The Exchanges

Q What are some of those things that you've learned to look for?

A So for us very specifically, the things that we like fragmented industries, we like things that are owned by mom and pops. One of the first thing we look for is who owns an asset. So boat marinas is a good example. We've been invested in boat marinas for a long time. If they're institutionally owned, it's probably not for us. If there is a big PE firm or a big hedge fund that owns these things, that's not where we like to play. The people that we see in our deals are family offices and high net worth individuals. That's a good place for us to start. The second thing that we've gotten really good at identifying, but is non-correlation. Can we be convinced quickly that some asset is not correlated? And really we think about equity markets. The main factor that most of our clients have running through risk factor that have running through their portfolios is equity. And so we try to look for things that are not correlated with the equity markets. How much capital is in the space? We obviously like to look for things where there's not a lot of capital in this space. And then very quickly we get to who's the right operating or management team. We've gotten a lot better over 10 years at figuring out, okay, if this is an interesting idea that is fragmented, there's not a lot of capital to it, it's not correlated, it can meet our return hurdle, who's going to operate and run this busin…

AI assessment note: “we like fragmented industries, we like things that are owned by mom and pops”

Q What goes into understanding something new in your process? It comes across the desk, it fits some of these heuristics that you've developed, and then you have to dive in.

A So I think the thing that we think about most is our single biggest advantage is time. If we're doing our job correctly, We are not looking at assets or looking at deals with a ton of competition where you have to have an LOI or a term sheet in within two weeks and a deposit down within three weeks. Otherwise you're going to lose the deal by definition. That's the wrong space for us. And so when we think about finding these new spaces, it takes us a lot of time to underwrite them. Whiskey as something that when that came across our desk six years ago, we knew nothing about investing in whiskey. Literally nothing. Three different groups pinged us and said, hey, you got to look at what's happening in the aging curve. I didn't even know what the aging curve was. I didn't know anything about what it meant. So that took 18 months to underwrite that deal in which you are spending a full year and a half talking to everyone that you can in this industry. You're talking to cooperages. You're talking to brokers. You're talking to brands. You're talking to everyone that you can. If we don't have time on our side, we can't understand a new industry and we can't get there. Oftentimes we throw deals back because we say we're just not going to get there. There's more capital that's there to close a deal before we're going to get there. And that's good. We say that doesn't work for us. So I th…

AI assessment note: “took 18 months to underwrite that deal in which you are spending a full year”

Q and more. In the AI era, asset and wealth management firms moving to Ridgeline gain a decided advantage. That's why customers call it miraculous, game-changing, and an awakening. If that's not how you would describe your investment management tech, request a demo at ridgeline.ai. And now, back to the show. But once you've found the space and the operator, what have you learned about how to put these vehicles together?

A The way that we structure our deals has certainly changed probably the most over the 10 years. I hearken back to what we think is our advantage, which is time and lack of competition. So we try to take advantage of that in our structuring. So first there's two pieces of structuring. There's Minimizing downside, and then there's maximizing your upside, and you can potentially enhance each of those through structuring. Unprotecting the downside, because we're looking at deals where there's not other capital around, we can do a lot of things to our cash flows and make them more senior in the stack. We can think about things like waterfalls. When do we get paid and how do we get paid in our seniority in the waterfall? We're not in competition with other private equity firms and trying to offer the best deal. We're the ones offering the only deal. And I think that has become helpful over time. On the maximizing the upside, we've learned a lot of lessons over time. And typically we tend to be more asset-based investors than we are operating company investors to begin with. And when we find assets that are really interesting, and let's just use as an example here, our boat marinas, those are really just assets. We think through, are these assets more valuable On their own. And whiskey, if it's fine, if you don't really need an operating team to do what you need for the value of the wh…

AI assessment note: “So first there's two pieces of structuring. There's Minimizing downside, and then there's maximizing your upside”

Q So you've now just come across 10 years in business. And I'd love to do a reflection of what's different now versus then. And I guess starting with the weird alternative, how do you think about it similarly or differently now than you did a decade ago?

A The original premise of us starting the firm was really that, and I'm going to put this in air quotes, that alternative assets Are not alternative anymore. And this was 10 years ago. If you think about private equity, it's a nine trillion dollar industry, hedge funds, three to four trillion dollar industry. And so they got this moniker and call it the late eighties, early nineties as being alternative. And they were, and you fast forward to 20 14 when we started our business and now 20, 24. And I think it remains the same that those are not alternative. And in fact, they've grown significantly since we started the business. We think about what we do today as trying to go back to the basics of finding today's alternatives. It's the same as when we started. I think this has not changed. What was the original promise of alternatives? It's twofold. It is first, by being early to finding an asset or an idea or an investment, you can extract outsized returns before the world finds them. And secondly, finding assets that have non-correlated idiosyncratic risks or diversify your portfolio is a worthwhile enterprise. And so that's what we do today. And that fundamental essence of it hasn't changed in 10 years, trying to find today's alternatives.

