Investing Billions - E96: “100% Alpha Portfolio” - Levy Family Partners

Starting point is 00:00:00 Part of what we look for in investment are we're looking for exciting entrepreneurs that we share their vision, that we believe with our time, resources, capital, and connections, we can accelerate the trajectory that they're already on. So the first thing we look for is, is there an alignment of mission? Do we believe in their core thesis and believe that they have the ability to execute to get to where they want to go? What are some of your pet peeves when it comes to emerging managers? I hate this notion of surprises where if there is, we're human, we're fallible, we all make mistakes, we've all had errors.

Starting point is 00:00:29 And if you're not forthright about that, huge pet peeve of ours. We believe in humility. We believe that it's important to never forget where you came from. I don't care how successful you were, we all put our pants on one leg at a time. And in remembering that, we are extraordinarily relationship-driven and team members, and we're always looking for we versus I. And in terms of emerging managers are extraordinarily relationship driven and team members. We're always looking for we versus I. And in terms of emerging managers, just being very upfront and open. This is where I'm excited. These are the things I'm worried about. And this is what the paths could look at if all things go well. We're trying to look for unique ways to make money, unique things that the average investor isn't seeing, whether that's deploying, you know,

Starting point is 00:01:01 water purification or cleaning, you know, investing in Africa. What are some destructive behaviors that you see other LPs do? Mike, I've been really excited to chat ever since our friend Vinu from Longview Asset Management made the introduction. Welcome to the 10X Capital Podcast. It's great to be here, David. Thanks for having me. So tell me about Levi Family Partners. Longview Asset Management made the introduction. Welcome to the 10X Capital Podcast. It's great to be here, David. Thanks for having me. So tell me about Levi Family Partners. So Levi Family Partners is the family office of Larry Levy and his children. Larry created Levy Restaurants, which is one of the largest sports catering organizations in the world.

Starting point is 00:01:37 So think hot dogs, hamburger, beer, food at the various events across the globe, everything from Wrigley Field in Chicago, where I am, to Wimbledon, to the New York Open. And he sold that business in 2006, which created the family office that I'm part of. For Levy Family Partners, what's your investment strategy? So we have four main verticals that we invest in. We have a real estate team managed by the diversified fund, some of the most iconic office buildings in the top cities across the US. We have a restaurant team. We have an internally managed hedge fund, including a specialist and activist fund that focuses on small cap stocks.

Starting point is 00:02:10 And then I oversee our venture capital, private equity and classified elsewhere investments. If I could be blunt, what part of the strategy is beta? What part of the strategy is alpha? In my world, it's entirely alpha. We're focusing on finding outsized returns that can give asymmetric return potential with limited risk. We are not looking in my side for beta at all. And tell me about how you look holistically at your portfolio. We're not looking at investments just for the economic return and limited risk. It's got to be something that activates the family's core, their generational beliefs and things that they really want to be part of with their capital. How many venture funds in your portfolio? And talk to me about your venture portfolio.

Starting point is 00:02:48 So part of what we do in designing our investment program is we're very cognizant that there are certain things we know very, very well, and a lot more that we don't. So we try to do is build something called the knowledge ecosystem, where we try to find sectors that are interesting to us and find the world class experts in those space to compound our knowledge base and help us filter out good investments from bad. So for example, we know very little about self-driving cars, but we found a world-class manager in Maneve that is essentially our rabbi in helping us understand investments in that space. And by building our portfolio out this way, we are able to invest in things. And then we find a deal in real estate prop tech. I can go to Modern Ventures and say to this PM Constance, what do you think

Starting point is 00:03:25 about this? And so I'm getting access to world-class expertise. And if they like it, we'll co-invest together. And if not, it's very hard for me to do a deal if an expert doesn't like it. We don't know. Talk to me about your sourcing funnel for direct deals. How do you source it all through your current GP network? Or are you also sourcing outside of your GP network? Do you have a grading system for direct deals? That's another great question because there is no shortage of interesting things out there to invest in. Part of what we look for in investment or we're looking for exciting entrepreneurs that we share their vision, that we believe with our time, resources, capital, and connections, we can accelerate the trajectory that they're already on. So the first thing we look for is, is there an alignment of mission? Do we believe in their core thesis and believe that they have the ability to execute to get to where they want to go? Assuming we believe that, we will call in a world-class

