The Exchanges

Q When you have a mandate that canvases each of, say, middle market buyouts, growth, and venture, how do you think about putting that portfolio together?

A It's a makase menu we're trying to build for each client. Where every dish has to delight, and then they have to come together as a smartly diversifying way. So a buyout portfolio, for example, will, as you would expect, targets both vintage diversification. We typically target a three-year commitment period. We then seek to diversify strategies within buyouts from turnaround to buy and build and target the core segment's GDP. So the portfolio is diversity across industries. And in venture, we're typically targeting, I'd say, 80% in information tech, and the rest in healthcare and biotech, and then 60, 70% the U.S., and the rest in proven parts of venture centers around the world. In addition to those general rules, we use a number of quantitative tools as well, including a Monte Carlo simulation tool that we developed with Josh Lennar,

AI assessment note: “It's a makase menu we're trying to build for each client.”

Q What are some of the characteristics of the ones that you have chosen?

A So from a business fundamentals perspective, they check a number of characteristics. These are all, for the most part, strong, good businesses. Mission critical product services to customers, hard to replace, resilient, pricing power, high margin cash flow characteristics. The capital Structure dynamics is also, I would say, more consistent than different. They tend to be anywhere between three to four times in leverage and entry. So when we see a deal that's four and a half times or more, we tend to raise our eyebrows. And then the last thing that's characteristic across them is that they sound obvious, but they have a very strong alignment with the strength of the GP. That's an area we pay a lot of attention to trying to tease out. Is this the deal led by the right partner out of a fund?

AI assessment note: “from a business fundamentals perspective, they check a number of characteristics.”

Q What was your path from China to the U.S.?

A So I came here as a first generation immigrant, and it was actually a funny story. I applied to a school in New York, and when I went to purchase a ticket, they said, well, you're going to Syracuse. And I said, no, no, no, I'm going to New York, meaning New York City. They said, no, no, you're going to Syracuse. Turned out that I went to a place named Oswego. And so I went to SUNY Oswego, um, unexpected thinking I was going to New York City. And that's like five, actually six hours away. So when I got there, I realized that was not the place that I wanted to stay. So after a year, I got myself to Williams College and that was the beginning.

AI assessment note: “I came here as a first generation immigrant, and it was actually a funny story.”

Q Well, why don't we start with your path to investing?

A The official beginning was 2006. I had worked several years in strategy consulting and M&A advisory and monitor group when I met the folks at GGV Capital. It was an eye opening encounter to the world of venture capital. Although I didn't join GGV several months after that encounter, Glenn Solomon, partner at GGV, introduced me to Catherine Crockett, My now partner at Grove Street. So a typical one connection leads to another connection story, but the more unusual, perhaps, and personal one dates back earlier. This was when I was about seven or eight years old. My mom and dad had started a dairy business in Sichuan, China, raising cows on the farm and selling milk in the city where we lived. Every morning, my dad would ride a motorcycle Carry in the gallons of milk from the farm into the city near the apartment where we left. I would greet him, help unload the milk and start shouting the neighborhoods fresh milk for sale. And then as people walked out of their homes lining up to buy our milk. I would help my dad or mom sell people the milk and collect money. It was in the 19 eighties in China. I think our milk might have been one of the first farm to table products. We had put in almost all of our family savings in this venture and almost lost it all. As it turned out, the milk business was very difficult before efficient cold storage, everything we couldn't sell the day off, we…

AI assessment note: “The official beginning was 2006. I had worked several years in strategy consulting”

Q How do you take in all of these areas of fairly large universe and start to think about how you get to that top 10% in each?

A I'd say the guiding principle relates to sourcing is that to pick well, we believe that we need to map the universe of opportunities, triage quickly to filter out those that do not meet your criteria, then seek to meet with as many options that meet your criteria as possible and proactively approach the best teams. And we do that through cultivating a reputation in the marketplace. Building informed networks, as you would expect, and a lot of just daily hustle. One example that comes to mind, although I cannot disclose the name of it, a venture fund, for example, came to us from one of the most respected venture investors in the Valley, who we asked who he most respects. He had a pretty high bar, so he didn't have a lot of ideas. And then we ended up backing This incredible team, along with owning four other LPs, including several prominent university endowments. So that's, you know, example of marrying a carefully cultivated reputation, the right relationships with proactive work.

AI assessment note: “to pick well, we believe that we need to map the universe of opportunities, triage”

Q What are some of the criteria that you use that fits that type of fund you're looking for other than someone great recommended them?

