E313: Why the Endowment Model Doesn’t Work for Taxable Investors

In short

Podcast Summary: How I Invest with David Weisburd - Episode E313

Episode Title

Why the Endowment Model Doesn’t Work for Taxable Investors

Episode Overview In this episode, David Weisburd interviews Aneet Deshpande, exploring the challenges and nuances of applying institutional investing frameworks, specifically the endowment model, to taxable investors and families. They discuss the importance of tax-aware investing, governance, pacing, asset location, and the significance of clarity in investment objectives for optimal portfolio construction.

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Key Discussion Points

Contrasts Between Taxable and Institutional Investors
Taxable investors face unique challenges that differ from institutional investors.
Institutional frameworks can fail for private clients due to:
Different liquidity needs (e.g., home purchases, education funding).
Tax implications that alter return expectations.

Rise of Tax-Aware Private Market Investing
The increasing importance of tax efficiency in investment strategies.
Example: Infrastructure investments yielding returns as capital gains through structured returns of capital (ROC).
The significance of asset location to maximize after-tax returns:
Improper allocation can result in a 30-40% loss in returns.

Application of the Endowment Model
Challenges for Private Investors:
Determining the right allocation to private markets.
Sourcing investments while justifying liquidity constraints.
Addressing pacing concerns (timing of investments relative to cash flows).
Misapplication of the Endowment Model:
Many private investors use endowment language without implementing its principles.

Market Trends and Structures
Shift from traditional fee structures (2 and 20 model) to more innovative investment strategies like co-investments and continuation vehicles.
Importance of understanding the motivations behind co-investment opportunities.
Discussion of the growing trend of Evergreen funds as a competitive response to traditional fund structures.

Governance Considerations
Good governance drives better investment decision-making.
Investment policy statements should be a key deliverable for clients:
Establish ranges for flexibility rather than fixed targets.
Mitigate risks from panic-driven decisions by investment committees.

Long-Term Wealth Preservation for Families
Key is to have clear governance and documentation for family wealth management.
Importance of educating future generations on roles, responsibilities, and investment philosophy.
Noting the difficulty of preserving wealth across generations without proper frameworks.

Avoiding Common Pitfalls
Dangers of ad hoc investments and lack of clear documentation.
Importance of understanding overall portfolio exposure and liquidity needs.
Challenges with maintaining a coherent asset allocation strategy.

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Key Takeaways

Tax Awareness is Crucial: Tax implications should be integrated into investment strategies to maximize returns.
Clarity of Objectives is Key: Knowing what one aims to achieve with investments can significantly impact success.
Governance Matters: Establishing strong governance frameworks can help manage emotional reactions to market fluctuations and improve decision-making.
Continuous Education: Engaging all family members in financial literacy and investment strategy is essential for sustaining wealth.

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Conclusion This episode provides valuable insights into the complexities and nuances of adapting institutional investment strategies for taxable investors. By focusing on tax efficiency, governance, and clarity of objectives, investors can better navigate the challenges inherent in their unique financial situations.

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Written by AI. May contain mistakes. Listen to the episode to check what was said.

Chapters

Tap a time to open that second in VO

Understanding the Taxable Investor Landscape

0:45 to 4:00

Exploration of the rise of taxable investors and the shift in investment strategies.

“At the low end for coastal clients, then it could mean 35 % difference in return.”

Challenges for Taxable Investors

4:00 to 7:00

Discussion on common pitfalls and challenges faced by taxable investors in applying the endowment model.

“and alternatives away from this 2 in 20 model into different things.”

Tax-Efficient Investment Structures

7:00 to 9:40

Insights on how taxable investors can utilize specific structures to maximize after-tax returns.

“One of the hardest things of investing is seeing what's shifting before everyone else does.”

Navigating Market Dynamics

9:40 to 13:20

Analyzing how market fluctuations impact investment decisions and strategies for taxable investors.

“And so the question that becomes more muddied, do you sell a depreciated asset in your growth assets to fund that?”

The Importance of Governance in Investing

13:20 to 14:03

The role of governance and investment policy statements in guiding investment decisions.

“And the best endowments I talked to, which I think are the best private investors, they give their investment committee ranges versus specific numbers.”

Investment Policies and Momentum Effects

14:03 to 17:42

Explore the importance of investment policy statements and how momentum impacts investment decisions.

“And then what you do inside of that really matters.”

