E393: What 8,000 LPs and GPs Taught Him About Investing | Ron Biscardi

0:00How much of a factor is having an anchor today? It's a big one. It's a signal to all the other investors that someone hopefully did the work to understand the strategy to evaluate the manager and got comfortable that both the manager, management team and the strategy are worth betting on. People who get into the business and think they're going to raise money in three months or six months, you're just setting yourself up to lose. So you have to be ready for a long process. And then it's really just a matter of getting out there and being in front of people as many times and as often as possible.

0:43What separates the top 1 % of allocators from everybody else? I think there's a huge, like a ton of similarities between the top allocators and the top managers. Generally speaking, I feel like the most common thread is their interest in learning. They're constantly educating themselves, learning new things. Like they're approaching their job with this like voracious desire to learn new things and to get into the weeds and to all the details. And I think there's also, while Wall Street is certainly known for its egos, in my experience, the best investors always have a very humble side to them.

1:31I mean, this is a business that is ruthless. The market doesn't care about anything. The market does what the market does. And it's our job to try and navigate that market. And I think the best investors approach it with a sense of humility because you can be really, really confident in your view and still be completely wrong because maybe you missed something. And this is all probabilistic, which means some percentage of the time it's not going to go the way it should have gone. You know, I'm a big fan of poker. And when I'm playing a hand and I'm 75 % to win, 25 % of the time, I'm still going to lose, even though I was a favorite to win.

2:16And that's how the stock market works as well. So in my experience, the best investors are ones who are thinking that way. They have that humility and they are just sponges in terms of reading and speaking to other people, digesting viewpoints that conflict with their own viewpoints. So that I feel like is kind of the most common characteristic. There's the IQ aspect to it. What about on the EQ? What's the pattern? EQ is absolutely huge. EQ enables you to use a network and relationships to gather more information. Basically, every super successful LP and GP I've ever met, they all have tremendous networks.

3:07They're all spending. I was at an event with, I won't mention the name, but I was at an event with absolutely one of the top tech fund managers in the world. And we're having a chat and a guy walks by and he sees him in his peripheral vision. He's like, that guy is part of Google's AI team. I've got to go talk to him. I looked at the guy. I had no idea who he was. I would have never had any idea. He was part of the team. And I'm pretty sure, by the way, he was many layers down in the team. This was not the guy running, you know, Google's AI project. It wasn't Demesis, obviously. It was not Demesis.

3:43But this investor knew who he was, knew that he was really smart, knew that he probably could learn something from him. And I think you have to have some personality, right? If you're going to go build relationships with people who can provide information that's critical into your investment decisions, you do have to have some personality. It's not like you're sitting in a room and it's all math. I guess maybe in the quant area of investing, it's certainly more math heavy and maybe what I'm describing is less of an issue. But I think actually even for those guys, when things don't go exactly well or you're trying to learn what other people are doing with their algorithms and their computer setups, it is still good to be able to lean on relationships to learn what are other people's approach, especially when it comes to problem solving, because someone else has already seen that problem and solved it.

4:41They can really short circuit the process for you. One thing I've noticed in the very top allocators, like Dan Fetter from University of Michigan, we've had chats about his philosophy. He'll come in early to support managers. And I asked him the question, what kind of economics are you trying to get by coming in early? And he's like, that's not the thing. I want to secure the relationship because the relationships are one at the earliest stage. And then you fast forward, there was a recent article that came out, which I could quote, University of Michigan has a$2 billion position in open AI. And I think so much of the industry is focused on these zero sum dynamics of how do I push down the fees?

5:24And very few people are playing it at the game that a Dan is playing it. The fee thing, to be honest, has never really made any sense to me. If you want access to the best investors in the world, I mean, the worst thing you can do is go at the fee. It's really no different than any other product in the economy. If you want quality, you have to pay for quality. And if they're going to generate a return of 20, 25, 30%, you know, someone who's in those kinds of ranges, are you really going to beat them up over the management fee? I mean, it seems crazy to me. And I've, you know, we have a tremendous amount of data at iConnections because we've had so many GPs come through the system and download all of the details of their funds.

6:08And the top tier managers are absolutely being paid top dollar and they should be paid top dollar. They're delivering the best returns. It's more efficient than not. I think it's more of a headline grabbing thing. And it also, it obviously can be strategy dependent. I guess it depends on what you're looking for. But when you said that, I kind of went straight to thinking about some of the venture funds I know. Two and a half and 30. If they have Anthropic and OpenAI and SpaceX in their portfolio, you should be pretty happy to pay those rates. What about conviction? Is that something that you see in the top allocators?

6:49And if so, how does that play itself out? Especially in alternatives, you have to have conviction. You can't trade in and out quickly, right, in the alts world. I mean, even in hedge funds, which are a little bit more liquid, you generally, you're not buying it, selling it, rebuying it, selling it. It's just not really how it works. It's so for sure. I mean, our LPs are spending a tremendous amount of time getting to know the teams that they're about to give money to, understanding their strategy, getting to know them as people, getting comfortable and ultimately developing real conviction about, you know, that allocation before they make it.

