Investing Billions - E85: Raising $6 Billion in Institutional Capital - Mikhail Blancovitch

Episode Date: August 13, 2024

Mikhail Blancovitch, Co-Founder of Unicorn Strategic Capital, sits down with David Weisburd to discuss strategies for raising capital from different types of LPs, how fund managers can craft a compelling story that resonates with LPs, and sources of growth for alternative asset AUM. The 10X Capital Podcast is part of the Turpentine podcast network. Learn more: turpentine.co -- X / Twitter: @dweisburd (David Weisburd) -- LinkedIn: Mikhail Blancovitch: https://www.linkedin.com/in/mikhailblancovitch/ Unicorn Strategic Capital: https://www.linkedin.com/company/unicorn-strategic-capital/ David Weisburd: https://www.linkedin.com/in/dweisburd/  -- LINKS:  Unicorn Strategic Capital: https://unicorn-sc.com/ -- Questions or topics you want us to discuss on The 10X Capital Podcast? Email us at [e-mail] -- TIMESTAMPS: (0:00) Episode preview (1:12) Overview of Unicorn Strategic Capital (2:29) Emerging managers & sector specialists (3:59) Portfolio strategies in Latin America (5:24) Comparing portfolio strategies by geography (6:39) Which institutional investors are most innovative (8:55) Reputation dynamics (9:35) Raising $6B from institutional investors (12:32) Follow & subscribe to the 10X Capital Podcast (12:53) Strategies for building LP relationships (14:11) Importance of meeting LPs in person (17:13) Crating and telling compelling stories to LPs (21:29) Sources of growth for alternative asset AUM (23:31) Impact of generational wealth transfer on investments (24:19) Client selection criteria  (26:04) Perfecting the fund manager pitch

You've raised, as I mentioned, $6 billion with your team over many years. Give me some numbers, like how many LPs would you have to reach out to raise $200-300 million? What are those factors that would determine the difficulty of a raise? I was thinking of my first project. That project was a fund manager, very successful. They had done a friends and family $56 million fund one. We went with fund two at my firm at the time. Total fundraise there was in excess of 250

million. And there we raised more than 100 LPs. The business opportunity that we focus on is in diversifying those portfolios. We bring in emerging managers and sector specialists that my definition of them is how I can bring alpha to your current exposure. What percentage of their money goes towards beta and what percentage of their money goes towards alpha? It varies because in the well-developed markets, such as Chile, you already have a decent exposure to the large funds. That's your beta exposure and they're fine with that.

But then you have markets, for example, in Brazil, where it's much more focused on alpha. How do you define a story that will resonate well with LPs? Mika, this has been a long time coming. We've been friends for a while and we even got to work together at 10X Capital. Welcome to 10X Capital Podcast. Thank you, David. It's been a long time and a very interesting and insightful friendship with both you and the 10X team, which I appreciate a lot. I know you don't like to thump your chest too much, but you've raised over $6 billion in your career. You raised $800 million over the last 12 months in the firm that you co-founded, Unicorn Strategic Capital.

Tell me about Unicorn Strategic Capital and tell me a little bit about your day-to-day. We like to think of ourselves as an investment solutions provider to investors and capital allocators across the Americas with a competitive moat in Latin America, U.S. offshore and U.S. Hispanic markets. On the institutional side, we serve pension insurance companies, larger single family offices and multifamily offices with access to emerging managers and sector specialists. Everything is on the alternative investment side. And on the private wealth intermediary, which is the new wave of capital that is coming to the ecosystem, we focus on providing infrastructure to access alternative investments

and investment products that may fit the client portfolios at scale. We've been doing that now for a year, super successful. We have teams in every country, offices, we are headquarters in Miami with offices in New York, in Mexico City, in Bogota, Colombia, in Santiago de Chile, in Montevideo, Uruguay, and in Sao Paulo.

