Yet Another Value Podcast - Dave Waters of Alluvial Capital on $PX

Episode Date: September 16, 2022

Dave Waters of Alluvial Capital comes on the pod to discuss his investment thesis on $PX.You can find Dave's original podcast appearance, where he discuss PX when it was still PIOE and some other small caps, here: https://twitter.com/AndrewRangeley/status/1300763059267481600?s=20Chapters0:00 Intro2:15 PX Overview3:30 Management fee streams5:10 Is PX's focus on fund of funds a concern?8:25 Disintermediation risk for fund of funds11:50 What is the market missing at PX?15:20 Why PX versus a larger alt?18:30 Comparing PX to KKR23:20 PX's acquisition outlook25:15 Can PX really cross sell funds?28:15 More on PX's acquisitions30:00 Adverse selection in fund of fund acquisitions34:00 PX's recent CRSS investment42:30 Why isn't PX buying back stock?46:30 How PX's stock will get more liquid over time48:15 PX's management team track record52:00 Why Dave's digging in Italy and Poland

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Composer. Trade slash value. That's Composer. Dot trade slash value. See important disclaimers at Composer. Trade slash disclaimer. All right. Hello. Welcome to yet another value podcast.

I'm your host, Andrew Walker. If you like this podcast, it would mean a lot if you could rate, subscribe, review it wherever you are. With me today, I'm having. happy to have on for the second time, one of the original guests on this podcast. My friend, Dave Waters, Dave is the founder, CIO of Aluvio Capital. Dave, how's it going? Great, man. How are you? Great to be back. I'm doing good, man. I'm doing good. Let me start this podcast the way I do every podcast. First, with the disclaimers, remind everyone, nothing on this podcast is investing advice.

You know, knowing you, normally I'd say that and then I'd have to give the added disclaimer, Dave Funk, Dave Traffics and some really quirky off-the-radar securities. We're actually going to be talking about one of your larger ones today, but everybody should just remember, not investing in advice. Please do your own work. Consult a financial advisor. Second to pitch for you, my guest, I mean, you were one of my original 10 guests. You were top of my list when I launched this podcast.

I love chatting with you. I love following you and just super excited to have you on for a second episode. So all that out the way, let's go to the idea we're going to talk about. The company is P10 Holdings. The ticker is PX. I believe this is your largest holdings based on your letters, which I read pretty aggressively. So people know the conviction that you've got in the work you've got on this.

I wanted to talk about it because I got so many in balance people saying, oh, what do you think about PX? And I was like, well, I know the guy who kind of is the ax on it. So I'll pause all that. What is PX and Y? It's so interesting. Great. Big story here.

Lots of developments happening. I've owned it for years. And it's so different than what I got going. but the storage system is better and better. So P10 is an owner of management fee streams from alternative asset investment vehicles. So all the way from traditional private equity fund to funds, through private credit, through venture and through impact slash ESG investing, and now getting into venture debt in their latest purchase. They are a pure management fee receiver. They have no exposure to carry.

And I like the vertical there in. I mean, I think alternative investments will continue to grow their share of the dollars of the investment. And there'll be some ups and downs along the way. But P10 will grow based on that. I mean, the returns on capital are insane. And they also have a huge NOL that they've successfully begun using, unlike a lot of NOL shell companies. So, yeah, lots to say about the management team, lots of say about the strategy, but that's the very basic, because we're talking alternative assets, management fee streams.

Perfect. That's great. And look, I think one thing, if people haven't done any work on the alternative asset management fees dreams, I think one of the big pieces of your thesis and people should understand is the alternative asset fee streams, you know, this is the old private equity, they charge two and 20. The 20 part is an incentive fee, which we make a big profit and we keep 20% of the profits. The two is a management fee stream.

And that management free stream, because it's so stable, it comes in hell or high water, people give it a much bigger, a much bigger multiple because it's so steady, it's locked and all that. And the big thing with PX, and you can correct me of wrong, you mentioned in the opening, they only buy that management fee stream. So what you're seeing is they buy that management fee stream and you're saying, hey, I get this, I get great visibility. People can and will slap a big multiple on this.

And that's one of the really attractive things about PX. Absolutely. I mean, I can hardly think of any other companies out there that know almost to the dollar what their revenue will be three, four, or five years out based on their current asset base. And I should say in this case that, yeah, I mean, two and 20 might be the standard. But in the case of T10, they're mostly running funds of funds. And their average fee rate is right around 100 basis points. And that's been pretty consistent over time. So essentially, they're pooling capital from other investors, getting a big pot. of capital and then dispersing that amongst various alts managers that they think are attractive and can get them into the best funds that way with their larger pull of capital. And for their time, for their service, they get about 100 basis points a year. That's great. So let's start there because their funds are almost exclusively fund of funds. I think one or two of them aren't, they've got a GP fund, which is really interesting stuff. But most of their funds, the vast majority of the AUM is fund of funds. And I do think that's interesting because, you know, fund of funds

have been around for a long time. And I think a lot of people look at a fund of funds and say, hey, a fund of fund, I invest in Dave. Dave takes one in 10 off the top. And then he goes, finds 10 private equity managers to invest in. We're all going to take two and 20. And a lot of the pushback I've heard on this idea. And a lot of the pushback I personally have is it's a fun to fund. And like at some point, like fund to funds, it's a fee stream on a fee stream. it's, you know, you have the risk that as your GPs get bigger, maybe they go directly to the LPs. As the LPs get bigger, maybe they go directly to the GPs. So I just want to ask you about that fund of fund structure.

Like, what gives you confidence in the fund, in the fund of funds that they're investing? Because, again, it seems like fees on top of fees to me. Yeah. And it is, in a way. But as in any fee, the question is, am I getting more value than what I'm paying? And I think for a lot of cases, what you have is, the typical example I give is, let's say you're a small college or university. You have maybe an endowment of, I don't know, 80 or 100 million. So small.

