Investing Billions - E84: How NFL, NBA, and MLB Players Invest

Episode Date: August 8, 2024

Justin Dyer, Chief Investment Officer of AWM Capital, sits down with David Weisburd to discuss how AWM manages investments for professional athletes. Justin details AWM’s adherence to liability-driven portfolio construction, how it invests in venture and unique considerations when investing capital for athletes.  The 10X Capital Podcast is part of the Turpentine podcast network. Learn more: turpentine.co -- X / Twitter: @dweisburd (David Weisburd) -- LinkedIn: Justin Dyer: https://www.linkedin.com/in/justin-dyer-cfa-cfp/ AWM Capital: https://www.linkedin.com/company/awmcapital/ David Weisburd: https://www.linkedin.com/in/dweisburd/  -- LINKS:  AWM Capital: https://awmcap.com/ -- Questions or topics you want us to discuss on The 10X Capital Podcast? Email us at [e-mail] -- TIMESTAMPS: (0:00) Introduction to Justin Dyer and AWM Capital (2:25) Wealth management challenges for athletes (4:45) Venture capital investment preferences at AWM Capital (7:07) Fund of funds structure and geographical tilts in venture investments (10:31) Balancing concentration and diversification in venture capital (13:02) Portfolio simulation and flexibility in strategy (17:09) Venture fund diligence and the weight of references (20:52) The role of disruption in venture capital (23:03) Philosophies on money, happiness, and living a flourishing life (27:19) Final thoughts and reflections

AWM Capital, a multifamily office. We work with professional baseball players, professional football players, professional golfers, in addition to the non-athlete side. What are unique issues that athletes have with managing their money that other multifamily offices do not have? Similar to some founders,

have incredibly small window relatively for wealth creation at a very, very young age, where all of a sudden mid-20s, let's call it, is faced with signing for 100 plus million dollars. That is a very interesting dynamic, psychological and otherwise, that faces athletes pretty much exclusively. In terms of portfolio construction for an athlete, what do you counsel your athletes to do and how do you construct their portfolios? Everything we do, whether you're an athlete, client of ours or non-athlete is 100% custom.

I'm very curious. You see kind of these simulations of people that are coming from middle-class families and basically become very wealthy overnight. You're seeing this over and over. Can we kind of settle this once and for all? Does money ever make people less happy? Oh, that's a good one. Justin, it was great meeting you at Milken.

Thank you, Alex Edelson, for connecting us. Welcome to 10X Capital Podcast. Thanks for having me. It's great to be here. So Justin, tell me about AWM Capital. Sure. So AWM Capital, in its basic sense, is a multifamily office. We have a number of unique aspects,

but number one being our unique clientele base, our professional athletes. The additional piece I'd like to hit on is we're human-centered. Really the quick history of AWM is Brandon and his brother, Eric, former professional baseball players many years ago, got done playing and decided to try and work on or improve the culture between athletes and money. So they set out to really improve that overall relationship. Early on, they did it with one of the big banks, won't name names, but pretty quickly figured out those aren't great places to effect change, be creative. You're really captive and restricted to how you can think about providing advice and all sorts of conflicts in terms of compensation models, et cetera. Basically, after a couple months, figured out the best way to do this

would be to try and build it on their own. So they did that in early 2010 timeframe, right around 2010, and started off in baseball. Obviously, naturally, that's where the vast majority of their network was. Now, fast forward to today, we're in multiple sports. We work with professional baseball players, professional football players, professional golfers, in addition to the non-athlete side. We're growing fairly well. What are unique issues that athletes have with managing their money that other multifamily offices do not have? Athletes, similar to some founders, have incredibly small window relatively for wealth creation

at a very, very young age, where all of a sudden, mid-20s, let's call it, is faced with signing for $100 plus million. That is a very interesting dynamic, psychological and otherwise, that faces athletes pretty much exclusively. In terms of portfolio construction for an athlete, what do you counsel your athletes to do and how do you construct their portfolios? Sure. Everything we do, whether you're an athlete, client of ours or non-athlete, is 100% custom. And I alluded to it earlier, I started out my career on the public side, and we really believe in the academic literature, if you will, that supports predominant allocation to public markets. Now, that being said, we're obviously going to get plenty into venture on

