Year in Review 2024 (EP.424)

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2:31Hello, I'm Ted Seides, and this is Capital Allocators. This show is an open exploration of the people and process behind capital allocation. Through conversations with leaders in the money game, we learn how these holders of the keys to the kingdom allocate their time and their capital. You can join our mailing list and access premium content at CapitalAllocators .com. All opinions expressed by TED and podcast guests are solely their own opinions and do not reflect the opinion of capital allocators or their firms. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions.

3:11Clients of capital allocators or podcast guests may maintain positions and securities discussed on this podcast. In each of the last four years, I've written an annual letter and shared it on the podcast. That letter included a review of our content and business and a peek at what's coming down the pipe. This year, we decided to reverse the production sequence. For this year's annual review, our CEO, Hank Sturmack, sat down and interviewed me about where we've been and where we're headed. Our conversation covers the best blogs and podcasts of the year, my investment activity, what's top of mind for allocators and managers, our upcoming podcasts, summits, and Capital Allocators University education courses in 2025, the team who makes it all happen, and a few closing questions.

4:04I hope you find the conversation engaging and informative. You'll also notice that with the letter, we begin our countdown of the top five episodes of 2024. This year's list includes a mix of investors across every asset class. Before we get going, we have some exciting news at Capital Allocators. We're hiring. We are looking for a head of business development to really lead all relationship building efforts with you, our community. followers in the institutional investment space. The role will involve all aspects of external facing engagements. That's our gatherings, whether it's our summits or our universities, from planning to leading correspondence with managers and allocators, to marketing the events that have open registration, to hosting.

4:51The role will also collaborate with existing sponsors and establish new sponsor relationships. And then the role will take on any new initiatives that arise. We're always experimenting with new things and we anticipate this person being a leader in those new initiatives. Ideal candidates are someone with five to 10 years of experience in financial services or investment management, especially in client -facing roles. That could be investor relations, gap intro, maybe it's software sales to institutional investors. Really what's most important is that this person is passionate about our mission of bridging knowledge gaps and making valuable connections for institutional investors.

5:29And without question, they are a fan of the podcast. The job spec is in the show notes if you're interested in learning more and applying. It's also on our website at capitalallocators .com slash about. That's capitalallocators .com slash about. Scroll all the way to the bottom of the page. Thanks so much for spreading the word about Capital Allocators and our head of business development job opening. Wishing you a very happy and prosperous new year and hope you'll enjoy Hank and my conversation about the capital allocators year in review. You wrote some interesting pieces this year. What piece stands out as one that's going to have legs?

6:08The volume of what I wrote this year was less than what I had in the past. The exception of that, of course, was the book. So Private Equity Deals came out. The reality is I finished writing the book a year ago, and it takes that long to publish it. So that's one. But on the blogs, there were three that I wrote. One called the Investment Office Playbook, one called the Investment Manager Playbook, and then on Yale's Emerging Manager Program. That crystallized for me that a lot of what we're doing is bridging knowledge gaps between GPs and LPs. Investment Office Playbook talked about what happens when a new CIO comes into the seat in terms of the timing and pace of the deployment.

6:49It's one of those classic, a manager comes in and ultimately hears, oh, it's not you, it's me. And they don't really know if that's true or not. So I was trying to give one lens on why that happens. And then on the other side of it, the investment manager playbook was about growth. My training under Dave Swenson was always the optimal money manager is a boutique, single strategy, doesn't grow, optimizes on performance, doesn't optimize on business profits. And while that's pristine, there's a part of that that doesn't consider the necessity of a successful business in generating optimal investment performance.

7:28Oftentimes, allocators see a manager, they like getting there early, someone who's great, delivering performance, And then they get frustrated as they grow without a true understanding that growth often is really, really healthy for organizations. That's got to be the right cadence of growth. It's got to be done the right way so that the manager and the allocator continues to be aligned. Those two were fun ones for me that got a lot of people responding. Yeah. I think especially with the allocator playbook, that was the sentiment from managers that that was an eye -opening, behind -the -scenes peek of what happens in the investment office.

8:04On the manager playbook, I heard you said recently, the asset management industry is a mature industry. How do you think about growth in asset management firms, given that the industry is mature today? Managers may want to grow because it's healthy for their organizations. There are a lot of those sophisticated institutions that can't offer growth to managers. So think about an endowment or a foundation that has a mature portfolio of alternatives. If they're going to add a new manager, they're probably kicking someone out. Managers are always trying to look for the next frontier. And those new frontiers today are private wealth, the Middle East, some sovereign, and then in credit in particular, in insurance.

