Investing Billions - E73: John Merrill on GroveStreet’s $10.5 Billion Investment Strategy

Starting point is 00:00:00 We've been around since 1998 as you just hit the nail right on the head. A total of 14 clients. From those 14 clients, we've had over $10.5 billion of commitments from them. So, very sizable relationships and we're very honored that many of those relationships span decades. If you look in our portfolio, you'll see some, certainly household names that are household names today, but when we backed them, they were first-time funds. And that's because that arises from this philosophy that you want to look at tested managers as well as next generation managers who are hungry, motivated, and might have a differentiated viewpoint and or access point on the opportunity sets today. You have the unique opportunity study under David Swenson while at Yale School of Management. Tell me about that.

Starting point is 00:00:39 Yeah, that was... For more ideas on how to raise venture capital in this market, make sure to subscribe below. John, I've been excited to chat. We got to catch up a couple of weeks ago. I'm excited to have you on the podcast. Welcome to 10X Capital Podcast. Thanks a lot. Great to be with you. I enjoy your podcast. So I'm honored to be among the many that you've interviewed. Thank you. I'm honored that you listen. So let's start with Grove Street. So what is Grove Street? Sure. Well, Grove Street is a boutique that is very focused in what it does. We've been around for 25 years. And what we do is focus on what we call the hard part of the private equity market. So lower mid-market buyouts, venture capital, and co-invests. For a few select investors, and the way in which we help them and partner with them

Starting point is 00:01:19 is by setting up separately managed accounts, highly customized separate accounts where we put together portfolios that meet their particular needs when they set aside a certain amount of capital that they want to deploy into this strata of the private equity ecosystem. Silly question. Why would institutional investors do SMAs versus direct into funds? What are some use cases? Maybe I'll just sort of step back and say when Grove Street was founded 25 years ago, it was founded with sort of three core principles in mind. One is focus. One is customization and high partnership. And another is alignment. And as we thought about those formative principles in starting Grove Street and thought about helping investors with this strat of the private equity market that I just described, we thought separately managed accounts are the way to go because they afford the opportunity for high degrees of customization for the mandates

Starting point is 00:02:09 that we execute. Bear in mind, these mandates are highly scaled, generally around $200 to $300 million deployed against these three strategies. And in doing it in a separate account, you get the ability for a lot of efficiencies of a fund and also customization. And importantly, and foundationally, you also get alignment. The way that that comes into existence is basically that the SMAs we set up where we're the GP and the client is the sole LP setting the parameters for the program. And as the GP, we are expected and eager to invest alongside of our clients, which creates a lot of alignment with our investors. So that's why we think separately managed accounts are advantageous. Efficiency, alignment,

Starting point is 00:02:53 and customization. I've heard LPs say that they allow them to tilt in a certain direction. If, let's say, you like a fund of funds, but you want more exposure to emerging managers, or you want exposure to Canadian venture funds, or whatever the specific mandate that allows you to tilt a little bit in that direction. Is that a fair way to characterize it? Well, I mean, I would go a lot further than tilt, frankly, because in the SMAs, these are true partnerships that we're setting up for our clients, one-to-one, directly discussed, collaborated, negotiated, and we set the parameters. So those parameters are fully defined in consultation with the clients. And if there's an interest in a particular weighting towards venture versus buyout or geographic mix, we'll definitely engage in that. But it's always done in a way where we have to feel very

Starting point is 00:03:27 comfortable that we can execute on it and we want to put our own money behind it. So it really is a fun collaborative process to get to the point where we create those solutions that we truly feel are aligned and execute on the needs of our clients. On a first principles basis, what problem is Growth Street solving? So what we're solving, we're solving a problem for clients who recognize that they might have a challenge, one of four things. One can be basically access. They might have a hard time accessing this strata of the market. Some venture managers, that's well known that they can be hard to access or lower mid-market buyout managers with a very narrow LP base. Another thing that we are helping folks solve is pattern recognition.

