E379: Why Great Investment Firms Eventually Stop Performing

0:00Today's guest is Luke Sarsfield, the CEO of RichPost, a publicly traded company. Luke was a global co-head of asset management at Goldman Sachs for 23 years before becoming CEO of RichPost. And RichPost solves a very big problem in asset management, which is how can managers continue to perform despite this incentive to always be raising more and more capital. Today, we go deep into how managers can be incentivized to continue performing for limited partners, what breaks as managers scale, and what the market is today for GPs that are looking to sell. Without further ado, here's my conversation with Luke.

0:38Luke, you're Chairman and CEO of Rich Post, which owns some of the most prolific asset management firms in the world like RCP, Truebridge, Bonacord. Before we get into the business, maybe talk about exactly what you own in these firms? We collect 100 % of the management fee stream, the fee-related revenue, and typically then we own just a little bit, just a small percentage of the carried interest or the incentive fee, but we leave most of that behind with the underlying managers. We think that obviously is a great tool to incent the wonderful investors that we have at each of those franchises, but it also creates great alignment between them and their limited partners, And that alignment is really critical to the models.

1:22When I heard about the business, I had to get you on because I think it solves the biggest issue in asset management today, maybe outside of liquidity. And the second biggest issue in asset management today is what LPs disparagingly call asset gatherers versus investors. Number one is we exist to serve our LPs, right? We want them to have a great investing experience. We want to generate consistent, persistent, durable alpha in whatever strategy we're executing for them on. We stay zealously focused on what we do. We want to execute for our clients in a world-class way. And we will only embark on a strategy or a capital raise if we think we can absolutely positively deploy that capital in a way that is consistent and persistent alpha generative.

2:09The second order effects of this are so fascinating. So if you go to a manager and you say, now you're being compensated almost entirely in carry. If you go to them and you say, the incremental dollars you make with carry, what's second order effect of that? Well, the second order effect of that is now they focus on where they could actually get a return. The word I would use is alignment, right? Alignment is what we focus on and what we try to create at every level, right? As a public company, we wanna be aligned with our public shareholders. But importantly, we are fiduciaries on behalf of our LPs, on behalf of our clients.

2:43And so our investors need to be aligned with those LPs, and those LPs need to see and feel that alignment. And to your point, I think a very pure expression of that is, our investors only do well when our LPs do well, right? And so if you work at one of the companies on the Ridge Post platform, and you do outstanding job of investing the money on behalf of your LPs, you will do well because of that alignment of carried interest. And the LPs see that, they feel that, they manifest that every day. And I think that's why they're so embracing of our model. One of the interesting things about your strategy is that you have several niche asset managers.

3:22Some of them have scaled more than others, but RCP, which is lower middle market, TrueBridge, which is venture capital, Bonacord, which is GP stakes. Middle market focused. Middle market focused GP stakes. How is it that the LPs sign up for all these different strategies? and what are they coming to you for? Increasingly, I think what's going on is you're seeing a lot of LPs who are saying, when I look across my portfolio composition, particularly the private part of my portfolio, by dint of some of the things we talked about, there are a lot of large managers in the world and some of them have gathered an awful lot of assets.

3:58And I noticed when I look at my mixology in the private part of my portfolio, that even though I may have it spread across several of those larger managers, there's actually a fair bit of inherent correlation in my portfolio because they all play in the same place. They focus on the same things. They may co-own assets or trade assets back and forth between one another. So even though I've diversified from a manager selection perspective, I may actually have a lot of return correlation because a lot of the underlying portfolio assets, companies, credits, whatever they are, are the same or very similar.

4:33And one of the things we're seeing a lot of LPs say is that I see a lot of reasons why I think the middle market is fundamentally differentiated. The return profile, particularly if you can execute against it in a world-class way, is superior. And so I, as an LP, want to have some exposure and some real diversification in the private part of my portfolio away from this kind of conglomeration of the large-cap stuff that I'm getting naturally. and the way I can get that is in the middle market, but the middle market, it's more complex. It's much less transparent. It's much more complicated to act in.

