Investing Billions - E422: Founding CIO of Berkeley Endowment on Track Records, Contrarian Investing & First-Time Funds

Episode Date: August 28, 2026

Why do so many GPs misunderstand what institutional LPs actually care about? David sits down with John-Austin Saviano, an Backing & Building Challenger Investment Firms and Former Endowment CIO, argues that one of the biggest mistakes GPs make is overemphasizing track record. Great LPs care less about the headline returns than how those returns were generated. They want to understand the investment process, whether it is repeatable, and whether the people and market conditions that produced past performance still exist today.

John Austin, you've spent over 25 years as an investor, including the founding CIO at the Berkeley Endowment. If you could point to one mistake that most GPs make over and over and over, what is that? The mistake that most GPs make is they have in their mind what they think is most important about their work, and they don't fully understand what an LP really cares about. And so they'll overemphasize things like track record or the fanciness of their bio. But what they really miss is what LPs really want to hear, which is about them and their process. Why isn't track record the most important thing for GP? Track records are part of the story for sure, but track records are inherently backward looking.

And track records can be an artifact of what has happened. But as the old investment warning goes, past performance is not predictive necessarily a future result. that is 100% true. Track records will tell you who was there, what they did, how those things resulted. But that is an artifact of the time in which they were done. A good track record, to be really robust, you need to have a lot of transactions or a lot of data points. You need to have a consistent set of decision makers. You have to have a consistent set of market conditions.

And that sort of thing isn't actually. what you see in most track records. Most track records are folks over the course of different market conditions, over a course of different decision makers involved. And so a firm's track record is not as robust. What we want to see from track record is evidence of an investment process at work that is compelling, that is repeatable, that is understandable. That's what we want to see from a track record. If we see a track record, that's a fantastic track record, but it's over too long, a time period in an environment that's very different than today, it's a lot less reliable. So a good LP is going to look for what drove the track record.

Said another way, if the track record was the exact environment, the same team previously that was starting to invest today, that track record would be highly predictive. I sometimes think about it as you think of recording artists, like their best albums are usually their first couple albums. There's something about that alchemy of that time period where there's a certain group of people that come together at a certain moment that generate a certain set of results. They have a certain set of life experiences that they bring to that moment of running their firm and attacking the market in that moment. And so maybe you were terrific in the post-GFC period and maybe that opportunity set made your investors tons and tons of money. your work in that time period was terrific, that isn't necessarily the environment we're in today.

And so if you were terrific in that period, are you necessarily terrific today? You could have firms have terrific track records from that time period who may be floundering today. Just to play devil's advocate, aren't there investors like Warren Buffett, like Ken Griffin, like Renaissance technology that have these sustainable competitive advantages for many decades? isn't that also pretty common? There are firms that have sustainable advantages. We feel like they're more common because they're most, they're famous. We all know who Warren Buffett is because there aren't 25 Warren Buffett's.

There's one. And so there are firms that can create sustainable ed. Ken Griffin's a good example of a firm like Citadel is very different than what you see from a private equity fund. A private equity fund might make a few investments a year. Citadel might make hundreds of investments in an hour. And so the process that you're buying at a place like Citadel is just fundamentally very different than we're getting at a private equity or venture fund. And so if you're evaluating a track record, you're looking for the durability of a process.

Frankly, you're getting a lot more data from a hedge fund than you are from a private equity fund. And durability is not just a number of years, just a number of investments. Absolutely. You want to be able to see the decision-making process again and again and again. and that's when you feel like you've got a robustness of a track record. Just to use a baseball analogy, if you had a batter that was batting once a day, 100 games a year for 10 years, that would be 1,000 at-bats. If you have a batter that's batting 1,000 at-bats per day like a Citadel,

even over a year, that might in some ways be a stronger tracker. And you said track record is not the most important. Processes are more important. Double-click on exactly what the record. that means. When I put my CIO hat on and I'm thinking about what do I want to see from a fund manager, how do I evaluate that fund manager? The thing that I want to know is what they see, how they see the world through their own eyes. I want to see how they find investments, how they evaluate them, how they structure them when they make their investments. What do they

do with those investments after they've owned them? And then ultimately, how do they sell them? There's a kind of natural process that you want to be able to see at work so you can identify what is this firm particularly good at? Some firms are terrific at sourcing. Some firms are terrific at a post-investment value at. They're very different skill sets. And when you're trying to understand a firm, you need to see what are the promoted pieces of their process. And that's what a good LP is trying to evaluate. Is it more common that a firm is,

really excellent in one of those areas, or is it kind of birds of a feather flock together where they might be really good at one thing and that starts, they start to improve the entire process across our value chain? I think one, I will say to fund managers, you have to be demonstrably graded at least one, if not two of those things and be very good at the rest of them. And if that's the case, you're going to do great. And so as an LP, you want to figure out what is it, where's the value at. So maybe you have a firm that is terrific at buying assets. They can just buy things because of relationships or insight. They can buy things better than the average firm. And so they're creating a lot of value on the buy. There are other firms that they pay market prices,

but they're extraordinary with those assets after they own them. That's the sort of difference we're looking for as an LP to understand how the firm's created. its value. To your early question about track record, if I go back then and I look at the track record, I'm going to see, hey, that firm was really good at buying those assets at a better-than-market price, and I can see that in the track record. Or it seemed like they paid full price for that asset, but they did something really extraordinary with it after they owned it. And as an LP, then, I understand what are the ways in which that firm is actually going to earn a better return, and that's important for me to understand to put them in my portfolio, but also to build

diversification of different kinds of managers in my portfolio. As I mentioned in the top of the podcast, you've been an investor for 25 years, including at foundations like the Moore Foundation, as well as being the founding CIO at Berkeley. How has the private markets evolved over that 25 years? It's really quite remarkable. The evolution of the private markets, I mean, The headline numbers are plainly known, just the explosion of asset size. And when I started as an LP in the early aughts, we had access to terrific firms because we had tons of liquidity. And with Gordon Moore as your founder, who's just an icon in the business and tech community, we had tremendous access to virtually any firm you wanted. That was a very different set of firms than there are.

