The Exchanges

Q You touched earlier on some of the key aspects of the diligence process, and I'm curious in particular, this idea of teasing out on the investment skill side what was attributable to the person versus the organization where they were involved previously. How do you go about doing that?

A It varies by asset class. I think in private markets, it's a bit easier. It tends to be clearer in an organization who has sourced the deal, who was involved with management team, who was structuring it. And so a lot of the focus in private markets is to go to previous deal, previous portfolio companies, talk to those management teams and ask them, you know, who was responsible for, for making this happen. I think in public markets, It's much more complicated, and obviously we're often dealing with no track record, and their referencing is really what can give you some comfort, and also tracking paper portfolios, and also digging deep in questions around these skill sets that we mentioned. So let me touch on each one. On the reference side, we try and go as three 60 as possible. So you're trying to speak to ex-colleagues of this person, There's some temporal issues there if the person is still employed. So you might be talking to ex-colleagues who are no longer at that firm, or colleagues who are aware of this person's desire to start their own firm. But you also want to be talking to market participants, sell-side analysts, people who are familiar with whether or not this particular person was making the calls. And then you also want to be talking to the management teams, similarly to private equity. Go to management teams and ask them, who are the best analysts covering your …

AI assessment note: “talk to those management teams and ask them, you know, who was responsible”

Q So why don't we walk through those frameworks to start with the founders? What is the framework you use to think about how you're serving founders?

A The challenge on the founder side is that a lot of the skills that make you a great investor are typically not the ones you need to build an investment firm. Sometimes you'll find founders that are gifted at both and they're like unicorns. So if you find one, you should immediately try and partner with them. Great investors are typically contrarian and you need that to generate returns. You have to see things others don't. You have to believe something that others don't. And that involves strong analytical skills, being very detail oriented. Whereas successful business builders are consensus builders, they have strong interpersonal skills, they think big picture, they have cross-functional breadth. And that cross-functional breadth is something that doesn't make itself evident upfront. Investment firms are really two very different things meshed together. They're a portfolio, and they're a business in the business of managing that portfolio. And that distinction is often lost, I think. So to address that challenge, We figured out we have to develop an operating partner platform. So, sort of private equity, venture capital inspired. We built a team, we built resources such as playbooks, how-to guides, we built monthly processes that would provide founders with hands-on business building support. And we think about it in two buckets, operations and distribution. So let me walk yo…

AI assessment note: “We figured out we have to develop an operating partner platform.”

Q Curious on the allocator side, you mentioned as the other key stakeholder. Most of the time you're in front of an investment manager, as you said, they are driving what they do, their strategy, they're hoping to attract capital. How do you think about it from the allocator's perspective and how you're trying to serve the allocator?

A I think there's three obstacles to investing in an emerging manager from the allocator point of view. First is how do you diligence these emerging managers? Second, how do you manage your own risks as an allocator? And finally, it's how do you create alignment when investing with an emerging manager? So let's take each of them in turn. On the diligence side, the way we have come to think about it is that when you're underwriting an investment in an emerging manager, there's three areas that you really need to dig into. There's investment questions, there's operational questions, and there's commercial questions. So in terms of investment, there's a few things that are particularly important with emerging manager investing. One is the evolution of A founder has to make from being an employee, being an analyst, being a VP, you know, depends in which markets you're playing, but essentially you're the number two, number three. And you're evolving into the number one, into the founder. And one issue is that the skills that you've been using as a number two aren't necessarily the same ones that you need as a number one. So let's take public markets as an example. As an analyst, you tend to focus a lot on security selection, sort of fundamental analysis. But as you become a portfolio manager, you also need to be good at portfolio construction, timing, sizing, and you need to be good a…

AI assessment note: “there's three obstacles to investing in an emerging manager from the allocator point of view.”

Q How did you go from Bain to founding Stable?

A So it's 2008. The world is on fire and I decide this is the best time to start a firm because The incumbents are completely overwhelmed by what's going on. Office space is cheaper. Salaries are cheaper to hire people. And luckily I'm armed with this necessary but not sufficient condition for entrepreneurial success, which is a very healthy dose of self-confidence and delusional optimism. Because I think if you're not delusionally optimistic, you'd never start a business. And that's how the idea for stable is born. So I felt I knew the investing side of the equation and the operational side of the equation. But I was really missing access to capital. And you can have a great idea, but if you don't have capital to put behind it, it probably just stays an idea. So the first thing I had to do was figure out, okay, who do I go for capital? And who are the people that are interested in backing an emerging manager? And that's what took me on the journey of figuring out what are the challenges founders face when building an investment firm. And that's what inspired the frameworks we use today, which is We care about two stakeholders. We care about the founders on one side, and we care about allocators on the other. And we had to understand what are the challenges the founder faces, and what are the challenges the allocator faces. And the founder ones were more intuitive to me as a foun…

AI assessment note: “So it's 2008. The world is on fire and I decide this is the best time”

Q The part of that distribution challenge is an information gathering one where it'd be easy if you were backing someone in a certain strategy and you knew this group of allocators is interested in that strategy now. How do you gather that information so that you have it in your hands and can deliver that to someone that you're working with?

