E422: Founding CIO of Berkeley Endowment on Track Records, Contrarian Investing & First-Time Funds

29:47And different is another way of saying bad, that they're going through periods of underperformance where the market is going a different way and they're seeing things differently. You want to know why they are underperforming. And when you do know that and you can see through, there's good decision making going on here. It's just not their time. It allows you to stay with them. Such an interesting point they brought up, which is different sometimes is bad. I also wonder whether different is sometimes weird. In other words, when you think about a manager's right to win, if everybody has the same right to win, it becomes kind of competed away.

30:23Do you find that some of these right to wins, at least for a time period, seem weird or seem different? We have to be doing something different to generate differentiated results. That's axiomatic. And so things that feel strange or feel different now can be very commonplace over time. We saw that in the endowment, the evolution of the endowment model. investing in venture capital, private equity, real assets, those sorts of things. When David Swenson wrote his book in the late 90s into 2000 were relatively new to institutional investors. Those things, investing in hedge funds, seemed risky. Now those things are fundamental parts of investor portfolios.

31:07So things that were really unusual at the time or felt really aggressive now are commonplace. You've written that many people copied David Swenson's style, but basically missed his principles. What did you mean by that? The essential thing of lesson that I took from reading Swenson, and I think was what drove so much of the results, was a willingness to do things that were different and to be an investor who used their long-term nature of their asset base to go and do things that are illiquid. Which at the time was very different. Which was very different at the time. And if you looked at how most endowments were invested into the early 90s and into the early aughts, it's just radically different than it is today.

31:52One of the mislearnings from Swenson and the record that Yale put up was that this was a formula, that if you went and you did a lot of things that were private, illiquid, that you're going to generate higher returns. But the critical difference, or I think the critical understanding needs to be that the great returns don't come from just doing things that are illiquid. The great returns coming from doing things that are unusual, that a lot of other people aren't doing. I used to say, if your capital isn't scarce, why would it be valuable? And so you look at parts of the market that are flooded with capital, it's pretty unlikely you're going to generate a greater return.

32:36conversely if you're looking at places in the market where there's not a lot of interest or there's not a lot of expertise you have a much better chance of being the smart money in that room i had the cio of calester scott chanon he talked about they have at this point over 350 billion dollars and when they go into a new asset class they need to be large enough because they're going to essentially move that asset class and i started reflecting and thinking about that even though that's true and CalSTRS has a unique problem set, everybody has this problem set. Whereas whether it's their capital or not, if there's a bunch of capital crowding into investment, for example, I would say large buyouts.

33:13Now there's trillions of dollars from retail that are coming on board. If there's so much capital going on, whether you have$350 billion like CalSTRS or you have$350 as a retail investor, you need to be wary of that. Yeah. The amount of capital chasing opportunity will inexorably change the prospective returns. And so being willing to do things that feel that are different, finding fund managers that have the guts to go into places where other people aren't, that will make a big difference. Years ago, as an example, I, as a CIO, was looking at a fund manager that was specific to a country. Growing up, I thought managing money meant paying bills and balancing a checkbook.

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36:33Write your own money story with Monarch. Use code invest at monarch.com to get your first year of Monarch core half off at just$50. That's 50 % off your first year at monarch.com with code invest. It was a country specific investment and it was a country that was flat on its back and it wasn't, we'd have a benchmark allocation to this. it wasn't anything but there was an enormous opportunity there because of the character and the quality of the stock pickers that we were able to find and the quality of the underlying assets and i remember when you're catching up with other cios or other lps and yeah compare notes what are you working on and i said well i'm gonna i'm headed down to this is brazil i headed down to brazil like why are you headed down to brazil well that's why we're going down because no one thinks there's a reason to go down there but it turned out to be one of our best fund managers for 10 years.

37:23What's an example of something about today that you think is highly underrated? It's always tricky to make a prediction about right now, but one of the things that I think is that I'm most interested in how it will play out over the next 10 years are the credit markets. Credit spreads are an all-time type. We've seen an enormous issuance. We've seen enormous issuance around new technologies. Those sorts of things tend to lead to excesses, which tend to lead to accidents and blowups. And so we haven't seen a true credit cycle for a good long while now, and we can't hold back the ocean forever. So I think what's really particularly interesting is who has the skill set to invest in a highly disrupted credit market if one emerges over the next quarters or years.

