Marcia Page – Corn Capitalist with a Velvet Hammer at Värde and MPowered (EP.355)

30:53We opened an office in Singapore shortly after the global financial crisis. We extended the type of assets that we considered. And then we also looked at a much wider range of return profiles. We also had to build out the infrastructure. I mean, regulation had also been a meaningful change in the post-GFC period of time and required an institutional quality, operational and compliance in a much more elevated way. So we invested in processes and systems. We hired our first COO. We added value-added operational capabilities for our portfolio companies. We had to come and reckon with the fact that we probably need to extend our governance and decision-making processes beyond the heads of the founding partners and really made a concerted effort to bring in the next generation of leadership, elevate their capabilities, their leadership development.

31:49All of these things happened really in and around the 2012 to 2013 period of time and became a choice point that has set the firm on a direction of highest quality, global institutional quality asset management firm. As you grew out the capabilities, the type of assets and strategies you looked at, how did that affect the construction of your portfolios? What it did really is give us an even wider range of capabilities from a relative value standpoint. So we had on the ground partners in Minneapolis, New York, London, Singapore, more recently Mumbai, that all had this capability of being able to look across the globe for relative value, look across various asset types, and be able to bring that lens across both liquid and illiquid strategies.

32:49So it really gave us a very unique perch as a global firm to be able to evaluate relative value. The practical effect of that is that the portfolio can ebb and flow quite a bit in terms of how and where your exposures are at any given point in time, particularly in kind of the classic flagship vehicle. So for instance, our European exposure has been as much as 50 % of the overall portfolio, but in the last handful of years, our Asian exposure has increased quite dramatically. The liquid versus illiquid strategies have also ebbed and flowed. Sometimes they're 50-50 at other points in the cycle.

33:34The biggest dislocations can often happen earlier, and you're going to be all in on your liquid strategies while you wait for the illiquid markets to turn into motivated sellers that ultimately allow you to shift the portfolio to more illiquid strategies. So it ends up being a very flexible platform. The other practical reality, Ted, is that as investors look for more specific kinds of exposures, in some cases, they're looking toward a flagship fund that naturally is ebbing and flowing with that relative value. In other instances, we're providing targeted exposure for individual investors who are looking for a specific asset type, a specific return profile, and or a specific geography.

34:25And by having all of these component pieces in the platform, you've got the benefit of creating the flagship that is our best judgment on relative value and or opportunities for our investors to be able to pick and choose and pinpoint their specific areas of interest. We're going to take a quick break in the action to tell you about SRS Aquium. Want to make sure your M &A processes aren't stuck in the past? Partner with a company that's been defining the future of dealmaking for nearly two decades instead. When it comes to M &A innovation, SRS Aquium has reshaped the way that deals get done, streamlining processes for maximum efficiency and minimum headaches.

35:13Professional shareholder representation, online M &A payments, digital stockholder solicitation, SRS Aquium pioneered each and continues to set the bar for game-changing innovation. So leave the days of disjointed deal management behind and define your future with SRS Aquium, the smartest way to run a deal. Learn more at srsaquium.com. That's S-R-S-A-C-Q-U-I-O-M.com. And now, back to the show. When you went from a centralized office to four or five different locations with senior people in each, how did you go about the process of moving from the centralized decision making to five different regional heads who have their own portfolios because they have a sleeve, but then you also want competition for capital in your flagship?

36:11So really a combination of a much more robust investment committee process that was inclusive of everybody from all of those locations together with limits on the more liquid parts of the strategies. We have always had a very robust strategic planning process, which meant that we came together as a firm at least once a year. We rotated that across various geographies and we still continue to do that. That allows for each part of the organization to identify their expectations for the business on a going forward basis and allow for thoughtful planning on what that would mean in terms of likely allocation across the portfolio.