this podcast and private markets at large. We love those asset classes, but we always hold up the public markets as an incredibly powerful bogey from not only an expected return standpoint, but the probability or the confidence that we have in expected returns. To get to the question specifically though around portfolio construction, we build portfolios in what academically is called a liability-driven framework. Really what that means is we're taking a client's liabilities, again, academically speaking, but essentially any listener can think about that as their own unique goals, both the timing of when goals need to be met and or the size of when those goals need to be met. And then we start to match those defined quantitatively goals with an asset that has a similar risk profile or an appropriate

risk profile, as well as a similar type duration. So when you need the money, the money is available. If it's incredibly important, we're not going to take substantial risk with that. And we essentially start with the most short term, most important, most conservative goals first, and then start to build a portfolio to support and layer on to support those goals for longer term, longer duration type priorities. And those liabilities aren't just making purchases, they're also drawdown on private equity style or venture capital style investments. That's exactly right. It can really be anything. I mean, a priority can be anything that can be quantitatively defined can really end up into a list of priorities that then we create a risk

profile around to try and match it with a specific asset class. When we were chatting, you were talking about Maslow's hierarchy of needs and how that applies to portfolio management. Can you explain? Sure. Yeah. So I love to use that term to give a quick summary of what liability driven investing is. And what I like to say is, you know, in a sense, it's Maslow's hierarchy of portfolio construction. And it gets back to exactly what I was saying. So we start with the most important, most short-term priorities first. And the asset class that I'm sure everyone's familiar with and can relate to is good old US treasuries or muni bonds, the foundation of the pyramid, if you will. And then as you start to extend in duration and relative importance, your priorities, you start to layer on different risk attributes or different assets with different risk attributes. So to go to the extreme, something that is call it for a priority or a goal for

future generations, or maybe there's just going to be excess wealth for future generations, which we're often dealing with, an illiquid long duration asset is a perfect asset to match up with that. That's one of the main reasons we really like private markets. We'll allocate the private market and specifically venture capital. So let's double click the main reasons we really like private markets. We'll allocate to private markets and specifically venture capital. So let's double click on venture. You really like the asset class. Why do you like venture? The short answer is because it's the best performing asset class.

Now, necessarily a unique take either, but bringing it down to a much more academic nature. So like I said, we're incredibly data driven, use the public markets as a bogey, all of the benefits that they have, both in terms of higher long-term confidence in actual returns to support priorities, et cetera. We then go look to private markets to see if we can outperform, especially if we can take on illiquidity type risk. And venture, among some other classes, but venture is the asset class that gives us a really, really high confidence in outperforming the public markets over the long-term. Additionally, I would say that just the general long duration nature of the asset class goes back to the topic we were just talking about around liability driven investing.

It's a long term asset class, very long term, because I truly believe not only is it, hey, let's invest today and let's be locked up in a 10 year vehicle plus extensions. It's no, we're committed to this asset class over the long-term. We don't time markets. We don't know when the great vintages are going to happen, but we want to participate in each vintage. So we have those outliers. And if you think about that, you start to really expand the duration of the asset class even further. And so we're thoughtful around matching that even longer duration than I think is commonly accepted to really, really long-term, again, in many cases, multi-generational well. You guys use a fund-to-fund structure to access venture. Why do you use fund-to-funds? We really want to take the free lunch,

if you will, of diversification first and foremost. And that is obviously a great attribute of a fund-to-fund structure, but that it also just allows us to tilt a portfolio towards, one way to think about it is towards factors of higher expected return and increase the probability of that, as opposed to just rifle shoot a manager on a one off basis. Even though we could we could write a bigger check and be more influential, it's just increasing our risk and our opinion, our risk exposure. So the fund to fund allows us to not only have diversification across managers, it also allows us to have diversification across time, but it also allows us to have, I mean, this is kind of a sub-bullet within the manager diversification bucket, but diversification across geographies, some diversification across stage, even though we really, really like the early stage seed side of the marketplace, which we can get into, also allows us to target smaller funds,