today. At the scale we are today, it's much harder to find terrific firms. And the assets in which those firms are competing over are just much more competitively bid. And so things that were great money makers 25, 30 years ago very reasonably are different today. That's the biggest challenge and the biggest difference as an LP. There's just so many more firms in general. There's so many more firms chasing what is almost by definition a more fixed pool of assets. There's no $100 million services company in this country that doesn't get called on by a private equity firm multiple times a month. 30 years ago, that was very different. Professor Steve Gabblin, previous guest, University of Chicago, a researcher, talked about how private equity firms used to go and pitch him

in the 90s. And he would always ask this question of, like, what's your differentiation? And some of them would look at him and say, we don't do that. That's kind of weird. And now today you just have these incredibly complex operational value add and all these processes. And that's just a matter of the hyper competitiveness. It's kind of like this Darwinian evolution of managers. A lot of managers don't realize also from the LP side, a lot of those LPs have chosen their managers. Indeed, LPs have chosen their managers, but any good LP, it should be a dynamic process. They should, just because you backed a manager in their prior fund,

there shouldn't be automatic re-ups. You should know why you're backing them. You should find the evidence that they've delivered on those reasons and that those reasons continue to be predictive of future return. That's what you want to see. The question about differentiation is an interesting one. back when there were a lot fewer firms, you could go and have proprietary deal flow. You could go and find assets that weren't banked. You could deploy operational resources to add a lot of value

to what were previously unsophisticated businesses. All of those things are kind of table stakes now. And as table stakes, they squeeze out a lot of the excess returns that you would expect for most private investment strategies. Is there common characteristics? among funds and the ways that they generate alpha today across the private markets? I wouldn't say there's one consistent way. I would say our job, if you put as I think as an LP, our job is to identify what are the ways in which they generate returns. And if I go and I see a firm that's, as I mentioned earlier, terrific at buying assets, I want to see that and I want to understand the conditions in which they're an advantaged buyer. And I want to be able to be able to,

to predict or have an intuition as to whether or not those conditions will continue. If it turns out that they've driven a lot of the returns from a post-investment value ad, I want to know what are the tools they've had. Are those going to be persistent? That's what I'm trying to figure out. I'm still thinking about this comment that you meant that track record is not the thing that's predictive. It's really decision-making and processes. Maybe you could double-click a little bit more on that. What are you looking from somebody that you would consider to be a great manager? From a great manager, I want to be able to see their investment process at work. I want them to be able to tell me how they look at the world.

And then I want to see how that translates into the way in which they do their work. And then I'm going to see that in the track record. I'm going to be able to, they're going to say, we look for these kinds of assets because we believe in this kind of efficiency or this kind of opportunity. Then we go to market. We find on those opportunities. We execute on them. that we put them together in a portfolio, and then over time we realized that those ideas.

That's true whether we're talking about apartment buildings, or you're talking about early stage venture. There should be a method to it that's observable and that the manager can effectively communicate. Then we're going to see that in the track record. I'm going to go back and see your winners and losers. I'm going to go and see those things that are mid-stage that are maybe not yet complete.

I'm going to go back and see operationally, are those things in line with what you said your process was? That's as an LP, that's what you're, what I need to see. Is two managers, one has processes and one doesn't. Why is the one that the process better? Well, I would say as a CIO, the one thing you can't do is do things you don't understand. You're going to get things right.

You're going to get things wrong. But the really truly unforgivable sin is doing things you don't understand. And so if there isn't a process, if you're investing behind someone, you're really not sure or you don't have an intuition as to how they do what they do, that's not really investing anymore. So it's really critical that you understand what they do, and it's really critical for the fund manager to be able to explain it. And what about on the manager level? What benefits are there into having very specific processes? For the manager itself, it is how they get durability, heatability of their as a firm as they go out and they invest. If every time they're kind of

jerking around to the way in which they approach the market, they're frankly not likely to be very good at it. One of the other real benefits is when you're building an organization, not just an individual who can invest, but a team. That team needs to have clarity. What's our strike zone? What are we going for in those investments? What are the things that are defined an asset,

a sort of our kind of asset? That's every good team member should know that from the most junior to the most senior. And then what do we do with those assets? How do we evaluate them? How do they come together as a portfolio? Every person on the team should be able to know that. I'm wondering whether it helps solve two main issues in a firm. One is chasing.

There's always this pull, this natural evolutionary pull, a fomo, then acid is being bit up. Stanley Drunk and Miller famously said that nothing is as cheap as after it's gone up 40%. Even Stanley Drunk and Miller suffers from that. So I wonder if it keeps you being disciplined. And also, it helps improve the firm. If the firm has very specific processes, it's almost having a thesis going into investment.

It could see where that firm is wrong and continue to evolve that strategy from fund to fund. A firm needs to know where its sweet spot is, and it's almost as important it's to know where it's not. So you're not pulled along to chase FOMO or to do things that are outside your core competency. Now, firms can evolve their core,

competencies, the markets change, the team's abilities can change. But what you want to be able to see in a firm is do they know what they wake up every morning to go and do? And that way, as an LP, you have a much better sense of how they're going to pull your capital and how they're to respond to the changing market. How much room is there for self-reflection between fund vintages or even within fun vintages? Everyone I talked to on the show is chasing the same thing, an edge. And more and more, the edge comes down to your information, not just having it, but being able to trust it when the stakes are highest. AI is doing more of the information gathering for you every day, and most tools are very good at sounding right. The summary reads clean, but can you trace it back to the filing,

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for yourself, start your free trial at alpha-sense.com slash how I invest. That's alpha-sense.com, how I invest. A good investment firm is always learning. That's true on the LP side too, that you're in that constant learning. The fun vintages, the learnings happen, I would say, as they consider the changes in the market. So if you're in an environment, like right now in the market, credit spreads are super tight.

and investing in an environment where base rates are relatively high to where they've been for a long time, and spreads are really tight. If you're a firm that's relying on leverage, you're going to invest very differently in this environment than you would in an environment where several years ago when money was almost free. And the spreads almost didn't matter because the base rates were so low.