38:14I think this concept of weird leading to structural alpha is a fascinating thing. And people always update their priors to think that they would have always done this like really weird high alpha trade. But sometimes it even goes from non-consensus to consensus to then non-consensus and thinking about situational awareness. In the beginning, it was a very smart money trade. Then a bunch of people came in and it was$45 billion. Then there's obviously this crash. And my personal prediction, I'm long on the manager. I think it's going to, again, become probably a smart trade. Even within one manager, this kind of counterbalancing fact between something that's weird or low status and something that's high alpha, these things tend to correlate in some ways.

38:59Yeah. The trick is you have to be able to unpack it. so were the great results a result of great process and great ideas or is it something else and a charismatic founder who's clearly brilliant who generates great results we still need to do our homework we still need to understand how those results are generated and so i'm not privy i don't know the details of how this portfolio was set up but it seems and again, the end-to-end results are still really astronomically high in terms of total return. But the way in which he's gotten there is something that would give a lot of LPs pause. And do you really understand, have the results been generated in a way that you think is likely to repeat?

39:43We're talking before we're recording, Ashby Monk has this concept of faux mu, fear of messing up. You think about situational awareness, it seems like it might be an interesting investment today, but a lot of LPs just can't take that career risk. Yeah, you could call it career risk, but LPs can only do things that they understand. And if you do something you don't understand, that's where you really get in trouble. And so if you're able to look at that hot thing and see that there actually really is something spectacular there, then an LP can say yes. But a serious LP needs to always remember their fiduciary duty to do things that they understand, that they have high conviction in.

40:27And that doesn't mean they can blindly sign the sub docs on something that has had a great return and just hope that it'll continue to do so. Goes back to understanding a track record. Well, not just the track record. You have to understand the drivers of the track record. What were the things that led us to that track record? Then you can have conviction in the track records. One of your most contrarian beliefs is that first-time funds aren't necessarily riskier than more established funds. Why? One of the biggest differences with newer firms, I like to call them challenger firms, is their knowability.

41:00And so if you are sitting down with the founder or founders of a firm raising their first pool of capital, as an LP, especially as a reputable institutional LP, you have incredible access. You have incredible insight. That team is highly motivated to spend a lot of time with you. They will share a lot of detail with you. You will get to see a lot of assets. You will really get to spend a meaningful amount of time with them and get to know them. That is fundamentally different than when you're investing in a high Roman numeral, say, Fund 14 of a very big franchise. If a firm's gotten to a Fund 14, they've clearly done a lot of things right.

41:43But Fund 14 is going to come with an enormous amount of complexity. So if I show up with a 25 or$50 million check to a 150,$200 million fund one raise, I'm going to get tons of insight access. And, but if I show up with that same 25,$50 million check to a fund 14, that's maybe a multi-billion dollar raise. I'm not particularly important to them. And so I'm going to get maybe a courtesy meeting with one of the partners. I'm going to get a great IR team, get a great data room. and I'm going to have a lot of anecdotes about the firm, but it's probably a very complicated organization that's going to be very hard for me to know.

42:27And that makes it a harder investment to make because you don't really understand who the decision makers are. You have to unpack, is that track record that you're seeing? How congruent is that with the current circumstances and team decision makers that are there today? those things are very hard to figure out in a high Roman numeral fund. Is it rational to invest into a fund one? I think it's absolutely rational to invest in a fund one. Newer firms, I think, are best seen as the R &D in an investment portfolio. What you want to see is in an institutional and in LP's portfolio, you want to see people that aren't doing all the same things the same way.

43:15And newer firms have less baggage, are motivated by different ideas, and are often doing new things or doing things in a new way. And that creates new opportunities in an institutional portfolio. And some of those things are going to work out really well. and those things that were that seem edgy or unusual at the time you would back them on that fund one may be conventional wisdom by the time they're raising their fund four so a good cio wants to have thatrd in their portfolio which means you're going to have to back some fun ones some fun twos this reminds me fun one or otherwise in venture capital there's this entire trend of AI native firms.