right? These, again, factors or qualities of what seems to be outperforming venture managers, which are typically smaller funds, usually earlier funds within the life cycle of a firm, you know, all the data out there that is supporting a fund one, fund two, and their increased likelihood of really, really substantial returns. Do you have a geographical tilt? Some people like to tilt towards San Francisco and New York, Boston. What do you think about that? I would say yes, yes and no. We certainly pay attention to the great hubs of venture capital or innovation or tech,

whatever term you want to put on there. And we want exposure to those ecosystems. So yes, if you looked at our portfolio, a good chunk of it's going to have SF exposure, a very good chunk of it will have SF, Silicon Valley exposure. We have a little bit in New York, some in LA, but we're open to looking at other geos that might be on the forefront of breaking out. We haven't committed capital to it, but LATAM is something that's of interest. Texas as well. Now it's hard. I say we're always data-driven and sometimes you do have to take a

leap of faith to say, okay, well, LATAM, we don't actually know what the general exit profile of that might look like within the next seven to 10 years, but does the data support taking a risk? Don't know. That's a question we're deliberating here internally. If any of your listeners have an opinion, I'm all ears and really want to think through that. But to answer your question kind of in summary, yes, we look at geos. We want to think through that. But to answer your question, kind of in summary, yes, we look at geos. We want to have exposure to the core areas of innovation and company formation. And we also want to be aware

and potentially involved in what's next, what's coming around the corner. That's something we'll dip our toe in. We do want to manage risk there and we'll don't want to ever go, say, like all into LATAM within our vehicle, but it could be some

interesting area of focus. You mentioned that you're deliberating geographical tilts internally. What else are you guys deliberating? Where is there a knock consensus? But is there a change right now within tech, company formation, venture capital at large, that's shifting towards more deep tech, hard sciences, aerospace defense? I think it was Peter Thiel said, we expected flying cars and we got whatever it was, 140 characters. If that is finally coming to fruition, just as a, as a citizen, as a human, I'd be pretty excited about that. A lot of the companies in the Thiel

fellowship, which is Peter Thiel's fellowship grants also are going after hard tech problems, which I think is interesting as well. Speaking of non-consensus use, you concentrate 65 to 70% of your venture portfolio in the early stage. It's more aggressive than a lot of LPs. Talk to me about your portfolio construction from a stage standpoint. It's one reason why we go a fund-to-fund route and why I can be comfortable with that allocation because we will spread that across eight to 10 managers, which some people might think that's a lot of diversification. Other people might not. We as an investment committee, as an investment team, are quite comfortable with that.

And then alternatively as well, we're fairly high volume. So we create an annual vehicle. So we're creating a fund to fund funds each and every year. And typically in almost every circumstance, our clients are participating across about five of those funds. So they're getting quite substantial diversification if you start to extrapolate out. Now there is some repeat or re-up allocations within that overall cycle. But the reason why we're comfortable, A, with that is because we run a fund-to-funds program. But then alternatively as well, the reason why we're driven to that part of the market or most interested in that part of the market is because that's where the highest returns generally come from. So we're trying to walk that fine line of both going after that outperformance and participating in the early stage side of things, but then mitigating the inherent risk that exists there through a little bit higher volume capital deployment. How does being so concentrated in early stage

venture affect diversification across the entire portfolio for clients? It's actually a great question. I think venture is just a standalone, in its purest sense, a standalone idiosyncratic asset class. But like I mentioned earlier on, we put a lot of stake or foundational work on the public side of our client allocations. And we're, A, we generally don't believe timing the market, active management works on that side. It certainly works on the public or private side, depending on the asset class. That's a whole nother conversation. And so we're fairly passively allocated or what we say, we focus on controlling what you can control on the public side of the market, which is actually quite a bit, even within a more systematic allocation, but also we're systematically allocated to value on the public market side of

things. And so in that sense, to your question specifically, ventures actually is quite diversifying because, you know, let's just say public markets are largely skewed towards large companies. We then skew towards value. So our overall allocation is large value oriented, which value itself has done okay, but it certainly hasn't outperformed like the growth side of the market has. But then venture is small growth, more or less. And it's a nice complement to the overall portfolio and does actually provide some diversification across an entire structure. Congratulations, 10X Capital podcast listeners. We have officially cracked the top 10 rankings in the United States for investing.