And you mentioned you guys focus on emerging managers as well as sector specialists. Talk to me about that. When you think about the alternative investment ecosystem, you have the megafunds. And those, by definition, were the first ones that were coming to these investors. And when you go and talk to them, their portfolio will already have a decent portion invested in all these established managers. So the business opportunity that we focus on is in diversifying those portfolios. We bring in emerging managers and sector specialists that my definition of them is how I can bring alpha to your current exposure. Sector specialization, we think is very attractive because a lot of them, you know, back in the day were saying, well, we need to get up to date with our allocations. We need to get to a place where our portfolio, you know, has the necessary buyout, venture, growth, hedge fund exposures. And typically that happens with the megafunds.

Now it comes a time where they're saying, well, we now need to go and start pushing a little bit on the risk spectrum. And that's where you start seeing that emerging managers, typically on the private equity side in Latin for the time being, are getting the most interest. Before it would be large buyouts, now you have a lot of middle market buyouts. Before it would be a potential large credit, Now you're seeing middle market credit or specialized credit in direct lending, et cetera. Same thing will happen, for example, with venture. While before your exposure was more to venture fund of funds, now you may want to start looking at more specialist type of funds that may appeal and may fit into those portfolios. You mentioned that they've basically

exhausted their beta investments and they're looking for alpha. Within an institutional portfolio in LATAM, what percentage of their money goes towards beta and what percentage of their money goes towards alpha? So it varies because in the well-developed markets, such as Chile, you already have a decent exposure to the large funds. That's your beta exposure and they're fine with that. But then you have markets, for example, in Brazil, where it's much more focused on alpha. Brazil, for example, currently is a private wealth market. The institutions there cannot invest in offshore alternatives yet at scale. So when you go there, you start thinking that a mega fund could be interesting, but probably either the specialized leaf of the mega funds or an emerging manager funds, three, four, five,

or a sector specialist that have a very, very good track record, top quartile, top diesel in the benchmark, et cetera. Those are probably having more traction. Uruguay, Argentina, for example, which are just starting in alternatives, I would say they're more on the beta phase. You know, they're more like, how can we have an exposure that tracks the private markets and that provides us a baseline position that will, you know, you will not have any surprises. That may happen with some other funds. And the other thing that goes with that is that in a private wealth ecosystem, there's a lot of need for infrastructure and servicing to many, many clients than when you're only on the institutional side. So by definition, typically the serving capabilities come with the very large managers. And in very mature markets like the United States, what percentage of their investments are in beta versus alpha type products?

I would say that the larger the growth, you know, you will see it by the success of the megafunds in the U.S. Most of the portfolio has been in the in the beta strategies that became beta strategies now, because, as you know, alternative investments is not a 50 year program. You know, it has been developed over time. These megaphones as well have developed, you know, have found a way of customizing programs for these large pools of capital to answer all the needs to those investment teams. What you are seeing is that their alpha exposure and what they want, what they want to grow on the emerging managers or sector specialists

are typically going to be to emerging manager programs that they are facing out to consultants in the US. And those consultants are running those programs, looking for this type of managers are going to be the next generation of GPs that make it to the broader portfolio. An emerging manager typically will receive a smaller allocation from a emerging manager program because receive a smaller allocation from an emerging manager program because their fund size is not yet to where these very large pensions will invest

a hundred million. They need to be a certain percentage of your total fund size. So it is driven a lot by technicalities as well from what we have perceived. I put up on the video, the innovator's dilemma, innovator, early adopter, early majority, late majority. How would you categorize institutional investors defined as investors writing $10 million plus checks in the United States? How would you group them in terms of innovation in asset management? I think that you have a portion that are early adopters.

You know, these are typically kind of the state level pension systems that we all know about. And then you have smaller programs, smaller pension systems that by definition cannot be early adopters or innovators because they need to get either up to speed with their programs. Other programs actually do not allow them the capabilities to be a first close investor or to go into a fund that, you know, is in early stages of their series of funds, you know, meaning it's not a fund 10, it might be a fund three, four. So I think it just depends. And what I have found in my career is that rather than giving it kind of a color of, you know, if I think they're doing the right thing or not, it is more of, it is what it is. You just need to play with it, look what the rules are, you know, and see which one you can take advantage right now. And the ones that you know,

you can take advantage in three, four years, prepare for that. Sticking on that same early adopters and late adopters, from large check writers, check writers that write 10 to a million, clearly the very early adopters are single family offices. Who would you put as the next by category? Is it elite endowments?