Wealth Preservation Strategies for Families

17:42 to 21:42

Learn best practices for families to preserve wealth across generations and establish governance principles.

“But having govern governing docs is support for today's episode comes from Square, the all in one way for business owners to take payments, book appointments, man and staff and keep everything running in one place.”

Common Governance Issues in Family Offices

25:56 to 28:00

Identify common governance issues faced by families in wealth management and investment practices.

“But, you know, certainly it hasn't changed, I don't think, the appetite from private clients to want to get exposed to these companies.”

The Diversity of Investment Strategies

28:00 to 29:10

Understanding how different legendary investors excel in their unique domains.

“just being more uh objective about uh what we see principally through the lens of academia versus what we expect in the future out of markets and out of our careers.”

Identifying Manager Genius

29:10 to 30:26

Exploring the importance of recognizing the unique strengths and weaknesses of investment managers.

“Said another way, I think Warren Buffett would be a terrible venture capitalist.”

Show all 13 chapters

The Allocator's Perspective

30:26 to 31:46

Discussing the role of allocators in preserving client capital versus seeking asymmetric wealth.

“committed to everything, you will dilute yourself in the value of the investment down to its lowest common denominator, which is medium-like outcomes, if not worse.”

Challenges in Investment Management

31:46 to 33:09

Examining the dual challenges of investing and running a successful investment business.

“That's where the, if there's any sort of arising conflict, it's probably first there from an outcomes point of view instead of, you know, majority of managers probably couldn't make it in other asset classes.”

Strategic Planning for Investment Firms

33:09 to 34:24

Highlighting the need for strategic planning within investment firms and the common shortcomings.

“And that's where we see some differences between the good and the bad.”

Hear the part that matters, and keep it.Open this episode in VO. Double tap your headphones to save a moment as you listen.

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Transcript

Automatic transcript. May contain errors.

0:00David Weisburd:What would most people be surprised about how you go about investing$15 billion in the market today?

0:06Aneet Deshpande:You have to have a clear line of side on asset allocation around things like cash flows, taxes, financial plan, objectives that are oriented around the family's own desires that may not be prescriptive, such as a 5 % mandate.

0:18David Weisburd:This rise of the taxable investor is a new phenomenon.

0:21Aneet Deshpande:It's such a hugely important phenomenon going on. And it's, I think, the segue a little bit into the democratization of private markets and all of the different investment vehicles that we are seeing come into markets. But this gets into a little bit of the how do you take an institutional framework and apply it to private clients? So it's one thing to be able to say, hey, we treat you as a multi-generational client the same way we treat you as a perpetual and down-air foundation. the reality is in past in history it used to be very difficult to take and express the same investment ideas you would have for that institution and employ that for a private client um i think in this day and age now if you set everything else aside so all else equal now we've solved that sourcing conundrum so we have the ability to bring our own internally sourced private market um investments for all of our clients and we do so using technology and a couple of different relationships we have to create a simplified investment structure for for private clients one of the nuances there is that perhaps didn't exist five, maybe even 10 years ago, was being more tax aware in that process.

1:23David Weisburd:At the low end for coastal clients, then it could mean 35 % difference in return. So you get a 15 % now, you're 10%. At the high end, it could mean 15 % to 8 % if you're investing in hedge funds or private credit that have the short-term income.

1:37Aneet Deshpande:Part of the response to that is not only different products and structures, but also being very thoughtful about how they're deploying those investments and generating returns, be that vis-a-vis capital gains or through the income lens. And to your point, if you don't appropriately asset allocate or asset locate those investments, you can lose 30 % to 40 % of your total return right after that.

1:57David Weisburd:What are some logging fruit in where taxable investors can use specific structures in order to maximize their after-tax return? Give me an example of that.

2:05Aneet Deshpande:So infrastructure is a good example. So there's a couple of different strategies in the market right now where, again, these things didn't exist a handful of years ago where you're making infrastructure investments. And because of the joint venture structure of the underlying investments, we're able to deploy all of the income distribution as a return of capital. So if you're a private client, you think about that after 10 years, you've eroded basis. And so now it's all long-term capital gain along the way you've cut a coupon, clipped a coupon that's been tax efficient by having the ROC return of capital benefit on there.

2:33Aneet Deshpande:And then if you're estate planning, you can use that to your advantage by having that asset flowing through an estate plan. Therefore, there's a step up in basis, and then you defer that capital gain even further. So a little small myopic way of dealing with taxes from an income seeking.