You're going to invest very differently there. So across a fund vintage, you're going to be responsive, hopefully, to the changing market conditions. That's a, we'll look a lot like learning over the course of a fund vintage. The reason I ask is a lot of LPs, especially institutional LPs, have said when it's a fund one and sometimes even fund two, you're almost backing the manager more than the specific strategy. Now, obviously, they expect the manager to do what he or she says they're going to do. but you're really understanding going eyes wide open, that strategy may evolve.

Yeah, you should expect every good firm to evolve, but younger firms for sure, you're backing the person and their ideas or the team in their ideas. Because there isn't an obvious, tremendous track record necessarily that you can rely on, really you shouldn't be relying on just the track record in any circumstance.

What you're asking, is this person in the right place in their life with the right skill set that's ready to lead a firm and to execute on this strategy. And then what are their ideas? Unpacking the elements of their strategy and how does it apply to the current market. And you put those things together and you can develop real conviction and belief, that this is the right person at the right time in their career executing a strategy that's right for right now. As I mentioned, you've spent 25 years evaluating managers.

Certainly there's some patterns. What are those patterns of those exceptional managers? Exceptional managers know who they are. And they know this is our kind of asset. This is our kind of process. This is the kind of situation that we invest in. They're very grounded. They are learners.

They do evolve and change. But they start from a sense of purpose and groundedness. The other things I like to see in fund managers is that they really view themselves as stewards, that they take very seriously their role as a fiduciary of someone else's money. And that seriousness has impacts the way in which the firm behaves, the way they respect their LPs,

the way the standards that they hold their employees to, their team to, that makes a huge difference. So those are things you're looking for guys that have really strong sense of who they are, what their ideas are, and they do it with a seriousness that reflects their role as fiduciaries. How does that play out within a fund?

You want to see deals done because or investments made because they fit really well with the fund manager's ideas, not because they need to deploy capital. The bad version of this is when you have firms that are doing okay deals that aren't really high conviction, but they're in the sort of business of asset management. They're not really investors at that point. they think about deployment, they think about pacing, they think about where they are in their investment period, much more than they think about this is an amazing opportunity. I'm really excited to have this in the fund. They'll worry about have I put enough money to work this month, this year versus is this the right time?

Is this the right kind of investment we should invest in it? When I think about that way of thinking, it also makes me think about the underlying LPs and the fund, what makes a good LPs? partner for the serious manager. Good LP is one who does their homework that shows up ready to understand what the manager does, to see the world through their eyes, and comes with good questions, and it is ready to do the work. I spend a lot of time now with GPs who are trying to develop relationships with LPs. And the best LPs are kind of a pain. They ask a lot of questions.

they want a lot of access, a lot of data, they really want to get into it. But that is really what defines them as good LPs and puts them in a position to be a really strong partner if the results hit a weak spot. If the firm gets off track for some reason, those LPs that have done the work are in a position to stick with it

because they really understand what's going on. It can separate a bad outcome from a bad decision. That's a lot of what good LPs can do. This concept of being rooted in your thesis is one of the most underrated aspects of I think of all of investing. Example I like to give is with Bitcoin. If somebody came to you and said, hey, you should buy Bitcoin, it's $10 a Bitcoin. It's going to be the next big thing. He just went out and you're like, sure, my friend's smart.

Let me buy Bitcoin. Then over two years, it went up to $150. You're very happy. You're like, holy crap, I'm 15x up. Then it goes down 20%. So you're at like at 11x. What are you going to do? Very likely you're going to sell.

Why? because you're going to lock in your 11x because you never had rudeness. And of course, you zoom out. Now it's at 69,000. So having that rudeness is just such an underrated aspect. And it does require much more work up front, but it keeps you from, especially when asset classes are very volatile, it keeps you from doing the wrong thing at the exact wrong time.

It's a very interesting point that the critical thing we do as investors is try and separate a good decision from a bad decision versus a good outcome from a bad outcome. Our job as LPs or jobs investors is to just make great decisions. And with enough fact, enough grounding, that those good decisions over time will pile up and overcome the bad outcomes that can still come from what is a good decision. What are the advantages of having this really smart LP as investor when it comes on the GP side? The advantage is really accrue in the rough spots. When a fund goes through a period where its assets underperforming or the markets are particularly rough,

having investors who really understand who you are, what you do, how the team works, mean that the investors are going to be a lot more calm because they can know if it's time to panic or not, not just because the results are bad or there's a bad mark or there's a bad quarter, they know, they can contextualize what's happening. And that makes them a much stronger LP. This is only further accelerated by if it's not your own capital. You were at the Moore Foundation. You were at CIO at the Berkeley Foundation.

It wasn't just your own capital. You couldn't just make one person's decisions. You had an IC that you had to communicate to. And again, going back to the rudeness, if you didn't know why this fund is in your portfolio and that fund might be down 30%. It's very difficult to defend that position. Indeed.

And as a good LP, you should have a set of beliefs and characteristics that you really look for in fund managers. And some of it is related to the particular investment strategy, but a lot of it is related to what kind of firm do we want to partner with? And most good LPs, and certainly we did this under my watch at Berkeley, we had a set of criteria. We had things that we looked for in firms that would be indicative of being good partners to us. And when we found those things, they were really easy for us to be good partners

back to them. So just like a fund manager should have a strike zone, so too should an LP. You should know what you're looking for and why you're looking for it. Maybe you could double click on this criteria that you used to determine whether it's a great fund manager. So there are a number of things in terms of being a good firm, but things that we would look for in partnering with fund managers. First thing we'd look for is alignment. Do we feel like the investment team is motivated to generate results that are aligned with our capital? And so it's a simple measure you might look at the GP commitment. But there are a lot of ways to get to alignment. What you really do want to see is just is it there? It starts with alignment. The second is, do you understand what

they do and how effective a communicator are they to you about what they do? Because your ability to make a good decision at the beginning or your ability to stick with the firm when it delivers a period of underperformance, that is enormously driven on how well you understand what they do. The next category I touch on is just one of the other characteristics that's really important for a fund manager is its fiduciary mindset. As we represented capital firm Berkeley or from the Moore Foundation, that's not our money. We're there as stewards of that capital for future generations. We want to see fund managers that have that same level of seriousness. So those are some of the things we'd look for. Maybe you can give me an example of a fund manager that you continue to back despite them

having a bad fund vintage. I think one particular strategy, I won't name names, but a firm that had a particular sector focus. And they had a terrific set of experience they brought as a new firm. We backed him as a new firm. And in the years of that first fund vintage, the sector went through a really tough patch.