5:11You really need somebody who can do that in a world-class way on your behalf and that's what we can be as a collective or we can be as an individual point solution within your portfolio under the umbrella of rich post capital. One of the most brilliant parts of your model and I rarely use that word. You're solved around a big conundrum in the GP stakes space. What is that conundrum? It's that public markets, private markets seem to almost give a zero value to the carry in funds. Unfortunately, that is the case. And particularly in venture funds and higher risker assets. So instead of bemoaning that part, you said, wow, let's make a business around that, which is if the market's not valuing it and good GPs are valuing it, the ones that actually believe and are willing to bet on their own skill, why not leave that with the GP and focus on the man's room fees?

6:04And the more I interview world-class asset managers and investors that have scaled and that have continued to deliver alpha over many decades, there's one thing that's in common is they have a simple strategy that's easy to communicate and that people get very quickly. I think you're exactly right. It's about putting value where people actually recognize and reward that value. Public shareholders generally have viewed incentive fees or carry as somewhat sporadic, somewhat opportunistic, not predictable, maybe subject to clawback. And so they're just not willing to capitalize that kind of on a run rate multiple basis.

6:43On the other hand, our investors who are close to the investments who understand the economic power of that think there's a lot of value there. They're right, by the way. I agree with them. But they see that value and they recognize that value and they embrace that value. And by the way, as we talked about before, that actually creates this real alignment with the LPs who want them to be thinking about how they drive great economic outcomes by investing the portfolio. And so you have a world where on the one hand, you're creating the right kind of alignment. Right. You're giving the public shareholders what they want.

7:16You're giving the LPs what they want and you're creating value for the system. I wonder if paradoxically that actually helps grow the management fees. In other words, if you truly have GPs that are totally incentivized by carry, they should, at least in theory, produce significantly better than those that are trying to grow their assets. And a second order effect, if you produce good returns over time, there are some managers that should grow more than, ironically, the ones that are trying to be asset managers. Do you see that? Yes, but I think the key phrase is overtime, right? Because it's not going to happen in the moment and it's not going to happen in a single fund cycle.

7:54But ultimately, remember, I always say this, we're in the business of delivering great economic outcomes, great risk adjusted returns for our clients. If we do that, they will entrust us with a greater and greater share of their wallet because they say you can execute on our behalf and you'll drive great returns. And we see that happening. That's one of the virtuous cycles of the model. Over time, our clients come back to us. Our client retention rates are incredibly high. They want to stay with us. They want to stay in the ecosystem. are clients who started as clients of a single strategy, but now want to become clients of multiple strategies for all the alignment reasons and all the talent capability reasons we just talked about is very high.

8:35And we're seeing the benefit of that. And generally when our clients are coming back to us, they're coming back and investing more in subsequent strategies or more in other strategies that we execute on their behalf. And so, yes, I think if we do our job right, and you've always got to start with that, are we doing our job right? Are we executing in a world-class way by generating great risk-adjusted alpha for our clients? If we do that, our success will follow. But I think you can't lose focus of the order of those two things. We've got to deliver the outcome. Then the good things will happen.

9:09It's not the other way around. I'm curious, and excuse me for the frank question, but have you always been so long-term in your thinking and thinking in this compounding? Or is this something that as you get older, you've embraced more? Look, if you're asking a personal question, what did Einstein say? The most powerful force in the universe is the power of compound interest, right? And obviously he meant that in a very literal way. But everything, if you do it right, compounds over time. The value of relationships compound. The value of data compounds. The value of your insights and your network will compound over time.

9:40I worked in a place at Goldman Sachs for many years that sort of really preached that mantra in so many ways. And so I learned that. I think I got it at a relatively young age. You saw it succeed, not necessarily in your career, but on organizational. I watched people. I watched it on an organizational basis, but I also watched people who I viewed as mentors and friends who were a step or two or three steps ahead of me have it be kind of central to their success in the organization, in their careers, frankly, in their lives. And so when you see that, you're kind of influenced by that, and hopefully you pick up a thing or two along the way from that.

10:15I have this theory on asset management and the financial markets in general. The asset management world is suboptimal on long term and focused on the short term. And why is that? I believe that early on in your career, when you go back, you were at Goldman Sachs, but you go to ABC Investment Bank. The first three, four or five years of your career, short term thinking and zero sum thinking is what dominates. So the people that end up making it through that five years, a large majority of them are going to be short term thinking because those are the only people that could deal with this crap for five years.

