Private Equity's About to Get a Lot Less Private (w/ Kevin Hsu of Lumonic)

0:00When should you roll your own? How would you do it? When's it going to break? And when you should just use a third-party product? I think that everyone should try rolling their own. That might be a contrarian take, but I think that... You're so sneaky. It's not venture capital. It's private equity. It's the private equity funcast. Pour yourself a drink and have a seat. Do you actually know your exposure? Do you actually know what you own? and do you actually know how it's performing? Today's conversation is going to be about portfolio monitoring and whether you should roll your own or not. And I think you're going to be surprised with the answer that my guest, Kevin Su, the co-founder and CEO of Lumanic, has to say about that.

0:47So let's dive in. Thanks for having me on the show. We got started about three years ago, really as a venture-backed kind of bootstrapped company. Before that, I always like to say I really built my career starting at a company called Carta, which is— I would think most of our listeners know Carta and know it well. Yep. So for the people who don't, what was Carta and kind of what was the spark for you to say, there's some other version of this I could do on my own? Totally, yeah. So I joined Carta because all my smartest friends from college literally moved to San Francisco and joined this company at the time called eShares.

1:23Carta is a cap table management platform. And so the way to think about it is historically you track a cap table, which is who owns what debt equity options inside of spreadsheets. Carta literally put it on the internet. I think a lot of SaaS can be boiled down to literally putting numbers on the internet. This is an internal meme that we have at Lumanic. But really what it's doing, and I think the kind of arc of my career is started at Carta, worked on cap tables on the product side. Carta became so many different things. I think one of the beautiful things about Carta is that it spun into all these different ideas, just starting with this atomic unit of who owns what.

2:00So now they have a fund administration business. They have an LP business. And they're the biggest cap table platform in the world for any private company. From there, I actually started another portfolio management company. So I'm on number two right now called Standard Metrics. So that was a portfolio management platform focused on venture capital firms. In the name, you can kind of see this thesis building up, which is the private markets doesn't really have any standardization or lingua franca. This is all sitting in version F2.2, version final, actually final spreadsheet somewhere. And the associate who worked on it, you don't have access to the folder he left it in.

2:44So you want it somewhere everybody can get it. You have one source of truth. Yeah, exactly. And that was focused on venture. and left there, took a couple months off, literally spent time in a cabin doing some writing, thinking about the next thing. And I got really interested in banking. Specifically, there's a book by, I think his name is like Jeff Wang. That is some two months in the woods that you got so bored that you read that book. I still find the central banking system incredibly fascinating. That actually led me towards looking at debt. I ended up spending a lot of time with this author named David Graber, who wrote Debt the First 5 ,000 Years.

3:22I'll send you a copy. You don't have one. I would love it. That book actually got me thinking probably too philosophical about debt. But that led me into starting to think about starting another company, specifically building within banking. And so our story is around January 2023, I wanted to work on the next thing and had a co-founder at that time. So it was just two of us. and we started spending time with people who worked at banks. And so Silicon Valley Bank, and the timestamp here is important because January 2023, Silicon Valley Bank, we ended up spending time with their kind of customer-facing team and then we ended up spending time with their venture debt team.

4:02And that's where we first stumbled on this problem that we solved today, which is you have a bunch of data coming in if you're a fund manager. And in this case, it was a bank. Specifically with venture debt, what was interesting is that it was compliance So you had to do this thing called the compliance certificate. I'll never forget the first time I ever saw that inside of one of these discovery calls, realizing, wow, there's this crazy document that gets signed every single month. You have to do it. There's no software for it. It's sitting in DocuSigns and PDFs and email attachments all over the place.

4:39And whether somebody remembered to save it down to the right file folder somewhere and name it the right thing, that's the way you find it. Exactly. And so one thing led to another and we decided by February, and I'm using the specific timestamps here. Oh, I know exactly where you're headed. Yeah. By February, we were like, okay, banks seem like they're going to be kind of hard to sell into. We're literally two guys in my apartment in San Francisco. And I think the question that started Lemonic was, is there anyone else that does lending like this that isn't a bank? And so non-bank lending, private credit.

5:13So we found that pretty early. By March of 2023, we incorporated the company. We had started talking to our earliest customers like Hercules Capital, Trinity Capital, Triple Point, all BDCs, all venture debt funds. And I'll never forget this. We flew out to one of our customers' houses because they basically said, this is a problem that I care about. I can't send you anything over email. You can come over to my house. And we said, how about this weekend? So we flew to San Diego. You can lean over my shoulder and I can show you my screen, but I can't send you any of this. And that customer ended up becoming customer number four or five.

5:51I won't share the firm name because at the time it was a little risky. In March, obviously, SPV goes down. At that moment, one of my favorite anecdotes is that we had asked a lot of these funds, surely someone's tried to sell you software. And my favorite anecdote is that this MD at a private credit fund said, what would software do? So that was a light bulb moment for us. We decided, okay, private credit seems like it's growing. Again, three years ago, I still think it was kind of on the back burner, but we got really lucky. Caught the tiger by the tail SUV. This is at a time when private credit assets are going from the hundreds of billions into the trillions, right?

6:27So not bad timing, which is great. Yeah. Tailwind for you. Yep. So we raised our institutional round from First Round Capital. Yep. Your office reminds me a lot of their taste and style, which is why I think I like it so much. Not an accident. Yeah. Our marketing and media strategy. Yep. Not dissimilar. Yeah. And, you know, keep in mind, 2023, it was pretty hard to fundraise if you weren't doing anything AI-related. I think ChatGPT had launched. Oh, just remember, June of 2022 was the SaaSpocalypse before the current SaaSpocalypse. And basically, software is dead, SaaS is dead. It became a pretty big theme.

7:01Yeah. Yeah. But we were sitting, again, I don't want to claim that we're the smartest guys in the room. Right place, right time. And then there's this idea of founder market fit that I think we had really strong. between my co-founders and I, my co-founders were early engineers at Carta. I was on the product side. And here we were sitting with private credit as an asset class that had no software. We had experience building portfolio management software at not only my previous company, but then also at Carta. And one of the dirty little secrets about working at Carta is that Carta is a cap table management platform focused on equity.