8:49So you've seen more and more interest trying to figure out how to address those quite different channels so that they can continue to grow and have healthy organizations. Where have you seen asset management firms successful in those new frontiers? You'd have to take each one separately. So private wealth is the one that everyone has their eye on, and it is very much driven by brand. you've seen more success from large managers that can get on the private wealth channels of the bulge bracket banks. There were some astounding statistics that I saw from 2023 of something like $65 billion in assets got allocated from the four large bulge bracket banks to say private equity, private credit and infrastructure funds.

9:38And you could compare that to the four or five largest sovereign wealth funds, and those were only five to 10 billion in total. So how do you address retail? Blackstone, the blue chip organization, all of a sudden, John Gray is on LinkedIn with a series of videos of him going for a morning run in different locations around the world. Totally different attempt at looking at a brand image. So in private wealth, you see that. It also is a totally different distribution angle. You need hundreds of people that are going to all these private wealth managers one by one. The other end of the spectrum, you have sort of sovereign wealth in the Middle East, very different relationship development, very different needs.

10:17They're looking for strategic partnerships, a manager that can do a lot of different things, again, lends itself to the larger organizations. And then say in credit and insurance, you see all these linkups. It started with Apollo buying Athene and more and more you see the insurance liability base matches really well with credit with some incremental yield and it's extremely low cost of capital for the managers. The challenge is that all of those channels make the winners win more. Then there's the podcast. Pretty exciting year on the podcast. continue to grow, continue to have marquee guests.

10:55I know it's like asking you to pick your favorite child, but who stands out as a favorite guest that you had on the show this year? Yeah, it's totally unfair. It's so unfair that I need to defer to the audience. I really enjoy the guests I get a chance to talk to and build relationships with. So what I'll go through is a little bit of my color on the guests, but it's also heavily driven by where did the audience engage the most? Because there were some really great guests across every different area we cover. If you look at legendary guests, Mike Milken came on, and then Richard Sandler, who's a long -time lawyer, the next week.

11:31So Mike talked about his history, and then Richard talked about the infamous case from years ago. On the allocator side, the first episode in what will be a continuing miniseries on training grounds was with Carnegie Corp, and had Owen Schumann, Kim Liu, Meredith Jenkins, Elisa Maul. And among the allocator conversations, that got as much buzz as anything. Then as you go through asset classes and private equity, I had the great opportunity to interview the guys at 3G, Alex Baring and Daniel Schwartz, talking both about 3G and their Burger King deal, which is one of the most successful private equity deals ever.

12:06And that was just an incredible episode. You go to public equity, Cliff asked us, Cliff is amazing. Probably if he wasn't a money manager, it would be a stand -up comic and you put that together. It's a lot of fun. On the hedge fund side, I had Ricky Sandler from Eminence come on. Ricky's been at it for 30 years. He's really evolved long -short equity in a lot of different ways as has been necessary by both the market environment and how the business environment's changed. And then probably the most timely I've ever done, my old partner, Scott Besson, coming on the day before the election and three weeks before he was named treasury secretary.

12:40I like to say that there's a capital allocators boost when someone comes on the show. I can't go as far as to say that President -elect Trump picked Scott to be the Treasury Secretary simply because he came on the podcast. Ted, I'll break the news. That was not the reason why he was selected as Treasury Secretary. I guess I'd agree. And then the last one is there's always this stream of interdisciplinary learning. So it's not managers, it's not allocators, but guests, I think their messages can really resonate and help both CIOs and managers be better in their seat. I've had Jen Prosec on a few times.

13:10She is unbelievable at understanding and how to deliver a message. And so that's always really fun and gets a really strong reception. Going to next year, who are you excited to interview? I'm always pretty excited every week in almost any of the interviews because I have the luxury of having great guests in this ecosystem. When I get asked, who would I most want to interview that I haven't? It's a very different answer than most people expect, which it is the CIO or the manager who I don't know, but they're amazing. And a couple of different of my friends or past guests say, hey, have you ever talked to that person about interviewing them?

13:45The last thing I'd say is that the way I have guests come on the show is usually at any point in time, I've talked to, I don't know, 60 or 80 people about coming on in the future. And then we just wait for the right time. So there are two of those CIOs who I've talked to for multiple years about coming on, who are coming on this year. And there's a manager or two as well. Have you made any more investments this year? My investment portfolio, for context, is really a best ideas. It's almost a total portfolio approach, much more than an endowment model. And it's fairly mature at this point. I have a lot of great manager relationships that I love leaning into.