Starting point is 00:04:13 group of experts that we have through our network. Part of the beauty of being part of the family office network is we collaborate with other families. So if there's a deal in hotel space, we can talk to the Pritzkers. If there's a deal that's in skiing, we can talk to the Crown family. And through expertise and combining what we know best with other families, we're able to filter out a lot of bad things that way. Double click a little bit on the initial diligence process. So we start with a high level premise of the inverse of the American criminal justice system. In the American criminal justice system, you are innocent until proven guilty. Our investment philosophy is exact opposite. you are innocent until proven guilty. Our investment philosophy is the exact opposite.

Starting point is 00:04:51 Everyone is guilty until proven innocent. So everything needs to be triangulated. Everything needs to be double-clicked, especially when we're in the early stage companies, when we don't have the benefit of audited financials all the time. We don't have the benefit of having things gone through an SEC process where a lot of the bad things have been filtered out. So by starting with a heuristic of you are guilty until proven innocent, it allows us then to triangulate absolutely every claim that has been made to make sure that what's being presented is somewhat close to accurate because there seems to be a lot of art in what's presented to us at this early stage. How would you categorize Levy family partners? Are you in a capital appreciation and evergreen type of maximizing returns? Are you defensive in terms

Starting point is 00:05:25 of capital preservation? How would you define yourselves? When I look at Larry Levy, who I have the fortune to work for, Larry is a consummate entrepreneur. He is someone that is an optimist. He's someone that believes that our best days are ahead of us and that we should be deploying into the American dream, which is best expressed through the entrepreneur. And we believe this is the greatest country on the planet, the best place in the world to be deploying capital, and by putting money with some of the best entrepreneurs out there. So we are in capital appreciation investment mode. As a prudent steward of capital, it's important to have a certain base of steady income for more reserves.

Starting point is 00:06:02 But the vast majority of what we're doing is for capital appreciation and taking investing in things that we really believe in. So double click on that. How much of the capital is going into things like venture and how much are coming into things like fixed income and more public securities? You know, we really don't get into numbers. That's, you know, as part of our, that's not something that we typically share, but I would say roughly 30 to 35% is in the venture private equity investment stock. And then the rest deployed between our internally managed hedge fund, the restaurant team and the real estate team. Talk to me about how you plan for drawdowns across venture funds.

Starting point is 00:06:35 So you have a vintage and it's obviously a private equity style drawdown vehicle. And how do you plan for that? We have a very, very robust accounting team in back office that's really terrific and helping us, you know, make sure that we're on top of our liquidity needs. You know, we're in constant communication with our managers. We're constant communication with underlying funds. Some on a daily basis, some on a week basis, certainly on a monthly basis. And we hate surprises. You know, we want to be on top of things.

Starting point is 00:06:58 So if something big is happening, we're well aware of it and we make a plan accordingly. And we obviously reserve, you know, we make our commitments contingent on where our liquidity is at that moment. And we have a full expectation that if there's going to be a drawdown, we're trying to be more aggressive in our internal markings just so we're prepared. And in those cases where you are surprised, what are some remedies for when you don't have capital? Are you taking out loans? Are you selling public securities? That's a great question. I mean, first of all, if we would never make outsized bets that are things that, you know, we wouldn't be immediately able to satiate if they were called. If you commit to something, you should expect that it's going to be drawn in a short order. And so we'll never make a bet that we aren't able to fill. It's just not who we are. And if we need liquidity, we have liquidity. There are all sorts of buckets that we have. By having a very diversified portfolio, we're able to pull liquidity from different areas. Is that all in treasuries? How do you manage the securities that you're matching against the liabilities of the drawdowns? So Larry's son, Ari, is an expert in publicly

Starting point is 00:07:53 traded securities and cash and liquidity. And he's really, that's his mandate as part of our liquid book and with part of his internally managed hedge fund. So he's constantly on top of that. And we spend a lot of time in our weekly investment committee meetings, understanding where liquidity is at the moment and making sure that we're in a good position. Again, we never want to be surprised on the negative side. Let's double click again on your diligence process. What do you like to see in the data room? I absolutely believe in quality over quantity. I find that there's a lot of fluff out there and a lot of things are unnecessary. If I'm doing my job right, it's filtering through all the unnecessary things and being,