Starting point is 00:04:05 As I mentioned earlier, we've been doing this for 25 years with a very seasoned team. And so pattern recognition is something that's built over time. And some teams that we work with recognize that their pattern recognition might be, well, maybe not as robust as ours,

Starting point is 00:04:17 and they can sort of leverage what we've built over time. Another thing that we're solving for is time. So sophisticated portfolios have lots of asset classes that they're pursuing. And the strata in which we operate is one where there's a high dispersion of returns. There's tons of opportunities out there. So it's hard to process. So if you don't have the pattern recognition or the time to really process that and look at that deal flow, that might be something where we're helping solve the problem. And then the other one is just deal flow. A lot of times we are here in the United States. We've been in these two ecosystems for a long, long time. We're well

Starting point is 00:04:48 known among the GP community and the emerging GP community so that we see terrific amount of deal flow that some of our clients who might be in Japan, they might be in the Nordics, they might be in the Middle East, have a harder time processing or seeing or accessing. You've mentioned that a lot of firms such as yourself stress alignment. It's a word that's thrown a lot in asset management, but few firms are aligned. Why is Grove Street more aligned than other firms? It rolls off the lips of money managers all the time. It doesn't matter whether you're a hedge fund or you're a long-only manager or private equity venture real estate. Alignment is used a lot. So much so that in many respects,

Starting point is 00:05:24 I feel like it's lost its meaning. As I mentioned earlier, it is foundational to Grove Street since we turned on the lights, since the earliest days. So how do we create alignment at Grove Street? Why do I feel so aligned with our clients? Well, there are a couple of factors. Number one, we invest our capital alongside of our investors. So it is directly cash from my bank accounts into the funds. I get capital calls just as our investors do in these same investments. That is a very galvanizing and focusing exercise, as you can imagine. It's also a rewarding one. We're very privileged to have that opportunity. Another thing that creates alignment is that only people that are actively at the firm are owners of the firm. So there's no outside interest that we get

Starting point is 00:06:05 distracted by or get demands of. So that creates another dimension of alignment. And then most basically and fundamentally is that much of our compensation arises from the incentive fees. We charge management fees to basically keep the lights on and maintain the operations, but our rewards come from our investments and the incentives after a hurdle. So those are the factors that lead us to feel very aligned and our clients to feel that we are aligned with them. Tell me about your investment process. You get these mandates, you look at the funds. How do you go about deciding whether a fund is a good fit for the SMA?

Starting point is 00:06:37 I guess the first thing is we look at a lot and do very little. We're highly, highly selective, waiting for those truly special. Give me some numbers on that. What's roughly your pipeline look like? We are, suffice it to say, seeing hundreds of managers a year and executing on just a handful. So what we're looking for in that process are managers, again, in lower mid market buyout or in venture that have, we think, a unique ability to assess the investment landscape in which they're operating. It might be biotech, it might be lower middle market industrials, but where their ability to assess the landscape,

Starting point is 00:07:08 and that not only means the opportunities, that means the deal flow, that means how that industry or area is changing in the marketplace is truly distinctive. That's one thing that we spend an inordinate amount of time looking at. And the way we process that, frankly, is by talking to them over and over about deals, because that's where we develop an understanding of their pattern recognition and we can apply our pattern recognition to that exercise. The other thing that we have to look for is like, we are investing with GPs who are going to own businesses. And in their ownership of those businesses is our expectation and hope that they make a real difference in those businesses,

Starting point is 00:07:44 that they will change them, that they will make them grow thoughtfully, that they will make them more profitable, that they will make them appealing to future buyers. That might be in three years, that might be in six years, that might be in nine years, hopefully a little bit earlier than that. But they are very good at helping businesses grow and expand and improve their businesses to create more value. You mentioned you're looking for managers that can assess the space that they're in. Are you talking about self-awareness and how they fit into the ecosystem? Tell me a little bit more about that.

Starting point is 00:08:15 There's many sort of vectors we can go down there, but I love where you started, self-awareness, that they understand where they can fit in the particular ecosystem in which they're operating, the opportunity set they're operating in, and where they can access things. So when their awareness and ability to assess the investment landscape is to say, where are their pockets of opportunity for growth and expansion if they were to buy and own a business? That's one dimension. Another is, are they able to assess where the opportunities are and access those opportunities? So do they have an edge in finding the businesses and then helping those businesses, again, in any number of sort of areas, excel in what they're set out to do or expand the scope of what they do in a way that would be value enhancing to the enterprise? There's different