Is it multifamily offices? Is it elite endowments? Is it multifamily offices? Is it specific people at specific pension funds? Or how would you, how would you look at their kind of the second movers that support the top funds? You have the single family offices you have, and then you have, if you were a very successful entrepreneur on a regional basis, you probably will have success with multifamily offices that have seen like, Oh, actually, I know you were the guy that created this company. And, you know, I saw how your growth, et cetera. So you may have appeal there, but I think on a more programmatic way, you're probably thinking about the elite pensions and endowments that will have these programs and that you know

how to get to them, or you can use your network or service providers to get to them and adjust to them. And these guys, I would say, is typically through these programs that they're allocating. Typically, if you do your homework and if you typically, if you're successful, you'll find a way to get a warm introduction, they will take the call and they will give you honest feedback,

in my experience. So it's more in terms of the team and the reputation versus the asset class. It might be a Yale endowment or Princeton versus, you know, endowments versus other institutions. Is that a fair way to categorize it? I think that you have those elites that are,

even for an established manager, getting that capital is very, very hard. I would say that there are names that are still large, maybe not that brand, with that brand recognition on a broader scale, that will have emerging manager programs that will probably be a better fit. And that's probably where I would spend most of my time

because I think your chances of success, if you did your homework are greater in that number. I do think that capital raising at scale is, is a lot of numbers game, you know, and it's a, it's a long-term game as well. You know, you've raised, as I mentioned, $6 billion with your team over many years. Give me some numbers, like how many LPs would you have to reach out to, to raise two, 300 million? What are those factors that would determine the difficulty of a raise? So I was thinking of my first project and that project was a fund manager, very successful.

They had done a friends and family, 56 million fund one. We went with fund two at my firm at the time. Total fundraise there was in excess of 250 million. And there we raised more than a hundred LPs. A lot of them said, this is very interesting. Thank you guys, but I'm going to track you because I cannot do it right now, or this is too early for me, etc. Interestingly there, because we did such a big reach out at the beginning stages of this fundraise, when fund three came to the market, we did a lot

of intra-marketing. We had a first close that was a first and final close at $450 million. But it was because we spent a lot of time meeting with investors, doing that first presentation. We closed the fund. We did non-deal roadshows. We made sure that they knew the updates. We made sure that they know how the portfolio was developing. We made sure that they know that the stories we were telling at the beginning of the fundraise, they knew how those have resulted. And when you have that programmatic approach to capital formation, I would say initial numbers are very important because then those guys, they would say, hmm, interesting. I see the forward momentum. I see what they are doing is right. It appeals. There's a need for my portfolio. And that's what helped us be very successful in the second, in the third, four or five fundraisers.

Initial numbers being basically returns that they could track over time. What do you mean by initial numbers? Initial numbers, meaning the, how many investors we reached out, how many investors we met. So the numbers game for us, you know, and that's why when I think of fund managers, I would say the ones that I don't think understand the game will tell you, look, I want to do a very focused fundraise. I want to go to the 10 top guys that will buy my product. That person in reality, I think does not understand how the market works. You know, there's 10,000 funds in the asset class and you have a product that you believe has long-term appeal and that you're doing a fund management company that's going to grow over time, you need to make the numbers now. Because it's not going to happen that when you're going to raise funds five, you go there for the

first time, the investor is going to need you for the first time. The chance of that investor meeting you for the first time and then making it to the final close typically is harder than if you go and meet them and start making a story of them, start developing a personal relationship, a professional relationship, perhaps start showing them some co-investment opportunities, perhaps start bringing them into your network, et cetera. That increases your sense of being successful on that, on closing that investor, thinking that the current fund closing is not your only goal. It's the most attractive goal at the time, but in reality, you wanna make sure that that relationship transforms and converts over time.