2:47David Weisburd:And that seems to be a lot of the tax strategy, which is either defer for decades where the net present value of those taxes are essentially near zero, but you still technically pay the taxes or die. And then your kids get the step up in basis. Many private investors use the endowment model language when they talk about their portfolio, but they don't really apply the principles. What are most private investors missing when it comes to applying the endowment model to their own approach?

3:15Aneet Deshpande:I'll give you three challenges. So one, what is the right number? What is the number in terms of asset allocation that you're willing to put towards private markets? The second is, okay, you've got the number. How do you source for it? How do you make sure that by locking up the liquidity, you're getting a better than public market outcome. And then pacing. So in private clients, we have, I'm going to buy a house. I have to fund college. We had a family member pass away. We are buying the small business. We have these other tax considerations. We have all these investment cash flows. Whereas an endowment may just simply have, hey, we have to spend 5 % of this, what it looks like over the next year.

3:49Aneet Deshpande:So pacing becomes very important to how am I going to build to that number once I describe that number? Those are the three, I think, biggest challenges in taking what we would say is the traditional endowment approach of applying to private clients.

3:59David Weisburd:There seems to be this trend and alternatives away from this 2 in 20 model into different things. Independent sponsors, co-invest, even CVs and continuation vehicles fall under this trend. Do you think this trend is here to stay? And if so, how are you able to capitalize on this?

4:18Aneet Deshpande:The pick in the Python moment for private equity is real. So you have a general exit problem. So things look a little better than they did, say, 12 months ago, 24 months ago for certain. But CV is going to play a role. There's no question about it in that world. And for those trophy assets where we are working with sponsors that we know can continue to extract value relative to public markets, those are interesting opportunities. And they will continue to be interesting opportunities. Again, I think the spread of outcomes there is going to be very wide, as you'd expect, somewhat of what we would see in traditional buyout or growth.

4:50Aneet Deshpande:But that's something that's out there. Co-invest, interestingly, there's almost two versions of this. One, there's co-invest strategies writ large, and we want to invest dollars into co-investment funds and take advantage of getting private equity-like returns without the fee burden necessarily. So there's that component. There's also just the increasing component of co-invest opportunities that are arising from a lot of late-stage unicorns in the market. And, you know, this is, again, they need exits, they need to deploy dollars, and they're looking beyond the traditional VC realm to be able to track those dollars.

5:27Aneet Deshpande:And they're looking at RIAs as a functional part of where to get that investment, those capital commitments. And so you're seeing a lot of, you know, buy everywhere moment here on SPVs, but you're seeing a lot of co-investment deals get structured with GPs that you may not have historically worked with. And you have to ask yourself the question, why am I seeing that co-investment opportunity, obviously? But for us, we've seen more and more of our, I would say, our higher conviction GPs that we are currently invested with bring us an increasing number of co-invest ideas.

5:57David Weisburd:Is it the two, the management fee, the 10-year 2 % that bothers you, or is it the 20 % carry? What is it that bothers you exactly?

6:04Aneet Deshpande:I don't know that either one of them bothered me, to be completely honest with you. Whenever we underwrite, we always think about the world on a net of fee basis, net of total fee basis. And so we have underwritten expectations that we expect out of strategies. One of the reasons why we re-upped with managers is because they've hit those bogeys, generally speaking. And so we like to stick with proven managers that we've invested with. But I think for your average RIA or indiscriminate investor that doesn't know how to measure what success may look like on an after-fee basis, after-tax too, for that matter, simply optimizing for lower fee on the front end is rationale to go after that investment.

6:42Aneet Deshpande:So I think, yes, it's good, but it's also, but be careful.

6:46David Weisburd:A lot of LFPs tell me it's what irks them a little bit is the 10 years and sometimes the 12 years of paying. Obviously, it steps down over five years, but that really accumulates. It ends up being 20 plus percent of the actual investment that gets paid in fees, which is pretty crazy. One of the hardest things of investing is seeing what's shifting before everyone else does. For decades, only the largest hedge funds could afford extensive channel research programs to spot inflection points before earnings and to stay ahead of consensus. Meanwhile, smaller funds have been forced to cobble together ad hoc channel intelligence or rely on stale reports from sell-side shops.