44:03Early Bird, one of the most famous firms in Europe, is now almost entirely AI native. There's a firm called Footwork that's on their third fund that's also doing everything kind of from an AI native perspective. If you don't have access to the next generation of investment firms or people thinking in the future, you could really get stale in terms of how you even determine whether a fund is good. It's a great point. The risk of being stale is significant, particularly in an environment right now where things are changing really quickly. The tools that investors are using to analyze investments are changing under our feet.

44:40They're changing very quickly. And so when I spend time with a new firm and hear about how they're building their team, those conversations, the things they're doing today are fundamentally different than they would have done 20 years ago. And they should be. The tools, the resources that are available to them now are very different. And so if you're a firm that's caught in between, that has a great legacy and a big team and an orientation of doing things for a certain way, for a long period of time, you've got to be pretty agile to adapt. And it's hard to adapt and to kind of move that process to the way new firms would be doing things today.

45:19And when you say R &D, what do you mean exactly? You want people to think differently. And so they may be addressing the same markets. They may be doing buyouts. They may be doing credit. But they wake up in the morning and they look at the world differently. They approach their work differently. and often what you'll find is that 38 year old that 40 year old who's got all those years of experience at a big mainline firm who then have an insight that they can't execute in their current firm either because they're not quite senior enough or the investor base isn't quite aligned with it but they have all this experience and they have that insight they see something different They see a different opportunity.

46:03And so they break out and they start something anew. Some of those things will turn out to be conventional wisdom and great ideas over time. That's the R &D that's in a portfolio, is having folks that are stepping out, using all their prior experience, not rejecting it, but looking and using that experience. And how do I use this in a different way? What do I have that's an insight on the market that's different than what I could do at my current firm? That's a lot of the R &D you're getting with a new firm. just play devil's advocate can lp not just have all fund 10 and later vintages what's the downsides of that the downside of that i think is you're going to have probably pretty average performance a lot of those firms that are deploying their fund tens they're very good firms they're going to produce reasonable results they're probably going to generate beta for whatever that segment of the market is, whether it's a real estate fund or a buyout fund.

47:01It's very, very hard to outperform because those firms are generally deploying lots of capital. Those are, fund tens are often most typically very, very big and they're relative to a few strategies where size is a huge advantage. And then all the things that made them that firm to get to a fund ten, those founders at drive that was the sort of origin story of that firm is fundamentally different when you're deploying a fund 10. And very, very few firms, particularly in the private capital arena, create enough of a culture that survives to keep a fund 10 just as agile and as aggressive as it was when it was a fund one or fund two.

47:40If you're starting endowment from scratch today, as you did for Berkeley, where you're founding CIO, how would you build that portfolio? One of the most important things in any institutional context is your governance. you have to understand the governance that you have and I sometimes will when I talk with other CIOs will joke like don't outrun your governance and that means that you are building a portfolio that meets the objectives of the institution and doing so in a way that is sustainable for you as a team and as an organization and that means bringing along your investment committee or whatever your oversight is to how you're thinking about it how you need to do that work I spent a lot of time with challenger firms, new firms.

48:22It was a big part of what we did under my watch at Berkeley, but you have to bring the investment committee along to that. If you're going to have a lot of differentiated thinking in there, it means you might have some periods of differentiated results, which means that you might not prepare your committee for that. They have to be prepared and they have to not just be prepared, they have to be excited by it because there are going to be times you're behind your benchmark. And if you're behind your benchmark and you're always looking over your shoulder, this is true whether you're an endowment manager or a stock picker, you're not going to be on your best game.

48:56You need to be able to play the game to the best of your abilities with clarity. That's what it takes to run a good portfolio. Do you find that most investment committees, whether endowments, pension funds, really have the best intentions for their organizations or is there a lot more politicking? I think investment committees vary a lot by how much they've delegated authority to their CIOs. That's the one main lever. Well, their main job, good investment committee, their main job is picking and managing the CIO. And much like a board company picks and manages the CEO, they're not really there to tinker with who's ahead in European sales or what the right fund manager should be in your private credit bucket.