And what allowed us to stay with that firm was understanding and being able to unpack how much of the results that they were generating were because of the environment or because of their efforts. And we

as a LP, had given them capital to go out and invest in this strategy, in this way, in this particular area, and they generated results that weren't great during that time period on an objective standard. But on a relative standard, understanding what was going on in the context of that particular sector, they did just great. And what we've seen subsequently is as that firm came through as the sector came through its rough spot, that firm has delivered outstanding results for the last decade. So that's one, again, knowing your GPs allows you to stick with them when things get tough and separate the good or bad outcome from the good or bad decision. Previous guest Cliff Asniss, who founder and CIO of, I think now roughly $150 billion,

he talked about this where some years, people are praising him for his performance. because they're benchmarking him against S&P 500, and he's like, you should be criticizing me. In some years, people are criticizing him for his performance because he might even be down, but the market's down way more, and they should be praising him. So there's always this de facto benchmarking that goes on.

And you don't want to be tricked by the good outcome. You could have a great outcome that was a result of a really bad process. And if you're tricked, and this is to your prior question about track records, you've got to have an outstanding track record. But if you look at how that track record was generated and it's not repeatable, well, that was just lock. And that's maybe one of the most dangerous things.

Someone wrote, I'd have to look up a quote, but it was something along the lines of like, there's nothing more dangerous to an LP than a GP with a great track record because it's really easy to get lulled into a sense of security by a great track record. This almost goes to the very foundation of investment. and Howard Markowitz won the Nobel Prize for proving that you could have this diversified portfolio. And then you step back and you think about, what does that mean? That means that some years,

some of your assets are going to be town, some years they're going to be up. And if you do the worst possible thing, which is selling when things are down and buying when things are up, you're not only going to do worse than the overall portfolio, you're going to actually have negative alpha.

So you're going to actually have negative returns. And easier sudden than done, you have to actually know which one of your managers are good and which ones are just in a bad part of the market. Indeed. Any manager that's going to outperform is going to have to be doing things differently than everyone else, which means that at times they're going to look

and their results are going to be very different from everyone else. And different is another way of saying bad, that they're going through periods of underperformance where the market is going a different way and they're seeing things differently. You want to know why they are underperforming it. And when you do know that and you can see through, there's good decision making going on here.

It's just not their time. It allows you to stay with them. Such an interesting point they brought up, which is different, sometimes is bad. I also wonder whether different is sometimes weird. In other words, when you think about a manager's right to win, if everybody has the same right to win and it becomes kind of competed away,

do you find out some of these right to wins, at least for a time period, seem weird or seem different? We have to be doing something different to generate differentiated results. That's axiomatic. And so things that feel strange or feel different now

can be very commonplace over time. We saw that in the endowment, the evolution of the endowment model, investing in venture capital, private equity, real assets, those sorts of things. When David Swenson wrote his book in the late 90s into 2000,

and were relatively new to institutional investors. Those things, investing in hedge funds, seemed risky. Now those things are fundamental parts of investor portfolios. So things that were really unusual at the time or felt really aggressive now are commonplace. You've written that many people copied David Swenson's style, but basically mystist principles. What did you mean by that?

The essential thing of lesson that I took from reading Swenson and I think was what drove so much of the results was a willingness to do things that were different and to be an investor who used their long-term nature of their asset base to go and do things that are illiquid. Which at the time was very different. Which was very different at the time. And if you looked at how most endowments were invested

into the early 90s and into the early odds, it's just radically different than it is today. One of the mislearnings from Swenson and the record that Yale put up was that this was a formula, that if you went and you did a lot of things that were private, illiquid, that you're going to generate higher returns. But the critical difference, I think the critical understanding needs to be that the great returns don't come from just doing things that are illiquid. The great returns coming from doing things that are unusual, that a lot of other people aren't doing. I used to say if your capital isn't scarce, why would it be valuable? And so you look at parts of the market that are flooded with capital, it's pretty unlikely you're going to generate a greater

return. Conversely, if you're looking at places in the market where there's not a lot of interest or there's not a lot of expertise, you have a much better chance of being the smart money in that room. I had the CIO of Calster Scott Chanon. He talked about they have at this point over $350 billion. And when they go into a new asset class, they need to be large enough because they're going to essentially move that asset class. And I started reflecting and thinking about that, even though that's true and Calcesters has a unique problem set,

everybody has this problem set. Whereas whether it's their capital or not, if there's a bunch of capital crowding into investment, for example, I would say large buyouts. Now there's trillions of dollars from retail. they're coming on board. If there's so much capital going on, whether you have $350 billion like Calsters

or you have $350 as a retail investor, you need to be wary of that. Yeah, the amount of capital chasing opportunity will inexorably change the prospective returns. And so being willing to do things that feel that are different, finding fund managers that have the guts to go into places where other people aren't, that will make a big difference.

years ago, as an example, as a CIO, was looking at a fund manager that was specific to a country. It was a country-specific investment. And it was a country that was flat on its back. And it wasn't, we'd have a benchmark allocation to this. It wasn't anything. But there was an enormous opportunity there because of the character and the quality of the stock pickers that we were able to find and the quality of the underlying assets. And I remember when you're catching up with other CIOs or other LPs, And you have, compare notes, what are you working on?

And I said, well, I'm headed down to, this is Brazil, headed down to Brazil. I'm like, why are you headed down to Brazil? Well, that's why we're going down, because no one thinks there's a reason to go down there. But it turned out to be one of our best fund managers for 10 years. What's an example of something about today that you think is highly underrated? It's always tricky to make a prediction about right now.