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8:27Aneet Deshpande:I mean, there's a, you know, the, and perhaps people more sensitive to it now because, you know, investment periods are longer, hold periods are longer, fund ages are longer, and there's a lot of different reasons to start looking at the compounding effect of that math. But I do, you know, again, And I'm not apologizing for it, but I think a lot of that is being also used to drive dollars into the Evergreen space because of the natural immediate compounding that they allege the benefit you get versus, say, a traditional drawdown structure. So, you know, it's hard to draw the similarities. It's hard to draw the parallels.

9:04Aneet Deshpande:And there's certainly nuances there. But I mean, fees are a problem across the private market industry. and Evergreen will do its job, I think, to drive more competitive fees across the industry.

9:16David Weisburd:On the capital commitment, so you invest into a fund and it draws down over two to three years. What's the best practice in terms of how you manage those liabilities?

9:25Aneet Deshpande:In ordinary times, it's like-for-like assets. You're funding a growth asset. It should be sourced from a growth asset to keep your asset allocation in check. Of course, I think what happens a lot of times is the market's in disarray or something's going on. when you do get those calls. And so the question that becomes more muddied, do you sell a depreciated asset in your growth assets to fund that? In other words, just to put a finer point on this, do you sell your S &P 500 position to fund your buyout growth, your growth equity commitment that you've just been called for? Ordinarily, we would say, yeah, that makes sense.

10:00Aneet Deshpande:The reality is if the market's down 20%, the S &P 500 is down 20%, you just start to have these probability, the probability start to go in your favor of keeping money there instead of taking money out. And so you have a different problem there of sourcing from maybe relatively appreciated assets or assets have done better than the growth asset that you've just talked about. The biggest issue during times of distress is denominator effect. In times of duress, you have public markets are decreasing and your private markets are staying relatively intact for all the reasons we know. And so you have a higher proportion of private assets than you would have otherwise normally thought prior to that decline in public markets.

10:40Aneet Deshpande:So that causes a little bit of friction too.

10:42David Weisburd:You're not keeping the money in cash, you're keeping it at some asset that is liquid. And then as the capital call comes in, you're transferring out of that asset.

10:52Aneet Deshpande:The nuance there is for short duration strategies that we may be deploying it, cash is probably the right thing. If you're talking about private equity, the six-year investment period, that's a different liability construct. So it really should be dependent on what that investment theory looks like, informed by your own pacing assumptions. And so the scenario you don't want to be in ultimately is a short duration liability vis-a-vis the capital fund by a long duration asset like public equity. That's where you have to be mindful.

11:17David Weisburd:And this denominator effect, essentially public markets go down, your private markets on a percentage basis are now a larger part of your portfolio. Why not just under allocate to private markets ahead of this, knowing that there'll be this drawdown in the next 10 years, or what other tools do you have to solve for that?

11:34Aneet Deshpande:Let's use today as a good example. So the S &P 500 has been up, it's doubled in five, four, five, three, four, three and a half to five years, whatever it is, it's up double digit percentage points, over 20, over 2018, whatever it was last year. And combine that now with the fact that you've had realizations anemic. You have capital call, investments, commitments that have been called increasingly now, but also very slow. So you have this natural fatigue of like, why am I locked up in private markets? I'm looking at the S &P going up 75 % in three years. What is the benefit here? So now you have the inverse of the denominator effect, which you have increasing public market investments and lower proportionally, the numerator effect.

12:16Aneet Deshpande:So we have to figure out how you actually go about solving that. And for us right now, it's simply just making sure that we have the number. We have this saying here, our head of sales says, if you don't know where you're going, any road will take you there. That's the same construct in asset allocation. If you don't know the number, you will have a very hard time ever getting to that point in time versus being disciplined about the S &P 500 is going to be volatile no matter what. You know, that's why it has the 18 % standard deviation. It's going to go up and it's going to go down. Over time, it will go up.

12:43Aneet Deshpande:Private markets are going to be a staple and stable part of portfolio. How do we get to the number that you want over time? And so pacing models are a very important part of that once you describe the number you want to get to ultimately. And that's being committed through time, over time by vintage. and David, your point of how do you anticipate drawdowns? I think it's very hard to create expectations on pacing around probability of market outcomes. We have to assume certain things of public markets and then we react accordingly on the funding side of the equation for those commitments.