And you want to put, say, six or seven million into private equity. Well, you might have an investment committee of two or three people and then maybe a board of directors that they have to sign off. But do these people really have the ability to fly around the country and due diligence on 50 different private equity funds and then decide on five to invest in. And the answer is they absolutely don't have that time or that expertise. But what you can do is you can go to somebody like RCP advisors, which is P10's sort of traditional private equity manager. And you can just say, okay, they're raising whatever fund and you put in $6 million

and they'll get equal checks from another 100 people in your search. circumstance, and they'll do the diligence because they have that massive history and experience and investment staff, and they'll put you in the best funds they can find, and you get diversification, and you get, well, frankly, a liability reduction because if you're a tiny little investment staff of a small university, if you pick a good fund, everyone says, congratulations, you did your job. If you pick a badge bun, you're out the door because the buck off stops with you. So really it's sort of like an outsourced investment staff in some cases, and that's where the value of B comes in. Yep. I think, I don't think I've ever had KKR on this

someone pitched KKR on this podcast, but that has been a long time pitch for KKR, Blackstone, and all these really big guys, like, hey, if you're at a college endowment and you go take a risk on a startup fund and they do great, awesome, you get a pat on the door. They go up 100x. You get a pat on the back. If they do awful, you get fired. Whereas if you invest in Blackstone, they do great. Pat on the back, they get fired. They say, well, everybody else invests in Blackstone. Can't hold that against you. Exactly. Fun to fund. Let me just ask one more question on that. So what about disintermediation risk? Well, right? Like the example you gave was a small college endowment who goes to RCP to get advised on private equity. And I could see disintermediation

coming in two forms. One, you know, you always hear about the KKR, the Blackstone. They're trying to suck up every dollar they possibly can. Right. Like they've talked about, hey, how can we get into individual investors IRAs, right? They're trying to get $500 tickets from individual investors. If they're trying to do that, I'm sure they're trying to think of ways to make it a lot easier for every small college or endowment in the country to write them a $6 million check. And then the other way I could see it would be like, you know, someone like a JP Morgan or the giant banks, they do have advisors. And it does seem like they could almost undercut RCP on fees just in the way that they've got these great relationships with,

they've got relationships with the GPs and they can make money on all sides of the transaction, right? Like they took their fund of funds fees to zero, but they got the college endowments banking business and they got the GP if they got all the advisory fees for the all the transactions they do. Like they make so much more money on that. So how do you think about the disintermediation on both sides of that coin? Yeah, I think the RCP in particular has tried to address that risk a little bit. But number one, by focusing on a niche that's sort of out of a little bit out of reach of KKR and Blackstone, in that they're focused on the lower middle market of private equity. So their funds are smaller. They're looking at opportunities that just might be a little bit too small for your 10, 15 billion private equity fund that's out there.

So they're sort of like I am, kind of competing in a niche that is just inaccessible to the really large pools of capital. But at the same time, I mean, the competition is stiff in this industry. I mean, there's a lot of people out there competing for the dollars because it's so attractive. The economics are amazing for the sponsors in the GPs, a lot of cases. And that also comes down to the fact that RCP has delivered really excellent returns over time. I mean, I think that there's a lot higher risk of being intermediated if you're a more mediocre or kind of lower quartile provider. but RCP's returns have been fantastic. And you can look, they publish them right there, they're right there, and their investor

deck, it's not private, it's not secret stuff. But they have a 20-year track record of really delivering for their LPs, and that creates a lot of loyalty and momentum. And, you know, these LPs are just likely to re-up the next time they come around for a new fund. And that kind of, so the risk is definitely there. It could definitely happen. I mean, but I know they're thinking about it just as hard as J.P. Morgan and the bigger

ones are and they have the niche focus and the track record to defend their, to defend their franchise. Yeah, one of the classic things, maybe not so much in 2022 when all tech growth stories have been killed, but in 2021, it's like, hey, when the large comes for the big, or when the large goes for the small, the small generally wins because it's all they think about. They're much more nimble. They're going to make a much better product. And I think something similar could be applied to RCP versus J.P. Morgan where it's like, hey, RCP, all we're doing is focusing on these small guys who can't write a big enough check to get into the giant PE, like we're, we're going to hold their hands. These are very much relationship businesses that can't be

underestimated, hold their hands, really customized reporting all that sort of stuff. Anyway, I was so excited to talk to you. I jumped straight into fun and fun and I didn't even start with my traditional open question. So, look, we're going to talk about a lot of stuff. We already talked about a lot of stuff, but I just want to back a big and just high level say, look, market's a super competitive place, right? PX, it's on the smaller side, but it's certainly unknown. It's a finch-wit, darling. So I just want to ask, you know, what is the market missing that you are seeing that makes

this a compelling investment that's going to generate, hopefully, risk-adjusted to alpha, if all goes right? Yeah, well, first I have to say that, you know, even though P-10, it's like a one-and-a-half billion market cap, so a solid small cap, in other words, it doesn't trade that way because the share structure is nothing like that. There's only about 20 million shares that trade that were listed. They sold in a combination of capital raise and some insider selling in their IPO in 2021. And of that amount, probably less than half is free floating. So even though this thing has a one and a half a million market cap, it has less than $100 million in the free float.

So honestly, it trades like a microcap. I mean, it's well off the radar of the really large pools of capital out there. It's not included in any kind of passive index. And so it doesn't see the flows that go into and out of the market. It doesn't go that way. And it's still, I think, just kind of little known and under research. I mean, as far as most people are concerned, P-10 sprung into existence in late 2021 when the IPO. So not even a full year of reporting. And so the story's just not really out there yet. I mean, even though they traded over the counter for years before that, and I very enthusiastically owned them. There's just not much of a track record here.