49:44That's not what a good committee does or a good board does. They're there managing the executive. And so a good investment committee will pick a great CIO, understand the plan that CIO is executing on, and back them in doing that. And that requires a lot of work on the CIO before you hire that person. You understand their plan. It takes a lot of communication from the CIO to the board about the implementation of that plan. And then it takes a lot of restraint. Good investment committee members are listening more than they speak, and they forgo the opportunity to tinker and always have suggestions.

50:29They're there to guide, not tinker. Let's go in the LP to GP relationships. One of the underrated aspects about spinning out and being your own GP is that it's very difficult to get feedback from LPs. So you may be committing the same error over and over without ever finding out why the LP has their pencils down. What are some common mistakes that GPs make? A GP will often come in hot with their track record and think that they're selling a track record. and LPs are interested in your track record, but what they really want to know is what drove that track record. They want to be able to unpack it.

51:12And so coming in with what quartiles you were and your DPI numbers, all those things are very important. But a good LP is hoping to back you for years across a whole bunch of fun vintages. And so they need to know who you are. They need to know how you think. and if they can do that, then they'll be interested enough to look at your track record and then they can be a good partner over time. A lot of GPs miss that. How do you balance that with LPs that have so many funds that are being pitched and sometimes the track record is the thing that gets somebody involved in the process of getting to know you?

51:50This is one where track records do matter. They do help get attention. That's true. But an LP, their job is to kind of hear that signal in the noise and to kind of be able to see it, to know it when they see it. For a couple of years of my career, I had a boss who was a Buddhist. And he was a great investor, but one of the things that always stuck with me was he had the idea of a beginner's mind. And as an LP, it's super easy to be cynical. As an LP, you might get pitched a couple hundred times a year, year after year after year. and you're going to back a shockingly small percentage of the firms you meet with.

52:31You have to balance that cynicism, that experience with the idea that you might just hear something great. The meeting you're coming into may be the one that breaks through. Maybe that thing that's going to occupy the next six months of your life doing diligence on because you met someone with an extraordinary set of ideas that you're just compelled by. You need to balance that cynicism with that sense of opportunity. Oftentimes, from a psychological standpoint, I think of novelty when you say that, when you say thousands of pitches. How does an emerging manager bring novelty into their pitch and their approach?

53:10How important is this? Novelty for its own sake, obviously, is not particularly valuable. But what you want to hear is from a fund manager is that they're doing something, if they're doing something differently, that there's an obvious compelling reason to it. A good pitch has a sense of inevitability to it. When you look at the person who's starting the firm or the founders of the firm, their experience, the part of the market that they're addressing, the timeliness of what they're doing. Is it a really interesting and obviously kind of hot thing to do right now? And then are they demonstrably a master of their trade?

53:53Like if you put those things together where you've got a great person who's a master of their trade addressing like a really interesting opportunity that's particularly hot right now, like that's what we're looking at. That'll get an investor to sit up and pay attention. And so that doesn't have to be like wildly novel. It just needs to have those component pieces to it. And most LPs will deny this, but how big of a factor is actually FOMO, fear of missing out? FOMO is not a huge deal to a lot of LPs because LPs have the benefit of time. There are some fund managers that are very hard. They're hard to get into.

54:35And LPs really have to dance. They need to build relationships. And there are relatively few of those. They are the ones we all know about. They're the famous ones. and I think there's one left in venture benchmark. There are definitely firms that are very tough to get allocations for and particularly if you're a larger pool of capital. If you're a smaller pool of capital that needs a$5 or$10 million allocation you're going to have a lot more things you can do than if you're writing$100,$200 million checks. So that is there is a part of the market where that's true. But the FOMO doesn't really drive a lot of LP behavior.