13:14David Weisburd:It's interesting because a lot of this actually comes down to the least sexy, most important thing in investing, governance, which is what's upstream of all your decisions. And the best endowments I talked to, which I think are the best private investors, they give their investment committee ranges versus specific numbers. So they don't allow themselves to optimize on arbitrary asset allocation numbers that keep them from this flexibility. I interviewed Brent Beshore, who has this really interesting 30-year private equity fund, and he predicts every decade there's going to be some black swan event.

13:47Aneet Deshpande:Yeah, that's so true. And for the majority of our clients, and just kind of focusing on the endowment foundation side, they're operating with that sort of framework. So you have to have one codified investment policy statements. That is a future practice that every institution should follow. And then what you do inside of that really matters. That sets the tone for the investment committee. It protects the organization or the corpus of the assets from decisions that the committee may have otherwise made. So there's a interplay there that I think is very valuable that leads families and family outcomes also in a similar way.

14:23Aneet Deshpande:Investment policy statements are and should be a key front-end deliverable for clients. To your point around the ranges, that's a very, very, very important thing. What gets lost, I think, a lot of times in markets is the power of momentum. And if you rebalance too much, you lose the momentum effect. And that can be meaningful for people. So this idea that you want to be so precise every day and tout that as an asset sort of sets aside the fact that there's this thing called momentum and that you may actually do better by letting it run a little bit before rebalancing. So you can quantify some of this stuff, obviously, but those things are real.

14:59Aneet Deshpande:And having things like ranges and your IPSs allow you not only operational flexibility, but rebalancing flexibility and then investment flexibility for us as decision makers to be able to make decisions and not be held to an Excel sheet for all intents.

15:12David Weisburd:You have a 10-person IC. There's always that one bad apple, especially when the market's down 20%. It only takes one panicked IC member to destroy the entire investment policy. Instead of ruining that, you have to really think from the corporate governance side. And I think few institutions have really gotten this right, like Alaska Permanent, URS, Utah Retirement Systems. and instead of sitting around hoping that human nature won't surface its ugly head again, they created these governance awaiting this kind of next crisis and making sure that the investment team itself is able to navigate some of these difficult times without kind of being captured by the IC.

15:53Aneet Deshpande:Yeah, yeah, and that's so true. You have to have a source or a document that will outlive the trustees and the employees of a given institution. It reinforces the permanent nature of those pool of assets.

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16:09David Weisburd:What's some of the best practices that it comes to families that are looking to preserve their wealth over several generations? What are some governance principles that they could institute in order to avoid what I would call the Nepo baby or other issues that might come downstream? Not that it ever happens, but just theoretically speaking, hypothetically.

16:29Aneet Deshpande:Yeah, that's a great question. All of this work is done on the front end. I mean, so you have to have familial buy-in. It's education. It's educating not only Gen 1, but Gen 2, Gen 3, wherever you are in the life cycle of the family. And so that's not only getting everything lined up with an advisor, making sure there's relationships built across the firm, that there's trust there, that you have all of these documents in a single place available for all the generations to build an access pool, et cetera. Just basic governing principles for families include having all these documents set up, the estate plan, any governing docs for a family, the trust docs, everything spelled out clearly.

17:09Aneet Deshpande:Roles and responsibilities, probably the biggest thing. What is the role? What is the responsibility? How do you teach that and grain that into your children, into your grandchildren, ensuring that you don't have that world of, you know, here's a statistic. And it's hard to find this data, but, you know, family offices tend to start to have problems after Gen 4. You know, there's this little kind of behavioral idea that preserving the intention of the founding principles gets more and more difficult by generation. By generation three, four gets pretty, pretty well diluted out. So how do you how do you sort of refine and define that over time is obviously very difficult.

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20:01Aneet Deshpande:Not all applicants will qualify.

20:03David Weisburd:When families come to you and they've had a bad experience with another RIA or another multifamily office, what are the most common one or two governance issues that were done at this other advisor that you just see happening over and over and where we go.

20:18Aneet Deshpande:Yeah, no, not clear documentation is one. That's, that's clear.

20:22David Weisburd:Just making investments ad hoc. Some family member comes in, I want to invest into this, this private equity.

20:27Aneet Deshpande:Like, look at this, this direct investment. Can you please look at this? It's, you know, it's a, it's either a real estate deal down the street or it's a buddy's, you know, venture idea that he's raising for past the hat. And so putting parameters around that is very important. And again, it goes back to the governance of documentation and ensuring why are we investing in certain things? Who has say in those investments is obviously a very important thing. Creating an investment committee or an investment advisory function or something that can rest within the family also is something of importance.