7:37I personally worked on the debt tracking and I remember it was a part of the product like no one ever wanted to touch. So no one really understood credit, debt. I didn't know what it was. We've looked at Carta a few times. This may be dated as a private equity firm and just the way we own and the structures we have and the debt we have. Yeah. We understood cap table management, but the private equity side of it was lacking in our opinion. Yeah, yeah, yeah. And they're not a private equity platform. I mean, venture is where they really shine. But I would say we've looked at Carta and it was like, yeah, it's great for venture, but not for us.

8:08Yeah, 100%. And so I think that kind of segues into our thesis as a product roadmap and strategy, which is we started in private credit, but we realized very quickly private credit is probably one of the hardest asset classes to build monitoring for. If we can crack private credit, I think six months into building the product in the company, we realized this product might work for private equity. This product might work for venture. Although each of those markets were kind of afterthoughts for us, but we architected the product. And my co-founder, Andrew, deserves all the credit on this. We have this idea of building in a primitive-based way.

8:47It's a very specific way of building. The closest company that builds products like us is probably Rippling. The idea there, Parker Conrad, who's a founder I'm a big fan of, has this idea of a compound startup where effectively, if you can figure out what all the primitives are for whatever market you're going after, When you enter into new markets, you just use those same set of primitives. So an example of a primitive for Lumonic would be, if you looked into our database, you'd notice that we don't have a metric. We don't have financials. Things are abstracted to things called properties. And that's really nice because on the front end, if a customer interacts with our product, if they're a private credit firm, we turn it on, we label it covenants.

9:25And then for private equity, we call it whatever we want in the backend. So it's this really kind of elegant solution that my co-founder really drove in terms of architecting a platform. What's unique about private credit made it tough to crack or the attributes that we were like, oh, if we could do this, everything downstream of that is easier. Yeah, so by definition, every deal within private credit in a portfolio is different. Every borrower has a different set of covenants. Every borrower, their financials are still super messy, but they have just bespoke deals. And so building a platform that can account for all these individual things that you want to track across borrowers, but then also being able to roll that up into a global view to look at your entire portfolio.

10:08Let's say you're a private credit fund manager across 50 to 200 positions. That's just fundamentally really hard. If you think about, I'll just, you know, don't want to pick on Carta, but Carta is really trying to impose standards on how a cap table is tracked, right? Lumonic is almost the - That's where it broke down for us. Yeah. Which was like, hey, again, in venture, it's like, hey, we all own common equity or we all own some convertible prefer, you know, a safe or something like that. For us, I mean, we're a buyout investor. Most of our deals are structured pretty similarly, but there's nuance and changes where sometimes we need it to like inside a cap table to have different structures and different tranches and layers.

10:49Exactly. Which gets a little more difficult on the buyout side. Exactly. And so our thesis, and I think it ended up becoming true, is if you can get the right primitives down, and this is a very lemonic word, but basically it's the Lego blocks. If you can figure out down to the studs, what are the primitives that would work in private credit? You could probably reassemble those into other asset classes. This year we've signed more private equity and venture capital firms than we have under our platform than private credit. So let's, I want to tell a few stories, right? And I know you've sat in on like investment committee meetings and kind of deal meetings with private credit funds and others just to get a sense of kind of how things work.

11:29So let me tell a couple stories and then you can jump in with your own of what you've seen. I was just with Kunal, the CEO of Morningstar last night and you and a bunch of private credit people. And his first job in 1997 at Morningstar where my two brothers started their careers, you know, several years before that here in Chicago, his first job was to go into the fax room, take financials and metrics and other things from mutual funds off a fax machine and then type them into whatever access database or whatever it was that Morningstar was using at that time. I'm sure it was more than access, but maybe not much more.

12:07And then my wife's job when I went to business school was she got a job with the endowment of the university I was at because she had been working in investment banking alongside me. And she went to them and said, like, this is summer of 98. Like, things were blowing and going, and checks were just showing up from everywhere. and they were kind of like, not exactly sure where, we got a check from Sequoia, but I don't, what was it tied to? What did we pay for? So she literally just took what, you know, today would be PDFs, but then were just mailed quarterly statements, mostly in the venture portfolio and the buyout portfolio later on, and just typed in, this fund we're in, we have this much money.

12:47They own these 30 companies. She went and did research. This is a software business in healthcare. This is a telecom business. And she would just tag them basically. And it took all of two years to go through and do that manually. My prediction is we will look back 10 years, 5, 10, you tell me what timeframe from today. And the stories I just told will feel the same as 10 years from now when people look back and say like, we did it that way? Like you actually got a PDF from Intralinks and then I would say probably did nothing with it for most LPs or just reference it somewhere. So what's your story of sitting in these meetings of how data is getting handled on the portfolio monitoring side at the GP, at the LP level, and even upstream and downstream from that?

13:41Yeah, so it's a privilege that I've gotten to basically be able to sit in on our customers' portfolio review meetings. And you might be wondering, why would I join these? So what Lumonic does is effectively - Why would you join them? Because I assume you're a really good product manager and product managers are basically anthropologists, the best ones. They're super curious anthropologists. Like, how do I build a product for you if I don't sit in and watch you actually in your natural environment, right? So that's why I think you were sitting in them. Good for your customers for letting you sit in on it.

14:09I know. And they're really confidential meetings too, right? Like people kind of let loose and you really understand an organization's structure and hierarchy inside of these meetings. Our data powers those meetings. And so I think for me, seeing it firsthand to say, okay, interesting. It's interesting that one of the takeaways was that a lot of the data credit and private equity firms look at is usually retroactive. And so portfolio review, I think as a concept is actually pretty interesting because it's like, you're looking back at data. Dude, it happens a month at the earliest after the end of the quarter.

14:43So you're looking at 120 days ago. because it takes you a month to kind of get the books closed, get the meeting set. It's probably six weeks after the end of the quarter. We're already almost halfway through the next quarter before even looking at the last quarter. I mean, that's us. And we only own 12 companies. So it's not that hard. But it still is like, okay, when are we going to do this? How are we going to do this? How do we pull it all together? And Cass on my team, who you guys have met, she pulls it all together with some help of the associates. And we've been, how do we automate this?

15:13How do we automate this? And we can talk about that later. But I mean, it's a constant thing. I was like, is this worth automating or not, given how many companies we have and the complexity or lack of complexity? So, all right. So you're sitting in portfolio reviews of much, much bigger organizations with hundreds of positions across, you know, dozens of private credit funds. So what was the common theme you're hearing and the frustration? Yeah. Well, I think, one, data is outdated and you're making these decisions. I think, number two, it's usually more of a review than it is any kind of action-based meeting, right?