A So in both buyouts and venture, I would say there's a set of clear criteria that define the attributes of something we look for in buyout. For example, we look for operationally intensive teams with a well-defined strategy, a set of expertise, low loss rates, A demonstrated ability to generate upside and strong alignment. And in venture, we're looking for teams led by partners who have invested in, in a meaningful way, not just a casual join in the club way, the most important technology companies, including those that are becoming tomorrows. This is part of the judgment we have to exercise to call which ones are That executes a thoughtful strategy in terms of portfolio construction, stage focus, and raising funds that are appropriately sized for the team and opportunity.

AI assessment note: “we look for operationally intensive teams with a well-defined strategy, a set of expertise”

Q If you turn over to the venture side, how is your diligence process different than what it is in buyout?

A I think underlining the process of diligence is quite consistent. The process itself has to be bottoms up, detailed. We always, for example, spend a lot of time with the manager. We always do deep references, including lots of off sheet references. We always do independent modeling work on the important unrealized investments. So we have our own low, medium, high views of the trajectory of unrealized investments and always have multiple internal discussions where everybody shares their views and votes. So those core elements of the process don't change. The specific questions related to each investment can change. So in venture versus buyout, for example, while you can Analyze the emerging driver companies that are unrealized and build models and projections and gather different facts around it. There's a lot more qualitative, pulling different sources of insight and facts and context when it comes to venture. To understand, for example, who is on the rise in terms of reputation, who is maybe Dying on the vine, may I say, that's oftentimes not obvious to the broad investor base, but we're trying to get to that.

AI assessment note: “There's a lot more qualitative, pulling different sources of insight and facts and context”

Q So what are the types or the profile of the clients that you have of these 14?

A While we have a concentrated base of clients, we serve a quite diverse group. So we work with very sophisticated family offices, large insurers, pensions, southern wealth funds, and they span the globe from the US and Canada to Europe, the Gulf, Asia. Underneath that variety, however, are some important common characteristics. The first thing I would say is that our clients are very sophisticated investors. So as either some of the largest institutional pools of capital in the world or hyper-connected families, they have great market access, great intelligent internal teams, and exceptional investment track records. As opposed to what your former colleague, David Swenson, would call the casual investors, our clients, I would say, are really serious investors. So they understand deeply the potential, but also the challenge in certain segments of the market, whether it's venture capital or low-end market buyouts, and approach them really thoughtfully. So the final common thread across them is, I think our clients tend to have a unique combination of Self-awareness and self-confidence. They are deeply aware, because they are great investors themselves, the benefits and the trade-offs of what to do in-house and when to leverage an external partner, and they are confident to operate from the first principle. In picking a manager, for example, they can focus on what should matter the…

AI assessment note: “we work with very sophisticated family offices, large insurers, pensions, southern wealth funds”

Q I'd love to dive into the diligence process, maybe on each of them. And so let's start with a mid-market buyouts. You mentioned teams with operational intensivity and helping their companies. How do you tease that out? Because it's something that oftentimes you would expect many of the managers would say, oh, we do all these things to help our companies.

A Again, astute observation because nobody, at least now, comes to market without saying they are operationally focused, even though that was maybe less the case dating back 1015 years. There was a period of time investor focus on where the source of return may not have been front and center about operational. There's a lot of things we look for, as you said, to really tease that out. One would be looking deeply into the core members of the team's prior records. So we like, for example, teams that have members that have been not only investors, but also true operators. And there are many examples of that. We look for demonstrated evidence where they have truly changed the trajectory of companies. Including sometimes near failures that were able to be saved. And quantitatively, there are things you can look for too. For example, it is usually the case that an operational intensive team tends to use also less leverage at the beginning. So if we see a team that tends to use a higher leverage at the beginning, that is a bit of a warning signal to us, because if you are trying to really impact the trajectory of a company operationally, You don't want to compound that with high financial risk, certainly not at the beginning.

AI assessment note: “There's a lot of things we look for, as you said, to really tease that out.”

Q What does a fully baked due diligence process look like and result in for you?

A A fully baked diligence process includes the elements that we talked about a little bit earlier, lots of cycles together, lots of references, lots of modeling work, and lots of internal discussions and debates. The result is a strong set of views emerging within our own team, not always consensus, but a strong set of Pros and cons that have emerged that each key members of the investment team of Grove Street are fully aware of. Because we have a quite concentrated approach to investing, picking not that many things to do every year, one of the things we try to do is to have for the high priority opportunities is to have a all hands on deck approach. Where while everybody is encouraged to source their best ideas, when we come down to a subset of those to do, it's not just one or two or three deal team members. It can be the full team that spend time. So the result is, I would say, a very strong set of clarity around the key questions for each investment.