Starting point is 00:08:57 philosophies in venture. Some people just believe they need to get on the right rocket ship. That's kind of the Founders Fund thesis. And there's all sorts of ways, obviously, in private equity and buyout, you have to provide a lot of value add and you have to drive that process. But in venture capital, tell me about value add. Where are the vectors of value add that you see that lead to the best business models? It's different. I'm sad to say it's different for different teams and what they might be pursuing. Maybe I'll come at it in this way, where we see some of the firms that we back are the classic solo GPs or teams that are formed by former founders. And what they do in the venture space is, as you know well from the various discussions

Starting point is 00:09:32 you had in your own work, is that they bring to bear sort of the vision of a business's growth potential and what's needed in that exercise. The go-to-market strategy, the team building strategy, the sort of fundamental technology platforms that might be underlying a given company's, you know, sort of endeavor. And so those value add can come in lots of different ways. It can come on the technology side. As I say, it can go to the go-to-market strategy. It can be the pricing. But often it is also about the team-building as well, because these are small businesses that are expanding. And in doing that, they need to build out the team. And that's a very delicate process that needs to be executed on very effectively

Starting point is 00:10:09 for these small startups to reach real potential. So I wanna get back to the investment process. So you get these hundreds of funds. How do you decide what's the first cutoff? What's a quick way for you to say no to a fund? Undeniably, we do look at numbers, right? You gotta start with the facts, but those are rear view. Those are looking in the rear fund? Undeniably, we do look at numbers, right? You got to start with the facts, but those are rear view. Those are looking in the rear view mirror.

Starting point is 00:10:28 And, you know, today, as we look at numbers, there is a bevy of managers that come to us with very impressive results. But what we want to do in seeing those results is see the sort of, if you will, the batting average. We want to see very low loss rates, particularly in the buyout space. Obviously, in venture, that's a little bit different. And the areas where we would say a quick no is where, you know, if we were to see a team that we didn't feel had a distinctive edge in identifying opportunities or assessing the landscape. Another area for a quick no, sort of self-evident, but

Starting point is 00:11:01 is ethics and integrity. If they're respected in the community ecosystem of venture, by way of example, that's a very tight knit group. You know it intimately. And that is one where if there's ethics or integrity, a question mark in the least, that would be an automatic no. Another area that we look for is a business, are they scaled for success? I guess is what I'm trying to get to. Do they have, is there ample opportunities in the space to create value or is it terribly crowded or is it too niche? Let's take a step back on your client management. I think you've only had 14 clients, if I'm right, since you guys started in 1998. Tell me about that. What do you look for in your clients in order to partner with them? We've been around since 1998, as you just hit the nail right on

Starting point is 00:11:41 the head, a total of 14 clients. From those 14 clients, we've had over $10.5 billion of commitments from them. So very sizable relationships, and we're very honored that many of those relationships span decades. So it is a true privilege to do that. And we have purposefully kept our client base quite narrow, quite selective. And we've done that because size is the enemy of investment success, we believe. And also, our model, where we're investing alongside And also our model where we're investing alongside of our clients, where we're giving real leverage, candidly doesn't scale well.

Starting point is 00:12:09 And that's fine with us because we have a good outcome for our clients, which is also a good outcome for us with this alignment of incentives that I described. So we don't need to expand dramatically. So you asked what we look for in our clients. In many respects, it's a two-way street. Grove Street and our services are

Starting point is 00:12:25 bought, not sold. But when we are engaging with the group, our model is best with very sophisticated investors that understand the private equity landscape, understand the opportunity set, understand the strata of the market in which we're participating. And then the other thing in that is that they have a self-awareness. They understand that that part of the market is hard to prosecute on and believe that finding a collaborator might be advantageous. So that's another thing we look for. So we look for sophistication, savvy, self-awareness, and collaborators, because we are engaging in very long-term investments with our clients, both at the individual level, but at the SMA level. And so we want people that are true

Starting point is 00:13:02 collaborators because that's a very rewarding aspect of what we do. And it really sort of links up very tightly with the sort of value proposition that we have. And then I guess the last and again, a self-evident thing is highly trustworthy and high integrity. These are partnerships. We view them as our investors. We're investing alongside of them. We need to be side by side with people that we trust and that are of the highest integrity. And we're honored that we've found quite a few of them. You have a boutique type model in terms of the number of clients, not in terms of AUM. What does that allow you to do? What practically is the benefit of having a few clients? It is very rewarding because we develop very, very tight relationships. I'm tempted to reach over and grab my phone to see if there are any WhatsApp messages from our partners