7:27it's very important but you also have to be careful of it because you don't want your conviction to override common sense because when things don't go well or everyone's belief that a particular strategy was the right way to go and then it doesn't play out and the market starts to show you that the thesis was wrong you do have to adjust the best investors are always willing to take in new information and make a new decision. When, you know, when the information set changes, you have to reevaluate. But I do think it's definitely an industry that focuses on building that conviction before an investment decision is made.

8:11You could chase conviction off the cliff. The most obvious example of that is GameStop. It was clearly the right decision to short it. and yet Melvin Capital and other funds blew up. Yeah, it just, it didn't go the way everyone thought it would. I crossed out the word conviction in my dictionary and I have a new term for it. I call it Antonio Gracias. When I saw the news that Antonio Gracias had backed SpaceX 30 times, I was embarrassed because I had gone around and thought I had high conviction companies that had backed three, four times and I was off by an order of magnitude of 10. But what Antonio has done, what several other funds, Founders Fund also has these crazy kind of conviction bets is you have to see it to kind of believe it.

9:00Yeah, and Antonio is really unique because Antonio and the team at Valor are very operationally experienced and they are in the weeds with their portfolio companies at a deeper level than almost any fund I've ever seen. So, you know, when Tesla was going through its crisis in developing its production line, and they went through the period where they had put too much automation into the production of the cars, and they had to rethink all of that. I mean, Antonio was at the factory with Elon working through those problems. I mean, so when you're that deep into the investment, it enables you to be that much more convicted.

9:45So I'm sure that when other investors were looking at P.E. ratios and what year-over-year numbers looked like, Antonio understood at a much deeper level what was actually happening in the production process. And I'm sure that informed him in a way that made him comfortable committing 30. That's such an interesting point. In other words, the conviction is built by having a bottoms up understanding of the business. For sure. I think I don't know another way of doing it because. Everything else is just bravado. Why are you convicted? Well, I know for sure. Why do you know for sure? You have the same information as every other investor.

10:24Exactly. It feels like a lot of talk to me without a really deep understanding. And obviously he's been a close friend of Elon's for such a long time. and Elon's first principles thinking, I think has spread through the whole ecosystem of Tesla and SpaceX and all the companies he's touched. So I know that it's the way the folks at Valor think and for sure the way Antonio thinks. Speaking about how people think, you get to see this pattern matching of thousands of LPs, thousands of GPs. You're just seeing this at every conference. If you were a first time fund today, how would you raise capital?

11:00The first thing I would do is be prepared for it to take a very long time. You shouldn't really get in the game if you're not ready for it to take a long time because it probably will take a long time. It's not an easy business. People want to get to know you. In the beginning, no one has a reason to give you any money or to really test you out. So they want to spend time with you and get to know you. And you have to be prepared for just a very long sales cycle. But if you are prepared for a long sales cycle so that you're like humans are just so focused on our expectations being met, set your expectations far out into the future.

11:41And then it's fine to do that and then work really, really hard to exceed that expectation. But I think people who get into the business and think they're going to raise money in three months or six months or have set themselves up where they're in financial trouble if they don't raise the money in a short period of time. Like you're just setting yourself up to lose. So you have to be ready for a long process. And then it's really just a matter of getting out there and being in front of people as many times and as often as possible. Like we see that the funds that have the most success with us are the ones who commit to multiple events.

12:18And they're just here every time. And, you know, the first time they walk in the door, it's probably pretty overwhelming. You know, we have thousands of people at these things. tons of LPs, and you walk through a room and you can see lots of people know each other. You're probably not gonna know many people the first time you're through. But by the third time you're through, you'll probably be looking at your 70th, 80th meeting and a bunch of people who now you've seen multiple times feel like friends. So you just have to go at it with the mentality that I'm a newcomer and I'm privileged to be in this room and I'm gonna take time to really get to know people and build relationships and not put kind of undue pressure on them or myself to have to transact right away.

13:05I mean, in my prior business, which was a hedge fund and just all its fun seeding business. I mean, we talked to investors for years, in some cases, before they allocated. That's how it goes. And sometimes along the way, you think you're going to get an allocation, then the market It does something and it changes everyone's view. And now there's another delay. Like, it's a long process. It's honestly, I can't really think of an area of the economy that has a longer sales cycle than this one. And, you know, the problem is people hear the handful of stories where, you know, so-and-so left and they walked out the door and a month later they had a billion dollars.

13:48Like, okay, it does happen. But it is such a small exception to the norm. I wish people just wouldn't even see those. It's the availability bias. In startups, you have the same thing. You only see the headlines before it used to be a TechCrunch article would come out and there might be 30 companies that were in that space, but everyone saw this one article and everyone's comparing themselves to this one. That's exactly right, yeah. And then if you look at the guy who raised a billion, yeah, he spent the last 20 years working for Steve Cohen and all the LPs knew him and everyone knew and believed in him.