36:55So with plenty of flexibility in that, you have an upfront plan that you're working around and a regular investment committee process that is bringing those individual deals for first look and final approval combined with limits on the liquid side of the business. And so were there any other key inflection points in that path? The two that I had talked about was the personal move to London, I think 2.0. The other thing I would just say is an intentional plan by each of the partners to ultimately, I'm putting air quotes around retire, because both George Hicks and I continue to be co-chairs at Varday all these years later, but really being very intentional around how we transition the business and how we communicated that to our stakeholders, particularly our investors and other key people around the organization.

37:47It's been a very smooth transition from the founding partners to the next generation of leadership and one that required a lot of intentionality and really strong communication skills. What were the aspects of that plan that you implemented and then that worked in that transition? When we were doing Varde 2.0, it was really intended to have the basic elements that we're going to allow for that transition to occur. So it was really a combination of extended governance, leadership, development, and ultimately a communication plan with our limited partners. But it also required that we elevated key people in the organization into more senior leadership roles well in advance of when those leadership transitions took place.

38:44So that by the time we got to those kind of announcements, there was a very clear sense of the next generation of leadership. A real practical part of that was allowing other people in the organization to have more visibility in the fundraising and business development process. One of the challenges of this business is for the first 20 years, most of our investors were exposed to George Hicks, Greg McMillan, and Marsha Page, the cumulative exposure to the founding partners was something that we had to be very deliberate about and begin to build visibility across the next generation of leadership so that there was confidence on the part of the LPs that there was not just a high quality set of talent, but that it would be handled over a multi-year period of time, and that all of the operational pieces were well in place.

39:41How did you handle the transition of economics in that succession process? It's really been a tale that the founding partners have with economics basically reflecting the skin in the game for that year or for that fund. So there isn't a buyout per se for the next generation of partners, but rather a declining interest in the firm and enormous amount of skin in the game as to the underlying economics over that period of time. That's what allows economics to free up such that there's more and more economics over time that's available for the next generation of partners. Over time, our partnership has expanded from the original three to 16 today.

40:28When you started 30 years ago, there was no real thought of anybody of these businesses getting capitalized. And a lot of the way some of the other peer organizations have transitioned are through some type of monetization event, a stake, a public offering. Curious how you thought about that over the last bunch of years. It's a really good question, Ted. When we developed how partners would retire and how new partners would come in, we did contemplate the concept of a sale of business and developed what that would look like in that event. I can tell you when we started this business personally, the concept of enterprise value was non-existent.

41:11Clearly, over the last 10 to 15 years, there's been a keen development of lots of capabilities and a certain maturing and consolidation in this business, no doubt. So there is enterprise value, but we think about it in the context of how that value, in effect, is transferred amongst the partners over time. We're certainly not contemplating a change in the transition of Varde. We've appreciated being an all-privately held company, but it's been very interesting to watch those developments in this marketplace. you understand why those solutions exist, because there are points in time where that transition creates liquidity challenges potentially for that next generation of leaders.

42:00I'd love to turn a little bit to some of your investment lessons over these 30 years plus of experience. What are some of the key insights that you've gleaned from what leads to success in this area of the markets? It's been the power of the platform and having capabilities across geographic areas, asset types, and various return profiles. It's having tools in the tool shed, for instance, that ability to think about relative value, but also capital structure and relative value within a capital stack. It's being deeply cognizant and having a point of view on enterprise value and where value breaks.

42:47There's a litany of skills that are required to be effective in this, and that is a willingness to tackle complexity. One of the things that I've observed in the marketplace is that some of these situations, many investors shy away from by virtue of the complexity of the underlying situation, whether it be the valuation, the capital structure, the process of restructuring, or the nature of the characters involved in the transaction. It is a skill set that's developed. So it requires work effort. It requires an activism. It requires a way of thinking through the whole shape of the trade from downside to your base case to ways that you can create potential optionality.

43:33It's the valuation piece, but it's also being deeply aware of what's happening in the security selection across that capital stack. So it means getting into the details of what your rights are and how and where that's going to play and what the dynamics will be in the right structure. The other thing that might not be quite as obvious is it requires the right fund structure and investor base to have the ability to have the time to do a proper restructuring and or the staying power definitely requires the right kind of fund structure. Sometimes it's the mismatch in that funding structure against what you're trying to accomplish over a multi-year period of time that can be a challenge.