55:19LPs sometimes will do things to fill a bucket. That's the bad version of it, I would say. It's not FOMO. It's the idea that, hey, we have an allocation to opportunistic real estate. We have an allocation to a middle market buyout, and I have a commitment pace I'm supposed to hit, and they need to look busy, and they want to be busy. And sometimes the expression, don't just do something stand there that your idea is that not to just do things for the sake of doing them or not to do the things that are feel like this is the best of the things we could be doing in this rather than asking yourself should we be doing this at all that lps as a class can be guilty of doing because the institutional incentives are to employ capital or to segregate people by investment strategy or asset class within that team they don't want to go a whole year and not make a commitment.

56:15That doesn't feel good. That doesn't look good on your annual review. What did you do with your year? Saying that you sat on your hands, but in some cases that may be the right decision. And there's this paradox where you want to be building these relationships for many years. Rahul Mugdahl said that I think he spent 15 years with UTIMCO before they wrote their first check. So that's certainly a paradigm, but you also have a business to run and without AUM, you're basically dead. How do you manage getting LPs to work on your specific vintage when you're an emerging manager? You can fish, you can farm, you can hunt.

56:48And I'm stealing this framework from someone who's, I should figure out who was inside it. But you can fish, you can hunt, or you can farm. Hunting is what most people think of a fundraising, that they're going out and And they're thinking like, I need to get an Ivy League endowment into my fund. And they know exactly who that is. And they're going to go exactly at them. And it's big game. And the likelihood of success is, in most circumstances, is overwhelmingly low. And, but some people will spend an exorbitant amount of effort trying to get those LPs. And if it works, it's fantastic. But it's a high energy output to do that.

57:30the farming is a little bit what i think rahul would be describing of you're going and you're managing you're cultivating you're nourishing that relationship over a long period of time that ultimately will bear fruit it'll take time and the fishing is the other thing that you do it's actually really much more i think fishing is much a much better strategy in the environment of podcasts and social media where you're putting yourself out there, you're putting your ideas into the marketplace and you're allowing people to find you. And so whether it's doing your podcast or writing on LinkedIn or doing things that just sort of drip out to LPs, over time, they feel like they know you.

58:19Used to just be quarterly letters and it's still that of those things getting out there. But that's how people can build conviction over time. And so by having those lines in the water, you don't know when that bite's going to come, but hopefully it will come. And part of phishing is also listening. You mentioned some people have portfolio allocation. And if you listen and if you're sensitive towards that and somebody has to check a box, you could position yourself as a box. Yeah. You think of it, some parts of the portfolio for institutions is one in, one out. We're not going to re-up with this manager or it's a hedge fund.

58:55And like we're finally, we've had our limit. we're going to redeem from that. And what happens is the CIO will say to his team, all right, who's in the pipeline? Let's light up the pipeline. And here she'll go and see what are the five or 10 firms that we really liked. And let's go get up to date on those firms. And that's, if you're a fund manager, that's sort of the hanging around the hoop. That could happen six weeks after you first meet that team, or it could happen six years later. You want to be on that, you want to be front of mind. Like, oh yeah, we always really liked those guys. We just never haven't backed them yet.

59:23Yeah, we should do the update. We should find out where they are. Mike Maples and more recently Rick Heitzman has used this analogy where they look for believers. They're not trying to convert people into either their fund and to the asset class. To what extent is that true? That's right. When I coach fund managers, I'll say the second best answer you can get is a no from an investor because you don't want to spend a lot of time with folks that take an extraordinary amount of convincing. Either you haven't told them a compelling enough story or they're uncertain enough that they're not really going to act efficiently.

1:00:03And so trying to convert people is just very, very hard. If you find people, if you're an effective communicator of your strategy and your story, even still, probably 90 % of the people you talk to are going to say thanks, but no thanks. And ideally, they do actually say no. And you're looking for that 10 % that do say yes, that are pulled forward, that are interested. That's a much better use of your time. I have a thesis, a double-gated process for LPs. I want you to shred it up and destroy it. My thesis is when GPs look at their pipeline, they meet with 100 LPs and let's say five of them end up invested.