But one of the things that I think is that I'm most interested in how it will play out over the next 10 years are the credit markets. Credit spreads are an all-time type. We've seen enormous issuance. We've seen enormous issuance around new technologies. Those sorts of things tend to lead to excesses, which tend to lead to accidents and low-ups. And so we haven't seen a true credit cycle for a good long while now,

and we can't hold back the ocean forever. So I think what's really particularly interesting is who has the skill set to invest in a highly disrupted credit market if one emerges over the next quarters or years? I think this concept of weird leading to structural alpha is a fascinating thing, and people always update their priors to think that they would have always done this really weird high alpha trade. But sometimes it even goes from non-consensus to consensus to then non-consensus and thinking

about situational awareness. In the beginning, it was a very smart money trade. Then a bunch of people came in and it was $45 billion. Then there's obviously this crash. And my personal prediction, I'm long on the manager. I think it's going to, again, become probably a smart trade. Even within one manager, this kind of counterbalancing fact between something that's weird or low status and something that's high alpha, these things tend to correlate in some ways. Yeah.

The trick is you have to be able to unpack it. So were the great results a result of great process and great ideas, or was it something else? And a charismatic founder who's clearly brilliant, who generates great results, we still need to do our homework. We still need to understand how those results are generated. And so I'm not privy, I don't know the details of how this portfolio was set up. But it seems, and again, the end end results are still really astronomically high. in terms of total return, but the way in which he's gotten there is something that would give a lot of LPs pause. And do you really understand have the results been generated in a way that you think is likely to repeat?

We're talking before we're recording. Ashtby Monk has this concept of foam you, fear of messing up. You think about situational awareness. It seems like it might be an interesting investment today, but a lot of LPs just can't take that career risk. Yeah, you could call it career risk, but LPs can only do things. that they understand. And if you do something you don't understand, that's where you really get in trouble. And so if you're able to look at that hot thing and see that there actually really is something spectacular there, then an LP can say yes. But a serious LP needs to always remember their fiduciary duty to do things that they understand that they have high conviction in. And that

That doesn't mean they can blindly sign the subdocs on something that has had a great return and just hope that it'll continue to do so. Goes back to understanding the track record. Got understood, well, not just the track record. You have to understand the drivers of the track record. What were the things that led us to that track record? Then you can have conviction of the track records. One of your most contrarian beliefs is that first-time funds aren't necessarily riskier than more established funds. Why?

One of the biggest differences with newer firms, I like to call them challenger funds. firms is there no ability. And so if you are sitting down with the founder or founders of a firm raising their first pool of capital, as an LP, especially as a reputable institutional LP, you have incredible access. You have incredible insight. That team is highly motivated to spend a lot of time with you. They will share a lot of detail with you. We'll get to see a lot of assets. you will really get to spend a meaningful amount of time with them and get to know them. That is fundamentally different than when you're investing in a high Roman numeral, say, Fund 14 of a very big franchise. If a firm's gotten to a Fund 14, they've clearly done a lot of things right.

But Fund 14 is going to come with an enormous amount of complexity. So if I show up with a $25,000 or $50, $500 million check to a $150, $200,000 fund one raise, I'm going to get tons of insight access. But if I show up with that same $25, $50 million check to a fund 14, that's maybe a multi-billion dollar raise, I'm not particularly important to them. And so I'm going to get maybe a courtesy meeting with one of the partners. I'm going to get a great IR team, get a great data room.

And I'm going to have a lot of anecdotes about the firm, but it's probably a very complicated or, organization that's going to be very hard for me to know. And that makes it a harder investment to make because you don't really understand who the decision makers are. You have to unpack. Is that track record that you're seeing? How congruent is that with the current circumstances and team decision makers that are there today? Those things are very hard to figure out in a high roman numeral fund. Is it rational to invest into a fund one? I think it's absolutely rational to invest in a fund one. Newer firms, I think, are best seen as the R&D in an investment portfolio.

What you want to see is in an institutional and an LPs portfolio, you want to see people that aren't doing all the same things the same way. And newer firms have less baggage, are motivated by different ideas and are often doing new things or doing things in a new way. And that creates new opportunities in an institutional portfolio. And some of those things are going to work out really well. And those things that seem edgy or unusual at the time you back them on that fund one may be conventional wisdom by the time they're raising their fund for. So a good CIO wants to have that R&D in their portfolio, which means you're going to have to back some fun ones, some fun twos.

This reminds me, Fund One or otherwise, in venture capital, there's in this entire trend of AI-Native firms, Early Bird, one of the most famous firms in Europe, is now almost entirely AI-Native. There's a firm called Footwork that's on their third fund that's also doing everything kind of from an AI-native perspective. If you don't have access to the next generation of investment firms or people thinking in the future, you can do. could really get stale in terms of how you even determine whether fund is good?

It's a great point. The risk of being stale is significant, particularly in an environment right now where things are changing really quickly. The tools that investors are using to analyze investments are changing under our feet. They're changing very quickly. And so when I spend time with a new firm and hear about how they're building their team, those conversations, the things they're doing today are fundamentally different than they would have done 20 years ago. And they should be. The tools, the resources that are available to them now are very different. And so if you're a firm that's caught in between that has a great legacy and a big team and an orientation of doing things for a certain way for a long period of time, you've got to be pretty agile to adapt and it's hard to adapt and to kind

move that process to the way new firms would be doing things today. And when you say R&D, what do you mean exactly? You want people to think differently. And so they may be addressing the same markets. They may be doing buyouts. They may be doing credit. But they wake up in the morning and they look at the world differently. They approach their work differently.

And often what you'll find is that 38-year-old, that 40-year-old who's got all those years of experience at a big mainline firm who then have an insight that they can't execute in their current firm, either because they're not quite senior enough, or the investor base isn't quite aligned with it. But they have all this experience and they have that insight. They see something different. They see a different opportunity. And so they break out and they start something anew. Some of those things will turn out to be conventional wisdom and great ideas over time. That's the R&D that's in a portfolio is having folks that are stepping out using all their prior experience, not rejecting it, but looking and using that experience. And how do I use this in a different way? What do I

have that's an insight on the market that's different than what I could do at my current firm? That's a lot of the R&D you're getting with the new firm. Just play devil's advocate. Can L.P not just have all fund 10 and later vintages? What's the downside of that? The downside of that, I think, is, you're going to have probably pretty average performance. A lot of those firms that are deploying their fund tens, they're very good firms. They're going to produce reasonable results. They're probably going to generate beta for whatever that segment of the market is, whether it's a real estate fund or a buyout fund.