15:42So people are saying, hey, what's the risk rating on these specific deals? okay, maybe make it a little higher. What are the marks? A lot of that meeting feels very passive. I think that was most surprising to me, where when I think about portfolio monitoring or portfolio management, it feels like it needs to be way more real time. It feels like you should have fresh data. And this is kind of what we do, but it feels like it should be more timely. There's a bunch of reasons that we can unpack as to why that is and how the market ended up shaping this way structurally. But I think that's the biggest takeaway for me.

16:13It's a very retroactive, passive meeting whereas it feels like the future of a portfolio review meeting should actually be you should have all the tools to be able to re-underwrite on the spot. You should have all your inception numbers. You should have all your actuals. And if you did want to re-underwrite that deal as of today, what would you do? This is a bigger conversation, but let's have it, which is public-private convergence. Obviously, Morningstar, which we haven't mentioned, you're now part of PitchBook, which is part of Morningstar. So you now have visibility into all that with all that data.

16:48But Kunal and Nizar and you now, conversations we're having is public and privates are going to converge. They already are. It's going to happen whether we like it or not. And the plumbing is behind the money. The momentum's way ahead of the plumbing and the infrastructure to track it. I think we're going to get to daily closes at our portfolio companies in the near future. That means if you're at a daily close, you could do daily valuation. Walk me through that vision of where we're headed, and then we'll jump in and kind of talk about where we are now. I feel like I've spent most of my career building specifically just boring, unsexy infrastructure, putting numbers on the cloud or on the internet, making it easier to get data in and data out.

17:36One observation is that today the paradigm is you public and private companies. But it feels like, and I think right now is a really good moment because of OpenAI, Anthropic, these really large private companies about to go public, where it's always felt like there's this in-between stage of a company. And so this isn't one of my original ideas. There's this guy named Manu Kumar, who actually co-founded Carta with Henry. He has a firm called Canine Ventures, but he has this thesis that he wrote probably four or five years ago of a privately traded company. So it's this in-between layer that it feels like it should exist, where when you look at Anthropic or OpenAI, I think they probably have reasons on why they need to go public.

18:18But there are, I'd say, a huge cohort of private companies now where, you know, the only thing really different about them is they don't have liquidity or, you know, reporting standards. But it doesn't quite feel like a lot of founders today want to go public. There's not really good reasons unless there's a huge capital demand or... Stripe may be the perfect example of this, right? The company that everybody thinks should be public because of, one, it's got great leadership and they brought technology to an industry that didn't have a lot of technology. It's raised gobs of money and they've done tons of secondaries and there appears to be quite good liquidity for the investors there.

18:55So if liquidity is the reason to go public, if you have liquidity, Why do you care? Exactly. And I think another angle on it is that, you know, my mom can't invest in Stripe. I'm a huge fan of Stripe, have a ton of friends at Stripe. But I think that's really the reason. But if you're the founder, Patrick Collison or John Collison, that's, you know, Kevin's mom wanting to invest in Stripe isn't a good reason to go public. So why would you? Totally. But she could go to Sutter Capital or some other place and buy some employee's shares at some price that, you know, gets privately negotiated. Yeah.

19:31And so we're touching on another thing, which is I just think the secondary markets within any kind of privates is just really interesting. There's a lot of activity happening across private credit, private equity, continuation funds. That's a whole thing, you know, probably separate podcasts. But which requires? Infrastructure, yeah. Infrastructure, plumbing, transparency, consistency, a gap style agreement on like, hey, what are these things worth? Privates get to pick what things are worth, right? in the private credit market, a little less arbitrary because people are public, companies are marking things to market and that reflects what the equity might be worth if a big public provider is marking it down or marking it up or something like that.

20:15So yeah, so this is the challenge. This is why I think 10 years from now, we're gonna look back on that story that I told about my wife and Kunal and I'm gonna be like, we did it that. What do you mean you waited six weeks to put a PowerPoint together there to walk through your team and show a hundred companies a hundred different ways yeah right yeah with a hundred different metrics that matter yeah with a okay we're already deep into the second the next quarter so there's nothing we can do about that now what can we do in the short time we have before this quarter's over yeah all right so let's talk about um uh who's the buyer like we you and i've had this conversation as a yeah as a startup ceo trying to find product market fit is there an obvious person you're calling inside these firms who's like, oh yeah, I'm in charge of that.

21:02Yeah. Because I think the person in charge of it at Parker Gale has probably changed four times in the last 12 years. Yeah. So good luck trying to find a person here who, who's in charge of it now. Right. And that might change. So who is the buyer? The buyer is the person that's going to pick up the phone and cares about the issue. I think if there's anything I've learned selling, you know, meeting customers in this space, it's that you can kind of bifurcate it by saying you have the front, the middle, the back office. And the product we sell really is post-investment. And usually it's someone in the middle or back office.

21:38So usually titles are like CFO, COO. But if you were to look at our customer base and the buyer for all of our customers, it's not consistent at all. This is the number one thing I tell new new salespeople. So that's the sales challenge is like, there's pain. Yeah. Well, yeah, is this a, we would say, and you've heard this before is, is this a painkiller or a vitamin, your product? Yeah, I think it's a painkiller for very specific. If you fit this criteria, which is your portfolio is growing. Usually what we see is around, we do have firms that'll start, you know, they'll close a new fund and they'll get usually pitch book and then they'll right away want a portfolio monitoring solution.

22:21And usually it's because at a previous life, they had a portfolio where they just couldn't really see what was in the ground. So usually our magic number is 15 to 20 portfolio companies. And then two, this is really hyper-specific, but if there's been any kind of workouts or events in the portfolio where it would have been really nice to have numbers since inception, what did we think we underwrote this to, the plan, everything in a central place. That's usually like the best case scenario. We had a customer sign up with us this year where we'd been talking to them for probably two years and they only came back to us because they had a covenant default.

23:02And long story short, they didn't know about it until maybe 45 days later. You know, head of the firm said, what was that tool that like literally would have prevented this from happening? And they came back and, you know, said, give us a contract. And the reason your tool would have prevented it Because you're pulling in data every month and you have the credit agreement sucked into that thing and it's automating tracking against the metrics you're pulling in. Yeah. Right. So it would have triggered it literally the day you got the financials. Yeah. And in my scenario of that, we get to daily liquidity or sorry, daily closes.