So that's why I do believe that it's a numbers game. 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.

What's the best practice in terms of cadence for following up with an investor that didn't invest in your fund that might be tracking you? I like to provide them with quarterly updates. I like to also say, hey, we're going to go and visit a region. I don't want to do that on a quarterly basis, but typically once a year to keep the conversation happening. And sometimes you will have some opportunities that might appeal to them. And I do think that when you have an investor in mind, when they tell you, actually, this could be a typical case, we actually like the space. We are thinking about how we want to access. We are open to co-investment opportunities. We are open to co-investment

opportunities, we are open to reviewing deals. That doesn't mean they're going to do the co-investment opportunity, but you have a great opportunity there to reach out when you have a potential asset that could be attractive and you can start telling them, hey, I want to talk to you about this opportunity, how I'm ordering writing it, how I think of my investment thesis, of my value add, et cetera, et cetera. And then you can start having more in-depth conversations that perhaps was more useful than the first time that you went just to pitch your strategy and your firm. So that cadence without tiring them, of course, and knowing them that they have a lot of work to do, I think it is healthy. This is different personal than email. I think the emails,

quarterly, you know, every time that there's a new closing and you can show that momentum is great. But once you close the phone, I do think you need to keep a communication. It's not good to be, hey, you remember me for three, four years ago? Because then a lot, especially in this environment, a lot probably has changed. You have to build your well before you're thirsty. Yes.

In terms of today, we live in a post-COVID world. And I know you should meet with everybody that goes into your fund. Obviously it goes without being said, but on a practical level, you raise for a $500 million fund. It's a hot fund.

How many of those LPs, as the fund manager, met physically in person? What percentage? In my experience, that has changed. Actually, you had great fundraising numbers during the pandemic. And that was all done through Zoom. I do think that you probably can have with certain investors an introductory Zoom call. But I do think that when you're talking about serious capital and serious relationship development, you probably need to go and visit and show your face. And it might be different.

New York is different than in Miami and in San Francisco in terms of how many people you have working in the office or not. In Latin America, from what I have seen, you have a lot of people working at the offices and a lot of people that appreciate have working in the office or not. In Latin America, from what I have seen, you have a lot of people working at the offices and a lot of people that appreciate seeing yourself in the room. I had one experience with a mega large top 10 family office. And we went with this fund manager

that was very, very impressive. One of the most impressive guys I've seen present. And the guy said, you know what? The DLP said, you know what? I appreciate you coming here because I now understand it. If you were doing a Zoom call, you will be one box in my five monitors and I'll be just paying attention sporadically versus just having you here, seeing how you act, being

able to answer the questions, being able to know that I could have a personal relationship, a professional relationship with you. And that for me was one of those kind of like defining moments in your mind that you say like, wow, I do think that this is actually the case that you go and need to go meet people. I don't know if that's going to become a old school problem, but I do think there's still a lot of old school people that would like that. And you have to take the chance. So you raised 400 million, let's say for a fund two, fund three today, Q3 2024, what percentage of those LPs with a top quartile manager on average have to see in person

in order to get them in the fund what do you see today in my experience i think of serious investors probably 80 to 90 because when you're essentially pre-covid numbers i mean essentially pre-covid numbers i don't think it's pre-covid numbers although 100 of the money raised during covid or close to it was virtual. Yes. But the driver behind that, interestingly, is, and they focus a lot on reops because during the pandemic, they could not go and visit. So typically you will have a requirement in their investment programs where you need to go and visit, you need to go to the office, you know, touch and feel and see like, okay,

this operation is real. You had that situation happen. So they would be able to do the real because they had invested already. But when you have a new manager, you know, you can see by the numbers, it becomes a little tougher if you don't go and visit because either you have to visit or they have to visit because it's typically a requirement. Now you may have some larger, but typically smaller investors that, you know, they don't have that requirement and they might just do the Zoom. And we have, I would say typically a decent number of those, but the real capital, like when we have kind of that commitment that you say, wow, that typically requires a visit. We were talking pre-interview. You said that you like stories that will resonate.

