The Exchanges

Q Well, why don't you take me back to how you got into this business in the first place?

A I started doing work, investing in private equity as a limited partner, going on 22 years now, so a long time. My first job doing this was at a business school. I went to Stanford for business school and took a job with Hewlett Packard's Pension Fund. So, small investment group at HP Corporate that was managing about a six, seven billion dollar pension fund, and I think partly because they were located in the valley, we had a tremendous amount of exposure to private equity generally, but also venture capital more specifically, and they'd been investing in alternatives for probably 20 years. Had a great track record, and for me, frankly, it was an amazing place to start a career doing this type of work as I was working for some of the people that have been doing this from maybe even the beginnings of the industry, we might say. So it was a fantastic learning ground for me as I started my career out of business school.

AI assessment note: “took a job with Hewlett Packard's Pension Fund.”

Q And what was your path from those initial years at HP?

A After Hewlett Packard, I took a job with a fund of funds platform, a firm called Coelos Group that was based out in Seattle. They originally started as a hedge fund of funds, but they decided they wanted to move into private equity as well. This was also a very unique and in some ways a fortuitous opportunity for me from a professional development standpoint. The folks that they brought on to run what was a new private equity platform Were folks that ran Duke University's DUMAC, the management company that manages the endowment assets. It was the chief investment officer who had actually founded DUMAC, had a private equity there, Sally Shubing Russell, and they had a track record that went back again, 20 plus years of relationships doing this in private equity, traditional buyouts, venture capital, as well as other areas like real estate and real assets. So for me, again, after HP, I got very lucky to have found myself in a group where it was a tremendous learning experience. And Quelos itself had developed a really interesting platform that would become very relevant later on in my career. It was a database, but it was a very sophisticated database, nothing that I'd ever seen before as a related to manager research. So that database ended up sparking ideas later on in my career about building something better for other limited partners. Then eventually Quelos was an attractive…

AI assessment note: “After Hewlett Packard, I took a job with a fund of funds platform”

Q How do you think about secondaries, both as a mechanism for your primary funds, and then as a separate vehicle where you're investing and buying?

A Yeah, so we have a separate secondary program. I'll actually touch on what you mentioned first, which is how do we think about our own funds? One of the things that fund-to-funds are notoriously, I think, bad at is they end up having really long, long fund lives where they can go well beyond the 10 years that a normal underlying GP commitment is, and part of that's just because oftentimes if you have a portfolio of 10 or 12 underlying managers, there might be one or two that have some leftover positions. There's escrows, They're still doing audits, which, of course, starts to degradate returns for everybody, and most investors don't want a fourteen-year K-one. We try to aggressively, really starting in years eight, nine, and 10, start to look at opportunities in the secondary market, just like we would as a buyer of secondaries. We look for places where we can package funds where we believe there's more value in selling than what we can get in the lift of the return in the remaining hold period that could be unknown. So we start evaluating them over time. We have someone internally here who that's part of their job to do on a regular basis. And when we find their situations where we think it is in the best interest of our investors to exit an opportunity, we do so. We've been very successful at doing that and wrapping up older funds. In our secondary investing, that's in some w…

AI assessment note: “I'll actually touch on what you mentioned first, which is how do we think”

Q So when you were looking at the breadth of different strategies, all different types of managers, You started to mention the research process and data aggregation. What did you want to do with it?

A Yeah, I mean, one of the things that Coelos had done was created a proprietary database that was really amazing. And unfortunately for them, they did it before things like Salesforce existed. And so they spent a lot of money to develop something that was unbelievably useful. We used to have a philosophy at the firm that if it wasn't in the database, then it didn't happen, or it didn't exist. And what was great about it was it created an institutional market intelligence. So we had meeting notes that went back 10 years in some cases. For us, it was a way of keeping track of managers, to keeping track of data as well, track record data, historical and current, as well as keeping track of what I'll call more qualitative market intelligence about their strategy, about their team, about what they said they were good at. So that when you meet with managers on their next fundraise, maybe after you turn them down in the first fundraise, You can see what they said three or four years ago, and then compare it to how they're pitching themselves today. So all that sort of institutionalized knowledge wasn't sitting in people's notebooks. It was sitting inside of an electrical database that all of us could access, regardless of whether the people that had had those meetings were still with the firm or not. And that was a really significant difference from a lot of the other organizations I'd…

AI assessment note: “it was a way of keeping track of managers, to keeping track of data”

Q service business, so there's a thousand different funds, you're doing this analytics, that's the same analytics off of objective measures across the funds. It's not hard to think a certain small subset of those managers will be deemed the best ones. How do you then deliver that in such a way that you're not saying, well, you really only want to invest in these 50, forget about the other 950?