23:32You wouldn't know, you wouldn't have to wait till the 20th day of the following month to know that when the books were closed, you would have seen yourself headed towards a covenant default. Yeah. Within the month you defaulted. Exactly. Yeah. Exactly. Yeah. So what is, let's talk about what's happening now. Yeah. So what are people tracking? Taking a PDF and typing it all in, that's hard. Yeah. So there's friction there. Yeah. Automating everything off of a report from one of your portfolio companies sounds amazing, but in actuality, I don't think many people are doing that. And then you've got AI and MCP servers and all these other things.

24:06So where's most of the industry now? Yeah. And then what does good look like today? Yeah, so I look at our CRM analytics every week. And the specific thing I look at is, of the private credit funds that we've met with, what percentage are on spreadsheets? That number is 60 % as of last week. So not using a software tool at all, just through spreadsheets. 60%. 60%, whereas... Of a$3 trillion market. Okay. Three years ago, that number was closer to 80. Private equity is actually pretty different. This might actually surprise people, but it's closer to 40 % are in spreadsheets. And then in venture, I think venture is probably the most saturated.

24:47Most firms have some kind of tooling. One other thing that's pretty unique about venture is that because by nature of their investments, they're spending a lot of time with founders, most of the venture firms are pretty AI-pilled. And so they're building something on their own. Some analysts can just spin up an app to do some of this stuff and vibe code it. And so penetration, I would say, of software specifically for monitoring is actually quite high in venture. This is monitoring the financial performance of your underlying portfolio. And then in credit, the covenants and other requirements to stay compliant.

25:24That's right. And then in private equity. Venture guys, they don't have financials. What are they tracking? I mean, I can see they're tracking the cap table to say like, oh, this is how much we own at this valuation. But like, they don't do any diligence. What do they need to track financials for? I'm just giving you a hard time. Yeah. So, all right. So, we got 60 % of private credits on spreadsheets. 40 % of private equity still on spreadsheets using some sort of portfolio monitoring tool. We've built our own, used a third party, and now we're thinking about building our own or using yours. Yeah.

25:55So, it was good timing. So, I mean, this is just in the last 12 years. Yeah. We've gone through this. And you'll talk me out of building our own, but we'll do that after the pod. This is probably obvious, but what are people tracking? Is it just, are we tracking the whole thing? Balance sheet, cash flow, full P &L, or are we tracking just the major metrics? Yeah, so I'll give you an analogy, maybe two here. So effectively, all Luminic is, is we're a ledger. And I'll use, you know, for the audience, mainly being private equity, private credit people, think about it in accounting terms. And so all a accounting tool is, is a ledger.

26:34And then you create different cuts of that data, which are your financial statements. So you have your P &L, your cash flow statement, your balance sheet. That's all Lumanica is. We're a ledger that stores all your financial metrics, your qualitative metrics. And so on the private equity side, this would be if you have value creation KPIs that you set at underwrite. These are the things that you're tracking in a time series way. We're going to drive margin from X to Y. We're going to go from this retention to that retention, something that wouldn't necessarily, not everything would show up in a P &L.

27:02Yeah. And so KPIs are actually a lot more of the drivers. There's pro forma financials. Some of these companies are really acquisitive. On the credit side, it's all the financials. And it's also things like covenants, compliance certificates, loan tapes. I think the interesting way to think about Lamonica is if you use this analogy of a ledger, we're effectively, we have different forms of things that it powers. So one specific use case and set of metrics is valuations. So, lumenic data is used for valuation. So, there's probably a standard set of 25 to 30 metrics that any private equity or any private credit fund should be tracking.

27:45Because if you use a third-party valuation firm, they're going to ask for those. We'll preset those for you and get them out. Wait a second. So, I don't have to send an email to the associates of the firm and say, hey, guys, Kroll showed up. Or no, Duff and Phelps, Kroll, whatever one they are. They're here again this year. Start pulling everything from the file server and get them all the financials they need. You could just say, like, here it is. Exactly. Okay. And what the valuation firms and even the auditors, right? Auditors are another use case. What they all want is they want traceability down to the source file.

28:18And that's literally what our software does on the front end. You drop in files, we ingest the values from it, and then we show you an easy way to be able to get down to the source file. So if you click on something, it'll say this is where it came from. Exactly. The second probably bucket from the ledger that people use data for is portfolio review. So we just talked about this. On a quarterly, if not monthly basis, I'd make the case that you probably should have some ritual as a private equity firm or private credit firm where you're looking at the portfolio. And you're ranking it, right? So I think having that meeting is one thing.

28:52Looking at the data is another thing. Having some kind of framework. This is probably the most interesting piece that I get to see, but I can't really talk about in terms of what firms do. But everyone has a different way of assessing risk, right? By asset classes is different. Most firms have a proprietary risk rating on the credit side where it's a number system, it's a letter system. And how those numbers get determined can be really quantitative or really not. And so portfolio review, and we'll power those artifacts. It's sometimes pretty visually dense, but we have ways that we can make it more visual.

29:27The last piece is for LP reporting. So pretty standard for us is customers will come to us after they've implemented our software to say, hey, we have AGM coming up. I want to tell a specific story about our portfolio. How many jobs does our portfolio companies create a year? Interesting insights that are not just how are the companies performing, but it's like you have a firm, you have a thesis, you have a narrative that you want to tell. And a lot of the data that you collect on Lumani can actually tell that story. One of the interesting things that I've always thought we should do during implementation is we should look at, we should pretty deeply embed ourselves into the firm's strategy.

30:06Look at their past AGMs, look at their past fundraising and say, okay, because those are the outputs that you care about, we need to start collecting that data now. So that's one. And then on a quarterly basis, there's usually LP reporting that we can power. Yeah, as you're talking, I'm thinking through exactly where we do these things. So the first Monday of every month, Paul Stancic comes in, who runs GoToMarket for us, basically reports on bookings for every company. And this is before we've closed the books, because we know what bookings are, the last day of the month. And it says booking is against budget, and bookings go over some period of time.