20:58Aneet Deshpande:But the scattershot, the buckshot, David, investments is probably the biggest thing where you have a... Just because you have amassed a ton of wealth doesn't mean you should be aloof about asset allocation. And just mistake number is just also not willing to deal with a single provider. And I know it's very difficult. There's relationships involved. You may have a business with your own relationships there. And so how do you find a resource for you that can bring all of this together? Because it requires a deep middle and back office and significant amount of operational resources to be able to do that.

21:32Aneet Deshpande:And majority of firms out there or single advisors aren't prepared to do that, don't have resources to do that. So that's another area, I'd say.

21:41David Weisburd:It says there's a related, which is you make random investments and you don't even know which random investments you've made.

21:47Aneet Deshpande:Yeah, that's exactly. And the hard part is, if you have a collection of private investments, what does that collection even look like? From getting fund updates to understand what portfolio companies are doing, if they're fund level, if it's private investments, what are your exposures and how does that roll up into your broad overall asset allocation?

22:05David Weisburd:the second order effects of that let's say you are invested in this friend's venture capital fund you may not even know whether they're calling money in six months or in five years and the second order of the effects of that why does that even matter is that you have to keep all your portfolio liquid you may be over allocating to liquid and why does that matter you're not getting that alternatives premium and the illiquidity premium so it's not just that you don't know what's going on it's that you have to be overly conservative if you don't know what's going on.

22:32Aneet Deshpande:That's right. That's exactly it. And we see that time and time again. And it's, again, if you don't, back to that saying, if you don't know where you're going, you're going to take you there. So if you don't have an asset allocation or don't know what you're aspiring to, what chance do you have in making sure that you've got the right underlying investments to get you there? I think it's very difficult.

22:49David Weisburd:A well-known single family office in New York City, which will remain nameless, they have this policy where I believe it's$10 ,000. Any family member can make these one-off investments, even in a restaurant, up to$10 ,000. But outside of that, it goes to IC and then the IC has final say. And this is how they've been able to kind of toe this line between giving the family members some level of autonomy while not just storing the wealth.

23:13Aneet Deshpande:Yeah. And it's not to say that what we say is etched in stone. It goes back to the idea of having a investment policy with ranges around it, having very specific dollars carved out, say for co-investment ideas that you want to be interested in that may not necessarily be part of your overall asset allocation. I think it's totally fine. We do this a lot where you have a predetermined or set amount of dollars carved out for opportunities that are being sussed out by internal networks, for example, instead of through our own platform. So those are not things that shouldn't be done. It's just doing a way that's informed by the larger objective at hand.

23:50Aneet Deshpande:So I think your point's spot on.

23:52David Weisburd:On this co-investment, I see a trend in the institutional space of making it more rules-based or algorithmic versus this kind of one-off. Do you see that happening in the taxable space? And is there a way to construct these portfolios, maybe not to be fully passive, but to have some rules-based approaches to how you process going to?

24:17Aneet Deshpande:Yeah, I think that's common. I mean, it's already there. We're already there, but it's going to continue to grow and get better and more evolved. I do think, you know, once you describe the outcome that you're looking for, there's going to be a co-invest platform that can help you get to that point. So, again, a little bit of a technology plus desire thing. But I think the large one-off co-investments that we see through the late stage venture lens are probably just that. That is just simply giving people access to, you know, things that would have ordinarily been in the public market. And so that's, you know, I'm gonna call it, whether that's being able to talk about, you know, your investment in SpaceX at Saturday night at the country club or otherwise, I think that those are a little bit separate.

24:57Aneet Deshpande:You're gonna have more systematic co-invest opportunities. And it seems like we've seen a couple of platforms and I'm excited to see where this goes in the next, you know, 12 to 18 months.

25:10David Weisburd:SpaceX is an interesting thing. It went from a family office trade to an institutional trade to some would argue a family office trade again.

25:15Aneet Deshpande:And that's where you gotta be careful of, you know back to the code by saying you have spvs being launched um all over the place with blind access in many cases they don't have access you have multi-layered spvs with fees upon fees upon fees upon fees like what outcome do you expect in that if you're a spacex investor on a multi-layered spv like if the thing doubles now we're talking to two trillion dollar company or whatever it is um one that's got to be your underwrite and then two you have to net out the fee burden of all that stuff and then okay is that a rational investment it starts to get tough i I mean, we're simply looking at, I think, the retail market now being a liquidity mechanism for a lot of now employees with tenders and other institutions.