Starting point is 00:13:41 in Israel, because we're in tight dialogue with them as we are with our partners in Japan and other parts of the world. You know, keeping the client base narrow really affords us to adhere to and deliver on that customization that I mentioned earlier, and really understand what our clients' needs are and objectives are so that we're as, you know, executing on them as tightly as we can in the context of the parameters we set for the SMAs. So I think that's one important thing. Another important thing is just when we talk about a breakdown and alignment of interest that happens in a lot of money management organizations that I've seen over the years, it's when there are many mouths to feed. In other words, lots of different client

Starting point is 00:14:17 structures, lots of different investment opportunities. And that is one where there's distraction. When we have a narrow client base, we can be highly focused and it diminishes any conflicts of interest. There's no area where conflicts are totally ameliorated, but they can be managed and it's more easily done in a small and focused way. Let's say you get your 15th client or you decide to take on a 15th client and they say they want to build out a venture book in 2024. How do you get them access to Top Quartel? Well, it's something we're always striving for. And the way in which we build out our venture portfolios really sort of breaks down to sort of looking into the successful GPs we've backed in the past, but also looking for the next generation of talent. And so if we're working with a group

Starting point is 00:14:58 that's embarking on building out a venture portfolio, first and foremost, we want to understand that they truly understand the long-term nature of venture and that they are going to be steady, disciplined participants in the asset class, because I don't need to say it to you, it's not for tourists. And so as we go about our work for them, we want to understand the level of concentration that they're comfortable with and what geographic aperture they're open to, along with potentially like sector appetites, like is there openness to biotech or not? And then from there, it really breaks down to looking at, you know, creating a portfolio that's a mix of, I'll call the sort of tried and true, very successful brand name winners. And then

Starting point is 00:15:36 also those next generation of opportunities. I mean, some, if you look in our portfolio, you'll see some certainly household names that are household names today, but when we backed them, they were first-time funds. And that's because that arises from this philosophy that you want to look at tested managers as well as next-generation managers who are hungry, motivated, and might have a differentiated viewpoint and or access point on the opportunity sets today. So kind of like a barbell approach of trying to get into those highly selective funds, but also new managers. I think that's right. And by the way, some of the new managers,

Starting point is 00:16:08 again, something you know well, are as highly selective as some of the big brand names. So we call them spin-outs. There you go. Right. Exactly. Spin-outs are marketing reason. There's two categories. You had the unique opportunity study under David Swenson while at Yale School of Management. Tell me about that. Yeah, that was fantastic. And in fact, I'd love to say that I engineered my way to go to Yale just so I could study with David Swenson. But that would be revisionist history. When I was there, I heard there was this guy named David Swenson who was teaching a class on institutional funds management.

Starting point is 00:16:37 And it sounded pretty neat. And I took the class and it changed my career trajectory for sure. I wish he could listen to this podcast so he could hear what I'm about to say, but it was the easiest class to teach of any class I took at Yale. Why could that be? David Swenson showed up and I'll tell you how the class unfolded. It was fantastic. He would call up managers of every stripe. So Tom Steyer from Farallon, head of Madison Dearborn, Shorenstein, everyone would show up to our class. They'd get a phone call from David Swenson. The next week they were in our classroom at the Yale School of Management telling us about real estate or hedge funds or whatever the strategy were. And David would introduce them,

Starting point is 00:17:13 let them give a pitch to us as the students in the class. And then we had to write up manager memos and we would submit them to David. And I'm guessing he's not the one that graded them. You know, now this is something where I've got to definitely give him his due. He was so incredibly dedicated to the graduate classes and the undergraduate level classes. I mean, he is an educator through and through. So notwithstanding the fact that he didn't have to give all the lectures because he had all these managers parading through, he was truly dedicated to the class. And in fact, when he was sick in his later years, he would continue to come to class and participate. So it was a truly phenomenal

Starting point is 00:17:45 experience. The other thing I love to tell about that experience is it just so happens, and this is going to date me, that he was writing his book, Pioneering Portfolio Management, when I was taking the class. And so on the class, on the days where he didn't have a manager and he'd give us one of the chapters to edit and review. And I like to think that there's a comma or maybe a semicolon that made its way into that seminal book that we all have on our shelves. Well, he certainly understood operating leverage. What would you say were David Swenson's superpowers? David was such a gentleman, an educator, just a gracious human being that sometimes his roots from the Salomon Brothers trading floor were forgotten. I mean, he was an incredibly rigorous