It's very, very hard to outperform because those firms are generally deploying lots of capital. Those are fund tens are often most typically very, very big. their relative of a few strategies where it's size is a huge advantage. And then all the things that made them that firm to get to a fund 10, those founders at drive that was the sort of origin story of that firm

is fundamentally different when you're deploying a fund 10. And very, very few firms, particularly in the private capital arena, create enough of a culture that survives to keep a fun 10 just as agile and as aggressive as it was when it was a fun one or fun too.

If you're starting endowment from scratch, today as you did for Berkeley where you're founding CIO, how would you build that portfolio? One of the most important things in any institutional context is your governance. You have to understand the governance that you have and I sometimes will, when I talk with other CIOs, we'll joke like, don't outrun your governance. And that means that you are building a portfolio that meets the objectives of the institution and doing so in a way that is sustainable for you as a team and as an organization. And that means bringing along your investment committee or whatever your oversight is to how you're thinking about it and how you need to do that work. I spent a

lot of time with challenger firms, new firms. It was a big part of what we did under my watch at Berkeley, but you have to bring the investment committee along to that. If you're going to have a lot of differentiated thinking in there, it means you might have some periods of differentiated results, which means that you might prepare your committee for that. They have to be prepared and they have to not just be prepared, they have to be excited by it because there are going to be times you're behind your benchmark. And if you're behind your benchmark and you're always looking over your shoulder,

this is true whether you're endowment manager or a stock picker, you're not going to be on your best game. You need to be able to play the game to the best of your abilities with clarity. That's what it takes to run a good portfolio. Do you find that most investment committees, whether endowments, pension funds, really have the best intentions for their organizations or is there a lot more politicking?

I think investment committees vary a lot by how much they've delegated authority to their CIOs. That's the one main lover. Well, their main job, good investment committee, their main job is picking and managing the CIO. And much like a board company picks

and manages the CEO, they're not really there to tinker with who's the head in European sales or what the right fund manager should be in your private credit bucket, that's not what a good committee does or a good board does. They're there managing the executive. And so a good investment committee will pick a great CIO, understand the plant that CIO is executing on,

and back them in doing that. And that requires a lot of work on the CIO, before you hire that person, you understand their plan. It takes a lot of communications from the CIO to the board about the implementation of that plan. And then it takes a lot of restraint. Good investment committee members are listening more than they speak and they forego the opportunity to tinker and always have suggestions. They're there to guide, not tinker. Let's go in the LP to GP relationships.

One of the underrated aspects about spinning out and being your own GP is that it's very difficult to get feedback from LPs. So you may be committing the same error over and over without ever finding out why the LP has their pencils down. What are some common mistakes that GPs make? A GP will often come in hot with their track record and think that they're selling a track record. And LPs are interested in your track record. but what they really want to know is what drove that track record. They want to be able to unpack it. And so coming in with what quartiles you were and your DPI numbers,

all those things are very important. But a good LP is hoping to back you for years across a whole bunch of fun vintages. And so they need to know who you are. They need to know how you think. And if they can do that, then they'll be interested enough to look at your track record. and then they can be a good partner over time. A lot of GPs miss that. How do you balance that with LPs?

So have so many funds they're being pitched and sometimes the track record is the thing that gets somebody involved in the process of getting to know you. This is one where track records do matter. They do help get attention. That's true. But in LP, their job is to kind of hear that signal and the noise and to kind of be able to see it,

to know it when they see it. For a couple of years in my career, I had a boss who was a Buddhist. And it was a great investor, but one of the things that always stuck with me was he had the idea of a beginner's mind. And as an LP, it's super easy to be cynical. As an LP, you might get pitched a couple hundred times a year, year after year after year, and you're going to back a shockingly small percentage of the firms you meet with. you have to balance that cynicism, that experience with the idea that you might just hear something great. That meeting you're coming into, maybe the one that breaks through. Maybe that thing that's going to be, that's going to occupy the next six months of your life doing diligence on

because you met someone with an extraordinary set of ideas that you're just compelled by. You need to balance that cynicism with that sense of opportunity. Oftentimes, from a psychological standpoint, I think, of novelty when you say that, when you say thousands of pitches, how does an emerging manager bring novelty into their pitch and their approach? How important is this? Novelty for its own sake, obviously, is not particularly valuable. But what you want to hear is from a fund manager is that they're doing something, if they're doing something differently, that there's an obvious, compelling reason to it, a good pitch. A good pitch has a sense of

inevitability to it. When you look at the person who's starting the firm or the founders of the firm, their experience, the part of the market that they're addressing, the timeliness of what they're doing, is it a really interesting and obviously kind of hot thing to do right now? And then are they demonstrably a master of their trade? Like if you put those things together where you've got a great person who's a master of their trade addressing like a really interesting. opportunity that's particularly hot right now, like, that's what we're looking. That'll get an investor to sit up and pay attention. And so that doesn't have to be like wildly novel. It just needs to have those component pieces to it. And most LPs will deny this, but how big

of a factor is actually FOMO, fear of missing out? FOMO is not a huge deal to a lot of LPs, because LPs have the benefit of time. There's some fund manager. that are very hard, they're hard to get into. And LPs really have to dance. They need to build relationships. And they're relatively few of those. There are the ones we all know about. They're the famous ones.

And I think there's one left in venture benchmark. There are definitely firms that are very tough to get allocations for. And particularly if you're a larger pool of capital. If you're a smaller pool of capital that needs a five or $10 million, allocation, you're going to have a lot more things you can do than if you're writing $100, $200 million checks. So that is, there's a part of the market where that's true. But the FOMO doesn't really drive a lot of LP behavior.