AI assessment note: “A fully baked diligence process includes... The result is a strong set of views”

Q Once you've done the work, found someone that you think is great, it's rare that you're the only one who's done that. And in a market where everyone is trying to find the next great manager, how do you think about this concept of your reputation so that you can win over a GP in, in the event that there's scarce capacity?

A It is true, as you say, oftentimes really compelling opportunities tend to attract more capital than needed. It is, of course, however, worth remembering that sometimes the contrarian views can be correct, and even the consensus views, even when they're right, can still be diluted. If a amazing fund that should be raising one billion ends up raising two billion because investors pile in, the risk return profile may have changed. That they're not as compelling anymore. But yes, in those situations where the opportunity is truly amazing and competition for it intense, part of our special power is to sell ourselves as preferred investors. So a recent example that come to mind is a European lower mid-market buyout team. They had been backed by a number of Prominent European families exclusively. And over a dozen year period generated exceptional returns and demonstrated that this was a team that could have a lot of potential ahead of them for many years. So we caught wind of them before they decided to raise their next fund, reached out directly, and they included us in their outreach. But on the day of the scheduled call, they emailed and said, sorry, we We have to cancel it because we've decided that we're not going to take any non-family investor. We're not going to take no for an answer. So wrote a letter from one entrepreneur to another, had one of our GPs call them directly a…

AI assessment note: “part of our special power is to sell ourselves as preferred investors”

Q What if any are some of the mistakes that you see people making in the market?

A One behavior I do observe is that investors sometimes, or boards, et cetera, are influenced by a rare view mirror of returns. So in 2009, 2010, for example, you look back, the 10 years of venture return was pretty bad, and people are saying, we'll never do that again. And now it's a time where you look Back 10 years looks pretty good, and it probably will look good for a while, just because the stickiness of returns. Yet underneath that, I think there are just important changes happening across the platforms, from large ones that are going through succession and team transition, to the small ones that tried their hands and now saying, maybe this is not something I want to do anymore. I think that there's a lot of We'll just do what seemed to have made sense going on with investors. It's comforting. There's conventional wisdom. It's you should just stick to your meetings. I think on the margin and in some corners, maybe even more than just margin, rethinking how you deploy and what portfolio you built for the next decade is something I don't think a lot of investors are doing.

AI assessment note: “investors sometimes, or boards, et cetera, are influenced by a rare view mirror of returns”

Q And on the venture side, we're seeing the beginnings of IPOs at significantly lower valuations than the last round. How are you seeing that flow through to the behavior of your venture managers?

A Six months ago, I think the prevailing market view was probably that we would have to wait until second half of twenty-twenty-four for the IPO markets. People were pegging the close of the market maybe to two plus years, which is the high, is the upper end of historical window shut. Now you're right that it seems like with Instacart, Arm, Flavio, this, you know, all have filed and there are others too, that the market may be reopening. So I think we'll see a sorting of different companies, you know, Instacart, for example, at a price that's significantly less than the peak valuation. Now in the venture portfolio, they have been marked down because in between there have been prices already paid to it. And some might argue there was a buying opportunity just about a year ago. On the other extreme of it, a company like Clavio is going to be really interesting to see because Clavio has consumed in total less than twenty million of venture capital in its life. It's incredibly efficient business. So in theory, that would be, should be loved by the market and we'll see. I think there's no net change to the investor behavior. If anything, most investors probably were expecting the window shut longer. So again, I worry about the bad behavior return too soon, but I think there's enough Issues to sort out in existing portfolio that will still command a lot of tension for a while.

AI assessment note: “I think there's no net change to the investor behavior.”

Q What are some of the other metrics you might look at when you're thinking about the operational expertise of the team?

A Maybe I'll mention an example. So a fund that's based here in New York called In Tandem, it's a healthcare specialist in buy and build healthcare services businesses. The team came out of another well-known private equity firm where they were acting as a contracted management team running deals, and they did that for close to a 10 year period. With an exclusivity during certain periods with this one fund and other times bringing other investors. So they were literally acting as the CEO, the chief marketing officer, the chief legal officer, the M&A officer for each of those buy and build platforms. They did it sequentially. So in that particular case, when we talked about their experience, we spoke to the CEOs they worked with. The level of engagement when you force rank that to what a typically advertised operational, you know, team, it just stands out.

AI assessment note: “when we talked about their experience, we spoke to the CEOs they worked with”