How do you define a story that will resonate well with LPs? I would say that story resonates. You need to know your audience and there are different audiences. I would divide this as well from the discretionary pools of capital and non-discretionary pools of capital. So with a single family office, with a well-established program, if you know them well from either a placement at your perspective or a GP perspective, and you know what they're looking for, and you know that they have a gap in their portfolio, that you know that they really like this segment, but they cannot invest more in their manager of choice. So they're looking for and you know that they have a gap in their portfolio that you know that they really like this segment but they cannot invest more in their manager of choice so they're looking for potential in the allocation that story will resonate a lot and you can say you typically have this great speaker at the gp side that will tell you a non-fiction story

backed by data and their modes and the way that they do things differently and typically those can be more complicated to tell. And that's fine with those pools of capital that have discretion. When you're talking about non-discretionary pools of capital, I will put here the multifamily office segment, the intermediary segment, the private bank, et cetera, where you're selling to an individual that needs to go then and sell to an end client. Those stories, you typically need them to be strong.

You typically need to be differentiated, but they cannot be the very, very complicated story to tell that you need two hours to do it. And as I think about where we want to direct our efforts and where we think we can add value to a potential client, I always think about those two, on where we think we're going to have more opportunities because you may have a very technical, this may happen, for example, with some hedge fund strategies, some credit strategies,

some bio strategies as well, where you need one hour and a half to go over this. And you will find that there are investors that are fine spending that time because they want to go over it. You're actually going to inform them as they're thinking about asset allocation, et cetera. But whether you have others that are saying, hey man, my business is raising assets actually. I need my family office clients to put more money with me. Those stories have a different type that they need to be developed. And in any of those cases,

it's very important to pair that salesmanship. That's why when I go and we start listening to the story, I always ask my clients, like who's gonna be the guy pitching? Who's gonna be with me on the road? Because I think that first impression is very, very important. And typically you will see that those guys have a structure to their pitch. They have their main points that you need to do. I typically like to hear the story many times as well, because I start

saying like, this is what's resonating with each client. You know, it's important that you bring that and you kind of remind them because they typically have a repeat. When you're doing a roadshow, it's like repeat, repeat, repeat. But when you start these strong stories, I always say like, okay, we're going to have a short time. Let's make sure we touch on these two, three things that we know, if you know the client well, that we know these are the three things that this client needs to go and tell to the end client to be able to raise the capital.

So I focus a lot on those characteristics that we think raise the chance of success and that on the other hand, you may have a great strategy, you may have a great track record, but if you're not able to articulate that effectively, it's going to be a challenge to raise capital. And that's two different decks that you use, one for direct pitches and one for intermediaries? No. Typically, you have on the institutional side, we'll have the fund manager and we'll participate from those meetings in a way that we want to touch on the main points, understand that these portfolio managers may have a need or two that we want to tackle. In the intermediary space, I would say

you become much more of an evangelist from my business perspective, meaning I will do have my fund manager client pitching initially, but then something that is very different in the intermediary space is that while a fund, a pension fund might tell you, look, we're going to pass on this opportunity. Very hard to have that in the intermediary segment because they might say, look, I love it. Not right now, but the next month they're meeting with new clients or they might get new clients and you know, they start that you can go and tell the story again. So in order to leverage our efforts we typically our individuals our sales team is the one doing the storytelling so it's not different decks but we do say like hey i can

tell the story very effectively put the face in front of me i will go ahead and do that but i typically need i typically want at least my core story to come from the fund manager because those are the guys that really have the passion about their business. And you know that they know where are they differentiators if they really know the market. But the intermediary space, how big of an opportunity is that? You have the wirehouses that have a decent side of the market, but they do not have the majority of the market. There is an opportunity that is growing in scale and in numbers on what we call the independent segment. These are spin-off groups that are saying, I don't want to go to the UBS, etc. I'm going to go to more independent shops that are actually now of scale.