LPs sometimes will do things to fill a bucket. That's the bad version of it, I would say. It's not FOMO. It's the idea that, hey, we have an allocation to opportunistic real estate. we have an allocation to a middle market buyout and I have a commitment pace I'm supposed to hit and they need to look busy and they want to be busy

and sometimes the expression don't just do something stand there that your idea is that not to just do things for the sake of doing them or not to do the things that are feel like this is the best of the things we could be doing in this rather than asking yourself should we be doing this at all that LPs as a class can be guilty of doing because the institutional incentives are to employ capital

or to segregate people by investment strategy or asset class within that team. They don't want to go a whole year and not make a commitment. That doesn't feel good. That doesn't look good on your annual review. What did you do with your year saying that you sat on your hands? But in some cases, that may be the right decision. And there's this paradox where you want to be building these relationships for many. years. Rahul McDahl said that I think he spent 15 years with UTIMCO before they wrote their first

check. So that's certainly a paradigm, but you also have a business to run. And without AUM, you're basically dead. How do you manage getting LPs to work on your specific vintage when you're an emerging manager? You can fish, you can farm, you can hunt. And I'm stealing this framework from someone who's, I should find out who, figure out who was inside it. But you can fish, you can hunt or you can farm. Hunting is what most people think of a fundraising, that they're going out and they're thinking, like, I need to get an Ivy League endowment into my fund,

and they know exactly who that is, and they're going to go exactly at them, and it's big game. And the likelihood of success is, in most circumstances, is overwhelmingly low. And, but some people will spend an exorbitant amount of effort trying to get those LPs. And if it works, it's fantastic.

But it's a high, output to do that. The farming is a little bit what I think Rahul would be describing of you're going and you're managing, you're cultivating, you're nourishing that relationship over a long period of time. That ultimately will bear fruit. It will take time. And the fishing is the other thing that you do in it. It's actually really much more, I think fishing is a much better strategy in the environment

podcasts and social media where you're putting yourself out there, you're putting your ideas into the marketplace and you're allowing people to find you. And so whether it's doing your podcast or writing on LinkedIn or doing things that just sort of drip out to LPs, over time they feel like they know you.

Used to just be quarterly letters and it's still that of those things getting out there. But that's how people can build conviction over time. And so by having those lines in the water, you don't know when that's going to come, when that bite's going to come, but hopefully it will come. And part of fishing is also listening. You mentioned some people have portfolio allocation.

And if you listen and if you're sensitive towards that and somebody has to check a box, you could position yourself as that box. Yeah. You think of it, some parts of the portfolio for institutions is one in, one out. We're not going to re-up with this manager or it's a hedge fund. And we're like, we're finally, we've had our limit.

we're going to redeem from that. And what happens? The CIO will say to his team, all right, who's in the pipeline? Let's light up the pipeline. And here she will go and see what are the five or ten firms that we really liked. And let's go get up to date on those firms. And that's, if you're a fund manager, that's sort of the hanging around the hoop. That could happen six weeks after you first meet that team or it could happen six years later.

You want to be on that, you want to be front of mind. Like, oh, yeah, we always really like those guys. We just haven't backed them yet. Yeah, we should do the update. We should find out where they are. Mike Maples and more recently, Rick Heitzman has used this analogy where they look for believers. They're not trying to convert people into either their fund into the asset class. To what extent is that true?

That's right. When I coach fund managers, I'll say the second best answer you can get as a no from an investor because you don't want to spend a lot of time with folks that take an extraordinary amount of convincing. either you haven't told them a compelling enough story or they're uncertain enough that they're not really going to act efficiently. And so trying to convert people is just very, very hard.

If you find people, if you're an effective communicator of your strategy and your story, even still, probably 90% of the people you talk to are going to say thanks, but no thanks. And ideally, they do actually say no. And you're looking for that 10% that do say yes that are pulled forward, that are interested. That's a much better use of your time.

I have a thesis, a double-gated process for LPs. I want you to shred it up and destroy it. My thesis is when GPs look at their pipeline, they meet with 100 LPs and let's say five of them end up invested. I actually think there's two gates, two-gated process to that. One is only 10% do work. So 10 out of those 100 will do work. And that second gate is actually very high conversion.

The people that actually do work to invest maybe as high as 50%. What do you think about that? It's absolutely right. I mean, as an LP, you would take tons of first meetings. You take a tiny fraction of that at second meetings and an even smaller fraction of that at third meetings. And is that the signal that you're looking for is time, time invested as upstream of capital invests?

When I work with fund managers, like one of the things I'll ask them is sort of the diagnostic on their fundraising, like, how's it going? And I'll ask them, like, how many third meetings have you had? How many onsites have you had where the LPs have come to? see you. Those things are indicative of someone who's not just sort of window shopping, but someone who's doing honest, serious work. And so yes, to your point, the conversion rate of folks who've gotten that far in the process, it goes astronomically higher than it is from those first meetings, because there should be a massive drop-off between first meetings and

second and third. The second, third, fourth meeting, that's almost when you have that LP conversation. The first is almost just so trivial. all that almost any LP will talk to you. LPs are in the business of kind of knowing the market. And as I mentioned earlier, like, they're looking for the kind of interesting new idea, even if it's a low probability. Like, there are ideas to kind of stay up on the market. And maybe I mean, here's something that's really remarkable.

Chances are, the odds are you're not. But that's part of the job is doing that. Then that second meeting, the first meeting is just sort of like, what's really here? The second meeting is like, is this something we should really spend more time on? that third meeting and then sort of beyond is like, now we're going to do real work. And that first one's kind of a sniff test. The second one's maybe a little broader. Hey, we're going to bring in the asset class head or we're going to bring in the CIO for a little more of a sniff test.

This is something we should spend more time on. That's a natural part of the pipeline process. When I coach GPs on how to approach LPs, I really emphasize them. Those first meetings should be half hour zooms. In half an hour, you should be able to tell enough of your story. that you can give them a good sense as to what you do. And you should be able to get a little bit of a sense of them as an investor. And from that, everyone can decide whether or not this should continue,

whether or not we need a formal first meeting or, hey, that was a good bit of information. Not for us. You move on. So you're not wasting hour-long meetings on things, either as an LP or as a GP, but things that just aren't going to be a fit. Try to get it down to a 30-minute meeting. So another way, the pitch needs to be clear. specific enough for that LP to almost make a binary choice on whether to take a second meeting.