44:17The other piece is recognizing that these opportunities tend to be staged over time. Certainly we've had periods of time where you've had very quick recoveries and it's been a very short instance, but in most cases, it requires a patience and a willingness to wait for that motivated seller. Sometimes that can take a lot longer than you think it's going to. As you prepared for, let's just say, stepping back to be chair, how did you think about what to become the next stage of your career? As Vardae's business grew, in my view, we created a business with a really distinctive culture and one that I'm very proud.

45:01Being a woman in a male-dominated field of alternative investing actually never seemed to hinder my success, and probably because I was always in a position to be able to commit capital. But what I believe happened is I think that success perhaps led me to overlook some of the facts, challenges, and barriers around diversity in the investing business. So it really wasn't until 2016 when I moved from that intense co-CEIO and co-CEO roles into my current role as executive chair, now shared with George Hicks, that I kind of looked around. It was the first time I had time to really look around and take stock.

45:44And I was like, where did everybody go? How is it possible that I'm one of the few women to found an alternatives firm that has a long track record that was built to scale. This really resulted in me taking a hard look around the data in our business, both at Vardae, but within the investment industry writ large. There's a ton of data out there on gender in particular, but it became pretty clear that the rate of change in financial services has been nothing short of glacial during my career, particularly among senior leadership in this business. When I looked at Varday's numbers, I also, particularly among our investment professional ranks, also noted that our numbers were really right there with the industry averages.

46:34And I personally found that a bit humbling. How is that possible given this phenomenal culture that we built, and quite honestly, my own female leadership. So my natural inclination is to start digging into the data and really understanding why we have this conundrum of lack of senior female leadership really was influenced by a book called What Works by a Harvard professor by the name of Iris Bonet, and really developed a much better understanding that there isn't a silver bullet, but rather a combination of key actions that include, of course, authentic and committed senior leadership that sets the tone at the top.

47:20You got to walk the walk. If that's not happening, this business is filled with smart people and it will be dead on arrival. The book really influenced my thinking on how you can hardwire the organizations to mitigate unconscious conscious bias in your talent management processes from hiring to promotion so that you, amongst very small cumulative changes, create a material change in your participation from a diversity standpoint. Statistically, women tend to self-rate lower than men. So we have dropped self-ratings from our promotion process. Another small example is when you are developing your plan for a hiring approach, generally we do not launch the interview process until we have at least two diverse candidates in our pool.

48:14Statistically, there's a much higher likelihood that you'll have at least one of those candidates go to the next level of interviews than having just one candidate in that pool. It's akin to kind of the Rooney role in the NFL. So we really started building on all of these hardwired, small but effective changes at Vardae. I was really proud of what we had done and actively involved in all of those efforts as I, air quote, retired from Vardae. People are fond of saying that culture eats strategy for lunch, but I've now suggested that culture is necessary, but not even close to sufficient when it comes to achieving diversity in an organization.

48:55You need to be super, super intentional. So I basically said, okay, this has been a remarkable learning experience. We've started to implement these things at Vardae. How might I influence the industry more broadly? I went out there and I met with women and men and LPs and GPs. I created convenings, and ultimately kind of found myself in a position where there was a lot of agreement, but not a lot of action. So I called it being in a field of bobbleheads. I had a lot of people that were like nodding, nodding, nodding, but the reality is it didn't feel like there was any commercial action that was following on the back of that.

49:39So this really caused me to step back and reflect on, wow, maybe there is an actionable commercial opportunity, investment opportunity in this space. I did two more things and went into a second set of research with several folks at Vardae as well and came to two observations. One, that there are numerous research reports that show that diverse managers generate alpha outperformance versus their non-diverse peers, so that there was a potential to create alpha by investing in diverse talent. Secondly, for me, the real clencher was a Knight Foundation report that showed that only 1.4 % of$82 trillion in institutionally run assets in the United States are run by diverse-owned firms.