They only resumed SEC reporting a couple of quarters ago. So it just takes time to get the story out. I also think a lot of people look at it and think, okay, a small kind of subscale, alt provider, like, why wouldn't I just buy one of the blue chips that are out there that have this, you know, immense brand recognition and just hire the best people all the time and are, like you kind of mentioned, like the IBM, alt solutions for institutional investors. And I get that. And that comes down to sort of like, do you, what's management? Like, are they capable? Are they incentivized? And I happen to think the world of the two guys who established

the company, Clark Webb and Robert Alpert, these guys put $4.5 million into a bankrupt shell about four years ago. And now they've turned it into hundreds and hundreds of millions in equity value for each of themselves. It's one of the best deals of this century, I have to Fank and few people know about that yet. So I think the world of these guys, I think they're super bright, super motivated, and they want to keep on building this. I mean, 59% of P10 shares are owned by insiders. And it's meant to be a long-term thing.

I mean, you don't see people tricking shares out of the market. They believe in this. And a lot of them are locked up for the longer term. So I love it when I see a case where a business is owned by people who have done well and they're pretty comfortable. But if they can get the shares, the double, triple, or more, they're talking about incredible wealth, and they have every incentive to do that. That's great.

So there are two threads that I want to pull on in what you just said. The first was you said, no one knew about this into the 2021 IPO. And I just want to note, Day's first podcast appearance, late 2020, PX, it was PIOE at the time. It was a focus there. So I just want to say, we were focused on it. That is true. That is true. But no, the other thing you said, people ask about why not invests in one of the larger

Alch. You know, I mentioned KKR, Apollo, Blackstone, all these guys are public. And that actually really segues nicely into my next question, which was, you know, all of investing is opportunity costs. And obviously, like, we can say why buy PX versus any number of other stocks, right? But I think the opportunity costs directly here when you think about it is, hey, let's compare PX to the best peer. And that's probably the other listed guys. So maybe we can start by just talking a little bit about PX's valuation. And then we can dive into talking about comparing them some of the bigger other guys. Yeah, totally. So right now on my numbers, I think that with the latest acquisition of Western technology investors, I think P-10 can do about 90 cents in run rate free cash flow

for year. And a couple things that go into that, P-time is not a cash taxpayer. They have a massive NOL shield and they also have some intangible assets. They amortize and you get the reduction there as well. So they won't be a cash taxpayer for quite a long time, probably later this decade, if not sooner, if not later than that, I mean. So there's a tax shield. So the earnings are not directly comparable. I'll just add. If they're a taxpayer before later than this decade, I think you would be pretty happy because I don't know, it might be an acquisition's mission shut off, but it also means that earnings just skyrocketed so much. So if they start paying taxes, It's two years from now. It's like, oh, they're making so much money. It's a good problem to have.

Correct. Or some crazy legislation came out that wiped away. Nothing's impossible. But yeah, I'll be thrilled if they burn through that NOL faster than I think they can. So generally, right now they're running it around, just around 18.5 billion in fee paying assets under management. On that, they get about a 1% fee rate. So, you know, call it 180 million in revenue. And after that, the margins are incredible. They're guiding from between 55 and 60% even to margins. So, I mean, you're converting well over half of each revenue dollar into pre-tax, pre-interest, cash flow. They have a little bit of debt that they've taken on to perform acquisitions and for liquidity purposes.

But it's low cost. It's well structured. It's long term. So essentially, after you get to the EBITDA, then after you did that, the interest cost, that's free cash flow. There's zero capex. They have no physical assets whatsoever, which is a pro-a-con in some ways. It's entirely people-based. So they have to take care of the people. But the cash flow profile is so immensely cash generative. But I think it deserves a really high multiple. But here we are trading at around 13 times, what I think is

current run rate cash flow. And with the AUM growth, it's guided to over the next couple years. I think we're at below 10 times street cash flow, looking just a couple years out. People can see me nodding long because every, I built a model, like, I'm really interested in the idea. So I built a model. And it's, it doesn't have to be a complex model because everything Dave said, they give you on the calls. They talk about it all the time on the Q2 calls, but you can basically just plug in, hey, here's their, here's what their assets are at, 1% of revenue, 55% EBITDA margin is the low end. I think they're a little bit above that already, but, you know, it can fluctuate. But you do that. And that's your current

earnings and then you've just got to figure out what the essence of management. So he hit everything in my model right off the bat. Okay, so trading net, let's call it low to mid teams run rate free cash flow right now, obviously growing. I'm going to talk acquisition of seconds, but right now they're actually growing really nicely organically too. Some of that's good performance. Some of that's a little bit of dry power of committed capital coming in, all that type of stuff. But let's compare that to the most, the best alts. I only build a model out for KKR for this podcast, but I think what happens for KKR applies to most of the other ones. So KKR is trading for about $50 per share, a little above that right now. Of that, about half of it is book value per share. And KKR is unique

among the Alton that they keep a lot of their book invested in their funds, right? So that $25, $26 per share, that's, hey, KKR flagship private equity fund. We've got $2 billion in there, all that type of stuff, right? So if you just value that at book, which some people do it above, Some people do it below. I think book is fine. They trade for $25 per share. That would put them at about 15 to 16 times run rate kind of management fees, right, which is the direct comparable there.

And that's not even giving them credit for they get the incentive fees because they own the full GP, unlike PX, which owns only the management fees. So I look at it and say, okay, I get a little bit of a discount with PX, but that's assuming zero value to the KKR incentive fees. And I think we talked fund of funds versus GPs already. But I would probably lean a little bit more towards owning like a direct GP versus this. Now, the counter, which I'm sure you will say is PX is going really quickly. They've got acquisitions.

