E323: How Billionaires Build Their Portfolios Audio

15:55David Weisburd:I think the other thing that we always look at day one is where do you want to be actively involved versus where do you want to be passively involved? So are there boards that you want to be on? Are there industries that because you sold your business, you don't just

16:05Jonathan Dane:want to buy and 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. Whether you're selling lattes, cutting hair, running boutique, or managing a service business, Square helps you run your business without running yourself into the ground. I was actually thinking about this the other day when I stopped by a local cafe here. They use Square and everything just works. Checkout is fast, receipts are instant, and sometimes I even get loyalty rewards automatically. There's something about businesses that use Square, they just feel more put together.

16:37Jonathan Dane:The experience is smoother for them, and it's smoother for me as a customer. Square makes it easy to sell wherever your customers are, in store, online, on your phone, or even at pop-ups, and everything stays synced in real time. You can track sales, manage inventory, book appointments, and see reports instantly, whether you're in your shop or on the go. And when you make a sale, you don't have to wait to get paid. Square gives you fast access to your earnings through Square checking. They also have built-in tools like loyalty and marketing, so your best customers keep coming back. And right now, you can get up to$200 off Square hardware when you sign up at square.com slash go slash how I invest.

17:13Jonathan Dane:That's S-Q-U-A-R-E dot com slash go slash how I invest. With Square, you get all the tools to run your business with none of the contracts or complexity. Run your business smarter with Square. Get started today. If you've been considering futures trading, now might be the time to take a closer look. The futures markets have seen increased activity recently and Plus500 futures offers a straightforward entry point. The platform provides access to major instruments, including the S &P 500, NASDAQ, Bitcoin, natural gas, and other key markets across equity indices, energy, metals, forex, and crypto.

17:48Jonathan Dane:Their interface is designed for accessibility. You can monitor and execute trades from your phone with$100 minimum deposit. Once your account is open, potential trades can be executed in two clicks. For those who prefer to practice first, Plus500 offers an unlimited demo account with full charting and analytical tools. No risk involved while you familiarize yourself with the platform. The company has been operating in a trading space for over 20 years. Download the Plus500 app. Trading and futures involves the risk of loss. This is not suitable for everyone. not all applicants will qualify. If you've been considering futures trading, now might be the time to take a closer look.

18:25Jonathan Dane:The futures markets have seen increased activity recently and plus 500 futures offers a straightforward entry point. The platform provides access to major instruments including the S &P 500, NASDAQ, Bitcoin, natural gas, and other key markets across equity indices, energy, metals, forex, and crypto. Their interface is designed for accessibility. You can monitor and execute trades from your phone with a$100 minimum deposit. Once your account is open, potential trades can be executed in two clicks. For those who prefer to practice first, Plus500 offers an unlimited demo account with full charting and analytical tools.

19:00Jonathan Dane:No risk involved while you familiarize yourself with the platform. The company has been operating in a trading space for over 20 years. Download the Plus500 app. Trading and futures involves the risk of loss. This is not suitable for everyone. Not all applicants will qualify.

19:15David Weisburd:Do a fund, you want to be there. And we're going to carve that into its own piece of the bucket. We're not, for those specific instances, we're going to do one of three things. We're going to write a huge check to a fund to make sure that we can be on the LPAC committee and be a part of it. We're going to go out and buy a company and operate it ourselves, or we're going to go out with another family office or another investor. We're going to buy a company and we're going to be some type of executive chairman role helping guide it. And that could be a huge piece of the portfolio. I mean, I have families that after they've sold it, they'll put 20, 30 % of what their liquidity back into another business.

19:45David Weisburd:And so that piece of it has to be considered in the holistic portfolio. So once we know that, where you want to operate, what it looks like from a cash flow need, then the rest of it starts to fall into place. We build a program. How much do you want to do in venture? Real assets, public markets. We need the beta exposure. What's that look like? But I really think it comes down to just working with the family to understand where their mindset is.

20:06Jonathan Dane:I love that. So you start with the liquidity because that's essentially constraint. if you need to have$10 million a year, you can never have a situation where the market draws down so much that you can't access that$10 million. So you start with the constraint and then you actually go in the other direction, which is you play to their strengths. Where does that family have alpha? Where could they build alpha within their portfolio? And then size that accordingly and then build out the rest of your portfolio.