50:361.4%. Even for me in this business, it was a stunning number. So I personally came to the conclusion that I put my capital dislocation hat on that this was one of the most inefficient markets for capital formation that I had ever seen in my career. It was a classic dislocation opportunity combined with the opportunity to create alpha by virtue of the performance by diverse teams. This is the precursor for Empowered Capital that I decided to make a financial commitment and personally commit$75 million to invest in diverse investment talent. I brought on two people to work with me as we started, in effect, investing off of my personal balance sheet.

51:23Chrissy Pariso had been at Exelon and Ibai Haney had previously been an investment professional at Varday. The two of them joined me and we started making commitments. It was really at that time that we were blown away by the talent that we were seeing and the range of investment opportunities that were in effect kind of becoming clear to us. We went about creating a bottoms-up understanding of the actual addressable market. Interesting to me, Ted, that with all of the information that's out there in the financial markets, there wasn't a single source that identified the universe of private alternatives managers that were led by female or other underrepresented talent in this business.

52:13We basically created a bottoms-up database that was over 800 private alternatives managers. It was across a range of assets from venture capital to growth equity, private equity, opportunistic credit and real estate strategies, were really surprised by how deep that addressable market actually was. Now, in fairness, the average AUM across this universe is about$500 million. It's pretty small relative to most investment management firms out there. It skews a little smaller by virtue of the fact that roughly half of those funds are venture capital. But even so, these tend to be funds one, two, three, or four.

52:59They're still very much a more emergent part of the market. But they are not first-time investors. These folks are coming from exceptional pedigrees from fantastic firms. There is an absolutely very interesting addressable market here. And ultimately, we decided we wanted to get more capital flowing to this talent. and that's when we decided to found Empowered Capital. The academic research you cited indicating there's alpha from diverse managers, there's a lot of research about cognitive diversity and the benefits of that in decision-making. When you're talking about a universe of 800 managers, it feels more unlikely that 800 as a group will produce alpha.

53:44So I'm curious, what you found are the determinants of the diverse managers you've chosen to invest in that are the ones you feel are more likely to add value in the future? It's absolutely the case. And certainly, we are looking for that best-in-class talent across this universe. So certainly, the pedigree and the type of experience and the quality of firm that these groups have been working at, learning from, and being trained in is a critical component piece. It is a trifecta. If we've got somebody who's got investment expertise and has had some exposure to the operating side and the infrastructure side of their organization and has had at least some exposure to the business development or the fundraising side, that is very, very attractive trifecta of skills.

54:44One of the biggest challenges is being able to have an attributable track record. There are instances where this group of talent will have an attributable track record, but clearly we want to be able to see a long and steady quality track record. In some instances, it's attributable, but other instances, we are really trying to create that from multiple sources, inclusive of understanding the investors who would have otherwise understood the underlying deal and who is responsible for that deal. We will also look to do pre-fund deals with an individual manager to, in effect, underwrite shoulder to shoulder with that manager and really see the quality of their underwriting, their ability to think through enterprise value, be through a complicated negotiation, and bring a deal to fruition.

55:38So in some cases, it's basically doing a joint underwriting with that manager to really assess their capabilities, their underwriting skills. What have you found different sitting on the other side of the table from what you have for 25 years, 30 years as a fund manager? Well, the practical reality is we both have a GP and an LP hat going, right? At Empowered Capital, we are basically making commitments as a GP through three transaction types. So pre-fund direct deals, fund commitments, but also co-invest as well as what we call GP structured partnerships. We're investors full on. We have to be out in the fundraising markets ourselves.

56:24It really goes to assessing the quality of that investing talent, that underlying track record, relying heavily on deep diligence in terms of the quality of that track record and deep reference checking. It's not like we're coming in and have a deep understanding of every single one of these individual investing strategies. So it's being clear about what the universe that we're operating against, classic benchmarking against all talent, to be honest, and expecting a track record that's going to hold up against all of the peer firms out there. And then recognizing that this talent has probably had slightly different challenges in getting to the point of being able to start and launch their own firms.