And we're going to talk acquisition second. But just when I lay out that when I lay out that opportunity costs, like why is PX the way to go versus KKR or something else when they're kind of at this similar thing, even if you just zero out incentive fees, which is a bold. zero out. Yeah, well, first off, I got to say, I don't own KKR, but I do think it's cheap. I wouldn't call anyone dumb or anything for buying KKR because I think that's an incredible business. And it does trade at a pretty reasonable price if you asked me. A couple things I like about P10, though, is like, like you said, I mean, I like the pure management fee focus. It's very easy to analyze. It's really like a growing annuity. And so I think it should get that premium. I mean, other private equity sponsors, their earnings are going to bounce around a lot more just because

in the long run, they'll do very, very well with their incentive in their carry, but in a particular year, it can be up 50 percent, down 50 percent flat. You just never really know. And so it's just the predictability is a nice feature. And you can touch on it as well. It's just the growth opportunity. I mean, your KKR, your Blackstone, your Brookfield, whatever, they're just, they're giants. I mean, they, P10 is kind of where they were 20 years ago or maybe more. And so, I mean, yeah, obviously they're going to continue to grow, but at some point, there is a limit where they just will have difficulty maintaining, you know, a high, single digit, low teens rate of AOM because just isn't that much AOM out there to suck in. And so at some point, and I'm not saying it's

this year or even soon, but at some point, they growth will slow down because they can really only tech assets from each other in a handful of other competitors at that point. I think P10 has a lot more blue sky in that nature, in that respect, and they can do things that move the needle a lot more easily than KKR. I mean, with this latest acquisition of Western technology, they're increasing their AOM by about 10%. And it's going to be about 12% accreted for pre-cash flow. Think of the size of the acquisition that is necessary for Blackstone or KKR to add 10% to its. AOM. In most cases, they're a lot more focused on in driving AOM growth internally, which makes a lot of sense. For now, I mean, Pathan is doing a great job, increasing AUM internally,

but they're also very, very much engaged in the acquisitions. But it's more than a pure financial engineering sort of thing. We can get more to that, how they think about acquisitions later, but it's such a much larger opportunity for them versus their mega-cap years. Let's talk acquisition now, because that's actually the piece I was most interested in that's such a great segue. I think it's, aside from the fund of fund parts, that's the piece I was most interested. So, look, we've talked PX as investing in fund of funds, what they do, all that sort of stuff, but a big piece is they're doing acquisitions, right? And what they're really doing is they're going, and especially buying into new verticals. Just two weeks ago, you mentioned it was WTI, right?

So they bought a venture debt fund, basically, a technology debt fund. So they're getting into that. And I'll talk crossline a second, but one of these tough things I have with acquisition stories, which PX is, they're going to go out and they're going to buy fund of funds. And you would think a fund to fund should be a reasonably sophisticated buyer and seller, right? Their whole thing to their whole things to college endowments is, hey, we're sophisticated and evaluating these private equity firms. I would hope they're sophisticated and evaluating what their own business is worth.

So PX is going to go buy from these sophisticated sellers. and they're going to somehow create value from these acquisitions, right? And generally, when I think acquisition stores, you create values in two ways. You can do it through synergies, or really you can only do it through synergies. Here, PX does have the tax shell, which gives them some benefit, but I don't see huge synergies to PX just going in buying WTI's management feed. So I do worry like, hey, they're buying from sophisticated sellers without synergies. how are they really going to create value going forward from doing this?

Right. And you're exactly correct. It's not the case where they can go and if they can run this more efficiently than the previous owners and they'll ring out savings. It's not that at all. A couple of things is, I mean, one, they want to round out their product offering because the more different types of alternative strategies they have in their stable, the more value they provide to their LPs who maybe come to P10 and looking for private equity and Pete Kennel say, well, you know, why don't you compliment that with some private debt or things like that? Can I just pause there? So this was going to be one of my next questions, but so when the LPs come and they're looking for things, PX can go and this is cross-selling,

right? But I was curious because RCP has the relationship, right? They bought RCP and RCP's got all the college endowment relationships. Just PX owning RCP and then going and buying WTI? Like, can they really cross-sell like that, right? Because the College Endowment went to RCP for the private equity firm. It seems like a tough thing for RCP to say, hey, sister company over here will help you with venture debt. Does that make sense? A serious thing, but they really can and they really had success doing that. And one reason that it's economically attractive for the RCP principles is the RCP principles are big PX stockholders. And that's one reason they kind of insist on the companies they buy and taking a lot of stock because they want them aligned for the longer term.

I mean, they don't want the silo effect where, oh, if I send them over there, that's less revenue for RCP. But if it all comes back in a way, if they're all big owners of the mothership in a sort of way. So, so yeah, rounding out the product set is a big thing. Additionally, like you said, they want to be involved in some of the fast-growing sort of more innovative niches within alts. That, for example, was the motivation behind buying Bon Accord, which they lifted out of Aberdeen, which in kind of a circular thing buys minority stakes in GP's, in private equity sponsors. So they kind of have that part of the value chain, which can grow as well. And also Hark, which sits under the debt silo, but they provide financing,

on that asset value to private equity funds, not asset-specific financing, but to the entire fund, which can accelerate returns to LPs, which can, they can provide to portfolio companies that they want to. But it's an innovative thing, and their first fund did really well, and they're going to raise another one here. But, yeah, I mean, you're exactly right. It's not that they buy this and it just can make, because it makes sense of a spreadsheet. It has to make strategic sense in the context of the greater PX, P10.

structure. And they've emphasized a lot of times in calls and in shareholder meetings that I've gone to, that they don't view themselves as a dealer in alternative assets managers. I mean, they're not going to buy something and guessing it all up, make it look great and sell it five years down the line. They consider it a permanent relationship, which is a reason for insisting on a high percentage of stock. I mean, in some cases, they can make a greater return on equity on their investment by using all cash or using more debt. But that's the reason for insisting on a large amount of stock in the transaction is to align the incentives there. Well, that hit my next question because I was going to ask about using stock because the other thing with acquisition stories is it's tough when you say, hey, we're going to create a lot of value through acquisitions.