On a regional basis, you can actually convert into some warehouses. That capital pool in Latin America is in the trillions of dollars. I would say single digit trillions. And in the U.S. is many, many trillions. Think about how much capital you have in your 401ks. Think about all the capital that as these new generations start getting the transfer of wealth from older generations need to be invested now for the first time into alternative investments. So when you think about that is, I think where a lot of the growth is going to come from.

Why? Pensions, you're not going to get tremendous pension fund capital growth in the US. It's a mature market. You're not going to get the same thing from other mature markets in Latin America, other mature markets in Europe. But the market where you jump from 2% allocation to 4% is huge from a numbers standpoint, is on private wealth. There, you need to go how to manage. Of course, getting into the wirehouses is very important.

Wirehouses being JP Morgan. JP Morgan, UBS, Morgan Stanley. Getting there requires a lot of work. It is very expensive. And of course, if you nail that, that's a great success. When you go the independent route, I would say it's a lot of work as well, but they're more open to opportunities

that will help them to compete with the wire houses. And that has a lot to do, for example, with what is the infrastructure that you're using, the level to be able to invest smaller tickets. Right now, you're not accepting a $10 million ticket. And there are platform sources like iCapital that provide that connection and allow you to move effectively.

And you expect a huge growth in wealth because of Baby Boomers, the inheritance from Baby Boomers to the next generation? I do expect that. I do expect that the wealth that has been caught in pensions, you know, and invested through pensions will now start being invested by through wealth managers if they start doing their work right. And because if you can get greater performance, greater customization, greater servicing to your needs,

I think you'll have people saying, hey, I'm better off just using this individual that has taken the time to understand me and to think that right now I have three young kids and I want to prepare them to college. How can we design a program for that? How can we design a program for my next generation? We were thinking about your parents, grandparents, et cetera. So I think there's going to be number one, a great wealth

transfer from older generations to the new ones. And I think there's going to be a lot of new wealth coming into the system online that is right now offline because of the efforts of a wealth industry as well. You are pretty selective. We've talked about some of your clients off the record. What do you look for in a potential client? You know, they're typically going to come, I would say, I split that in my mind between either spinoff groups from other fund managers that are typically top performers or very successful entrepreneurs. These two groups will have a very distinct approach to investing, a very distinct approach of how they look at the market. They have very clear metrics of success. And more importantly as well, they have already developed a following of investors, executives, former companies that they have dealt with, et cetera. And all of that

amalgamates to what typically I would consider a very attractive opportunity to grow with those firms. Because at that level, we know that there's going to be a lot of work done and we know it's going to be a work that's going to pay off in years three, four, five. So we are looking for those compelling stories with those clear metrics of success, with a good following that is a result of his previous success, with a team that we think has the ambition and the intention to grow scale to larger pools of capital. And that for us make, you know, a very compelling candidate to be a client. What percentage of your funds do you work on multiple vintages, two, three vintages? Is that

a common thing or is it typically one vintage and you bring them out for re-ups? Probably 80, 90% is several vintages because we become very close with these GPs. We have a true partnership. You know, this is business. There's going to be great things that happen. There's going to be things that are not so great. But we do believe in this product. We do believe in the strategies.

And typically, it's a decision of, hey, I just want to keep working together. And there's going to be, as always, easier fundraise, more difficult fundraisers. But when you believe in a product, those guys are going to stay with you through several vintages. How many times does it take for a fund manager to get their pitch down to an elite level? I think it has to be on the 25, 30, 40 pitches with very strong, tough audience where you start getting your feedback

and you start saying, okay, now I got it. Thanks for jumping on the podcast and we'll definitely hang out in Miami very soon. Thank you, David. I really appreciate your time. I love this podcast. I'm a fan. out in Miami very soon. Thank you, David. We appreciate your time and I love this podcast. I am a fan. I will be in touch. Thank you, Mika.

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