14:22So the new investments I made this year tended to be co -invests. I invested everything from a sports betting app to an AI company alongside to Gavin Baker at Atreides, to a European snacks business with Scott Spielvogel at One Rock Capital, to a blind pool with Chaz Koch at LB Partners, who just does an unbelievable job when he finds best ideas. And I made two investments in things related to the industry. So one, I'm an advisor at 10 East, which is a platform for alternative investments. They did a round for their operating company. And I also made an investment in Oldwell Labs run by Campbell Wilson, which is the very best software I've seen to help allocators find and monitor managers.

15:09So that's most of where my activity is. Now, probably the most interesting one for next year, and it might sound crazy and certainly will sound contrarian, is a SPAC, a new SPAC. So I was involved in a SPAC in the heyday three years ago. We have a great team of people, some of that team decided to do another one. When we did the first SPAC in 2021, there were something like 650 SPACs in the market. That completely disappeared for a lot of good reasons. And in the last year, there were only 40 or 50 IPOs of SPACs. So far, far fewer, but it still exists. Now, at the same time, private equity industry has had liquidity challenges.

15:51So you've seen the growth of continuation vehicles, a rise in secondary interest activity. And SPACs will not be the next innovative solution. They were just far too maligned from the last cycle. But it is a potential exit route for certain companies. Now, it's not going to be that many companies because there are so few SPACs. But we had a thesis that there will be a need for liquidity, particularly in the middle market. So we're going to be looking for a company that is public company ready, a real business, $100 million of EBITDA or greater, call it $2 to $10 billion of enterprise value with significant revenue.

16:28We just listed the IPO two weeks ago. It's Newberry Street Acquisition 2. And we're going to start the hunt going forward this year. It's going to be a lot of fun to look. One of the things I'm always attuned to is folks in the institutional community care about what you're thinking, what you're hearing. And so when you think about the topics the institutional community want to hear about next year, what are those topics? What's top of mind for allocators are first, let's call it the private equity cycle. So there's some discussion of what's going to happen with liquidity. When you talk to allocators, they're not actually worried about liquidity.

17:07This is nothing like 2008, but they are wondering when will distributions come back and how will they address continuing to invest in the private markets. The obvious big one now is this potential for a new economic regime in the US. Between the new president, Scott, alongside Kevin Hessard at the Economic Council and Doge, there's some chance that you have a significant realignment of the US, both in the world and some rationalization of the budget in the US economy. So what are the implications of that are important? And then AI is present of how is this going to change industries and investments.

17:42On the manager side, all of that always ties into performance. And that's first and foremost, top of mind. I've yet to have a day in my career where people thought it was just going to be easy to make money. Even when the opportunities in retrospect are easy, there are lots of reasons why it's hard in the moment. On the capital side, fundraising has been really hard. You've had this bottleneck in the private markets that's also affected public market fundraising. And so that capital on the margin, is it going to come from private wealth? Is it going to come from the sovereigns? How are we going to replace the capital that's going out?

18:15And then the last big one I think is industry structure. You're starting to see consolidation. We just put out a conversation about consolidation on the allocator side. There's certainly a lot more of that happening on the manager side as well. So what are the implications for that over time? How about our business? What are you excited about heading into 2025? It starts with the hub of the podcast. When the podcast has just crossed 20 million downloads, basically stopped counting. There's about 100 ,000 listeners as measured by Apple and Spotify. And then we've got the investment management operations, which I love as if the podcast is a challenging business because you're sharing a conversation for free, why don't we do it with a smaller potential audience?

18:56And yet it's really found its thousand true fans. So finding those areas where people can engage the right way. And then the business side, there's two pieces. So we have these ad sponsors and I'm doing backflips that my great friends at WCM are going to be our lead sponsor next year. Paul Black came on the podcast years ago, very unique organization. They've been incredibly successful. And in fact, when I appeared on Patrick O'Shaughnessy's Invest Like the Best talking about private equity deals, he asks his favorite last question of what's the kindest thing anyone's ever done for you. And from the prior time I had been on the show until then, something had happened that Paul had done for me that was the kindest thing anyone's ever done for me in my life.