But if you're issuing a lot of stock for it, it kind of does come back to say, oh, you're the one more question. So you kind of, and this was more when we were comparing them to kind of KKR, but you talked about the blue sky opportunity, how much there is. And I do wonder, how many verticals are there for them to buy fund-to-fund advisors, right? Or do you think they eventually go exit the fund-to-fund? Because, you know, they've already got a lower mid-market private equity. They've got a few different debt. They've got the tech VC. Like, there are that many categories for fund-to-fund.

It's not like you're going to have a fund-to-fund that's specifically focused on New York real estate private market lender. So are there a lot more fund-to-funds that they can do? Or do you think the blue sky is just eventually they exit fund? to funds and they're doing P.E. directly or they're buying P. LP management fee streams directly or something like that. Yeah, well, they basically move past the focus on fund to fund. So RCP is still, of course, their largest manager that they own. And I kind of consider it, that was their blue chip acquisition. Yep. Very, very strong brand, long operating history, a large asset base. And having that

in their stable, that brand name, that cash flow enabled them to go out and buy a couple more more entrepreneurial, more innovative offerings. And so the most recent acquisitions have been in direct funds outside the fund of a strategy. And I do like that longer for the longer term. I think they'll continue to focus their efforts there. Let me ask a little bit more on the acquisition strategy. So, you know, there's this, I've heard it's been in about, I don't know if I don't fully believe it, but some people will say, hey, the things that you, the best businesses that you want to buy a lot of times, they're not publicly traded. So especially people business.

And I think the example of this would be consulting, right? Like the big three consultants, Bain, BcG, McKinsey, all of those are private. If you saw their financials, I think a lot of people, even if they scoff at consultants, I think a lot of people would be really interested in buying their consulting consultant businesses if they could, but they're not public, so they can't. there are public consultancies, but those tend to be much, much lower market, much less brand, not as good businesses, basically. And the same could probably apply to accounting firms, a lot of other businesses, right? So I do think people say, okay, yes, there are management fee streams

for sale, but they're not management fee streams from the best businesses, right? You can't go get KKR's management fee stream. You can buy KKR stock, but you can't get direct access to the management fees and that's because the best people at this they're betting on themselves they think there's a lot of growth to come they're just not going to sell basically so some people would say px is buying they're just buying average company management fee streams and eventually that's going to come back to hunt them in some way right it could be i think you've already addressed seller bias but i do think there's other ways to come back so how would you respond to someone who said hey they just can't get access they're kind of buying from the second tier management fee streams here

Excuse me. Yeah, absolutely. So at first I would say there is probably something to that. I mean, yes, they're probably not going out and buying you very pinnacle of the most incredible management teams and sponsors in each field. Because like you said, either they're not for sale or if they are, they're so incredibly pricey that it just wouldn't make any sense. think they are doing is identifying good, these streams and good managers with the potential to be great. They need a long-term home. It could use a bit more exposure, could use a greater amount of marketing expertise and more resources dedicated to bringing assets to them. A good example is Truebridge, their venture provider, which is successful in its own right. But, but had never done any fundraising in Europe before they bought them. Just didn't have the personnel, didn't have the connections. And that was one of the first things that P10 did when it bought True Bridge is start talking to their LPs in Europe and introduce them to the strategy.

And it was a great way to, it was very successful. They almost immediately raised several hundred million additional capital from institutional investors and in the Netherlands and other places for that. So a lot of these businesses are successful businesses doing a lot of great things, but they don't have the overarching infrastructure to do everything they want to do in some cases. They've been more focused on building the relationships with their existing LPs and building their investment expertise. But being a part of a structure like P10 can sort of take them to the next level. So I guess good to great is the goal here.

You know, take a good fee stream and I've never read the book. I don't know anything about it. It's a phrase. But that's the goal here is to take a good asset and improve it with the relationships they have. And that's the plan. What I liked about that answer is it also went back to the synergies discussion we had earlier. Because honestly, one of the big things when I was researching this was I was really skeptical on the synergies. And I know they talked multiple times about actually exactly what you were saying on their calls where they said, hey, we're really good at getting people access to Europe.

Maybe we're not so good at North America. But that's great when we buy a North American business and get them to Europe. And you just gave a very tangible example that proves out, hey, this is actually synergies in action. This is actually cross-sales in action. They recently announced this might have been, it was either right before or right after the WTI deal. I think right before, I can't remember specifically. But they announced what they call the holy grail of all alternative capital is getting permanent capital, right? That's everybody wants to do it.

All the private equity guys have been going out and buying insurance companies because an insurance company gives you captive permanent capital. It's gone terribly, but right. Yes. In general, it has gone terribly. Well, it's, there's been limited successes, but some of them have done actually done really well because, you know, the argument would be if you go buy an insurance company and the insurance company is investing in generic AAA fixed income that's making 3%.

If you're really good at fixed income and you can take that and do like private market and lending at 7% and you can charge fees on it because you can fee stream out. you can fee stream out from the insurance captive upstream with the 1%. You can create so, so much value from that. Now the devil is in the details in the execution. Sure, sorry. P. You said it hasn't gone well for some people.

PX just did their first permanent capital deal, right? And this is with CRSS, which is a publicly traded OTC company. People should, they can go look at it if they want OTC, e-liquid, people should keep in mind that carries a lot of extra risk. But it was a really interesting deal. Obviously, he talked about a lot. I'm not 100% sure what they're doing, what their fee stream from it is. So I want to turn over to you.