Starting point is 00:18:20 person in the way he approached things. And, you know, that was foundational to everything that happened at the Yale Investments Office, everything he taught us in that class. So that rigor was there. I think what's also very distinguishing is he really came at things from a first principles perspective. Let me give you an example of that. And this was sort of the differentiating thing, I think, for, you know, how he became so iconic in the endowment management world is he looked at Yale University that had been around for hundreds of years and said, our investment approach for this institution with that type of time horizon should match to it. I say that today, it's like motherhood and apple pie at the time, that was very unique thinking for someone in that position. And so that sort of illuminates the sort of first principles approach. And then the other thing

Starting point is 00:19:01 that was a true superpower of David's was an eye for talent. It goes without saying. You can look at it on two dimensions. The first dimension, of course, is in the managers that he was able to identify. And this is something that came out when we met with all those managers that came through our class at Yale was he identified those managers ready for their next chapter of investing. And so ready to be backed as first-time funds. And so I mentioned them earlier, Farallon, Shorenstein, Hill House. He saw them when they were ready for, if you will, prime time, well before it was prime time hour. And so that ability to identify talent and view managers as partners, not providers, was really distinguishing. The other dimension of identifying talent, and again, this is well-known and you can just survey the CIOs of many university endowments and find that he identified the talent needed to manage the endowment office, the investments office at Yale. And he was identifying the talent and cultivating that talent to become great investors for Yale in the first place. And then many of them spun out. So there's a diaspora of

Starting point is 00:20:05 his students, former colleagues that are leading major universities and university endowments and other institutions as well. So he had a keen eye for identifying talent. You mentioned when we last chatted that David was great at leveraging Yale's name and balance sheet while also being fair with managers. Tell me about that and tell me about the balance between the give and take in your relationship as an LP with GPs. Just focusing in on that question about David and the give and take between LPs and GPs. Maybe I'll start there, which is, look, it is, and I saw this at certainly at Yale with David Swenson, but also some of the other organizations that I worked at, notably the Investment Fund for Foundations. You know, the LPs who view the GPs as true partners and vice versa, particularly for long-term investors, is highly advantageous. You go into the process. If you were thinking of yourselves as true partners, GPs and LPs alike, then you are really being candid with each other. You're getting to know

Starting point is 00:20:55 each other. You're getting to really understand the strengths and weaknesses of one another in a way that the long-term investment outcomes tend to be better. And so I think that as it relates to Yale and how David leveraged that, I mean, look, it goes without saying, self-evident to everyone, that if Yale is an LP and a fund, that is an incredible stamp of approval. And David was aware of that, as are the LPs, excuse me, as are the GPs. And well, for that matter, as are other LPs, right? The whole ecosystem is aware that having Yale invested alongside of you is a stamp of approval. And so with that leverage, he could have negotiated terms particularly advantageous for Yale. But David thought more broadly than that.

Starting point is 00:21:33 He thought about the totality of the ecosystem. And he did use Yale's heft and reputation to negotiate terms, but it was for the benefit of the overall ecosystem. So I think that that particularly forward thinking and, you know, had a lot, not just forward thinking, but thought laterally. He thought about the benefits to the overall ecosystem. The other piece that I would say is really important is that sort of hearkening back to David's background on Wall Street, he was highly attuned to Yale's unique, you know, its balance sheet, its credit rating, and therefore its

Starting point is 00:22:03 ability to execute trades and negotiate sort of contracts with Wall Street and sort of the issuance of debt at the university in a way that was highly advantageous to the university. But again, always in a fair way. Very curious. A new fund is starting, or let's say it's their first institutional fund, Fund 3. How much of the work is landing the anchor? Is that 50% of the work, 80% of the work? When somebody like a Yale or a Grove Street comes in, does it basically fill itself? I think it's different in different circumstances. I think it can fill itself quite quickly. But look, I think allocators are very discerning. They're independently minded. And the good ones don't just look to the right and