10:51And then, as a matter of fact, the industry downstream of that asset management, private equity, they tend to be more short term focused, even though if you took people from outside the system, if it didn't have to go through this funnel, there would be much more long term thinking in the industry as a more efficient strategy. What do you think? It's hard to argue the point, right? We live in a world that in many ways is set up for a certain element of short-termism. You report results on a quarterly basis every three months. And then you're judged, you know, oh my gosh, your EPS was a penny above or your EPS was a penny below.

11:24And either all trees are growing to the sky or the world's ending as a corollary of that. And so we do live in a world that has a certain element of short-termism. And I think, you know, people in their careers, you know, particularly when they start off, they, you know, they are engineering to an outcome or they want to get the next promotion or they want to do well in the next comp cycle. And so in many ways, the systems are set up to put a certain focus on short termism. But I do think over time, and maybe it's the benefit of being in a long cycle business, right? Private markets is a long cycle business.

12:00Definitionally, a fund lives for seven, ten. 13, 15 years. And specifically, the carry is extremely long cycle. 100%. The management fees are today, the carry is at the end, right? And by the way, all our carry is set up in a European waterfall way. So it's really at the end, right? Everybody, we pay back all our investors, we pay back, you know, them, hopefully in spades. And only then do we start to capture and collect that carry or investors start to capture and collect that carry. But I think this, this is a really important point you're on more broadly, right? And I think one of the things we try to, you know, work on is how do we get our people to kind of take that longer term view to say, look, you know, I may do something today that is not necessarily in the immediate short term interest of whatever it is.

12:48But I think by doing it, it will pay real dividends, it will help me grow in my career, it will help the organization flourish, it will help our LPs do better in the long run. But you really need to focus on getting people to think long term, because to your point, a lot of the systems, a lot of the world we inhabit is set up to kind of promote a certain amount of short termism. Expert calls have always been one of the most powerful ways to build conviction. But today, investors are asked to cover more companies, move faster and do it with leaner teams. With AlphaSense AI-led expert calls, their TGIS call service team sources experts based on your research criteria and lets the AI interviewer get to work.

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14:45Take advantage of AlphaSense AI-led expert calls now. The first to see wins. The rest follow. Learn more at alpha-sense.com slash how I invest. And you, Luke, are the CEO of a public company, Rich Post. How do you manage the quarterly reporting versus the decade-long outlook? On the one hand, you've got to have a vision and you've got to have direction, right? There's this old saw. If you don't know where you're going, you're certain to get there, right? You've got to say, what do we believe in? What are we trying to accomplish? Where are we going? And one of the things I did early on in my tenure as I was assembling the new team and the new kind of strategy and structure was to go out very publicly.

15:26we did an investor day in 2024, and we laid out what were our long-term growth drivers, what were our strategic imperatives, what did we think that plan was going to yield from an economic perspective. And so we're very transparent about that with our shareholders. We said along the way, we're going to give you quarterly reports. We're going to focus on how do we execute against those longer-term goals. And we're going to report out on our execution. And we're going to give you KPIs and other indicators that hopefully will support the fact that we're progressing against those long-term goals, maybe frankly also at different times identify places where we're falling short and then what are we going to do to remediate and accelerate against those long-term goals.

16:05But I think it's really important to lay out to people, whether it's to investors and to our people internally, what is the long-term vision? What do we seek to be? What is the aspiration? And then how do we work from where we are today to get there? And sort of I think that's really important as opposed to what sometimes creeps in is the incrementalism, right? If I do this this year, well, the next year, if I just do 5 % or 10 % better, that's all I need to do. But it's not necessarily in pursuit of an end. It's not necessarily with the view of what's the end goal, what's the end state, what do I ultimately want to accomplish, and what do I believe that this platform and this franchise can be?

16:45Have you had a churn of your LPs from short-term holders to long-term holders, or were you messaging this kind of strategy from the very beginning? We have not had the churn, is what I would say. We have very long-lived, very loyal LPs, and we are very lucky to have them. This was the strategy from the very beginning. The strategy is the same. Ultimately, we exist for what I would say is a very simple reason. It's to deliver world-class, risk-adjusted returns on behalf of our LPs, right? There's a lot of ways you manifest that. The customer comes first. The customer always comes first, right? And the shareholders benefit as a virtue of the customer.