20:29David Weisburd:I'll give you an antidote because I have a family, they're actually still owner operators of a business. And I spoke with them recently and they overcommitted to all these funds. And what ended up happening is I was reviewing their private investment portfolio with them and they had capital calls coming in they couldn't meet because they just kept committing, committing, committing. And what they had to do is go into their operating business, get a new line of credit, draw down from that just to fund their capital calls and commitments. And that's what happens when you build your investment portfolio without that liquidity structure in place from day one, because they weren't changing their lifestyle.

21:00David Weisburd:They still needed their money to live their life. The business was running. So how do you get the money to fund the capital calls? Unfortunately for them, they had to go into the operating company and do it that way. That's never a good answer.

21:10Jonathan Dane:Institutional investors talk to me about they're much more sensitive towards long-dated commitments and drawdown vehicles. Do you see that transfer over to the family office side? And so what are some ways to solve around that?

21:24David Weisburd:I get a ton of pushback lately about every single long-dated fund we go into, especially in the venture world, because I'm hearing endowments live forever. Institutions live forever. But families, family money, if you want to see that return materialize. And so every time we bring another fund to the table, the term of it becomes, I would say, a top two discussion. What's this fund look like? Where are we going to hit our returns? When do we even get our money back? I would say families have become more and more stuck on the idea of, am I really locking up money for 15 years in a venture fund to maybe, What, where do I ultimately get a 3x return?

22:06David Weisburd:Is that worth it? And so I think that's where, when we invest now, there has to be something in that structure. That's not just private markets beta. If we're going to lock up for 10 years, 15 years, ideal liquidity premium has to justify that lockup. And the families care about it more so than ever.

22:22Jonathan Dane:Do you think that's the right approach?

22:24David Weisburd:I think that locked up money needs to be rewarded. Nobody would give the IRS, nobody likes paying quarterly estimates and nobody likes overpaying taxes because that's a free loan to a company. If I'm working with a manager and their docs say that I'm paying a 2 % fee on committed capital, which maybe that phases down after the investment window, but I'm paying a 2 % fee on the capital I commit to you, but I'm not going to see the bulk of my return until after eight years. Is that really the best way to give you money and earn a return versus hindsight and recency bias aside, the NASDAQ, which has kicked off 15 % a year, which I could have put into a tax sufficient structure, tax loss harvested, did a long short extension and sit here with almost no tax implications of it versus I just sat through a 300 page K1 from this company.

23:10David Weisburd:I'm paying taxes across 17 different states. I think it matters a lot. I think that I think if I'm locking up capital for a long term, you have to show me something unique that you're doing with my capital that justifies that long term lockup.

23:24Jonathan Dane:I think there's a couple of things at play here. One is I think there's a psychological aspect. there's almost this desire that you don't want to believe that in 15 years, you'll be 15 years older, and you don't want to wait till 15. You want that money sooner. So I think that's probably noise. And that's probably inefficient. What you said about if you're getting a 3x over 15 years, depending on when that cash flow comes in, that's not a great return. You should be getting a higher return in that asset class in venture. On the other side, I see the best thing you could do from a tax structure is to compound the returns for as long as possible, because you're not paying money on the compounding, obviously take advantage of QSPS and other things.

24:01Jonathan Dane:So I kind of see both of both of those sides. But I do think there's this egotistical drive to want to have the money sooner and to feel like you're doing well sooner that distorts the thinking.

24:11David Weisburd:It does. And it also comes into play with older families. So when let's say you've been working with a family, our family became liquid when the founder was in his 40s, 50s. The horizon, you know, at 40, 50 years old, your horizon still feels endless. You're 40 years away, 50 years away, it doesn't matter. So now flash forward 20 years, the family's paycheck is 72 years old. And now he's starting to think about life expectancy and legacy. And you bring him an investment, a phenomenal venture fund that is doing the earliest of early stage venture investments. We're looking at an 8x projected return for 15 years.

24:45David Weisburd:So he sits there and he's like, I'm 72 now. So maybe at 87, I'll see this return. Is it even going to work? I don't know. Or my kids, What are they going to see? Are they going to understand why we did this? And so I think this, to your point, the psychological aspect starts playing a bigger factor, the older the family gets, which is why the investment committee matters so much. But when you're older, you want to see those returns hit faster and sooner. And it doesn't help that the media just sensationalizes the one or two big wins that come out every two to three years. And if you had invested yesterday, you would be at a billion dollars today.