30:39Now, he's literally pulling those from a weekly spreadsheet he gets. We have our mantra is less data more often. Yes. Which is like, I only need these things, but I need it every Monday. So that comes in in a spreadsheet. He then goes and grabs all those spreadsheets and then puts this little, I mean, it's a 20-minute conversation in the Monday meeting, the first Monday of every month. Yeah. Unless all the numbers are read and then it's maybe an hour and 20-minute conversation. Yeah. But we do that. Every quarter, we do the portfolio review. Every quarter, obviously, we do the, we don't do a monthly portfolio review, though I guess if we had more data and easily accessible, we could and would.

31:18and then portfolio reporting and then AGM, which is, yeah, again, our stuff's all in spreadsheets right now. Again, we had a tool. We were manhandling it to get it the way we wanted it. It was much more for value creation tracking than financial tracking. We would like both, but if we wanted to lean on one, financial tracking more important to us than value creation tracking. And then I would love to get to a place where I'm not sending a PDF over intralinks to my LPs. And we have a, I mean, you see our, office. It's a very pretty office. Visually appealing. Our quarterly report is visually very appealing.

31:53Yeah. On purpose. Lots of charts and graphs. It looks pretty. There's a lot of information and we have used visualization to make it obvious what's working and what's not working. But I envision a time where I just have I'm sending them a link and they're going to some HTML, some website that clawed code in an MCP server tied into a backend product like yours is basically like, go click on stuff, play around with it, you know, change timeframes, change whatever you want to do. Like here it is, manipulate it. And that just makes the commentary up front that I would make one either, maybe unnecessary.

32:32Uh, and two, just like, again, transparency, public, private convergence. You can do this. You can go in pitch book or fact set or whatever. And, or, uh, you know, Morningstar and find all the public company stuff you want. Yeah. We're headed here. We're headed here and, and the thinking that that's not going to be a requirement that you can't just give a flat file, you know, PDF to a large financial institution or a retail investor and say like, here's what I think. It's like, no, no, no. Show me what is true. Right. Yeah. I mean, this, this, you're, it's kind of a thought provoking question, but, but I've always thought, because I've spent a lot of time with family offices, some of these endowment funds, the LPs at the end of the day, they, they probably love the PDF you send them and they probably appreciate that it's thoughtful, but they also just want a raw data dump of all the data because that's what they're doing on their end.

33:20They have all these fund managers and they're extracting, they're doing the same process on top of the data one more time. And then go fundraise and every LP sends you a different DDQ requirement, which is like, all right, give me your numbers this way, give me your numbers that way so they can decide, well, what's the issue? Were all your returns for multiple expansion and debt paid and leverage, right or was it from value creation of like making the business better was it from growth was it from growing growing margins expanding EBITDA was it from leverage was it from mark and they want to know and they have a they will build a graph basically says hey Parker Gale generates most of the returns from x yeah and I'm like no it was y yeah so again like no no no look at the data yeah and then because I'm giving 25 different LPs or 120 have different LPs different cuts of the data based on their format.

34:08It's like, no, no, here it all is. Have fun with it. That sounds like a kind of better way to do things. Yeah, I mean, it comes back to infrastructure. Now, there's no standard way of an LP wants to see it. They call it like the portfolio workbook or whatever they call it, or the value creation matrix or something. And it's like, no, here's everything. Have fun with it. It's all audited and you can go auditable in terms of you click on something, it'll pull up the document. What's the edge case though? Where does it break? I'm thinking of like, I'm doing add-ons. I'm restating things. I've got ad backs.

34:40We brought in a new CFO and he decided to find gross margin in a different way because we put customer success up in cogs instead of down in sales and marketing or onboarding or whatever it was. So gross margin went from 75 % to 68%. It was like, no, no, no, that was just a reclassification. And I'm not going to go back all the way six years and restate the whole thing. Like, where are the edge cases that you're like, guys, I'm solving 99 % of your problem. let's not spend all our time in the edge case, but where does it, where do current systems start to struggle a little bit? It's a good question.

35:12Yeah, yeah. That exact scenario that you just painted is, you know, I'd say if your portfolio monitoring solution doesn't handle that and automatically tells you there's a reclassification and the numbers, you know, you can choose exactly down to the period when you want to restate it. Like if it doesn't do that, that's table stakes. Like any portfolio monitoring solution should be able to do that. I think where the edge cases are today, or we're probably in Act 2 of, call it private market infrastructure software companies. And again, I've spent a lot of time studying this space, built in this space.

35:41I think Act 1 was effectively putting numbers into a website. My wife and Kunal were doing in the late 90s, which is I'm going to take something that's in a physical form and put it in a digital form. Act 2 is probably where we're in now, which is you had a bunch of companies innovate on how to get data in. and I think with the AI kind of wave here, it really has impacted this space in a good way but effectively you have all this messy data and you need to transform it and move it into a standardized format to then be able to tell stories from it, make decisions off of it. If I were to guess where Act 3 is, I think it's being able to blend data from different sources, right?

36:25So as a private equity fund, you have probably three core systems one, your CRM, two, some kind of portfolio management platform, and then three, you probably have a general ledger that your fund admin uses. Yeah, we use NetSuite. Yeah, yeah, yeah. And none of those systems talk to each other. None of them. And so you have this massive entity resolution problem, which is what is a deal that started in Affinity or DealCloud that then ended up in Lumonic that we tracked and had all the financials with, and then that the fund admins are booking in the schedule of investments down to the journal entry.

36:59And no one's actually tied any of that together. And I think Act 3 and where we spend a lot of time thinking is how do we actually become the database that blends it all together? One way you could go about it is you could build three different companies. Or two, you can figure out this kind of interesting way to be able to transform data in a more generalized way. This is why you see a lot of firms. I think one of the emergent trends right now is a lot of firms will actually have a snowflake or some kind of data warehouse where they basically pool all the data. and LeMonic being one of those sources, CRM, fund admin.

37:30And then they're effectively doing transformations to actually do that unification. But that's not a product. That's a data engineer and a data warehouse. Oh, that's an IT team inside your firm that likely has high turnover would be my guess. Because once you kind of build it, it's like, it was fun to build it, but then to just monitor it, it's not that exciting. Exactly. And you're like the one dude inside the firm who knows about this stuff and you can't talk to anybody. Most engineers want to be around other engineers doing cool stuff would be my guess. What have you been impressed by clients or prospects doing?

