pour on, I should expect some sort of high return to be compensated for bearing these additional risks,

which is another reason why I don't think it should be all of your public equity portfolio, but can be part of kind of a balanced diet within a public equity exposure. Going full circle, we talked about AI and its disruption within the entirety of the capital markets, but also AI is a tool. How are you using AI across your 30-person investment team in order to gain alpha for your clients? It's super exciting. I think we're just scratching the surface. So far, I would say a lot of productivity enhancements. We hired a chief technology officer a couple of months ago and just little things that you can do so much better, faster, quicker to free up mind time, mind share to focus on driving performance. So if there's an example, if there's a venture

manager, private equity, it doesn't matter. They're coming back to market with their next fund. Dump last fund stocks and the new fund stocks into pick your favorite AI tool and say, find me what changed. You don't have to read 180 pages document from Kirkland and Ellis where they try to bury all the things they don't want you to find on page 165. It'll just say, here's the three things that change, whether it's key man clause, you know, carry waterfall, whatever, that saves a ton of time. CRM tools that are just much more user-friendly. Some of the user-face interactions we use to summarize data to look at portfolios.

I write quarterly commentary. ChatGPT is your best friend. We're writing commentary of something that maybe took 10 hours, maybe takes an hour now, because you just have your best friend right there could bounce ideas off of and help coalesce your thoughts. So that productivity enhancement is how we're using it now. I know we're just scratching the surface. We're trying to hire younger folks than me.

I don't think I'm that old, but at 46 and I see what some of the 26-year-olds do. I'm like, man, you are so much better at this than I am. So giving them free reign to run and play and figure out with the right security controls around it to figure out how do we really take it to the next level. And I'm super excited that what the productivity of one employee five years from now will be the equivalent of three, four, five people when I started 2004. What are you using the incremental time for outside of improving your golf game? That hasn't worked yet, but I'm going to keep trying.

Thinking about the portfolio now, what's our exposure to AI? Do we have too much, too little? Is it in the right pocket? So anything that can drive performance, that is what people that do portfolio management for living should be doing, not reading 180-page legal documents or agonizing over how to do wordsmith a commentary. So things that will be truly value add to drive performance and then see if I can get my handicap into single digits.

Okay. One could walk and chew gum at the same time. Well, Nolan, this has been absolute masterclass second time. Thanks so much for jumping on the podcast and looking forward to, I'm due for a trip back to the Midwest, so looking forward to sitting down soon. Thanks for having me back and look forward to seeing in person.