AI assessment note: “It's the same as when we started. I think this has not changed.”

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

A Without a doubt, my two partners, Ashley and Gus. So for different reasons, and as I mentioned already, Ashley and I have known each other for a very long time, but she is responsible for most of my career. She's had a very similar path to me. We both started our careers in investment banking, but she got me a job at Stanford Management Company at the Stanford University Endowment. I had left finance to go to Capitol Hill for a while, and she called me. She's like, you need to come to, I was like, what's an endowment? I don't even understand what they do. She's like, no, come here. She had been a soccer coach. She played soccer at Michigan and had been a soccer coach at Stanford. She'd also been in investment banking. And so she just helped get me on the track, but she's also just been an incredible friend for my whole life. And so Ashley and I've worked together since 2001. So for 23 years and known each other since eighth grade and Gus I mean, just an absolutely incredible business partner. I've worked with him for 18 years and his skillset around process and process improvement and essentially has been for a long time our de facto CFO and COO. He's an incredible investor as well, but he's also just really good at making sure that the trains show up on time and run efficiently and he's amazing at it. He does it with a smile every day. He's just been an incredible partner.

AI assessment note: “Without a doubt, my two partners, Ashley and Gus.”

Q Yeah. Why don't you go through the lessons learned?

A I think a couple of things. So, first and foremost, the best people in the world in any industry always leave behind a wake of superfans. People that just Love them, are shouting from the rooftops about them, and it's not hard to find them. When you have to really search to find someone to give a reference, or you're only able to find good references from the references that they provide, it's probably not the right person. Another thing that we've learned pretty quickly is the quality of a work product that comes out of an individual or a group is highly correlated With their success executing whatever they're going to do. And I say this because oftentimes when we are pursuing a management team, for them to convince us that they're the right ones, they have to deliver work product to us. Some are really, really good. They are succinct. They are professionally put together. Others are just haphazard. They might speak and talk a really good game, but they're materials. They're actual work product. Is all over the place. I hearken back to the Mark Twain quote, which is, I didn't have enough time to write you a short letter, so I wrote you a long letter. And we see this all the time. Well, people will get presentations from people that are like, 80 pages. They can't succinctly get to either why they are good at what they do or why the opportunity is there. And I think quickly sayi…

AI assessment note: “first and foremost, the best people in the world in any industry always leave behind a wake of superfans”

Q As you reflect over these last 10 years, what do you think is true today that you didn't back then?

A That this was gonna be easy. So, when we first started this business, we had a list of, I think it was, 300 LPs, and we're like, yep, they're all gonna love this idea, and we're gonna go out to talk to them, and they're all gonna invest. And we stepped off the cliff, and we started this business, and we still have that list. Of that list, I think it was close to 300, one, one of those people actually invested in our business. Actually, we've always used a corporate coach since the beginning. She talks about this a lot and entrepreneurs go through this phase. We were in this uninformed optimism phase and everybody has it because you don't start a business. You don't do anything new if you don't have the uninformed optimism. And very quickly you get hit in the face with the informed pessimism. And then the question is just, can you get through it on the other end to the informed optimism? And obviously we were able to get through that, but still we love what we do, but it's not easy. We have a very specific piece of what we do, which is like in this niche weird space, there's a lot of things that are harder, like finding deals. There's no brokers in this space, so that's hard. Structuring deals. We're not a buyout firm that just uses the same structure or similar structure. All, every single structure has to be bespoke and unique. How you exit our deal, everything is difficult an…

AI assessment note: “That this was gonna be easy. So, when we first started this business”

Q How do you think about the second order correlation?

A Yeah, without a doubt. So the first second order correlation piece that we think about most often is exit. And we might find the most non-correlated business and its cash flows are not correlated with general GDP cycles. But if we own that asset or that company and we want to exit it to another private equity firm or take it public, even though we might have a non-correlated cash flowing asset, a general lack of liquidity like a 2008, 2009 environment would bring on the secondary correlation effect that says, great, you have this non-correlated asset, but you can't do anything with it now and you can't sell it. And so we need to make sure as we think about portfolio construction, we have lots of different ways to exit our assets. So a lot of things that we do are self liquidating. Most of what we do, we don't have to sell to other private equity firms or take public, but there are some things that we do. So we want to have a diverse set of these things. But secondly, and most importantly is if that is the case where we're in an environment where there's not a lot of liquidity, that it doesn't really matter for us. We'll just run the business. It's a non-correlated asset. The fact that we're probably highly correlated are illiquid environments and also GDP or the economy is generally not doing as well, and that's okay. Actually, those environments can be fine with us. We just ru…

AI assessment note: “the first second order correlation piece that we think about most often is exit.”