25:17David Weisburd:But people see that that's what's on top of your mind. And then why am I investing for 15 years when I could have been in something that hit it in two years?

25:24Jonathan Dane:When the Mag7 is beating venture beta, that's a problem.

25:28David Weisburd:Yeah. I mean, I hear that every single day. I mean, I had this conversation two weeks ago with the family. Why am I still putting money in early stage venture when the Mag7 has outperformed it for the past, I think it's five years now. I guess if you roll it back, it's even a whole decade. Well, why am I still locking up capital on them? Why don't I just go on the Mag7? We'll do a long, short extension. We'll overwrite it. We'll do all this. there won't even be taxes on it. That's a really tough conversation to have. Yes, portfolio construction, beta side, drawdown volatility. But if you're just worried about returns, I mean, that is a very hard conversation and that is top of mind with people.

26:02David Weisburd:And I have a lot of families that they're very frustrated at the lack of DPI coming out of funds. It's great that you're marking me on paper after four or five years, multiples, three, four, five X, that's great. But I haven't seen more than a thousand dollars get distributed to me. So when do I actually get this money? And that's becoming a real concern of families that I talk to that I don't really care what paper says. When am I actually going to see the dollar?

26:29Jonathan Dane:Talk to me about lower middle market PE. It's one of your favorite asset classes. Why do you love it so much?

26:34David Weisburd:There's three reasons we like it. One, the growth of mega funds has created this massive inefficiency in the space because the bigger funds, which to your point of bringing retail money and all the time of money, they can't write 30 to$40 million equity checks. It doesn't even move the needle on their fund. So you have a lot of smart institutional money that can no longer invest in the space. And when you do that, it narrows the bucket to a lot of regional private equity firms, or I'll call them the super regionals, that want to come into it. So you have this smaller bucket of people, some of it less institutionalized, less experience.

27:07David Weisburd:But in this country, in the Midwest, in the Rust Belt, we're private business owned in this country. I mean, that's where all wealth is created. That's the majority of how businesses are. You have this huge pool of companies and you have a lack of smart money chasing it. That creates an inefficient market and great opportunities for buyers. So that inefficiency is something that we love. The other thing is there is simply tangible value creation in middle market private equity. These are family owned businesses. These could be first gen or second gen families that they've just been running it.

27:37David Weisburd:And the families have done really well for themselves. They've made a lot of money. They have a great lifestyle, but there may not be processes and procedures in place. They may not have a real CFO or real sales channel. They may not have integrated into ERP systems. And so when private equity comes in, there is actually a legitimate playbook you can put in place to create operational value. We're not even financially engineering or talking bolt-ons for top line and multiple ARB. We're talking true operational value of just coming into a company with a fresh set of eyes and making things efficient in it.

28:07David Weisburd:And so I love that because it's not contingent on multiple expansion or engineering. It is, there's a core operating way to increase it. And then the last piece of it, and this is where my love-hate relationship comes in, how do you exit it? Well, you bought in a space that the big funds couldn't plan. But if you grew it, you may have grown it to a size where you can now exit to the big funds. And so it's this interesting dynamic of, I don't need to compete with a big fund to buy. I can put tangible efficiencies in place to grow it. Oh, but now I'll take advantage of this massive market of dry powder, billion, billion dollar funds and sell to them because they have to deploy.

28:43David Weisburd:And if I have a half decent company, what a great exit we can build. Said another way, the amount of dry powder

28:49Jonathan Dane:is a problem for the large buyouts. It's an opportunity for the lower middle market that's selling to them.

28:53David Weisburd:That's correct. A hundred percent is.

28:57Jonathan Dane:Lower middle market. I think there's, correct me if I'm wrong, hundreds of thousands, if not maybe a million of these small businesses. What specific sub sector of the lower middle market do you like the most?

29:07David Weisburd:I'm in Pennsylvania. we're based in Pittsburgh and in this demographic, which I'm just going to lump into the Rust Belt, the lower middle market manufacturing is a phenomenal space to play in. There are so many opportunities there, especially in this region of the country that I look at them and we love it because you don't have the volatility of like a consumer packaged good or something. You have businesses that because they're manufacturing, they can be scaled. They can grow because of what they do. You can put sales systems in place and truly create value. And it's really our favorite place in all of middle market, of all of lower middle market, private equity.