Starting point is 00:08:29 here are the seven salient points that we need to know to make an investment decision. And how do we get rid of the fluff? What are those things that you wish managers would have in their data room? And what are some things that you wish that you consider fluff that you wouldn't want them to have in their data room? So first of all, going back to this notion of hating surprises, I never want to be surprised. I always, if there's something negative that's going to happen or there's something in the data room, very likely we are going to find it. And I'd much rather proactively say, here is something when you do your diligence, you are going to find, and here is why it is not an issue. If we do our

Starting point is 00:09:02 diligence and certain material facts are not there, that's a red flag and very likely we're not going to do an investment. Versus here is something that happened, why I believe it wasn't a big deal, and here's what the lesson that we've learned from that mistake or this error, and here's why it will never, ever happen again. So again, I never want to be surprised. I want to know what the issues are, and I want it to be a collaborative effort. We're looking for teammates. We're never going to be investing in things that we're looking for on the outside are distressed. We're going to be looking for someone that we believe in their vision.

Starting point is 00:09:30 And we believe in radical transparency, radical openness. And we want to know, look, it's easy to be your friend in the good times. But to know who's going to be there when the cold wind blows, who's going to be in the trenches. This is a battlefield. This is a war. It's a team. And if we're going to invest, we're on your side.

Starting point is 00:09:43 But we've got to know that you're on ours as well. What are some of your pet peeves when it comes to emerging managers? So one I would say is exactly what we were just talking about. I hate this notion of surprises, where if there is, we're human, we're fallible, we all make mistakes, we've all had errors. And if you're not forthright about that, huge pet peeve of ours. We believe in humility. We believe that it's important to never forget where you came from. I don't care how successful you were. We all put our pants on one leg at a time. And in remembering that, we are extraordinarily relationship-driven and team members. We're always looking for we versus I. And in terms of emerging managers, just being very upfront and open. This is where I'm

Starting point is 00:10:19 excited. These are the things I'm worried about. And this is what the path could look at if all things go well. Given you have such a focus on reputation and trustworthiness, what percentage of your managers are you sourcing from co-investors and what percentage are you sourcing directly cold? I would say 60% come from our fund managers and four come cold. You know, with our thesis driven, you know, we're constantly by applying creativity to the investment philosophy or the investment process. We're trying to look for unique ways to make money, unique things that the average investor isn't seeing, whether that's deploying water purification or cleaning,

Starting point is 00:10:52 investing in Africa. In terms of planning and allocating to certain asset classes like private equity, do you think about it holistically or are you just basically deploying on a one-off basis? The family would like to look at things in individuality, you know, an individual investment, things that speak to them. And they never want to have an artificial parameter prevent them from deploying capital in something that they're very, very excited about, or saying, I need to add to this exposure

Starting point is 00:11:16 just to fill in this artificial bucket of having X percent in a certain asset class. They're much more deal specific. If there's something that they love and it speaks to them and they think that we can add a lot of value in, then we're going to go in it, irrespective of kind of where we are in the portfolio. Now, year end, we do take a step back and say, how do we look? How does our portfolio from a percentage? Are we out of whack in a certain area? If we are, then we'll proactively try to fix it, but we're not going to automatically add things that don't fit unless there is an organic desire and something that really speaks to the family and what their beliefs are. What do you wish you knew before you

Starting point is 00:11:49 started at Levy Family Partners? You know, at business school, they said investing was just all up and to the right. You know, it takes a lot of work and this is a full contact sport. And it's a lot of fun, but it's a lot of work and it's grinding. And I think understanding the psychology and, you know, these are founders with dreams and they've got their own mortgages and they've got their families and really understanding the dynamics that go to play and appreciating the X factor that there are so many unknowns in the world that we're playing in. And how do you handle when the bad things happen? You know, those are things that you don't necessarily focus on the curveballs that are going to come along

Starting point is 00:12:21 the way. It wasn't so long ago that Silicon Valley Bank failed. That's not something we were expecting. You've got global macro events. You've got a pandemic. I mean, every day is something new. And how do you navigate the uncertainty? When you take a step back and focus on how could you be more effective versus more efficient, working on the things that really matter, as an LP, what are your points of leverage in terms of generating returns? Where does a little bit go a long way? You know, one of the lessons that Larry taught us from his many, many years of running Levy Restaurants is the value of Midwest service and adding just as simple as it sounds, how can I add value? How can I be not just a check to you, but what are the pain points that you're dealing with and how can we help alleviate them? What are the one, two or two things that if we could help you on would