1:00:40I actually think there's two gates, two gated process to that. One is only 10 % do work. So 10 out of those hundred will do work. And that second gate is actually very high conversion. The people that actually do work to invest maybe as high as 50%. What do you think about that? It's absolutely right. I mean, as an LP, you would take tons of first meetings. You take a tiny fraction of that at second meetings and an even smaller fraction to that at third meetings. And... Is that the signal that you're looking for is time? Time invested is upstream of capital investment? When I work with fund managers, like one of the things I'll ask them is sort of the diagnostic on their fundraising.

1:01:16Like, how's it going? And I'll ask them like, how many third meetings have you had? How many onsites have you had where the LPs have come to see you? Those things are indicative of someone who's not just sort of window shopping, but someone who's doing honest serious work and so yes to your point the conversion rate of folks who've gotten that far in the process it goes astronomically higher than it is from those first meetings because there should be a massive drop off between first meetings and second and third the second third fourth meeting that's almost when you have that lp conversation the first is almost just so trivial that almost any lp will talk to you lps are in the business of kind of knowing the market and as i mentioned earlier like they're looking for the kind of interesting new idea even if it's a low probability like their idea is to kind of stay up on the market and maybe i'm gonna hear something that's really remarkable chances are the odds are you're not but that's part of the job is doing that then that second meeting the first meeting is just sort of like what's really here the second meeting is like is this something we should really spend more time on that third meeting and then sort of beyond is like now we're going to do real work and that first one's kind of a sniff test.

1:02:30The second one's maybe a little broader. Hey, we're going to bring in the asset class head or we're going to bring in the CIO for a little more of a sniff test. Is this something we should spend more time on? That's a natural part of the pipeline process. When I coach GPs on how to approach LPs, I really emphasize to them, those first meetings should be half-hour Zooms. In a half an hour, you should be able to tell enough of your story that you can give them a good sense as to what you do. And you should be able to get a little bit of a sense of them as an investor. And from that, everyone can decide whether or not this should continue, whether or not we need a formal first meeting or, hey, that was a good bit of information, not for us, you move on.

1:03:12So you're not wasting hour-long meetings on things, either as an LP or as a GP, on things that just aren't going to be a fit. Try to get it down to a 30-minute meeting. So another way, the pitch needs to be clear and specific enough for that LP to almost make a binary choice on whether to take a second meeting yeah best thing that can happen out of a first meeting with a lp is is that the lp says great this is super interesting send me everything the second best thing that can happen out of that meeting is the lp says like i really appreciate making the time today this doesn't really seem for us and maybe they give a reason maybe they don't but they're kind of declarative that this is thank you but no thank you you mentioned this inevitability.

1:03:57Eric Anderson, who's been my mentor now for 15 years, just several years ago, he started his fourth unicorn as a founder. So clearly he's an exceptional founder. He always taught me this idea of never wait for investors, always execute day after day and keep investors up to date, but never wait on them, never rely on them, just keep on executing as if they're not going to come around. And that paradoxically what gets investors to come in. Does that apply to GPs as well? The real challenge, the raw materials of investing is capital. And so the sort of keep going, you can't do it without capital, right?

1:04:36You can't build out your team. You can't build out your team. You can't demonstrate a track record if you don't have the capital in which to do so. I think I would take the idea of persistence and put it to being in market, telling your story consistently and finding your people. that is, that part I think is very consistent. We were talking about, before we started recording, this concept of how important your founder is as a GP, your co-founder. And me and Curtis, we've worked together for five years before we even started our firm. Now we've worked together. And no matter what happens, we want to work together.

1:05:10So we're going to continue to iterate and continue to push through. I underestimated how important that is. The partner is even more important than the strategy. The strategy could evolve, but if you have a bad partner, you might have one or two misses with your strategy and you give up much more easily than if you have a great founder yeah having a that relationship between founders is a critical component of any firm's success and it doesn't mean it's always easy it is i mean the analogies to like a marriage or a reel, that it requires effective communication, it requires a long courtship, that you know each other really well, and that there's just a deep level of trust.

1:05:55That's an essential part of a founding team. I learned this concept of inversion from Charlie Munger about a year ago, this concept that instead of thinking about, well, lead to your success, you think about all the failure modes. And if you could avoid these failure modes or you could invert these failure modes, you'll end up on the path to success. What are some failure modes for emerging managers? Where do emerging managers fail over and over in their process? The common mode, one of the most common things I see is in folks that are starting firms that are trying to create something they think LPs are going to want.