Please help this podcast continue climbing up in the rankings by clicking the follow button above. This helps our podcast rank higher, which brings more revenue to the show and helps us bring in the very highest quality guests and to produce the very highest quality content. Thank you for your support. When you look at comprehensive portfolio management,

are there simulation tools that simulate different diversification mandates and how they would have performed? Or how do you go about building a strategy for entire portfolio? We actually stay away from a lot of the traditional multi-carlo analysis type applications. And it really just goes back to how we think about portfolio construction, that whole liability driven approach. We're not building cookie cutter off the shelf portfolios with a set risk profile, you know, your standard 60, 40, 70, 30, whatever, 80, 20, where generally speaking in my past roles at various other firms, we used to do that quite a bit where you're bringing in capital

market assumptions, building an optimizer to spit out certain expected returns with a corresponding or acceptable risk profile within a liability driven framework, that side of portfolio construction becomes a little bit less relevant. A great analogy that someone just within our orbit has told us once, and he's built a piece of software to support this is the idea of liability driven investing is it can kind of follow this riddle where, let's just say 10 years from now, you want to go camping at a lake and the water level of that lake fluctuates. A typical investor or statistician, let's call it a typical investor, would go and do a regression analysis, Monte Carlo, et cetera, and figure out, okay, well, I'm going to have a 90% confidence that the lake is going to be at this level 10 years from now. Well, really what a liability-driven portfolio is doing is building a boat. And you don't really care about the level of the lake. You're immunizing is the academic term or the financier term that is used.

You're immunizing a portfolio against all these different risks. It's not perfect, right? There's no perfect or free lunch within investing. But by doing that, by immunizing a portfolio, using assets that have a very similar risk profile to whatever goal or priority or liability, you pick your word, whatever that represents, you eliminate the need to have Monte Carlo or distribution outcomes if you're doing that the right way. Speaking of liability, prognosticating liability, I imagine I'm not the only one that can't necessarily think 10 to 20 years from now whether I'm going to want a boat or those are constantly dynamic. Depending on the magnitude of change, yeah, there's maybe a conversation that needs to be had with a client. And oh, if you now all of a sudden want to do this next year, flexibility might not be inherent within the portfolio to do so. Especially we see it fairly commonly when assets are transferring in that have been managed for quite some time or managed on their own, where people

don't really think about long-term liquidity profile or liquidity need that they may or may not need. And so constantly looking at this with clients, looking at effectively call it a dashboard with their priorities stacked with the most important short-term at the bottom and then kind of more flexible longer term at the top helps us constantly a reorient to are these things still really really important to you and do they give you excitement do that you feel like oh yeah if i do this i'm gonna i am gonna have a more flourishing happier life and it's not you know what you remove it from the the list. But what that also allows us to do is constantly have a, not only a liquidity profile target, but an actual asset allocation target. So short answer is a, yes, they are incredibly

dynamic. Things are constantly changing. Things come out of left field, but the more we plan for just life in general, the better off we typically are, even with the dynamic nature of left field. But the more we plan for just life in general, the better off we typically are, even with the dynamic nature of it all. Going back to venture funds, talk to me about a diligence process. So you meet a venture manager. How do you disqualify somebody quickly? And what incremental information do you add to your diligence process as time goes by? It's a question that I'd say is ever evolving, and I hope it is always ever evolving. I always, I think earlier in my career, I always thought, okay, you know, there's got to be a silver bullet out there somewhere, but I just don't think that's the case. And as I've grown, I don't want that to be the case necessarily. But really the process

generally takes the following form. I love being forefront on the relationship side. I think especially where we allocate, it is such a relationship-oriented business that I think that human connection is really, really important to put first and foremost. So I'm usually called the tip of the spear on relationships and then essentially bringing in a funnel from there. So internally, once I have a face-to-face or virtual conversation with someone, I have my analyst team go through a scoring process. That's really the piece of it that I think is truly ever evolving. The stages change here and there, but that scoring process, the internal review process