25:54And I think you have to be careful there.

25:56Aneet Deshpande:But, you know, certainly it hasn't changed, I don't think, the appetite from private clients to want to get exposed to these companies. And that's an outlier. I guess there's plenty of other firms out there, late stage firms that are interested.

26:07David Weisburd:The only thing worse than two and 20 is two and 20 on a two and 20, four and 40. Unless, I guess, you're in Citadel or back in the day, Stephen A. Cohn. and then it might make sense you started out as a trader in 1999 if you could go back and whisper one timeless principle in your ear in 1999 in order to help you either accelerate your career or help you avoid costly mistakes what would be that one principle it's a very good question and

26:30Aneet Deshpande:i think about this a lot actually so i i'm a runner not avid but i run just to just to try and stay in shape and whenever i whenever i do it i invariably doesn't matter how much i try to

26:40David Weisburd:clear my mind i keep coming back to this idea of replication crisis and there's this you know

26:44Aneet Deshpande:statistical thing out there that says that majority of, you know, a significant majority of academic studies out in the literature have been difficult to replicate in real time out of sample. And I think that's very well seen or observed in finance. And you don't have to go too far to find that stuff, whether it's using PE multiples as your proxy for future expected return, whether it's inflation views, you know, visibly the 70s and the way we're printing money today, if I call it that there's all kinds of ideas where if you just simply treat the world as a scatterplot draw a best fit line and let that drive your decisions you've been a pretty bad place so I mean I think there's like going back in time I think it's easier in hindsight today but just thinking about the world that way is I think very important or interesting that those things meaning being able to look at mathematical relationships we know there's no immutable laws in finance but look at those relationships with a higher grain of salt and saying things can change permanently um and and they do actually change permanently um and even if permanent is only 20 years inside of a career and that may be temporary on 100 timescale it's permanent for you inside of that timescale your career timescale so um i think there's a fair amount of like just being more uh objective about uh what we see principally through the lens of academia versus what we expect in the future out of markets and out of our careers.

28:13Aneet Deshpande:So that's probably the biggest thing.

28:14David Weisburd:I think in general, just intellectually being honest with yourself, writing down your priors, seeing how markets evolve. We humans have such a desire to just revise our investment thesis just in time to kind of hide our mistakes. It's almost like so inherently human. One of the things that I've been thinking a lot about, I spent on Sunday with a very well-known investor, and he's done deals with Warren Buffett, Bill Ackman, all these top investors. And one of the things that in retrospect should have been extremely obvious as he was explaining these different legendary investors, also Tony James and people like that, is that they were all so idiosyncratically different.

28:58David Weisburd:And what makes Warren Buffett Warren Buffett, and what makes Bill Ackman Bill Ackman, and what makes Tony James Tony James is so it is syncretically different. And the reason they were successful is because they applied their genius into a very specific vertical. Said another way, I think Warren Buffett would be a terrible venture capitalist. Kind of sounds funny to think about that thought experience, but there's nothing, you know, Warren Venture has been around for, you know, over half a century and some permutation of the world. There's a possibility that young Warren Buffett would have gone to venture capital and he'd probably be a third or fourth tier investor.

29:29David Weisburd:Maybe he'd be second tier, maybe he'd be first quarter. I'll be certainly wouldn't be born both and i think we have this misnomer that good investors are good investors where i think good investors have very specific strengths which oftentimes are very specific weaknesses in another context and like finding the manager's genius i think is such an underrated thing and it's only obvious in retrospect it's like of course bill ackman's a great investor yes but he's very great in this specific domain and if you had put him in another domain he maybe not wouldn't have been as great and maybe still be top quartile but he wouldn't be bill ackman

30:00Aneet Deshpande:yeah it's so true today and it permeates i think a lot of manager due diligence processes today where you know you may have a process that eliminates that sort of genius because you can't handle that kind of key man idiosyncratic risk inside of your underwrite and that's a tough that's a tough thing i mean we've taken the approach that we find smart people we invest with them you know you make sure a lot of other things are right but uh if you if you take a committed to everything, you will dilute yourself in the value of the investment down to its lowest common denominator, which is medium-like outcomes, if not worse.