1:06:34They go through their process in setting up the firm trying to appeal to investors. whereas the stronger idea is like have a really good sense of who you are have a really good sense of the opportunity tell a very convicted story around the opportunities that you see and then find the investors that fit with that you going out and trying to fit what you think investors want you're it's going to seem disingenuous it doesn't seem core to who you are that's a mistake you see pretty commonly in many ways even if you do somehow convince investors to invest you're not going to have great returns you may not have great returns you may have great i think what you're going to have is you're going to have a firm that isn't something that like you feel deep in your bones and the some of the very best founders that i've had the chance to back i know they're going to do this work whether i back them or not they're going to do it with whatever capital they can raise like this is like they see it as their life's work they're drawn to doing this work and as long as they can make a decent living doing it that's what they're going to do and hopefully they're going to attract a bunch of great LPs that come along with them, but that's not slowing them down.

1:07:44They've burned the ships. They're on their way. Talk to me about what you do today. The work I do, I've been on the other side of billions of dollars worth of sub docs. I've said yes to firms at their kind of earliest moments. And now I use that experience to help entrepreneurial founders navigate the launch and growth of their firms, help them as they face what really can amount to thousands of decisions in their early years of building their firm help them increase the speed and likelihood of success. And that's the work I've done for years now. What are most new firms lacking? A lot of new firms will hope that they can raise capital that will generate fees that will enable them to build the organization as they want it to be.

1:08:30And they kind of want to not take the risk of having to hire a team and convince people to join them, spend the money to have people on payroll long before any LPs have committed. And that generally just doesn't work. If you're pursuing a strategy that requires a team, it's entirely reasonable that the LPs are going to see a kind of minimum viable product of that team. And so fund managers need to kind of be honest with themselves is to like, this is what the minimum viable version of our firm looks like. And that's what's going to be required to get an LP to say yes. And then you'll get the management fees that will support the infrastructure that you built.

1:09:16Solving the chicken egg problem. In this case, you really do need to have the thing for LPs to buy. The hope that they will think your idea and you are so compelling that they're going to just take a ride on the idea that you're not just going to be a great investor, but you're going to be a great firm builder. and you're gonna be able to recruit great people, that's asking a lot of your LPs. Conversely, if you show your LPs, look, we've been able to attract awesome people and we are ready as soon as the capital's here and we've got a great pipeline, the machine is already working. It's a lot easier for LPs to get on board that.

1:09:51If you go back 25 years ago and you were first starting to be an investor and you could give yourself one time as a piece of advice, what would that be? one bit of advice is focusing on alignment just sort of understanding why people are making the decisions they are what are their motivations the number one thing that's more than just gp commit it's more than gp commit it's sort of where are they in their time of life what do they have invested in this conception of what they're doing where does this work going to take them and so even when you're evaluating someone as a hire is going to come work for you or a mid-tier person at a firm, right?

1:10:28They're in a process of their life and their alignment then is to achieving that next thing they want to do. And if you can understand them and understand where they want that to take them, then you understand how they're going to behave. And that's a, yeah, I think that's a really... Can you just figure that out by asking? Sometimes you'll get a very direct answer and sometimes you can need to kind of tease it out or make your own judgment because not everyone always knows. And not be aware. Not always. Not always. Sometimes when people start new firms, they do so sometimes because they're, like the bad version is when they do it because they think it's their time.

1:11:10It's their turn. They've seen other, they've had other friends do it and it seemed easy and they want to do that. And that doesn't typically work. You want people that are starting a new firm are doing the work because it's fundamental in who they are. Like they are willing to take the risk to leave the thing that was comfortable to do something new. And when you understand that, you can have, and that's actually present, have a very high level of commitment. And that alignment gets really high. Even if they don't have$40 million to write as a GP commit, that they're pot committed in terms of where they are in their career and the reputational risk they're taking.

1:11:50John Austin, this has been And absolute masterclass. Thanks so much for jumping on. Thanks for having me.