A In some ways, we do end up saying that. But what I would say is that we're talking a lot about data and benchmarking track record and things like that. But our evaluation, whether it be what I do today or what we did at Atlas, probably half or more is actually qualitative. And so the assessments that we do is a mixture of taking a Information about the team, their backgrounds, their experience, their strategy, and deciding, do we like these things? And then using references in a significant way to evaluate these people and sort of confirm a lot of the things they tell us as it relates to what they've done historically and how they've added value to companies. And so for us, I think that the biggest point we always like to make with our clients is that We think that the data stuff we do has a significant differentiation, but it's only part of what we do. What the data does and evaluating these unique ways does is it helps us do a better job of putting into context sometimes all the qualitative things that we are also evaluating. And so when we were in Atlas Diligence, we wouldn't put out a top 10 list. We wouldn't put out groups that these are the 50 best, and part of that is because The evaluation of managers has components of preference for different organizations and even different individuals. There might be an limited partner who I respect tremendously, who looks at a firm,…

AI assessment note: “we wouldn't put out a top 10 list. We wouldn't put out groups”

Q There's a lot of noise in private equity about the challenging exit environment. With rates going up, what are you seeing both in your portfolio and then across all the information you have of all these different funds?

A So last year was probably one of the worst years for proceeds and realizations that we've had in our data. And not surprising, anybody who's been touching either the bigger part of the market or the lower part of the market, we've seen overall activity decrease. Luckily, in the smaller part of the market, it hasn't been as extreme. There's a variety of reasons for that. Usually, our part of the market is more immune to whatever macro effects are going on. I think the biggest reason is that we just, one, use much less leverage in our part of the market. So where the credit markets at the top part of the market created huge difficulties, I think, for getting deals done. In our part of the market, we're using maybe three turns of leverage on EBITDA. That's probably less than half than most of the bigger part of the market is. And the other dynamic in our part of the market that's a little bit different on leverage is that vast majority of the leverage in our part of the market is not from traditional money banks, and it's certainly not syndicated loans. It's a lot of private debt, and the private debt funds have been raising capital very consistently for the last 10 years, and they have, in some cases, a higher risk appetite. So even through the uncertainty of the last 12 months, 18 months, they have been willing to lend. Now, sometimes at higher spreads, higher pricing, Maybe les…

AI assessment note: “last year was probably one of the worst years for proceeds and realizations”

Q When this comes to assessing managers for investment, what are the characteristics that you've seen through all this data that are indicators of future success?

A What we see is managers that have generally stuck to their strategy over time have produced the most repeatable returns, right? And that seems like a simple answer, but in our part of the market, especially the best managers tend to grow and they tend to raise more capital. There have been many examples of managers that have continued to perform at extremely high levels, even with larger fund sizes and targeting larger companies, but there's just a fundamental difference between Five to fifteen million dollar companies and 50 to a hundred million dollar companies. And I think one of the things that we have also seen is that there's no magical algorithm. So in some ways, it's really the reverse. And let's say a manager tells me in a meeting, well, you know, we bought this company at 10 times EBITDA. That might seem expensive, but everybody else was buying companies at 12 times EBITDA. You might say, well, buying cheap is better, but when you look at the actual data, you do a regression analysis, and so maybe you would expect to see it in the cheaper you bought, the return would be up and to the right. And what we really see is that, one, there's almost no relationship, and the R-squared is close to zero, usually de minimis, and there's a reason for that. One is that sometimes cheap deals are cheap for a very good reason. There's a lot of risk in those deals. Main learning from o…

AI assessment note: “managers that have generally stuck to their strategy over time have produced the most repeatable returns”

Q As you look out over the next couple of years, what risks are you most concerned about in the strategy?

A One question I often get, which I think is certainly somewhat of a concern, is part of our thesis of what we do and what our managers are doing is they're taking these smaller companies that bigger private equity firms can't and don't want to invest in. They're buying them for two or three turns lower than what those folks want to buy companies or can buy companies for because they're in a much less efficient part of the market. And they're also companies that are worth two or three turns lower because of where they are in their own maturity and life cycle. The goal of our private equity firms is to grow them, to diversify their products and services, to make sure they have professionalized management teams, to make sure they have a diverse customer base, and all of a sudden they have a shiny asset that they can then sell up to the bigger private equity firms to the next layer of the market. So the big question I sometimes get is, well, what if people stop investing in the next layer of the market? There's two really real reasons that they can pay bigger valuation multiples for the companies on the sale from our managers. One is, The companies are just better, higher quality. So that gives them the ability to do it. The other is they have the ability to finance them at much higher leverage levels. That helps drive higher valuations. And then really the final way is that they ha…

AI assessment note: “if that dynamic changes, where capital becomes more scarce above us, does that crush our thesis?”