29:44David Weisburd:We love manufacturing. We love value add distribution. And I would say we love anything on the industrial side. There is just so much value to be unlocked there.

29:55Jonathan Dane:One of the most interesting trends that I see in the lower middle market is independent sponsors. To your point, you have these former KKR, former Blackstone partners that have been classically trained in a large buyout, so now coming in and buying smaller assets. How does a family go about accessing something like that?

30:14David Weisburd:We work with independent sponsors, but they're not the number one place that we go to. And for us, it really comes down to skin in the game. I'm happy to work with an independent sponsor, but I like to see them put something into the table too. My biggest concern with them is many of them know the playbook and they know how to do these things. But then it's just on from one deal onto the next. Bought it, dropped it. I'm finding the next opportunity. And that that lack of conviction around the idea that lack of staying power can be problematic. I like independent sponsors who they are there. They came out of a larger institution.

30:50David Weisburd:They want to make a name for themselves. And so they're out there deal hunting. But they're putting everything into it. Like this is going to be their deal. They're going to buy this company, pour their personal capital in. They're going to build it, grow it, get it sustained, and then they'll find another one. I mean, I love that. That's almost like a family office buying a company because that independent sponsor, they are hungry for everything. And you know that you can get behind them and actually rely on them to do something.

31:15Jonathan Dane:What's the most common mistake that families with 50 to$500 million routinely makes?

31:21David Weisburd:I see families just starting out building their family office infrastructure over investing. When you have$50 million, you do not need to be in 30 different private equity funds. You do not need 22 different managers that you're investing in. What that does is basically give you a beta private equity portfolio that you could have just invested in one fund of funds. You didn't create anything interesting. And I can tell you all the arguments about why a family wants to do it. We're building relationships. We want to make sure that as further liquidity comes in, we have access to their funds. But what you forget along the way is you need to keep investing in every fund or the manager is going to cut you.

31:55David Weisburd:I mean, if you don't invest in fund two, they might not give you the offer for fund three. And so I don't like that argument. That is the biggest problem I see, because it leads to a consolidation of returns from a family office structure standpoint. You can barely manage it because you don't have a full infrastructure in place yet. And then just trying to understand and follow and monitor those investments doesn't work. I tell smaller families all the time, just go into a fund of funds.

32:22Jonathan Dane:What's the highest leverage way that you're implementing AI today as far?

32:27David Weisburd:Let me start by telling you where I'm not implementing AI, and that's for investment decisions. Especially in private markets, nothing will beat judgment and experience and talking to a person. We have a saying that we don't invest in funds, we invest in people. And that is more true than ever today, because AI is doing so much work that people are forgetting to meet with the person, compare stories across analysts and GP and managers, everybody aligned in the infrastructure. So we are not using it there. So where are we using it? Data processing, research processing. If we're digging into a data room and we're looking at decks and we want to start aggregating returns and ripping out that data, we're absolutely using it there because it will do the work of two analysts in two minutes.

33:12David Weisburd:We can load in memos and we can load in quarterly commentary and it can scan it, extract what we need to do and show us performance numbers. We can use AI to help overnight with, hey, we want to see how the beta of this fund compares to our portfolio. And it can just show us from historical numbers and investment types and what they've done, how it compares. So quantitatively, we love it. It saves time overnight. The other big place to use it is we are using it with our client communication. AI is absolutely helping to prepare content for clients. That doesn't mean it's doing it all. But if you're not using AI to enhance your workflow, you're just shooting yourself in the foot.

33:52Jonathan Dane:If you could go back to 2008 and you could give younger Jonathan one piece of advice that was timeless, what would that one piece of advice be that would either help you accelerate your career or help you avoid custom mistakes? I would tell my younger self, the answer is always no if you don't ask.

34:11David Weisburd:and I would say my career, whether it's been working with families, whether it's been working with managers, if you're afraid to ask, then the answer is already no. So what's the worst that could happen? Hey, can I join the board of this company that you just invested in? No, okay. I wasn't on the board anyway. It didn't hurt me. But being afraid to ask that question, being afraid to ask any question, it's a career hinder. You won't move forward because you've never put yourself out there. And so I would say I didn't start asking the questions early enough in my career.

34:43Jonathan Dane:Jonathan, this has been an absolute masterclass. Thanks so much for jumping on the podcast. Looking forward to continuing this conversation live.

34:48David Weisburd:Thank you, Jordan, as well.

34:50Jonathan Dane: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.