A First of all, I'd say it's not an exact science. Second, I'd say what people are looking for changes more rapidly than you'd think, given everyone espouses a longer term view. But one tool that we use a lot is our CRM system. So there we have 15 years of interactions with LPs. And as you get to know LPs, you really get a sense for the style of investing they have The types of founders they like to back, the stage of the life cycle of a firm that they like to get in at, and all those things helps build a profile. So I think that fundamental profile is more important than necessarily what they're looking for at any one time. I think there's sort of a core preference set of attributes, and that varies by investor, but you also can make vague generalizations by investor type, be them endowments and foundations, be them family offices, be them funder funds, big pensions. And so what we try and do is we try and create pre-briefs for our partners on the investors that are most likely to resonate with that founder's investment strategy. And it also involves having touch points with all these allocators. We spend huge amounts of time just comparing notes with other allocators and figuring out Okay, what types of investment strategies are now deemed to be more interesting? It tends to be a bit of a rear view mirror exercise. What we find incredibly powerful in trying to predict which inv…

AI assessment note: “one tool that we use a lot is our CRM system.”

Q when you get outside of the bounds of the relationship that you are having with the GP in any of these strategies, And then start to think about other allocators who need to invest in those funds for them to grow. How do you think about those issues and in the way that you want these firms to attract capital that still may have, for example, that adversarial GPLP relationship?

A That's a very difficult question to answer, but I'll try and answer it with some examples. When I started the business, I thought that I would be convincing my founders to keep fees high, for example. And actually, it's been the opposite. I find a lot of my time is coaching and sharing my own experiences building Stable with the managers we back around the fact that you have to be a long-term thinker. And you have to think about the relationship in a less monetary way and in a more strategic way. Let me give you an example. If a large institution comes and wants to invest with you fairly on in your life cycle, particularly large institutions like pension funds or sovereign wealth funds are quite fee sensitive. But the advantage of partnering with such institutions is that they're very Large. They continue growing. They're very long-term. We find them to be more understanding in periods of underperformance because they are so long-term and they have less pressures in terms of clients or stakeholders that some of the other LP segments might have. So it's a very valuable relationship on a long-term basis. And as I was just mentioning, growing with you is what you really want to try and achieve As a manager. And these are the types of institutions who, as you grow your investment firm, can also enable you to do new and exciting things in adjacencies to your strategy. So I find myse…

AI assessment note: “I find a lot of my time is coaching and sharing my own experiences”

Q How do you think about that in the context of the increasing use of technology across industries, and in this case, as it applies to asset management and the need to have resources to be able to invest into the next frontier of technology?

A So clearly technology is disrupting investing, and we think about it in terms of how it can produce more data to make better investment decisions. We think about it in terms of how can you use these technologies in your own firm to make better decisions. And then we think about it in terms of How is that technology going to disrupt The businesses that each strategy is investing in. And where we're focusing our efforts is on the middle part of that value chain, which is really about what type of technologies can we use to run better investment firms. And a lot of that has to do with data acquisition, data management, and essentially knowledge management. So what's kind of fascinating is that although investment firms do a lot of work on the investments that they make, they often don't take the same approach and the same critical and analytical lens on themselves. So what we find is that in investment management, there's actually quite a gap in terms of technological use for the business of investing. One thing that we're doing is we're trying to get involved with firms that are in the invest tech fintech space, which are firms that are allowing founders to be finding better data to inform decisions, but also to manage that data better internally. So it's about tracking how the idea came on the radar, tracking what work was done, tracking how it actually went, doing Post-mortems …

AI assessment note: “we think about it in terms of how can you use these technologies in your own firm”

Q now back to the show. I want to take some of these frameworks and put them into practice of how you go about it. So let's just start with sourcing and the identification of managers. So you're looking across asset classes in alternatives. So, you know, hedge funds, private equity, venture capital. How do you start to figure out which particular managers you want to take a close look at?

A Yeah, so taking a step back, we think of sourcing in two ways. There's proactive sourcing and reactive sourcing. So reactive sourcing is fairly straightforward. We get approached with tons of ideas. Most of them are lower quality, but there's still some diamonds in the rough. And then we have this proactive approach, which is a bit like that prepared mind approach. We study areas where we think there's higher return potential. There might be structural reasons why we think a founder might have an edge. And then our philosophy is let's start sourcing as early as we can in the founder's journey to start a business. You put yourself in the founder's mind. This is similar to my experience building stable. What are the first things you do when you want to start your own investment firm? You think about, okay, I should talk to a lawyer about the fund structure. I should talk to a compliance consultant to see how much the regulatory fees and how long the timeline is to get regulated. Or you want to talk to people who help design logos. And pick colors. And it's really about empathizing with that journey. And the sooner you can get involved, the sooner you can build conviction in that manager, the more time you have to spend with him or her, and they have time to spend with you. But on top of that, you can also help them not make the usual mistakes we see with emerging managers. So a l…

AI assessment note: “we think of sourcing in two ways. There's proactive sourcing and reactive sourcing.”