What's going on with the PX, CRSS deal? And do you think this is like the first in the stream? Is this going to create a lot of long-term value for them? Yeah. So this deal is incredibly intriguing. And it made almost no market impact for either company when they announced it. So just back up a quick second. And so the principal is the guys who founded P-TAN, again, Clark Webb and Robert Albert,

this is not their only force in the race. They also control a couple of other public vehicles, but P-10 has done the best and is furthest longest development. Another one is CRSS, a crossroads. And Crossroads is a Texas-based sort of alternative lender with a focus on community development. They're a CDFI, maybe not legally, but at least in their approach. Historically, they've focused on lending. Can you just describe that just so people know what that is?

Yeah, so absolutely their goal is to lend and provide capital to historically disadvantaged and that sort of underinvested in people in regions and municipalities, things of that nature. So to this point, they've focused on providing sort of non-standard mortgage loans, especially to Hispanic buyers. They buy and develop homes. They sell them to buyers, and then they finance with them through non-standard mortgages, which have a really, really high pay rate. Their delinquencies are very, very low.

So it's working. They also became a big PPP lender during those programs, but that's behind us now. I remember some people realized that and that they were going to make a lot of money. I think you might have been one. And I think the stock did not respond until they made a massive dividend, but probably neither here nor there. Yeah, I was involved a little bit there. So that actually ended up using up the entire NOL that Crossroads had.

So the Crossroads was kind of looking for a second to act. And what they decided to do essentially is to sort of scale up and become like a socially conscious impact lender, lending for renewables infrastructure and like I said, continuing the mortgage business and working with minority in women-owned businesses on lending us up like that. And with the goal of essentially, like I said, scaling up and becoming sort of a socially conscious BDC or something that's listed on in the exchange. But to do that, they needed some scale because they were small. And so along comes one of P10's managers along with another company, conversing capital.

And it's really interesting how they agreed to do this. So first of all, one of enhanced capitals, that's one of P-10s, a lot of business, one of their funds invested in a private placement from Crossroads, or Crossroads issued a bunch of equity and the fund purchased it, as well as conversing, which is a third party. Together, they sort of capitalized crossroads with the idea that they would do some more of this down the road, and Crossroads also got a line and credit, essentially doubled or tripled its capital. based doing so. And following that, now the Crossroads has all this capital, they'll go out and start making loans. However, Enhanced will manage the loans, originate them, manage them, and receive a fee stream for their trouble. And it's a permanent thing. It's not like it's a fund or they have to distribute capital and then gear up again and get a bunch of new employees because Crossroads is a regular old C-Corp. It's a permanent entity that they never have to distribute any

capital. I think they'll pay a dividend at some point, but for now, it's just scaling up. So essentially, Enhanced now gets management fees and origination fees on those loans from now to eternity. And that's the first capital, permanent capital vehicle they've produced. So just so enhanced and PX. I think PX participated in this directly as well alongside Enhanced. Am I remember that correctly? I don't believe they did. No, I think it was just a, yeah, through and. This Enhanced, made an investment into Crossroads. Yeah, a fund to manage by enhanced. So Enhanced fund makes an investment into Crossroads.

Crossroads is going to go out and originate loans. Well, Enhance does that for Crossroads. Crossroads is very passive in all of this. So what does Crossroads do in all of this? They're just a vehicle. Holding the loans. Owning the loans and holding them, collecting the... So Enhance will actually go out.

So Crossroads is basically a closed-end BDC at this point, right? Correct. Exactly. And so Enhance will go make the loans. And then Crossroads basically just buys them and Enhance getting origination fees, management fees, all that sort of stuff. Exactly. It's kind of circular, though, right? Because Enhance gave all the capitals or Crossroads, I guess it's permanent capital, but it's the same as on balance sheet capital, kind of?

I don't know. Yeah. Well, I mean, again, it's not enhanced the manager itself. It's a fund that enhanced managers. So it's not even enhanced capital. It's LP capital from other places. And supposedly permanent. I guess the LPs, it is permanent because crossroads are publicly traded company.

The LPs will need an exit at some point, but the exit could be as simple just hand them crossroad shares. Now they might have caveat you at that. I'm sure there's going to be other endgames in mind. And I'm sure that at some point crossroads will do an offering list on NYSC or something. And that could be the exit for that fund, that enhanced purchase the shares through or something. But, yeah, the idea is to scale that company out and make it larger, increase the liquidity and have a, like you said, a closed NBDC essentially. I think I understand it a little bit more now, but I'm still a, it's still a little, still a little, how much of Crossroads does enhance down now?

Did they disclose that? They did, up top of my head, I don't remember, but yeah, they do disclose the amount of capital invested in at what price. And so they became a large holder. Okay. Yeah, I only read the, maybe it's because I only read the P10, the P10 side of it. But it's a big deal. I mean, it was a 180 million with the option to do another 310. So half a billion dollars. And this is right now, I think post WTI, they're managing a little bit more. But it's about a $20 billion a U.M company, right? All NPS. So half a billion dollars into this, that is not, it's not nothing. No, it's not. And I think this is just the start. I mean, I think they'll do repeat it. offerings. I mean, if Crossroads can get its balance sheet to a billion, $2 billion, $5 billion, someday, and enhanced, is the manager originating a billion dollars a loans a year? I mean, that is substantial amounts of origination fees and ongoing management fees. So that's definitely the goal to keep that going. Cool. Let me ask you about one of my favorite things, and that is

share buybacks, right? So PX, I believe they started paying a very tiny dividend, but I was so they do have a share buyback purchase a share buyback program outstanding obviously insiders own a ton and this is a very liquid stock but there was a line in their Q2 call that struck me right this stock went from 14 to about 11 inch or quarter Q2 something along there I can't remember exactly and somebody came on and said hey you guys have a share buyback program in place the stock came down why weren't you buying and they said a couple things they said oh we were blacked out for a lot of the quarter our stock's really liquid so we do have to think, hey, do we want to take the illiquity out? But there was one thing that they said that really

jumped out to me. And it was, and I'm going to do a quote, we had an order and it just wasn't filled. And that strikes me because it sounds like they had a limit order to buy shares at a price that they thought were attractive and it wasn't hit. So the first thing that jumps to me is, hey, Dave, why are we buying when the management team said, hey, we had a limit order at a price we think we would be attractive to buy and it wasn't hit? So they're saying, today's price, which is higher than the price it was in Q2 when the limit wasn't hit, maybe, I mean, it could be cheap, but it's not cheap enough for them to deploy their capital into the company.