is ever changing. Always trying to learn. You know, I'm on the selection committee for the RAISE conference and I'm always learning. Yeah, we had Ben Black. We had Ben Black on our podcast. Yeah, I heard that podcast actually. He was great. Ben's a good friend. He's'm always learning. Yeah. We had, we had Ben Black. We had Ben Black on the podcast. Yeah. I heard that podcast actually. It was great. Ben, Ben's a good friend. He's an awesome dude. And I'm just constantly learning from that community, constantly learning from Alex, constantly learning from others as well, where, yeah, just trying to get an edge, improve. Are

we asking the right questions, both of ourselves, of the fund, and then externally in conversations with the manager. And we basically have a checklist more or less built into our CRM to form and shape those opinions and questions. And then effectively from there, we go through two to three investment committee conversations. And usually what happens is within each one of those conversations, more questions will come up and then we'll set up further conversations, formal conversations with the manager. Yeah. To your question on what's an easy pass, certainly funds that just kind of are outside of our sweet spot, you know, larger funds, later stage funds, we'll look at them because we occasionally will allocate to the later stage side within the remaining part of our portfolio. But that makes it a lot easier.

You know, on that side, we typically like kind of your, I'll call it plain vanilla, more generalist focused, typical tech investor type vehicles on the later stage. So anything outside of that, that makes it pretty easy. On the earlier stage side, it's hard, quite honestly, because I use it as, I use our sourcing as also an in point to inform our strategy. If I see something interesting, oh, okay, this manager, they spun out of, you know, XYZ top tier firm, well, they must be pretty damn convicted to actually do that. What do they know that I don't know? And so I think we end up erring on the side of more conversations than we should, just what we have resources to, but at the same time, I'm happy doing that because it is a, it's a point of data gathering for us. You mentioned references. What percentage

of your overall diligence process, how much weight do you give to references specifically? That's a great question. I would say if you're looking at the actual process, it's weighted relatively low. Like I said early on, it's such a relationship business that it's just inherent really, I think in everything we do, right?

You know, triangulating with other managers or other LPs, hey, what do you think about X, Y, Z, you know, triangulating with other managers or other LPs, hey, what do you think about XYZ? You know, I'm not going to use specific names, just so we're not getting in trouble here. But just constantly pulling the community to get a pulse that doesn't necessarily show up in a specific metric in our diligence process. But it helps me inform my position, which I then generally communicate to the team quite a bit. You mentioned spin-outs earlier and kind of free lunches. Why do you like spin-outs so much? And tell me about the opportunities out there.

I would say there's probably two reasons I like it so much. One, it's, I think, and I was on a panel at a conference not too long ago, and I said something similar, that VC investing is inherently disruptive, right? That is the whole, one of the main tenants of what we're trying to do. I think therefore, I don't, this isn't necessarily a truism, but venture capital in and of itself should be, and is often constantly disrupted. I think spinouts represent that opportunity. And one reason I like them. Number two, going back to risk mitigation or diversification, it helps us underwrite

an opportunity a lot more. I totally get that there is data out there that does support fund one from a former operator that doesn't really have a track record. It is, quite frankly, hard for us to underwrite to that. I like the spin out, especially when you have a track record that you can attribute. I like it for those reasons. What do you wish you knew before starting at AWM and specifically around venture investing? Ah, that's a great question.

The immediate item that comes top of mind is thoughtfulness around portfolio construction. And I mean that at every level. I mean that at our fund level. I think that's something that we're always challenging ourself on constantly iterating, tweaking, adjusting. Now, today, it's more around the margins. I'm pretty comfortable. We're pretty comfortable with where we are. But I also mean that down at the actual fund level as well. It's not to say we actually diversify across high concentration and low concentration managers. But as I've grown in my career, I've just developed such an appreciation for the importance of portfolio construction.