Yeah. The best thing that can happen out of a first meeting with an LP is that the LP says, great, this is super interesting. Send me everything. The second best thing that can happen out of that meeting is the LP says, like, I really appreciate you making the time today. This doesn't really seem for us. And maybe they give a reason.

Maybe they don't. But they're kind of declarative that this is, thank you, but no, thank you. you mentioned this inevitability. Eric Anderson, who's been my mentor now for 15 years, just a several years ago, he started his fourth unicorn as a founder. So clearly he's an exceptional founder. He always taught me this idea of never wait for investors, always execute day after day and keep investors up to date,

but never wait on them, never rely on them, just keep on executing as if they're not going to come around and that paradoxically what gets investors to come in. Does that apply to GPs as well? The real challenge, the raw materials of investing is capital. And so the sort of keep going, you can't do it without capital, right? You can't build out your team. You can't build out your team.

You can't demonstrate a track record if you don't have the capital in which to do so. I think I would take the idea of persistence and put it to being in market, telling your story consistently and finding your people. that part, I think, is very consistent. We were talking about before we started recording this concept of how important your founder is as a GP, your co-founder. And me and Curtis, we've worked together for five years before we even started our firm. Now we've worked together. And no matter what happens, we want to work together.

So we're going to continue to iterate and continue to push through. I underestimated how important that is the partner is even more important than the strategy. The strategy could evolve, but if you have a bad partner, you might have one or two misses with your strategy. You give up much more easily than if you have a great founder. Yeah, having that relationship between founders is a critical component of any firm's success. And it doesn't mean it's always easy.

It is, I mean, the analogies to like a marriage or real, that it requires effective communication. It requires a long courtship that you know each other really well, and that there's just a deep level of trust. That's an essential part of a founding team. I learned this concept of inversion from Charlie Munger about a year ago, this concept that instead of thinking about, whoa, leach your success, you think about all the failure modes.

And if you could avoid these failure modes or you could invert these failure modes, you'll end up on the path to success. What are some failure modes for emerging managers? Where do emerging managers fail over and over in their process? One of the most common things I see is in folks that are starting firms that are trying to create something they think LPs are going to want. They go through their process and setting up the firm trying to appeal to investors. Whereas the stronger idea is like have a really good. sense of who you are, have a really good sense of the opportunity, tell a very convicted story

around the opportunities that you see, and then find the investors that fit with that. You going out and trying to fit what you think investors want, it's going to seem disingenuous. It doesn't seem core to who you are. That's a mistake you see pretty common. In many ways, even if you do somehow convince investors to invest, you're not going to have great returns. You may not have great returns. You may have great returns.

I think what you're going to have is you're going to have a firm. that isn't something that like you feel deep in your bones. And the some of the very best founders that I've had the chance to back, I know they're going to do this work whether I back them or not. They're going to do it with whatever capital they can raise. Like this is like they see it as their life's work. They're drawn to doing this work. And as long as they can make a decent living doing it, that's what they're going to do.

And hopefully they're going to attract a bunch of great LPs to come along with them, but that's not slowing them down. They've burned the ships. They're on their way. Talk to me about what you do today. The work I do, I've been on the other side of billions of dollars worth of subdocs. I've said yes to firms at their kind of earliest moments. And now I use that experience to help entrepreneurial founders navigate the launch and growth of their firms.

Help them as they face what really can amount to thousands of decisions in the early years of building their firm. Help them increase the speed and likelihood of success. And that's the work I've done for years now. What are most new firms lacking? A lot of new firms will hope that they can raise capital that will generate fees that will enable them to build the organization as they want it to be. And they kind of want to not take the risk of having to hire a team and convince people to join them, spend the money to have people on payroll long before an ELP.

have committed. And that generally just doesn't work. If you're pursuing a strategy that requires a team, it's entirely reasonable that the LPs are going to see a kind of minimum viable product of that team. And so fund managers need to kind of be honest with themselves as to like, this is what the minimum viable version of our firm looks like. And that's what's going to be required to get an LP to say yes. and then you'll get the management fees that will support the infrastructure that you built. Solving the chicken egg problem. In this case, you really do need to have the thing for LPs to buy. The hope that they will think your idea and you are so compelling that they're going to just take a ride on the idea that you're not just going to be a great investor, but you're going to be a great firm builder and you're going to be able to recruit great people.

That's asking a lot of your LPs. Conversely, if you show your LPs, look, we've been able to attract awesome people. and we are ready as soon as the capital's here. And we've got a great pipeline, the machine that's already working. It's a lot easier for LPs to get on board that. If you go back 25 years ago when you were first starting to be an investor, and you could give yourself one time as a piece of advice. What would that be?

One bit of advice is focusing on alignment. Just sort of understanding why people are making the decisions they are. What are their motivations? The number one thing. And that's more than just GP commit. It's more than the GP commit. It's sort of where are they in their time of life? what do they have invested in this conception of what they're doing?

Where does this work going to take them? And so even when you're evaluating someone as a hire, how is going to come work for you or a mid-tier person at a firm, right, they're in a process of their life. And their alignment then is to achieving that next thing they want to do. And if you can understand them and understand where they want that to take them, then you understand how they're going to behave. And that's a, yeah, I think that's a really...

And you just figure that out by asking? Sometimes you'll get a very direct answer, and sometimes you can need to kind of tease it out or make your own judgment, because not everyone always knows. And not be aware? Not always. Not always.

Sometimes when people start new firms, they do so sometimes because they're, like the bad version is when they do it, because I think it's their time. It's their turn. They've seen other, they've had other. their friends do it and it seemed easy and that they want to do that. And that doesn't typically

work. You want people that are starting a new firm are doing the work because it's fundamental on who they are. Like that they are willing to take the risk to leave the thing that was comfortable to do something new. And when you understand that, you can have an end that's actually present, you have a very high level of commitment. And that alignment gets really high. Even if they don't have $40 million to write as a GP commit, that they're pot committed in terms of where they're in their career and the reputational risk they're taking. John Austin, this is an absolute masterclass. Thanks so much for jumping on. Thanks for happening.