14:23So when he walked out the door, He already had all the relationships and the credibility that you're trying to build. Until you build the relationships and the credibility, it's a process. How much of a factor is having an anchor today? It's a big one. It's a big one. It's... Can you explain that? Sure. I mean, an anchor investor is, in essence, the first person who puts money into a fund. And it's important because it's a signal to all the other investors that someone hopefully did the work to understand the strategy to evaluate the manager and got comfortable that both the manager, management team and the strategy are worth betting on.

15:07You really need an anchor to get a fund started because that's the first story that you're going to build on. You're going to go to every other investor that you meet with, and you're going to tell them that you have this anchor, and they're all going to want to hear the story. How do you know the anchor? Why did this person make the bet on you? They're probably going to want to talk to that person who made the anchor investment. But I would say for most funds, you shouldn't really try to do this. You shouldn't really try to get into the business until you have an anchor. Now, if you were trading in your basement and you turned 100 grand into 10 million or 20 million.

15:53Also GameStop. Something. There you go. Right. What was that guy's name? I forget. But yes. Grooring Kitty. Yes, that's him. That's an anchor investment. Now, it's not going to send the same signal to the other LPs, but at least you have a corpus that you can build on. And you're managing enough money that you're credible, right? Other LPs might not look, they're not going to look at it and say, oh, that's the same thing as someone giving you 20 million to manage. But now as you build your track record and time passes, they're going to look at you managing that money very differently than they are when you were managing, you know, 100 grand in your basement.

16:35So, but, you know, most people are not in that spot. Most people need to go find an anchor investor. And I'd say you want to at least get a very strong indication from someone that you can get that anchor investment before you really make the decision to jump into the business. 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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22:44The rest follow. Learn more at alpha-sense.com slash how I invest. A lot of GPs are confused by why an anchor is so important. And they fail to realize the most important resource for LPs, arguably is not even cash, it's their time. Every LP I've ever talked to has told me that they're understaffed. I've never met an LP that believes they're either fully staffed or overstaffed. and the framework that I have for this is I call it double-gated fundraising process. The first gate is, do we want to do work on that manager? And then the second gate is, once we've done work, do we invest? I actually think from the second step to the third step, it's a pretty high conversion.

23:25Let's call it 40, 50%. But from the first to the second gate, it might be a 5 % conversion. And all GPs see is, we talk to LPs and 2 % of them commit. They don't realize that it's actually a double-gated process. And the reason that's all relevant is it's highly rational for LPs to focus their time when they know the fund is going to close, fund is going to come together, and the terms have been decided because they don't want to have to do that all by themselves. That's absolutely right, I think. And also, you've got to distinguish between a liquid strategy like in a hedge fund where the anchor is important from a signaling standpoint, But the fund, assuming they can manage their expenses or they've planned for managing their expenses probably out of their own pocket, the fund could operate on$10 million and build a track record on that.

24:17in a private equity structure like what I think you're describing, it's a totally different ballgame. You're absolutely right. A Jeep or an LP is not going to want to spend time unless they look at it and they see, okay, there's an anchor and it's someone really credible, and they are also going to be handicapping. What will other LPs think when they see this anchor? Because that's going to inform what the likelihood is that the fund closes. Because if the fund doesn't close, well, then I just did all this work and all this diligence for nothing because they couldn't assemble the rest of the capital to achieve the closing.

24:52And the brutal aspect of that is the worse the market, the more the anchor matters. Because the worse the market, the more likely the fund will not close. And therefore you need that signal. Yeah, that's definitely true. I think we're moving into a much, I shouldn't say easier period. I think we're just moving into a period that is going to look more like the historical norm of private market fundraising and capital deployment. It's been a really tough three years, four years for private markets. We talk to LPs all the time and the vast majority of them have told me over the last five years, they have had either neutral or negative cash flow in their private markets portfolio.

25:42Now their portfolio value has gone up because the investments have done well. But if you don't have liquidity, it's really hard to continue to invest into future vehicles. So they have GPs coming at them where they gave them money in fund three and fund four and Fund 5 have seen minimal liquidity from those funds. And now the GP is showing up saying, I want you to commit to Fund 6 at the same level as you did the last three. And the LPs are saying, you have to start returning capital because I need those cash flows to make these future commitments. So where maybe I did$10 million in the last three, I can only do$5 million now.

26:22That conversation has been happening a lot for the last three or four years. So I think the SpaceX IPO, the Anthropic IPO, OpenAI, these things hopefully will really jumpstart the IPO market. We have not had a normal IPO market for five or six years. If the IPO market gets back to normal, it's going to be great for public markets, in my opinion, because that influx of liquidity, it's going to also drive a lot more M &A activity, especially these deals happening at trillions of dollars. I think the liquidity coming into private markets will drive much, much more activity than what we've seen. It's been a very hard fundraising period.

27:08Is that how you find that LPs think and that they deploy as DPI comes available in a specific asset class? In other words, even though the public markets might be up 50 % in several years, they're not redeploying into private markets until they have DPI? No, I wouldn't say that. I think the most sophisticated LPs know that in private markets, a really, really important element is getting capital into each vintage. because you really need the power of that diversification because there's too many outside factors that impact the performance of these funds. So the managers may be great at generating deal flow and picking the right management teams, but the environment that these businesses are being built in is changing constantly.