Q How about on the investment side, your biggest investment pet peeve?

A It has to be when you observe a failure in someone to change their mind when the evidence changes. And I think we've been seeing a lot of this very recently as there's more and more esoteric reasons why markets are moving and companies are succeeding or failing. I think stubbornness is fantastic when you're fighting a majority that has a different view from you, right? Like that variant perception does require faith in what you believe. But when you're just fighting mounting evidence against your thesis, I think the issue is Our industry tends to penalize changing your mind because it's seen as some sort of weakness or vulnerability, but actually changing your mind is the most logical thing ever if the evidence is changing as well.

AI assessment note: “It has to be when you observe a failure in someone to change their mind”

Q Where do you think stable heads over the next five or 10 years?

A The dream for Stable from the beginning has always been, we would love to back talented founders who want to run their own investment firm, and we would love to be able to do that no matter what type of strategy, in what asset class, in what sector, in what geography you want to do that. And, you know, finally, after 15 years, we're an overnight success, and we feel that we've built enough trust with Our investors and our partners to be able to do that. What I would love is to just be able to be even more helpful to those founders, and that means investing in our operational support and our distribution support and our technology, because as you scale, I think a lot of that founder coaching and help is very personalized. We've invested A fair bit of time and money thinking about what are the tools that we can develop in order to be better partners to our founders. But at the same time, we can always do more. What I worry about is Are we doing all we can do to maximize the probability of success with our founders? So what I would love to see us doing over the next few years is investing further in our capabilities to help the founders and also be able to support them in that journey. And all of those things require fresh capital. They require potentially capital in different parts of their capital structure, working capital, GP commit. And, you know, we'd love to be able to Help…

AI assessment note: “what I would love to see us doing over the next few years is investing further”

Q Where did that take you from your time at Bain?

A So, and they're sitting at Bain, and I'm thinking, I'd love to do something of my own, to finally be a founder myself. And disclaimer here, I think I'm going to give you the retrofitted story, so it sounds linear and hopefully easy to follow. But let's be clear, it sounds like we always knew what we were doing. That's not the case. I think most progress we made was through trial and error. You pilot something. It doesn't work. You pilot it again. It doesn't work. And then finally you, you figure it out. You just go big with that continually tweaking to this day. We still improve every day, but not only is it retrofitted, but I have a confession to make, which is I was at bait and I was thinking, okay, I'll try and build my own business, but I need a hedge because I had no confidence it was going to work. And on top of that, there were lots of technical aspects to investing that I felt I was missing, you know, the statistics, the econometrics, the options, pricing, all these things. Things that people talk about, and you feel you're not dangerous enough to ask them questions about. And my hedge was, I'll go into an MBA, and if it fails, I'll go back, find a job, and instead of saying, hi, Mr. Employer, I went to start an investment firm aimed at backing founders to have their own investment firms, but I failed. Here I am. Give me a job. I'll say, look, I'm now super knowledgeabl…

AI assessment note: “And my hedge was, I'll go into an MBA, and if it fails”

Q I'm curious when you start thinking about the types of people that have been successful, these number twos, number threes that are now going on to lead a firm, what are the characteristics of those people that you found are conducive to future success with more consistency than others? Not that it's ever perfect.

A Yeah. The million dollar question. So this is an area of focus for us since we started the firm. Absolutely fascinating. I think in general, there is a lot of weight in diligence processes put on the investment strategy. But at the end of the day, we're investing in people. And if you have a long-term view that you're going to partner with a person for 1020 years, I think understanding the person Is as important, if not more than understanding their investment strategy. And I would argue in some ways, the core characteristics of the person are more likely to stay the same than that of markets. So from a rational point of view, the one constant is the person and underwriting their behavior in 10 years time. It's probably an easier thing to do than underwriting how their markets are going to be in 10 years, which is an interesting thought experiment. Since the beginning at Stable, We've put a lot of effort into what we call manager background due diligence, and it has several components, but the objective is to identify certain backgrounds and certain personality traits in people. And we have a data-driven approach where we look for evidence around which personality traits and which backgrounds are more predictive of future success. So we have tools that we've developed around really getting to know the person very deeply, and this is a privilege that we have as a firm, because I…

AI assessment note: “the objective is to identify certain backgrounds and certain personality traits in people”