17:21But you've got to serve your client. If you're not serving your client in the long run, it will be to the detriment of your shareholders and to others. Shareholders are incredibly important. We value our shareholders. But the way we manifest and drive that value on behalf of our shareholders is by doing a world-class job on behalf of our clients. And if we do that, the employees will benefit and the shareholders benefit. The reason I'm double-clicking on this is I have a huge bias against the public markets. I'm an early investor in Anthropica. profit because in the$4 billion valuation. Congratulations.

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19:23Whether you're selling lattes, cutting hair, running a boutique, or managing a service business, Square helps you run your business without running yourself into the ground. I was actually thinking about this 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. 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.

20:00You 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 days 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. At Square, you get all the tools to run your business with none of the contracts nor complexity. Run your business smarter with Square.

20:31Get started today. Support for today's episode comes from Square, the all-in-one way for business owners to take payments, book appointments, manage staff, and keep everything running in one place. Whether you're selling lattes, cutting hair, running a 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.

21:01They just feel more put together. 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 days 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.

21:34And right now you can get up to$200 off Square hardware when you sign up at square.com slash go slash how I invest. At Square, you get all the tools to run your business with none of the contracts nor complexity. Run your business smarter with Square. Get started today. So I've told the team, try to avoid going public as quickly as possible. But I have a huge bias against going public for this very reason. this, the way that I would define it is this default short termism that sets in unless you actively go against the amount of firms that have actively messaged against it. You could literally count them on your two, your two hands.

22:13Jeff Bezos, when he took Amazon relatively early, especially in today's standard public, from the very beginning, he said, we're going to focus on the long term. And he attracted these investors in the public markets, obviously, Berkshire Hathaway, Warren Buffett and Charlie Munger. The other new phenomenon, which is almost two decades old, is Google originally created these founder shares. But all things being equal, unfortunately, I've seen the public markets be much more destructive of long-term value creation than maybe they were intended to be. We live in both worlds a little bit. So it's an interesting dichotomy at some level, right?

22:49We are a private asset manager by definition, right? All of our investing activity that we do on behalf of our clients is in this private sphere. And so we see the value of compounding over a long period of time, of making the right long-term decisions, and of really focusing on how do we create value across a period of time. On the other hand, we also exist as a public company, to your point, and we are subject to the vicissitudes of the public market. And obviously, the reporting and headlines and news flows will matter in the short run. You've got to focus on what you can control and you've got to separate yourself from the thing you can't control.

23:27What you can control, you can control your strategy and you control your execution against that strategy. And over time, if you have the right strategy and you execute against that strategy, one hopes and one expects that that will be rewarded in the market. But you can't control the day-to-day volatility in your share price. You can't control the exogenous news flows. You can't control what competitors or other participants in the sphere do. And you've got to stay clear-eyed about this is the sphere of what I can control, and I'm going to control that in the best way I know how. And I'm not going to get too focused on the other stuff because I believe over time, if I control this and I execute against the stuff I can control, it will yield a good outcome.

24:09Speaking of value, we have thousands of emerging managers that listen to podcasts, hundreds of so-called emerge managers. Many of them are still independent. What's the market today when it comes to somebody selling their asset management for them? This is still a relatively nascent industry. The alternative space has only existed for 30 or 40 years, right? This is not something that's been around for, you know, 100, 150, 200 years as many, you know, august institutions have been. And so the industry is maturing, professionalizing and growing in many ways and one of the ways it grows is new business formation right somebody works at a large asset manager learns their trade becomes excellent at their craft and then says I want to go do this on my own maybe I want to be independent maybe I'm an entrepreneur maybe I didn't like the bureaucracy and so there is a lot of new business formation new new franchise formation that goes on and then I think you have the other phenomenon right and the other phenomenon is what do LPs want thinking through the clients lens And I think there was a period of time where LPs were really on the lookout for every great niche manager that could exist who could execute in a very narrow kind of area or sphere of influence.

25:24Increasingly, as the LPs were looking at their roster of managers and that roster was just getting longer and longer and longer, they said, oh, my gosh, this is too much. Right. And so we need a group of partners who can execute in a world class way, but can execute in a broader based way, because we don't want to have that long tail of managers that we need to monitor. And our staff has to go visit and go to the AGM and spend time with three or four times a year. We need franchises who we can trust, who can execute. We're comfortable that they're going to invest in a world class way. but they're also, they have the scale, they have the throw weight, they have the heft that we know that they're going to be there and they're going to succeed in the long run.