Well, I mean, they've been really clear about their capital allocation priorities. And they've said that the hurdle for them to do anything, really, except go out and drive as an management, as AUM growth is really, really high. I mean, with the margin profile they have, with the tax deal they have, that's more valuable, the faster you use it, just from math, the number one focus for them is to go out and get more AUM because, like I said, the economics are so fantastic. And so they view the share buyback is not really a thing that it's not just a generic thing to support the stock, nothing like that. It's really there in case of a large holder wanting some liquidity or real dislocation in the share price.

I mean, at the time, like earlier this year, I mean, they went below 10. They were in the high nines and maybe it was $9.50 or something where they were looking to buy some stock. And, I mean, they weren't the only ones. I mean, all the olds were out as well. So, I mean, I like that they have a price that they think, okay, it's time to flip a little bit from focusing on acquisitions because our own stock is the cheapest thing out there. But I also appreciate how they know they need scale. They know they'll never get the multiple they really deserve until they're larger. and until the share is more liquid.

I mean, I've seen this time and time again where you have a little company and everyone knows it's cheap, the float is low. And you have investors saying, you buy back stock, buy back stock. And I think that won't help at all. Like, exactly what this company does not need is to go from trading $50,000 shares a day to $15,000. That just exacerbates the problem. And so I do think that, especially for low-flow companies, there is a higher,

a higher hurdle to hit before it makes a lot of sense to buy back a lot of shares. But if you look internally in the statements, they actually are buying back. They repurchased $1 million options from insiders at a slight discount to fair market value. And so they've done some opportunistic buybacks. But yeah, I mean, they're not the kind of thing. They're not going to programmatically buy back, you know, 1, 2% of the shares outstanding this year just because. they view it as opportunistic. You know, just the line you had in there where you said, the hurdle for e-liquid

stocks to repurchase shares is higher. I feel like every e-liquid company I talk to, their CFO should just listen to this podcast and play that back for me because I was, why guys buy back some shares and all of them, and probably rightly they say, hey, look, if we insider zone two-thirds, if we go buy-back shares, like, why are we even a public company? Because we're going to take all the liquidity out. And then I'll normally say, yeah, why are you a public company?

But no, you know, one other interesting thing. You mentioned, we've talked about the acquisitions, how they're doing with stock. And I'm doing it off the top of my head. But the WTI acquisition, if I remember correctly, 90 million in cash, about 45 or 50 million in stock. But the other thing is they also gave 4 million stock options to all the employees inside to, you know, align them. And 4 million stock options at current prices, that's $48 million of stock or something along those lines. Like eventually the stock options are going to best. A lot of them will get forfeited to cover taxes.

But you know, you can just, I guess I'm just saying over time, the stock will get more liquid because they're going to do stock deals and also they're going to give all of the employee stock options. And eventually those do trickle into the market. So, you know, until the insider sell a big chunk, it's never going to be the most liquid stock, but it will get more and more liquidity and get bigger. I don't know if you want to add anything to that. I'm rambling a little bit on it.

I mean, that's definitely the process. happening. And as part of the IPO, they actually reclassified shares into A shares and B shares, since I another one with a bunch of B shares that were the original ones. And the ones they offered were A shares. The Bs don't trade. They're super voting. But on any transfer or sale, they're automatically converting to A. So over time, there will be fewer B shares and more A shares. And they'll become much closer to qualifying for index inclusion. They definitely want to be in the Russell 2000 at some point, but they said it's just going to take time. And like you said, it is a process. It could take a couple years for those employee shares and original long-time

holders like me selling some maybe. But it will happen at some point. This will not always be in a liquid stock. I mean, you and I, I know you got your start. I know what I'm doing today. I have a lot of stuff that will always be illiquid until it gets a buyout or something happens. But that's not the case here. This is a stock that will steadily get more liquid over. time. Anything else we should be talking about on PX? Yeah. I mean, I would just recommend for people, like, take a look at the bio of the people in charge here. I mean, they have an incredible track record. Look at a couple of other deals they've done, especially look at GlobalScape. GlobalScape was this tiny little, yeah, kind of underperforming software company that I looked at and thought,

like what on earth like old school like PDF conversion technology but they had like the army and stuff as customers and like good luck and that was probably like a long term contract good like changing that the CEO was kind of strange and uh but they came in and they they worked wonders with it I was just amazed and kind of mad that I never bought it how well they did uh and so they've kind of cracked the code in terms of taking NOL shelves and uh it actually making them into something. I know we both watched a lot of NOL shells over the years, and the track record has been really disappointing for most of them. They either fail to do an acquisition, or they do a bad acquisition. They buy way too much. It's not a great business. They use way too much

debt. But these guys kind of came in and realized that we can do a transaction where we sell 49% more shares they have outstanding, which is not ownership change. Then we can do it again, still not an ownership change. And we don't actually have to get a lot of debt capital, at least at first. We can just increase the number of shares outstanding. As long as nobody goes over the ownership change threshold, we can kind of have a business as big as we wanted to be and still maintain the NOL. And I hadn't seen that before, at least in public markets,

and they've just had a runaway success with it. So, yeah, I just kind of think the world of these guys. And yeah, anything you can read about them, check it out. Do they own any other public shows right now? Yes. there is another one called Eli Holdings, which I have to say is super

tiny in the liquid, so due diligence all day. What's the ticker? I'm going to throw it on the watch list. E-L-A-H. This is an interesting one. This is the former real industry, which was a failed attempt

running an O-N-O-N-W-S shell, but they came in and re-cap-wise. And I have to say that this one's been a bit disappointing. They got a big, debt commitment from Goldman Sachs. I think like 600 million or something to support of acquisition. Yep. But it's been years now and nothing's happened. And I realized market conditions, everything was so bubbly. It was kind of tough to find something. But yeah, it's just kind of disappointing that they haven't found something yet. But big NOL, big resources available to them.