You know, it's commonly said your portfolio construction is your strategy or your strategy is your fund construction. And I truly, truly believe that. And I still am kind of amazed within the VC community at how often that's not emphasized or not paid attention to more. This is a game of, I don't want to say it's, it definitely is a game of skill, right? There is a ton of skill involved with this, but if you don't appreciate the difficulty of it and the importance of luck or spreading your bets, you're probably missing out an important part of the story. One of the paradoxes, especially of early stage venture is the concentration versus diversification dilemma. And the reason I call it a dilemma is if you have, let's say you have

one fund or one investment that returns a hundred X and you only invest in one fund, you're going to do really well. If you only invest in three funds, you're going to do great. If you invest in 10 funds, you might start to be reverting to the mean. The reason it's a paradox is if those number of funds, if you get 10 funds and you're in these, you have 200, 300 companies and you had a superpower law outcome, a thousand X, it basically negates everything. And it just may, it even dwarfs the a hundred X and it ends up actually returning everything, the rest of the funds over and you end up doing better. So there's this weird thing where in the short term, you could end up diluting your returns,

but in the long term, you could end up expanding your returns. And it's unlike any other asset class in the world for that reason. Yeah, 100%. And I think that actually is a really well-stated version of why we're so committed to the asset class and over the long term

and how we set up our platform to be fairly active and deploy over a pretty consistent basis, like I said, annually, because if we can get good returns on average, but then set ourselves up for those outlier vintages and hopefully outlier fund managers as well, then venture to your point is a phenomenal asset class. It's a phenomenal asset class if you just look at averages, but if you can tilt towards certain factors and increase at least what we feel like we're doing, increasing our probability of hitting what you just outlined is incredibly powerful. Yeah, there's a paradox there. You want to make sure you get good enough returns to

continue getting the at-bats in order to get that kind of superpower law return as well. What would you like our listeners to know about you, about AWM Capital or anything else you'd like to shine a light on? Oh, that's a good question. So, you know, I think the way we think about money is incredibly important to us, both me and my business partners. We think it's important to reorient the importance of money to lead a flourishing life. And just asking yourself that question on a consistent, constant basis and taking a step back to have that thought is an incredibly powerful exercise and it doesn't take a ton of time. And if you're ever curious and want to talk through just how we think about that and ask questions to both ourselves internally and our clients, I'd love to have those conversations. So I think that's broadly speaking for AWM specifically

and just what our DNA is and how we're structured for the long-term. But then specific to venture, I love the ecosystem. I love meeting new folks. I love challenging my ideas. You know, I think that just even this podcast is hopefully a short little example of that. So please reach out if you wanna challenge me on anything

and say, what the heck are you doing that for? Or just learn more from what we've done and how we've done it. I'd love to have conversations with anyone. I'm very curious. You see kind of these simulations of people that are coming from middle-class families and basically become very wealthy overnight. You're seeing this over and over. Can we kind of settle this once and for all? Does outside of edge cases, does money ever make people less happy overall? does it make, does it improve their quality of life or how do you handle that question? That's a good one.

I think, you know, the general data is right here where up to a point it is, it definitely leads to, you know, whatever, more flexibility, more options within life. And I think options are always a good thing. That all being said, I think money truly does magnify certain inherent personalities. But I'd go back to what I just said when you asked, what's a message I want to leave folks with? Asking yourself, what is the true purpose of money to you and orienting money towards that? Or what leads, maybe even extract money from the conversation of the comment for a second, what truly is a flourishing life for you? And then if you have more money and you can actually really build a structure that supports a more positive life of non-financial goals

and then say, okay, wait, I actually have all this financial capital to support that. We've seen that that actually seems to actually, it does lead to better outcomes if you can put money in its true place as opposed to really steer conversations and steer decisions. I think that's tilting. I'm not saying like that will be a silver bullet for everybody, but really reframing the conversation around money and having those conversations in a really meaningful way could certainly lead to a happier life

by way of money. What's the old saying? Money makes good people better and bad people worse. Yeah. So we'll leave it on that. Justin, this has been really enjoyable. Look forward to sitting down in Los Angeles or on the East Coast, Miami, New York. And I appreciate you jumping on the podcast. Thanks a lot. It's been fun.

Thanks for listening to the audio version of this podcast. Come on over to 10X Cabo Podcast on YouTube by typing in 10X Caboell Podcasts into youtube.com and clicking the subscribe button. On the YouTube version of this podcast, you could see the graphs, visuals, and key takeaways that accompany every episode.