Q Which two people have had the biggest impact on your professional life?

A The first, Sally Shipping Russell, who was one of our partner heads at Quellus Group. She was just really influential for me in a time period where I was just getting started doing this type of work. She had a wealth of knowledge herself and experience. I was at the beginning stages of my career trying to move from being a, what I'll call a task executor to someone who's actually taking a lead role and doing due diligence and things like that. And she just had a significant impact on, I think, my career development. Both from a technical perspective, but also relationship-wise. Meaning, one of the most important things in private equity investing as a limited partner are relationships. Relationships with the GPs, but also with other limited partners. We share information. We talk to each other. We learn a ton of stuff from each other, and I think she was a huge proponent of that and was very good at it herself, and taught me, I think, how to be good at it in this profession.

AI assessment note: “The first, Sally Shipping Russell, who was one of our partner heads at Quellus”

Q In those early years of the corporate pension experience and then the fund of funds experience into a large asset manager, what were the differences that you saw in how the different types of pool of capital would address this space?

A I would say that the differences between sort of a more specialized entrepreneurial fund of funds platform like Coelho's and the larger private equity markets type platform like BlackRock was that Coelho's was very happy to have very specific strategies That they believed, whether it be on the hedge fund side, or in our case, the private equity side, and then finding clients that fit those strategies that said, this is what we want, whether it be smaller market investment or venture capital. And I think that for BlackRock, the platforms that larger asset management firms like that are trying to sort of create solutions for everybody, or at least a mass appeal market. What that does though, is that theoretically, and I think some ways practically changes the risk return behavior of your investing. We were doing at BlackRock larger investments on the fund side, larger investments on the co-invest side and secondary side, and that part of the market has historically generated less returns, and certainly in a less risky way as well. The biggest change for me was a broadening of strategy outside of what we had been used to in a much more smaller niche-based company.

AI assessment note: “differences between sort of a more specialized entrepreneurial fund of funds platform like Coelho's and the larger”

Q How did you go from having a set of clients as an analytical service business to back to the investing side?

A RCP Advisors, where I am today, a number of the partners there were good friends of mine. We had been investors in some of the same funds. They focused on small market funds. Again, focused a lot on smaller market funds. We were on advisory boards together, so I knew them very well. When I started Atlas, I actually went out to RCP. I raised some capital from all limited partner, either institutions or individuals, and I said, hey, would you like to invest in this idea I have? And RCP itself had been known to have a very good database. And the initial answer is, well, we see you as sort of competitive, Alex, because you're basically providing all these great tools to people to do investing in these part of the markets themselves, when that's essentially what we're trying to do is provide a platform for us to do it for them. What they found out over time, and what I found out over time, is that there wasn't a lot of gray area. There were people that wanted to outsource it or needed to outsource it to someone like RCP, and there were people that were always going to do it themselves. And when they started looking at the clients that I was picking up, they were all folks that they had tried to sell fund to funds to, but who always wanted to do it themselves. And now all of a sudden there was a great platform to help them do it better. And the other thing that would start happening …

AI assessment note: “RCP Advisors, where I am today, a number of the partners there were good friends”

Q So as you built that up, what was the scale of what you had in the database at Atlas?

A At first it was small. The good news is we had some institutions that I knew that were early clients of ours, that we could use their name as a way of saying to managers, we have people who are going to subscribe to this tool, and this is going to give you a way to reach those potential LPs in your fund. Now what we didn't do was we made sure that all the analysis was objective, And so for a couple of years, we started building up that market intelligence and data. We were trying to cover at that time over a thousand managers, but over time we were able to create a platform that had a nice login for our clients where they could come in and essentially get a library of investment memos that frankly was just a huge time saver. And our clients were sophisticated LPs. They were folks that knew how to do a lot of the analysis. But they were very resource constrained. So how do we provide leverage for folks that want to do it themselves, but don't have the resources to do this on 507 hundred, a thousand managers? So that was the biggest, I think, value that we had created at Atlas was allowing a overworked LP to help them better cover a part of the market that they valued.

AI assessment note: “We were trying to cover at that time over a thousand managers”