Interesting. I'm going to throw it on the watch list and maybe do some work on it. No, look, NERLs are interesting. But one thing I have learned from watching them is they, I mean, as with everything. They can take a lot longer than they want because one thing with NOL is they need a deal, right? And M&A, especially at the size that a real NOL shell needs to do to kind of have it work with their tax shell, it takes time, it takes effort, it takes, you know, all the stars aligning. So it's tough, but it's been an interesting one for NOLs. Like I don't, did you see a couple weeks ago, RBCN, which was always a little NOL cash shell out there. They got, they had a really interesting deal done that had some, that was a very interesting one. And, uh, right.

There have been all sorts of ones. Steel partners is a lot with NOL stuff. So there are some specialists working out there. They're more or less shareholder-friendly, depending on the entity you look at. But there are some people who are doing. Steel partners and shareholder-friendly. I'm not sure if I've heard those two terms thrown together before. That was the less part of the shareholder-friendly.

But, yeah, they are doing deals. Quick question. I know you've been spending a lot of time over, I believe, Italy and Poland recently. How have those? how have those not i don't believe you've actually been there maybe you have been there but just kind of looking through the finals there how's that been going i mean nobody or i did not know that uh russia was planning to roll across the border with tanks and missiles and uh that into ukraine and that definitely hurt things in the short term uh also the polish economy is kind of

struggling with uh with of course of energy and and high inflation but but i got to tell you that the values are really unreal. I mean, I'm buying quality stuff that, you know, three, four, five times operating income with net debt, with net, excuse, net cash in the balance sheet. And like, if you're willing to look out past the next six months, past the next year, you're going to be fine. I think this is a tremendous entry point for a lot of really high quality companies, especially ones that export to the rest of the European Union or export to the U.S., especially. It's a tremendous time to be a European exporter if you don't depend a lot on energy. I'm not saying if you depend on energy, it's not a very good time.

No, no. But yeah, but I'm so enthusiastic about those markets. It's so funny. So, hey, I've heard a lot of pitches for, especially Polish. Like, Polish has a lot of really small gaming companies out there. And I've got one friend who's pitched them. And they're all very interesting. Or, you know, Connor McGuire has come on here and pitched a couple of European names.

And you look at him and you're like, oh, my God. Like you compare the values over to American companies of kind of similar quality and size. everything. You're like, these are so much cheaper, but it's almost like, oh, they just, they just keep going down and it's hard to just like step in front of them. And the one other thing is, it is tough because like if an American company keeps going down, at some point, generally an activist steps in and kind of forces something. And I just haven't seen a lot of activism over, especially in the really small companies in Europe. There's just not nearly as much. I mean, just culturally, it's not as significant. Again, there's sometimes laws and things that

make it more difficult to be an activist there. So yeah, you can't depend as much on an activist stepping in if the stock really struggles. So you just have to be a bit more patient. And frankly, I mean, Europe, European markets have been so awful over the past decade. And it scares a lot of people away. And I get that. I mean, there's a lot of reasons that people want to invest in the United States. I mean, we're pretty great in terms of investor-friendliness. We're number one. Yeah. So, I mean, I totally get it. But I just think that European valuations have been crushed so hard. And people take a look at an economy, like, this happens to me in Italy. People think, oh, Italy, like slow growth, like high government

debt, like bureaucracy everywhere in France to. And yeah, like I'm not excited about large cap companies or even midcaps for the most part in France, Italy, Germany. There's just, yeah, low growth. It's a problem, low innovation. But under the surface, there's a ton of really tiny, hugely innovative hungry, fast-growing, really profitable companies led by smart people who want to make it big. And I think it's a great time to look at those because they're getting targeted about with the general macro issues and general like cultural malaise that investors think apply us to the entire continent. And you were the one who turned me on to this. Like one of the issues in the U.S. is at this point, if you're not $500 million or a billion

dollars, it doesn't really make sense for you to be public because the public company costs for just too much. And especially to go public. Like I was just talking about the main cover of a to go public. Absolutely. Forget about it. No way. But you're the one who turned around like in Italy, you can have a $50 million company or forget 50, a $20 million company, IPO in like $200,000 worth of stock because there's, the costs are very low, which obviously comes with a lot of increased risks, but it also comes with a lot of increased potential opportunities and gives you access to really quirky unique stuff, which for someone looking to find alpha and quirky unique values, like that that's the dream yeah i mean it's not a place to look if you really really care about

your performance versus your benchmark over six 12 18 months but if you want to do well over three or five year periods i think you owe to yourself to to look in markets like that because yeah there's some wild stuff that is not priced correctly cool anything else you want to talk about not too much just hoping you're well uh if i make it up to new york we'll play board game or something together sometimes. You know, I had somebody from, I'm organizing a Finchwood board game night, and I had somebody from Pittsburgh who said they're going to drive up for it.

No way. That's awesome. Dave, stop slacking. Come on, drive up here. We'll play some. That's a carpool. Yeah. That'd be great. Anytime you come up here, let me know. And I'm going to have to do some work on some small Italian names

and try and have you got a couple tickers. It's fun stuff. Dave's one of my favorite people to follow. I'll include a link to a link to a link to a substack. He's got a substack. as you give him a follow there. But Dave Waters, thank you so much for coming on. Looking forward to having you on for the third time.

Appreciate it. A quick disclaimer. Nothing on this podcast should be considered an investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor. Thanks. Thank you. Thank you.

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