Q How about something like sports, which has become a very topical investment area? How do you attack something like that where there's capital coming in different parts, but you want to find a courtier-like investment?

A I think it's very similar to what I just described. So let's start with why do we like sports? What is the downside for us about sports is there's lots of big funds doing things and buying big leagues. So we got to find our place within that ecosystem. A couple of themes around sports is emerging leagues and emerging sports. So one of the deals that we are looking at right now and close to doing something in pro triathlons, sports So much hinges on media and distribution rights in sports, and so you either find opportunities where those distribution and media rights are in place and provide predictable cash flows over time, or you find interesting places where those don't matter as much, and there's other ways to get predictable cash flows, and that's what we really like about triathlon. Triathlon is very specific to the league itself, but oftentimes you're assessing, do you want to own teams? Do you want to own leagues? Where does the value accrue? But this idea of emerging sports is interesting to us. We're also looking at some things in badminton. We're looking at some things in cricket. The other theme that we like within sports right now is new formats for today's consumer. I've got twins that are nine and an 11 year old. The way that they consume sports today is totally different than the way that I consume sports in the early eighties. My kids cannot watch the nine innin…

AI assessment note: “A couple of themes around sports is emerging leagues and emerging sports.”

Q So when you went from years ago investing in funds to now investing in operators and these niche opportunities, what are the similarities and differences in assessing an operator?

A In our previous lives, we used to be allocators, so it feels like many, many moons ago. And then very early on in Cordillera, we did a small handful of opportunities because we were writing smaller checks, investing in other funds. The thing that I would say is, and it's what has been true for all three of me and my two co-founders throughout our careers is identification of people. When you're an allocator, the first thing you start with is a 30,000 foot view of where you want to allocate your capital and why. And we do the same thing, but it's just at a much more granular, niche, weird spot. Like, do I want to be in whiskey? Do I want to be in wireless spectrum licenses? Do I want to be in sports, et cetera? And if I do, who am I going to partner with in that space? And that feels very similar to being an allocator. So you first top down, figure out where you want to be and why.

AI assessment note: “who am I going to partner with in that space? And that feels very similar”

Q What are the most common specific examples that come up of something that hasn't gone well in the past that when you're underwriting a new deal you're referring to?

A Most of the time, I would say, we look back and we say, did we get the thesis wrong? Did we get the execution wrong? Or did something exogenous happen that we couldn't control? The vast majority falls into the middle bucket. We got the execution wrong. Either We weren't aligned perfectly with the operating team or the management team that we had somehow in the structure of the deal. Secondly, we just picked the wrong people. They had a really good idea, but they couldn't execute on it. Or sometimes we didn't bring the right resources to bear for that team. And I think we've worked really hard over the 10 years to develop internally the resources to bring to bear to those situations, but also Externally. There's a lot of interesting things and people that we now are kind of specific to our weird spaces that we can reach out to, to bring those to bear as well. So I would say the vast majority of things that we think through that didn't go well. We were smaller at the time and didn't have the resources to bring to bear to go get the A-team in the space. Our firm has evolved quite significantly since then, and as we are Writing larger checks into these opportunities, you can bring the A-team to bear, which is helpful.

AI assessment note: “The vast majority falls into the middle bucket. We got the execution wrong.”

Q I'm curious how you risk manage These situations, if something goes wrong, it's easy to see how it's self liquidating or it's a platform and it's growing, but you're investing in something that other people aren't for whatever reason. What do you do if it's not working?

A We have enhanced our asset management capabilities at the firm significantly over time. Sometimes they can be very familiar situations that anybody can jump into and run. But as you point out, we often find ourselves in different situations because Nobody else is involved in these companies. And this is where us building up our own internal asset management capabilities and a little bit of pattern recognition and secret sauce around what are the typical problems that people in our space run into, which can often be around people. How do we jump in and augment the people part of it? And that's where 10 years of pattern recognition of being in, we've seen this, Being humble around, man, we really screwed that one up last time, and we didn't do that right, and we didn't motivate them in the right way. How do we learn from that? And I think the humility around the things that we've screwed up, even in our investments that go really well, nothing goes perfectly. So like, hey, that one looks like that old deal. When we did that, this went well, but this didn't go well. Let's do something different here. And the same thing works When we have something that's not going well, be like, hey, it's got echoes of the other thing that wasn't going well. How do we manage that?

AI assessment note: “building up our own internal asset management capabilities and a little bit of pattern recognition”