57:17Those barriers have been somewhat structural in nature, but they're also been the function of unconscious bias. So this group of folks generally has statistically been promoted more slowly. They probably have been paid less statistically, and they're not necessarily as part of a privileged network. So we're very conscious of the different barriers. So recognizing that there is a deep need for liquid capital and a willingness on our part to basically be provisioning in our GP structured partnerships, a combination of working capital, a fund one commitment together with strategic support. So we recognize that somebody is coming with a very strong investment thesis, but are not necessarily going to be fully formed in terms of all the operational and business development sides of their business.

58:16So I think it's also bringing a willingness to to think about how to bring the best strategic support to these managers to help fill in the gaps on the non-investing side and to put them in a position to be on their best front foot. So when they are in an institutional quality conversation with an investor, that they are bringing their best foot forward together with our capital commitments and strategic support. If you're helping someone with their operations, there's a way of doing operations they may not have been exposed, so you can help them with. When you're talking about a network that some of these people may not have had, that's much harder to figure out how do you help.

58:56So how do you think about that type of strategic support with the goal of not just committing the capital so they have a chance, but helping them succeed? It's a really good question. And in fact, there are some great programs out there that provide, I'd call it the basic playbook. So we've deliberately sought to do much more of a consultative approach, really across what we call three pillars. So operational infrastructure, the business development, as well as talent. And the way we're delivering it really is kind of multifold. So we've got that expertise at Empowered Capital. As part of the founding of Empowered Capital, I also affiliated with Varday Partners.

59:43Vardae also brings a ton of subject matter expertise to bear on those conversations that are quite bespoke and what the manager needs at a given point in time. The other thing that we've done is we've created a lot of external relationships with vendors and outside providers across a range of capabilities that will often extend the pricing and their expertise to these managers. So we are really bringing a multifaceted and very bespoke and consultative approach to that manager depending on what they need. You can imagine if they're in an institutional conversation with an LP, they're reluctant to be a bit vulnerable on the areas they're not necessarily have been exposed to in their prior work experience.

1:00:30So again, they're bringing exceptional investment experience to bear, but we're really looking to provide support across those non-investing sides in a very sophisticated way, and it's relevant to what they're looking for and when they need it. As you look five or 10 years out from here, what would denote Empowered to be a success for you? I would love to believe that we're going to move that 1.4 % number, Ted, but it is an$82 trillion denominator. So it's not an easily moved number. The way I'm personally thinking about this is recognizing that this cannot be a fund one and done. It has to be a long-term commitment and take a long arc to this business.

1:01:17So that's the first starting point is taking a long view on this. But I'd like to believe that we're bringing structured solutions to these managers that actually is helping shape the market and ultimately expand the market for diverse talent. So success to me is that we've actually shaped the market. I've been in nascent markets before. This one is a relatively nascent market. I can see how it can play out over time, how we can help launch these firms, how we can help scale them, but ultimately how we can create a market for diverse talent and starting their own firms, launching and scaling their businesses.

1:01:55So to me, success would be that we actually continue to take a leading role. Our thought leadership and what we're actually doing in terms of capital commitment and strategic support shapes the market and creates something that people have never seen before. I want to jump into the closing questions. Before I do, what I'd love you to do is to pick out one or two people over the course of your career and some story or anecdote that you learned a key lesson from. Bob Lumpkins, the person that really hired me at Cargill, still a friend and mentor today, but probably gave me the toughest feedback that I've ever experienced in my life.

1:02:39Literally to the point of tears, I was presenting a credit and he stopped me midway and said, I don't think you're as well prepared or understanding what's happening in the underlying fundamentals of this company. And when you're ready, we can come back and have this conversation. It's important to provide feedback. It's important to receive it. It's important to have an external mirror on who you are. I trusted his advice. So it's the importance of an external mirror. Any others? This would be a group of people. In the early days of the distressed debt business, there really was an openness to sharing information and thinking around valuations and opportunities in the market.