Starting point is 00:22:38 look to their left and say, oh, look who's going in. I'll just follow suit. They want to do their own work. And they should, because every institution has its own idiosyncratic investment policy parameters. And it's a distinctive set of portfolio exposures. So anyone worth their weight in gold is not just going to sort of follow the herd. And so from a GP perspective, yes, it's helpful. But hopefully you want true, I mean, I think GPs should, and the really good ones do, want truly discerning, thoughtful, rigorous LPs joining their ranks, not fast followers. What percentage of the market is rigorous discerning LPs versus these fast followers? How would you characterize by AUM? I think the preponderance is fast followers versus rigorous and discerning. It's hard. Yeah, I think it's probably the old 80-20 rule. I think

Starting point is 00:23:22 you're probably right, sadly. It's also, you know, fast followers is a little bit too shorthand because there's people that are fast followers. There are people that are new and, you know, sort of coming up to speed on things. And, you know, that sort of potentially short sells. Short changes. Yeah, it sort of short changes some of the people who are following them. To ask a very dumb question, why would you want a rigorous discerning LP as a GP? What are the main benefits and what are the cons versus kind of a quick follower? Because, I mean, hopefully, one of the other things we look for in a manager is curiosity and a willingness to learn and an interest in learning. Because if you're not curious and interested in learning, then you're going to be surprised by a competitor or a risk that you

Starting point is 00:24:01 didn't expect. And so I think, you know, I think if you have the ability to have people in your orbit, I don't care if you're an LPGP, you know, you and I sit and having a coffee together, you want to be among people from whom you, you know, you can learn that make you better, that raise your game. And, you know, people that have that competitive interest and that curiosity tend to be better at whatever they're doing. And so it's, that's why it's advantageous. You want to be constantly evolving. And I think a good GP can do that. A good LP can do that for a GP. How's going to GP do that for an LP? Is that the basis of the partnership, this kind of like iterative game of we're doing this, we're getting feedback, you're giving me

Starting point is 00:24:37 feedback. I'm basically partnering and evolving together. Is that how you categorize a good partnership? I think so. Yeah. And I mean, the other thing is to stay in lanes. So I don't want to overstate this, right? People should realize what they're good at and what they're not good at, that the scope of their expertise, people will ask us about private credit all the time. And that's an area that we say we are focused on the craft and the areas that we focus on. So we're not going to, you know, sort of creep in our strategy. Strategy creep is a well-known problem for investment managers. And it doesn't matter if you're at Grove Street building SMAs or you're at a long-short equity hedge fund that starts dabbling in CMBS or something. Or an early stage fund that has

Starting point is 00:25:13 $8 billion, a billion venture fund. So you mentioned earlier, you worked at TIFF, the investment fund for foundations, where actually David Swanson was a founding team member. Tell me about TIFF. We'll get right back to the interview. But first, to stay updated on all things emerging managers and limited partners, including the very latest data on venture returns and insights on how to raise capital from limited partners, subscribe to our free newsletter at 10xcapitalpodcast.com. That's www.10xcapitalpodcast.com. So he wasn't a team member, just to be clear. He was a founding board member. So TIFF stands for the Investment Fund for Foundations.

Starting point is 00:25:49 And it was structured as a very neat thing. I had nothing to do with structuring it, so I can say this. It was set up as something of a cooperative, whereby smaller endowments and foundations that on their own might not be able to pursue the strategies of leading endowed charities could pool their assets together and have an investment team oversee those assets on a pooled basis and therefore operate and access opportunities and managers and strategies that otherwise would not be afforded to them. And it was a very neat construct or unique and sort of self-reinforcing construct insofar as it was in effect a nonprofit serving nonprofits overseen by a nonprofit board, said differently

Starting point is 00:26:27 by chief investment officers from leading endowments and foundations around the country, like David Swenson, who you mentioned, or Jack Meyer, who was the Harvard CIO for many years. So it was a very neat mousetrap that sort of wore the white hat in money management, a nonprofit serving nonprofits. It allowed the endowments to have even more impact across the system. Yeah, that's exactly right. Great observation. So a lot of the board members, it was able, one of the true privileges of my career at TIFF was being able to work with so many wonderful CIOs

Starting point is 00:26:53 from literally around the globe. You know, one of the CIOs, or excuse me, one of the board members at TIFF was Sandra Robertson from Oxford. And they would come and serve on TIFF's board because it was serving smaller nonprofits that they knew might otherwise not be able to execute as well or might be taken advantage of candidly. And then the other reason they joined the board, I think, I know because I heard it directly from them, is because they had so many peers. And so this little ecosystem that I've just sketched out also had some attributes of a think tank, a nonprofit think tank of how investment management should be done for endowments and foundations. How much of your time and how much do you spend with co-investors, other LPs, and how do you schedule that? And how do you format those relationships with other co-investors? So look, co-investing is something of the three things we do at Grove