30:33Aneet Deshpande:So I think that's a very, very, very important part.

30:37David Weisburd:Yeah, that's so interesting. Keyman, so much of this is just framing. It's so important when I speak to my partner, I'm so cautious not to frame certain things in certain ways. They just come out of your mouth. And there's very few actually terms that are neutral key man risk genius those are pretty leading terms and frames to put on somebody and yeah we don't have this whole thing where it's very hard to actually frame things neutrally and that that is downstream consequences how we think of it and shape our our strategy yeah and to your point i think there's um you know the you know for for being in my seat or our seats

31:15Aneet Deshpande:we're allocators we're by definition generalists our job is to preserve and grow client capital not create a bunch of asymmetric wealth. Our clients have already done that in the real economy. And so there's a nuance there too of making sure that we are able to find those people that we are generally not, but also have the discipline to create a process that can be sustained, repeated, and drive success for clients. So that's the punchline for being an allocator versus being a bottoms-up investor in a certain asset class, like the Buffetts and the Ackmans.

31:48David Weisburd:Have you found that in your own in your own managers that almost their strength is their weakness what makes them really good at what they do they would be very bad in in other contexts or it comes with this kind of like double-edged sword where they have other weaknesses that if they were in other verticals

32:06Aneet Deshpande:they would be bottom quartile absolutely i think there's it could be not only in investing principles um that could show up but also life principles how they run their businesses um it's the entrepreneurial problem entrepreneurs like it their way and so um you know it takes a special person to be able to have a point of view on a market have that expertise have the willingness to engage a team be a team player um because they're almost contradictory in some sense and and do it for the benefit of of an increasing client base and that's a that's a real i think challenge number one and then you overlay on top of that you got to be a good investor and good business person.

32:44That's where the, if there's any sort of arising conflict, it's probably first

32:49Aneet Deshpande:there from an outcomes point of view instead of, you know, majority of managers probably couldn't make it in other asset classes. I think we all know just they're there for that reason and no other, there are some very exceptional people that can do well, whatever they do. We've seen those kind of generalists out there. The real test, however, is can you not only be a good investor, but run the business effectively. And that's where we see some differences between the good and the bad. It's one thing to get through fund one, raise money. It's a second, you know, if you go from pre-fund past the hat to a fund one, fund two, you get to a fund three, and now you're institutionalizing your business and roles, responsibilities, and all those kind of things that you would expect, you know, more complex LPs or platforms to build up, to ask questions on.

33:33Aneet Deshpande:That kind of evolving is also very difficult.

33:36David Weisburd:You find that oftentimes this is the saying it's the player coach the the great investor is also builds the the firm because out of necessity or do you find that they they bring in other talent in your actual portfolio what tends to happen and what do you think should happen from the best bet necessity is never good

33:56Aneet Deshpande:it happens but you want to have a you know a glide path to what success looks like we ask those questions you know if you're at a fund two or fund three what does success look like what does the fund four, what does the fund five look like? What does the resource bill look like for you internally? And having a business plan or a strategic plan is really important. Oddly enough, GPs will enforce that of their own portfolio companies. Yet, if you look at their own businesses and ask them for that, they probably don't exist in many cases. So what is that strategic plan is very important because those are the soundbites that get us comfortable with the next fund and then the re-up and everything else down the road.

34:33Aneet Deshpande:And that's where I think there's a little bit of that dilemma, which is interesting.

34:36David Weisburd:They used to be venture capitalists didn't use any technology. I think they've since caught up, but it's a funny thing. Well, Anit, this has been an absolute masterclass. Thanks so much for taking time and looking forward to doing this again soon.

34:47Aneet Deshpande:Thank you, David. I appreciate the time and your wisdom as always. Appreciate it.

34:50David Weisburd:That's it for today's episode of How to Invest. If this conversation gave you new insights or ideas, do me a quick favor. Share with one person in your network who'd find it valuable or leave a short review wherever you listen. This helps more investors discover the show and keeps us bringing you these conversations week after week. Thank you for your continued support.

From the publisher

Why does applying institutional investing frameworks often fail for taxable investors and families?

David Weisburd speaks with Aneet Deshpande about adapting the endowment model to private clients, the rise of tax-aware private market investing, and why governance, pacing, and asset location matter more than product selection. Aneet explains how taxes, liquidity needs, and behavioral risks fundamentally change portfolio construction—and why clarity of objectives is the real edge.

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