38:03It's actually pretty barbelled. So this might be surprising, but a lot of the most innovative stuff I've seen personally is actually with these smaller emerging funds. And they do it out of necessity, right? I think - Because every minute spent monitoring the portfolio is a minute not spent sourcing the next deal. Exactly. And so they need an edge somewhere. And so some firms have opted to say, well, we're going to just be operating, like we're going to be a two-person shop. or maybe three, and one person is just the technology person is going to help us make it so we don't need a large middle or back office.

38:35And these are doing things like building, if you're a credit fund, building a website that basically captures leads. But once that lead information gets captured, that gets pushed into tools like Clay, where then it gets enriched from data from PitchBook. And I'm talking about a whole data pipeline here that you could build today. Oh, we call it the perpetual lead machine. Yeah. We've built it in clay and we spread it out across the portfolio. You guys use clay? Yes. Amazing. Okay, so we use, we got to talk after this. So - Just watch out for your enrichment costs. Don't enrich a list that you haven't scrubbed because you're paying for leads you don't need.

39:17100%. We can get into that. Yeah, I mean, clay is - It's like the in-app purchases, like my PlayStation. it's like oh my how no why is my why is my why did i spend so much on playstation oh yeah because i was buying stuff in the middle of the game yeah yeah and so that whole pipeline i'm basically deciding hey should we spend more time on this deal or not you can pretty much automate um and again the smaller smaller firms are doing that um and then uh i think even cooler is like when can you actually use data as an asset so in your clay table great we can hook up lumonic as a as a as a column there and that's a very specific clay reference but um this company that we're evaluating or underwriting, what is it closest to in our portfolio based off performance?

39:56Let's say you've been using Lomonics since the inception of the firm. You actually have this benchmark data set of your own proprietary data. And that's where I think the big firms, where I've seen really cool stuff, is firms that, call it 20, 30 years ago, basically decided, this data is going to be valuable for us. One day, we're just going to save it here. One day, we're going to want to reference this data set, and we're going to care about it. We're going to maintain it and clean it. And so I think the most impressive stuff at the larger scale is firms that are seeing thousands and thousands of deals a month.

40:24They've saved that data set down. They actually have their own proprietary benchmarks that basically it becomes alpha, right? For decision-making. Now, harnessing that I think is, is, is the next piece, which is like, great. Like we're, we're talking about a whole data, you know, engineering effort here, but, um, being able to say, great new deal came in, we've looked at 300 deals that look similar to this. What did their metrics look like? Are they growing at the same rate? Um, you can, you know, uh, you can kind of keep extrapolating further. I think the larger firms are doing that at scale, and that's where it gets most impressive.

40:53Just be careful the NDA you signed and what access you have to that data after the deal's no longer there, right? Good point. In a buyout scenario. Yeah. And again, this dinner we had last night, I asked how many people are using an MCP server. Zero hands up, right? So I was surprised by that. Good for you, though. And then two, I talked to a guy at a very large bank, and he's like, I'm not allowed to use Claude. Yeah. Not allowed to use OpenAI. That would shock people on Twitter. Yes. And shock people in Silicon Valley that massive financial institutions and some very large private equity firms are like, no, no, no, no.

41:25Compliance and IT have said, you cannot use these tools. Right. So then you need a third party. They're hiring you to say, hey, make sure you give me the guardrails. Exactly. This is my whole SaaSpocalypse argument, which is AI will be domesticated by enterprise software, not that AI is going to decimate enterprise software. Because the lawyers are going to get in the way. Compliance is going to get in the way. And they should in large enterprises. That's why large enterprises operate the way they do and are consistent because it's not, they have guardrails and rules. Yeah, I think one of the most underrated areas right now or under explored that I think is really interesting to be building is this governance layer for financial institutions and how they interact with any foundational model.

42:14There's no company I've seen that's like cracked this to say, you know, a massive bank wants to use CLOD and wants to use MCPs, but how do they properly interact with it so it's not completely the opposite of domesticated wild? That layer right now, I haven't seen anyone go and approach that. And I do think, you know, when you, there are tools out there that are kind of built to harness and add more guardrails, but I think it's really early stages, but this is an interesting area. Yeah, well, in conversations with Morningstar guys, a year ago, they thought the LMs are coming to destroy them, and the stock price would reflect that the market thought that too.

42:51Fast forward less than a year, it's like, oh no, they've come to cooperate with us because they need us, because we have great data, and we have a trusted brand, and we've got distribution with people trust, and you're built into the workflow. So hard to displace that. I think people have figured that out. I would imagine a lot of your prospects will say like, we're going to roll our own. When should you roll your own? How would you do it? When's it going to break? And when you should just use a third-party product? I think that everyone should try rolling their own. That might be a contrarian take, but I think that...

43:25You're so sneaky. I mean, it's true. Because you know it's going to work for a few weeks, and then somebody's going to forget about it. They're going to go back to the portfolio review, and then you're like, oh yeah, this thing kind of just went wild on me because I didn't nurture this agent or whatever it was. And it's just hard. We're not in the business of rolling our own, but I agree with you. Everybody should try and roll their own. Well, yeah, just for the fact of, I think, interacting with the AI models today, I think everyone should try it. Everyone should try to build something. I think the barrier to entry to try to create stuff right now is such a special moment where everyone can try it.

44:03I genuinely mean that, that you should try. I think that a specific metric I've tracked with our sales team is when people do try to build their own, we kind of timestamp it in our CRM. So there's something, if you're on the LeMani team, you know I'm really anal about tracking very specific things around customer journeys. Average is about nine months the firm will come back to us after they've started the internal build. Here's my guess. Step one. Hey, just take all those spreadsheets we get every month from our portfolio companies. put them in a folder attach Claude to it co-work to it yeah and then okay build our PowerPoint for the portfolio review yeah that's step one yeah okay that was a little clunky maybe step two is they get index or shortcut or some other AI you know Excel plug-in tool which we think were as a class horrible nine months ago now they're like hmm same guys on my team same team people on my team are like these are getting pretty good yeah So then maybe use that to make the data more standardized and then put that into a folder and attach Cloud to it.

45:09Step two is we're going to build our own MCP server. Yeah. Because then we can standardize all this. Yeah. Right? And we're just going to literally have our portfolio companies email the MCP server, you know, CC the, you know, somewhere where the MCP server can grab it. So we don't have to touch it. Okay. Well, I was in a room of 40 people last night. I think there was a few hundred billion dollars in the room. Yeah. Zero people building an MCP server or knew if their firm was. To your point, that seems like a good idea. But if you're on Twitter all the time, MCP is cooked. Just let the model do the job.