19:36And I told that story on the podcast. I won't tell here. I'll let people go listen to it on Patrick's. So very, very special, warm feelings for WCM and very glad to be partners with them. And then we've continued these sponsored insights. Done about a dozen each year. Those are managers that want to come on the show that we think, yeah, they'd be a great guest. They have their own reason and their own timing for one to come on. And they're sponsoring the show and those episodes have been great too. So that's the business of the podcast. The next big leg is our summits. Those summits are gathering very high quality allocators and managers and doing it in a way that leans into the relationship side of the business alongside of the investing side.

20:18We'll have our CIO summit, which is our third annual in April. It's actually already full at filled in two weeks. We'll do our SDM, our Senior Decision Makers Summit in June. And then we're adding a new small and emerging manager summit that will be in September. And like the other ones, there is a twist in our way of doing it. Back in my years at Protege, one of our favorite lines was, everyone wants to be first, to be the second investor. And what we're doing in our small emerging manager event is the managers that we'll invite to come will only be the ones that are recommended by an allocator who's coming.

20:56So that every manager who's there, there's already been buy -in and due diligence done by someone who's there. So the idea is that no allocator actually wants to meet with small and emerging managers. They really want to meet with good ones. They just don't want to have to go through all of the chaff to find the wheat. So we're going to try to help leveraging the relationships already in place. Why don't you share a little bit more about the structure of the summits because we don't often talk about them publicly. The premise of our summits is that most of the events that take place in any industry match buyers and sellers in their own way.

21:31And in the investment industry, that happens in two ways. One is the sellers go on stage and the buyers sit in the chairs. And the problem with that is twofold. One is it's just really hard to do. It's not very engaging to go sit in a chair for six hours, especially now we have phones in our pockets. And the other problem is that you don't need to go travel across the country to sit in an event to hear great speakers on investing. You can hear them anytime you want. So people are much more available than they used to be. The other type are the cap intro events. Our good friend and partner, Ron Viscardi at iConnections does an incredible job and Global Alts is coming up, and that will be an amazing event.

22:08So what we try to do is not that. Fortunately, from the podcast, we have the ability to convene really great people and we let them engage with each other. And we do it through a combination of some structured and unstructured time. Our structured engagements are all small group discussions. And depending on who the group is and what's most of interest to them, those are the topics we discuss. And they're two to one allocator to manager. We have a team of facilitators that are all phenomenal people in the industry that come and help facilitate those discussions. And then we have lots of breaks.

22:40I'm still on a mission to have more breaks at our conference than anyone's ever had at a conference. And then we'll do unstructured things. So there's seated meals and there's activities and things like that. So we do that for two days. And what we find is that it's just really engaging in the process of relationship development, which is probably the most important aspect of capital flowing over time. The summits are one flavor of gathering that we've put together. Why don't you share a little bit more about what else we're doing in convening people in this industry. The other big area is education.

23:14So we created Capital Allocators University, our partner Rahul Mugala and I put together during COVID. And the idea for that was there are all these disciplines that people learn in almost any field in the business world, except for investing, but they're incredibly important for success in investing. So think of things like decision -making and leadership and management and interviewing skills. We teach those in a group of allocators and allow them time to interact with each other. We've now done six of them. The right group of people for that is just below who comes to our summit. So think of it as people with five to 15 years experience in the seat.

23:54This year, for the first time, we added a new course for investor relations and business development professionals that we've just completed. And it was fantastic. So we've shared how do allocators view the process of picking a manager? How might a manager go about building relationships and developing a brand? And then we had a panel on conferences, which was so good that we're actually replaying it on the podcast. And we had a panel of CIOs talking about what not to do and telling more stories from the investment process. And again, we allowed lots of time for those investor relations professionals to meet each other and share ideas with each other.

24:33There was a buzz in that room. You don't know when you do this for the first time, if the people are going to get together and want to share with each other. But after a day and a half, people really were engaging with each other. I think one of the things that was interesting about that forum was it's rare to get investor relations people in the room together without a capital raise component involved. And when you had 50 odd people that are in those roles opt into spending time in a room without a capital raise component, it was pretty special. And I'll be excited to do that again. Where else do you see us heading maybe into next year and even thereafter?

25:09We're always thinking about different experiments we can do to add on to what we're doing and helping serve this community. And there's one that we've just leaned into. And there's one or two that we're thinking about that I think we'll get to next year. That one is strategic investing. So it's making some small investments into startups that are developing tools or services to serve the asset management community. In particular, if you think about things addressing the allocator community, allocators have infinite budgets to spend on money management services and next to no budget to spend on anything else.