Starting point is 00:27:40 Street, lower mid-market buyouts, venture, and co-investing. Co-investing is something we've been doing for the past probably eight years at this stage. And the way in which we really approach it is quite simple in many respects. We start with our own ecosystem of GPs. Fortunately, we have terrific GPs and we are able to see some of the deal flow from them. And that we have found through our own work, but also some academic studies from folks like Josh Lerner at Harvard Business School, who's actually an advisor to Grove Street, have shown that some of the best co-investment outcomes arise from not the random co-investment that's being shown by a standalone GP, but rather coming out of great funds themselves. And so that's something that we focus on. We do less on the venture side from a co-investment

Starting point is 00:28:23 perspective and more on sort of the, I'll call it the buyout side where we can, you know, underwrite the business, the businesses. There's a more natural fit on co-investing on the buyout side, more alignment. You mentioned, you know, at TIFF, you dealt with a lot of foundations, endowments, and you seem to have a very collaborative style. Which other LPs do you respect the most that you routinely come across? You can't talk about it categorically. It is individual by individual. And there are just incredible investors at any number of organizations out there. We work with insurance companies and pensions and sovereign wealth funds. And it is one of the joys of our work is to encounter people with whom we can collaborate and learn so much. It's hard to, you know, I think it's easier to define the character attributes

Starting point is 00:29:04 of people, of the truly talented ones than where they may sit, because people might find themselves so much. It's hard to, you know, I think it's easier to define the character attributes of people, of the truly talented ones than where they may sit because people might find themselves in very interesting seats, unexpected seats and be some of the most... You don't want any enemies, I get it. No, no, it's not. You can't talk about it categorically. There's fast followers in every seat and there's some brilliant people in unexpected places. That's an interesting thing. The fast followers are not by institution, they're by individual. Yeah. So you have some first principles leader types in some organizations, also some fast followers. Without a doubt. I think that that, talking categorically about sort of the skills and savvy of any given investor is, you know,

Starting point is 00:29:40 it's shortchanging to many people. You mentioned the characteristics of a top limited partner of a top investor. What are those characteristics that make the very best? Well, I'll start off with what I mentioned earlier, curiosity, constant curiosity, rigor and focus. You know, I think people that are focused on what they do are better at it. Ask Kobe Bryant, right? You can ask any number of, you know, obviously we can't ask Kobe Bryant, but people that are expert in what they do, ask Malcolm Gladwell, the 10,000 hours, right, that are truly focused and dedicated to their craft. And it may come in lots of different forms and lots of different endeavors, but that really matters. So focus and curiosity, and I would say passion, true passion for it. Actually circling

Starting point is 00:30:19 back to David Swenson for a second. One of the things that I don't think is fully appreciated about David Swenson is how much he truly loved Yale University. He was at every sporting event. You see him at a volleyball game, you thought he must love volleyball and only volleyball, but there he'd be at the squash match and then the football game the next day. He truly loved what he did. And you see that in managers that are truly loving their craft of health tech investing, maybe, or, you know, lower mid-market investing, sort of consumer services or business services. They have a passion and an interest. They're waking up reading about it. They're not looking at what's my AUM. They're actually looking at what are these businesses? How can I change them? How can I

Starting point is 00:30:57 create value? And that will lead to rewards for all involved. So I think passion, curiosity, rigor, and focus. We've done quite a few episodes here. Who am I missing from my roster of guests? Who should I have on the podcast? Well, you started off with one of my favorite people. So Chris Kubik. But I'm highly biased because he's a former classmate and a colleague of mine. I'm biased because I have to talk my own book and I love all my Grove Street colleagues. But let me go back through your roster and I'll come back to you.