45:46Why would you get in the way of it? We can have an argument whether you should do that or not. And then you've got an MCP. You'll have an MCP way to do it. PitchBook's got an MCP server. Like you guys can just interact with the tools through Claude Your Own. And then you get to the conclusion of like, guys, why are we doing this? Which is every single software company you own is dealing with the same thing. Exactly. Which is, I don't know if it's six months, nine months, 18 months. Somebody's coming back and be like, that was fun. And it was hard. And either it broke, the guy who did it left, it atrophied, the agents ran wild.

46:19Yeah. There's no harness around this. Like, just do this for us. I'm renting your software for a reason so you can figure this out for me. I think the world, again, coming back to not even just Luminic, but I think because the barrier to entry is gone now for creating software, the entire world right now is learning the software development lifecycle, which is almost the first thing you build is wrong. It's always harder to maintain it than you think. There's always all these edge cases that exist. and my unhinged view would be you could probably rebuild Lumonic and get 60, 70 % of the way there on your own.

46:58I strongly believe this. I think people are way more capable than they realize on building stuff. Why you're paying Lumonic, why you're signing up for our software is that that last 25%, that last 30%, talk to any engineer on our team, talk to any product person on our team is brutal. And it is all the edge cases is just to give a very specific example, we ingest Excel files into our Cloudplace platform and then we do a bunch of extraction on top of it. We have all this UI on top of it. At one point, we had to go as far as to meet the Microsoft Excel team based in China to go actually into the root of how Excel was built to go and understand, why can't we open these very specific file types that have these specific macros embedded into here?

47:44And our software just takes care of that. So that's the edge case stuff that I actually think, why a lot of these systems of records or ledgers are going to exist is because they've spent a lot of time doing that. Not to mention simple things like authentication, which is something that takes all the fun out of building. It's kind of all these layers of just stuff that is actually quite hard on the edge cases that you can just use off the shelf. Yeah, but that Excel China team edge case is, okay, two of your 100 portfolio companies break and nobody knows why. Yep. And you built it yourself leads the CIO in that portfolio review to be like, what are we doing, guys?

48:24We don't have data for these two companies. It was like, well, because they're models and we don't know why. It's like, okay, this is all garbage. Why are we doing this? How much time are you wasting on this when it's not your job? Yeah. Like, I'm not paying you to, well, maybe somebody on the team his job is to collect all the data, right? But like, why are deal people sitting around a table arguing about how to like standardized data from a business we own 10 % of the credit in. Yeah. And we just want to monitor whether or not, like, we should believe these guys or not. Yeah. So, yeah, I agree.

48:58I mean, this whole thing that everybody's going to roll their own drives me nuts. There's a very specific type of firm that I would say should probably go and build their own, which is there are venture firms that are investing in frontier technologies. that have built in-house engineering teams. And I actually think that's probably the right way to go. Hedge funds are kind of notorious for doing this, for building their own in-house technology. And it's an actual edge. I think that if you're investing in these AI companies, one, as a founder, I think that's really cool for a firm to actually be builders and actually creating things themselves.

49:34But then two, you're kind of face-to-face with the technologies that you're investing in. And I think in that very specific case, if you're a venture and you're investing in these AI-focused companies, I think it's like, it's probably the right choice, but for everyone, you know, 99 % of - Why waste all that amazing talent on a reporting product? No offense. No, internally. No, use that to create some edge or some differentiation that you can generate alpha from, not from like automating reporting. Again, we started this conversation with, in 1997, 1998, my wife and a friend of mine we're basically typing data from paper into a spreadsheet of some sort or a database of some sort.

50:16And the pressures around public-private convergence, right? It's already hard to start on the credit side, right? So not a big surprise you've had success on the credit side. It's coming for private equity. PitchBook and Morningstar know better than I do about when that's coming and LPs have a sense of when that's coming. I think of it as the co-founder of a business with a billion of AUM. On the very small end, I'm thinking, when do I need to be ready to provide the data that my LPs and prospective LPs will want to see and the regulators will want to see for me to be able to participate in this regulated industry?

50:58and if I'm just assuming it's going to be like some new 26-year-old I hire from William Blair owns the spreadsheet when the auditors come in or when the SEC shows up or whatever and my CFO that's a dangerous place to be owning a business that's regulated it's like no I need to be thinking of I'm gonna I'm I now have to handle compliance requirements we've never had to at our scale right our size we should be able to get away with it oh we're the small guys we don't need to do that more. Well, that ended and it's only getting the bar. I don't say worse because I believe in compliance and my wife was a compliance officer.

51:34I totally get it. It's getting harder and more expensive and technology is helping us punch way above our weight. It's going to be the same thing on the reporting side. An allocator is going to say, if you want my money, you need to give me this level of transparency because I can get it from somebody else. Oh, your returns are a little better. How do I know? Because you basically are just telling me what they are. I know for a fact that this other fund, I know their numbers at a molecular level because they provide me full transparency at a much faster rate. And that's how we would need to run our business and our risk management.

52:07And if you can't do that, then we can't be your LP. I mean, people in private equity just live in this bubble. They think that we're protected from regulation, protected from all these things. And we just do deals. It's like that deals is just a small part of the things we do. And I think building this infrastructure is critical to survive over the next 10 years. You're going to need to have a level of the data at a much more granular level. I mean, maybe a blog post that you should write because I'm a terrible writer, but it's like, what does it mean to be private, right? Looking forward, a private equity fund, a private credit fund, like what is actually, what does it mean to be a private company?

52:42I think it's like an interesting philosophical rabbit hole. Yeah. The private and private equity is a feature, not a bug. Um, but it's, you're kidding yourself if you think private equity is private. I mean, maybe in the small end of it, it still is. But again, what's happening at the high, the large end is going to trickle down. That is a great idea for a blog post. I'm going to steal it. Uh, but you can be a great writer if you just let Claude, you know, you teach Claude how to write like, uh, you know, like, uh, uh, somebody respect and then it can, uh, it can ape it. My latest piece is called, uh, from barbarians at the gate to nerds at the terminal.