1:03:27And whether it was Wall Street or other peers at that period of time, I learned the business from that group of people, really. And it was a really fun period of time and one that was interesting but highly developmental. And it really was a combination of a core group of people where we learned from each other. Who were some of the people that you learned the most from? I learned a lot from people like Mark Lassery and Bruce Karsh. We basically are peers in the business. They have built phenomenal organizations. I still consider them friends today, but we were really all in it together back in the day.

1:04:13What a remarkable group of talent that assembled in and around these opportunity sets in that period of time. All right, Marsha, I want to make sure I get a chance to ask you a couple of closing questions. What is your favorite hobby or activity outside of work and family? I love to be active. Every day I enjoy getting outside and moving. I don't care if it's biking, walking. My running days might be on their last legs. If I can combine that with travel, with people that I love to be with, whether it's family or friends, that's phenomenal. I just got back from a bike trip with two of my three daughters just about a week ago.

1:04:54It's absolutely my favorite thing to do. What's one fact that most people don't know about you? Probably that I was a music minor. So I play the piano. What's your biggest pet peeve? Arrogance, hands down. My subline in that is that anybody who's worked for me or works with me knows that I expect that people under-promise and over-deliver. So when I see folks that are prone to over-promising and under-delivering, it's to me another element of arrogance and it makes me crazy. Which two people have had the biggest impact on your professional life? I've already mentioned Bob Lumpkin, so he already has gotten status.

1:05:40But of course, my co-founding partners of our day, George Hicks and Greg McMillan, we were much better as a combined group and we are still friends today. What's been the happiest moment of your professional life so far? It's launching firms, launching Varday, launching Empowered Capital. I love the business building process and working shoulder to shoulder with incredible talent as we look to build something. What's the best advice you've ever received? When I worked with my dad in the drugstore, he was very fond of saying, Marcia, keep your head up. And he meant it both literally and figuratively.

1:06:23He didn't want me looking down when there might be a customer out there that needed help and that you would go out and actually help that customer. But he meant it figuratively. I've taken that very seriously. Always look for opportunities, take action, and embrace them. Okay, Marcia, last one. What life lesson have you learned that you wish you knew a lot earlier in life. At the end of 2011, I was at a pretty low point. We had been fundraising relentlessly in the post-GFC period of time. And 2011 was a particularly difficult year. If you might remember, we were looking to the abyss as to whether the euro was going to completely crash, and we had significant exposure in Europe.

1:07:05It was the end of the year, and my mom said to me, I think you could really use a coach and some feedback. This coach gathered verbatim feedback from colleagues at Vardae together with some friends and family. While there was some really nice feedback in there, the practical reality is there was one piece of feedback that has stuck with me ever since that, and that was that folks wanted to be even more courageous. They would observe that I had something to say and that I might be a bit reticent to actually share it. I wish I'd known that earlier, twofold. One, it's caused me to be even more courageous in what I'm prepared to say and when.

1:07:45But secondly, that people observe what you're doing, what you're saying, what you're not doing, and what you're not saying. You, somewhere along the way, become a role model and that it's very important that you be a good representation of a role model for the people around you. Don't hold back. How do you balance that with the idea that in good decision-making, often the most senior person infects the other people with their views if they don't hold back too early on? I really try to be respectful of the room as much as possible. Let other people do the talking first, because I've seen it a thousand times, if not more, that the senior person says something and the room just goes completely quiet.

1:08:34Whatever opposing views, depending on the culture of the firm, never quite rise to the occasion. I relish varied perspectives and people know that about me. It's a combination of people knowing that I want to hear dissenting points of view and generally letting other people speak first before I infect the room. Marcia, thanks so much for sharing this incredible story. It's my pleasure, Ted. Thank you very much. I really appreciate all the questions. Thanks for listening to the show. To learn more, hop on our website at capitalallocators.com, where you can join our mailing list, access past shows, learn about our gatherings, and sign up for premium content, including podcast transcripts, my investment portfolio, and a lot more.

1:09:25Have a good one, and see you next time.