Starting point is 00:31:21 But look, I think one of the things that a lot of your questions, which are very good, talk to other investors in other seats that might not be as sort of predictable. Now you do a very good job of turning over different stones and finding different places, but the perspective, you know, I learn a lot by way of example, we're privileged enough to work with two leading institutions in Japan. And I learned a lot from their perspective on the global opportunity set or similarly our client in Israel as well. What are some of the top lessons that you learn globally that you apply to as well. What are some of the top lessons that you learn globally that you apply to American investing? What are some, I guess, biases that American investors have that you've solved for through other global? I love that you use the

Starting point is 00:31:52 past tense and solved for. I take that as an honor. I'm going to put that on my resume. No, we have not solved for at all. We are solving. It will ever be solving. So I think one of the things, maybe we'll just stay in the world of venture for a minute because look, there is so much innovation in the United States. It's self-evident, but it is remarkable the pockets of innovation that exist across around the globe. We just talked about Israel. That is obviously everyone should read Startup Nation. It is a remarkable study in how an ecosystem can form. And there can be just incredible companies coming out of the ecosystem that exists for idiosyncratic reasons in Israel. You know, the same thing could be said if you sort of open up your aperture and don't just hang out on Sand Hill Road or in lower

Starting point is 00:32:33 Manhattan and Brooklyn, you can learn, you can see a lot of very interesting opportunities in deep tech, clean tech, you know, obviously in AI and other strategies. If you find your way to Berlin, the Baltics, the Nordics. It's just incredible ecosystem. And you don't want to rush to one place or the other. You need to start with first principles and look at all those character qualities that we talked about earlier. But what I learned is that there are pockets of opportunity everywhere, but you need to measure their ability to execute on a global scale and whether they can reach the TAM from Latvia or Lithuania or Milan.

Starting point is 00:33:09 So to your point, focus, right? No country you could conquer in a year or even five years need to pick one or two geographies that you could commit to over decades. I think that's right. What do you wish you knew before you started your career in asset management? It's a very thoughtful question. You know, one of the great joys is just sort of how much learning there is to be had from the GP community, the LP community. I guess I didn't realize what an incredible journey it would be in learning, in continuous

Starting point is 00:33:35 learning. So, you know what, but that sort of reflection would be wasted on a young John Merrill, probably. You know, I think it's, I think the other thing is to, I think I'm fortunate in that maybe I've done this because I just feel that I can learn so much from so many people, but maintain contacts with people is always so important. It's not, it's really about the people. Actually, as I ramble around, I think I might, it's really about understanding the people and the motivations of the people and the commitment of the people, whether it's the people you're working side by side with, or the people you're thinking about allocating to. When I was in business school, there were great organizational behavior classes that I didn't spend as much time on as I should have. I wish I had taken many,

Starting point is 00:34:13 many more organizational behavior classes. Don't tell Roger Ibbotson that, but it's incredible to see if you really focus on people's motivations and their commitments and their interests, that really helps you understand whether or not they're going to be truly long-term successful partners with you as colleagues or as a GP. Do you believe in Dunbar's law that you could only really manage 150 relationships? Do you believe in extreme focus on relationships as well? That's harder for me to embrace. It's probably realistic, but it's harder for me to embrace because I tend to find so many new, it's like if someone were to say, you can only focus and learn from and get the most out of 150 books in your life, we'd all know the answer that that's probably not accurate. At least, I don't know, that's my strong feeling. So I somehow apply that to people as well. I might be inaccurate in that assessment,

Starting point is 00:34:58 but I just met you and I know I've learned some things from you. And so I'm not going to quickly let our dialogue die. I appreciate that. What would you like our audience to know about you, about Grove Street, anything else you'd like to shine a light on? So with respect to Grove Street, I've had the privilege of working at a couple of different organizations during the course of my investment career. And I find it just incredibly rewarding and motivating in an organization where alignment is central to what we do and focus is central to what we do. I thought I had those in other settings, but I've never felt it as intimately and as intensely as I do at Grove Street. And I know that that leads to us delivering better outcomes for the partners we work with. With respect to myself, I'll just remind myself that being a constant learner is

Starting point is 00:35:41 truly the most rewarding thing in addition to being committed to and supportive of all the community as writ large, not only the investment community, but those around you and the organizations and countries that we're privileged to be a part of. Well, I've learned quite a bit. This is high ROI on my time. I appreciate that. I'm sure the audience enjoyed it as well. Thanks for jumping on the podcast. David, thank you. This has been a great set of questions and fun to have the dialogue with you. You've got me thinking. Thank you, Sean. For more ideas on how to raise venture capital in this market, make sure to subscribe below.

Investing Billions - E73: John Merrill on GroveStreet’s $10.5 Billion Investment Strategy

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.