53:15It's a history of software by how private equity came to love software and then loved it too much. That's my working title. I like it. Really around, you couldn't lever a software business and now you can over lever a software business in 30 years. Literally went from, and then obviously that's one of the challenges in private credit. All right, let's wrap this up with a couple simple questions. What is something you'll bet your bonus on in the next, that will happen in the next 12, 24 months. So we ran a survey recently, earlier this year, around basically the state of private credit technology.

53:50There was a bifurcation of where all the AI was getting deployed in our market. And the punchline is everything kind of pre-investment. It was just massive. It was like 2x adoption of all the frontier models of a bunch of AI tools on the front end is like a frenzy. Like firms that you would have thought a year ago would have had a ton of procurement and just weren't adopting tools, like everyone's kind of changed. And so if you're on the deal team, if you're in the front office, it's dramatically changed. What really blew my mind is that we saw little to no change on the middle of the back office.

54:28So what I would bet my bonus on would be that I don't think much is going to change in terms of AI adoption. I'd say if you're looking at tooling today, this is something I really like that, people shouldn't be charging you more for AI. Like this is just, it's going to be everywhere and it should be just part of software that you purchase. So yeah, kind of an anticlimactic answer, but actually in our world, not much is going to change. At my annual meeting a few weeks ago, I had a slide that basically talking about kind of alpha on the buy. How do you differentiate yourself on the buy? And it was, and I'll give you, I sent it to Canal the other day, which was here's every private equity workflow and data tool we have demoed as a small, like we are tiny, you know, compared to most in private equity that we have demoed since last November.

55:17And it was the logo slide, you would think it was like the MarTech venture capital investment slide that everybody jokes about, which is like, you know, there's so many logos, you can't keep track of them, right? Yeah, I don't know. There was 40 or 50 logos on that page. and yeah, we've looked and demoed all of them and they were all for the pre-acquisition, all for pre-acquisition. Yeah. And some of them have gone out of business. Some of them have already changed their name. Some of them have completely pivoted. But I agree with you. We had the Accordion team on recently, the head of AI at Accordion.

55:47They're kind of financial diligence, Q of E and kind of expanding into other things. And our whole conversation was like, how do we make finance fun again? And I was like, yeah, you automate all the tedious stuff so the finance people can actually spend more time on the fun stuff. Cass on our team at our annual meeting showed the calendar of a typical CFO in a year. And how many days do you have to spend on strategic stuff that increases the enterprise value or the opportunity to outperform? And it's not very many. When you get auditing done and financial reporting done and LP reporting done and all the stuff you have to do, you maybe have a few weeks a year to actually do the big important stuff.

56:25So I agree with you. Do you have any contrarian bets or things that you believe that other people in the industry or even your company aren't so sure of, given that you're a founder and have big ideas and probably have taken the other side of bets and have been successful? Contrarian takes right now. I think that AI adoption, although the numbers feel really staggering and it seems like it's everywhere, especially if you're on Twitter, When you look at the world's population, it's actually not that many people yet. There's a specific lecture at Stanford from the head of trading at, I forget the name of this firm.

57:09It's one of the big hedge funds. And he showed basically the adoption curves of social media platforms. And then these kind of must use everyday apps like WhatsApp or YouTube. and then kind of more niche apps like Amazon or Spotify and kind of three curves of adoption over a 20-year period. And then he plotted out where ChatGPT, Claude, Gemini, these models are. And where would you guess that adoption curve is trending right now, right? Yeah, everybody thinks that AI is straight up and the fastest thing to ever get to this level of penetration. Yeah. Yeah, it's somewhere in between the social media apps and the more niche Spotify's, Amazon's, right?

57:57And that's the adoption curve right now. And obviously this can change in a year, but I think it's a lot slower than people realize. And in highly regulated industries, I think there's still a lot of room to expand and grow, yeah. Well, then also let's decide like, what is a user versus somebody who just kind of dabbled with it? A lot of people have typed a query or used ChatGPT like a search engine. Yeah. Almost none as a percentage of the population, world population, has built an agent and let it loose on something. Yeah, yeah. And then that's another one. This might not be contrarian, but I'm very bullish on just human potential.

58:39I think everyone always underrates what they're capable of. And I think that we're in this period of time now where people can create and do a lot more things than they realize. In my personal network alone, it feels like a Cambrian explosion of people starting companies. It is crazy to me. In terms of the SaaSpocalypse, what I'm seeing on the ground floor in the earliest of stages is that everyone wants to build a company and everyone's actually building right now, which is one of the coolest things being a founder. I mean, it's obviously going to get really competitive, But I think you're going to see a massive increase in just net new companies getting created with people using AI.

59:24I think it's awesome. I think everybody should start their own private equity firm, too. I'm out there on Twitter telling people, like, now is a great time to do it. Why would you not do it? Go start your own firm. All right, closing question, actual closing question, which I've rarely asked. But given our conversations over the last few weeks, I think you'll be able to nail this one. And I didn't tell you what it was going to be. So you live in Seattle, right? Yeah. How long have you been in Seattle? A little over a year. All right. So you can either pick Seattle or San Francisco because you're more, have spent more time in San Francisco.

59:51But you have a good friend in town from out of town. Where are you going to dinner? Give me one in Seattle, one in San Francisco. Yeah. San Francisco would probably be Chez Maman. It's a French place. Get the steak frites, get extra ketchup, have a glass of champagne. It's our date night spot in San Francisco. and then Seattle, food's not as good as it is in San Francisco, but probably say get a sandwich at Hushy's, get the lemonade, get the cookie, make sure it's hot. Yeah. Amazing. Perfect. All right. Well, if you're in Chicago, you know I'm taking you to a VEC, an absolute stalwart of the West Loop and never misses.

1:00:37So, Kevin, I've really gotten to know you pretty well in the last couple of weeks. I appreciate you coming on I think this is an absolute banger of an episode everybody's thinking about this they're trying to figure out whether they roll their own or they go with a third party and I think the drumbeat of convergence and transparency is coming and the plumbing needs to catch up with it and I think you guys are positioned to be in a great spot to do that thanks for having me on yeah bye for now from the heart of Chicago to all over the globe couple private equity Geniuses, they share what they know They love to mess with technology Where the future is sink or swim It's the Private Equity Fundcast With Devin and Jim Technology issues Middle market PE-backed companies They bicker with each other And they don't take themselves too seriously It's not venture capital It's private equity It's the private equity fun cast.

1:01:43Pour yourself a drink and have a seat.