Starting point is 00:13:09 exponentially change your trajectory? I believe that if we can answer those types of things and have an honest discussion, and if there are certain things, David, that we don't believe we can add value, knowing it's okay to be passive and to step back. We only want to be helpful when we can and try and understand what those pain points are. And if we aren't the right solution, how can we find the right group? So for example, we have a 24-7 blood pressure monitoring company called LiveMetric that can identify a cardiac event ahead of time. The biggest pain point they have is how can you get a wearable device that's comfortable on top of your Apple device? Because if I can give you something that

Starting point is 00:13:42 you can sleep and now putting you aside, if your parent can wear this while they're sleeping and this device can identify a cardiac event before it happens and you can immediately alert people, this is life-changing. And what is the friction to get someone to wear something like that at night? And so spending that kind of time, understanding what are the pain points to help change your trajectory even further. 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.

Starting point is 00:14:11 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 are some of those pain points that GPs oftentimes need help with in your opinion? The GPs, from my experience, get overwhelmed by the vast majority of demands they have on their

Starting point is 00:14:29 time, both from their portfolio and their investors, and helping them to take a step back and say, how can we focus on what's really important in alignment of interest and having this fund be the most successful it possibly can and remove the noise? So whether that's having a quarterly call on Zoom versus 30 individual calls, whether that's giving them the time and space if they're dealing with a crisis to let them solve it and come to us a day or two later and giving them that freedom to have the time to solve a problem and do what they do best. The reason we back them in the first place was for their judgment and giving them the respect to have the time to deploy rather than be dealing with other things that are not as important.

Starting point is 00:15:08 So focusing on the one thing. What are some destructive behaviors that you see other LPs do in the ecosystem that you wish other LPs would not do? I can't speak for other LPs because I'm not one, but I think the most important thing that I have seen other LPs that is very destructive is if you make a bet on a GP, you're basically making a bet on their judgment and their process and their philosophy. If you have a difference in that philosophy at the onset, you should not be investing. But once you've deployed capital, at some point, you to infiltrate the GP thought process for making investment decisions and doing it very aggressively to the point where they are in their train of thought. And it dilutes their core competency and their core ability to make investment decisions.

Starting point is 00:15:55 And I think that can be destructive. When it comes to working at a family office, what's the biggest advantage to working at a family office versus working at an institutional LP? The greatest advantage of being in and working for a family office is I can go to prospective investment and I don't have a gun to my head to raise the next fund. I don't have a gun to my head to deploy capital. I don't have a gun to return capital as much as I'd like to. So I can go to a founder and say, what is the natural path of the business if you capital wasn't an issue? What do you want this business to be? If I took the pressure of getting an exit in three, four years off of your shoulders, and by giving them that ability to dream without this artificial constraint of imposed by me having

Starting point is 00:16:36 not having a fundraising circle, it's my biggest advantage. A fund can't offer that. They cannot allow a company to operate for an elongated period because they need to return capital. Now, sometimes you're forced to, but at the onset, I can say, what is your dream? How can we help you achieve it? What would you advise if a friend told you that he or she wanted to work at a single family office? What would you advise that they consider before taking on that role? I think it's an alignment of interests. Do you share the core philosophy of the family? Do you understand what inherently drives them across generations? Do you believe in the things that they believe in? Just so I am beyond fortunate that the Levy family, the values they

Starting point is 00:17:14 share, I learn from them every single day. I admire them. And being able to be in that ecosystem is incredible. Not all employees of family offices feel that way. I feel lucky every single day that I get to work for them. As a saying goes, when you know one family office, you know one family office. On that note, this has been a great chat. David, I'm very grateful you spent the time with me today. Thank you, Mike. Look forward to continuing conversation in person. Thanks for listening to the audio version of this podcast. Come on over to 10x Cabo Podcast on YouTube by typing in 10xCabot Podcast into youtube.com and clicking the subscribe button.

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Investing Billions - E96: “100% Alpha Portfolio” - Levy Family Partners

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