The Exchanges

Q So what was your time at Stone Point like?

A It was trial by fire. I joined in August, 2008. Obviously there was a lot going on at that time. You had AIG and then ultimately Lehman a month later. We were looking for the first couple of years at the carnage in financial services markets. I was in particular focused a lot on mortgages. We ultimately bought a business that sold foreclosures at auction. That was one of the more successful investments at Stone Point made during that era. It was an incredible training ground because probably a year into that time period, We'd had a week where a number of very prominent folks in the financial services community had come through looking for capital or looking for advice. Stone Point as a whole had Chuck and Steve and Jim and this incredible group of senior executives. I worked particularly closely with Nick Zerbeev and Aga Khan. They were great mentors and taught me a lot of what I know about investing. And I remember I was sitting in a meeting, there was this other group presenting, and I thought to myself, this is the peak. Sitting in that room with capital behind you and the ability to effectuate a transaction was as good as it gets. When you can be a principal investor, it's an incredibly exciting opportunity, and as a fiduciary, it carries a lot of weight, and so they had a lot of trust in me. I was there for six years. I learned a ton when I was there in terms of how to pre…

AI assessment note: “It was trial by fire. I joined in August, 2008.”

Q After this run at GEM you've had for a while, I'm curious as you reflect back on your experience in private equity, how does that inform how you might think differently about manager selection? It could be specific to buyouts or it could be across the board.

A Where my views tend to be more out of consensus with smart industry peers, I probably cover 25 or 30 that I talk to on a regular basis, and say when there's a big source of difference, I tend to weight the quality of the game the manager's playing more heavily than most do. Most of the endowments I talk to tend to say we're looking for the best people, and the quality of what they're trying to do, or how hard it is, or the base rates around whether others have had success is maybe of a secondary Importance to them. Look, we want the best people. We want to back the best bet. All that is still true. I would say part of my algorithm of whether decide whether a firm is an attractive investment opportunity is if you're pursuing something like corporate carve outs, which over time has been a very rich gold mine for a number of private equity firms, that's a great starting point for generating strong returns. If you're pursuing oil field services, that's been tough. I place a strong weight on the neighborhood as much as the house. Relative to a lot of other folks who tend to be, I think this person is wonderful, trained well, very smart. Especially in private equity, you meet a lot of folks who look good in a blue suit. We're trained to buy A plus assets and A plus auctions at very high prices with a lot of leverage. And that shows well to a committee. People like that. It feels good…

AI assessment note: “I tend to weight the quality of the game the manager's playing more heavily”

Q How did you find that transition from GP to LP?

A At the tail end of my time at Stone Point, we had raised Fund Six, and so that was a five or six billion dollar fund. So it was a meaningful step up in size. It had a lot of success. As part of that, I was the mid-level investor they would bring to LP meetings to say that I was happy in my job and that, you know, we were properly staffed, all the things, they've got to check that box. So probably six months before I left Stone Point, it was the first time I'd meaningfully engaged with our LPs, and I was impressed with their dedication to their missions, the depth of their work. They varied in shapes and sizes and what they were focused on, but they were people that cared deeply about doing a good job for their institutions. I had a sort of abstract version of what an LP did before, and I had loosely positive interpretation of that, but I didn't really know. And as I got to know the folks that were serving in that role, it got me more comfortable that this was a role where it would be different in the sense that instead of being in one narrow part of the world where you knew a lot about one thing, you could actually see everything and you could be looking across a much wider swath of things. That was exciting for me. When I moved over, I spent the first six months studying the industry because I didn't know anything about being an LP or what that meant. I was looking at all sort…

AI assessment note: “When I moved over, I spent the first six months studying the industry”

Q Well, Jay, I want to make sure I get a chance to ask you a couple of closing questions before we wrap up. What was your first paid job, and what'd you learn from it?

A I started working when I was 15, and I took two paid jobs. The first was I was a cashier at the local Eckerd Drugs, which was, as I learned, a terrible business. Later bankrupt, but was a real learning experience for me. I also, living in rural Georgia, was running a little lawn care company as well, where I would mow the lawns. I remember I had one weekend where I worked the morning shift both days at Eckerd, and then I was mowing lawns in the afternoon. I got home, and I was telling my dad just how tough it was, and it was hot and thin in Georgia at the time. He said, yeah, how'd you feel about that? And I said, yeah, it's just tough. I'm not sure if this is what I'd want to do forever. And he's like, good, get your education. So that was an important lesson for me of, I know what I don't want to do going forward, and that was an important motivator in the future.

AI assessment note: “The first was I was a cashier at the local Eckerd Drugs”

Q I'd love to turn from buyouts to venture capital. Very different market. How have you thought about an approach to manager selection in venture capital?

A Well, they are cousins on the asset allocators spreadsheet. They are vastly different industries in terms of how they operate. It's a power law business. Eighty-ish percent of the gains come from 15% of the funds. I find that since I started in the industry in 2014, the industry is really bifurcated now into these mega funds that are playing a very different game than the rest of the venture industry is, and so I'm just going to put those to the side for a minute as a separate issue. In terms of backing emerging managers in venture, Most of the folks we see are coming from one of two places. They have been operators themselves working at a well-known tech company, or they are spinning out of some sort of existing investment firm and pursuing the model. If you look over the arc of time, folks coming out of either of those situations have been successful. We will certainly look at and evaluate both. It's worth observing in venture that it looks very different from a life cycle perspective than in buyout because these young people are starting these companies because I think it was Paul Graham who said, The thirty-five-year-old knows too much to ever launch the big hairy audacious company, and the twenty-two-year-old doesn't know any better. So you tend to see these disruptive companies started by young people. If you look at who funds them, it's people who look like them. So a lo…

AI assessment note: “In terms of backing emerging managers in venture, Most of the folks we see”

Q The hedge fund market in particular has gotten much more concentrated in pod shops. It's just a fee insensitive. They're able to pay talented managers in their style quite a lot of money. Where have you found the emerging hedge fund managers that you wanted to back?

A It looks a lot like buyout. We will occasionally see the person who is so passionate about investing that the doctor who managed money on their own and then found outside capital. That will happen on occasion. We've backed some talented people who look like that. In almost all the cases, though, it's an apprenticeship business where you've trained at a good firm. You've been shown what good looks like from a research perspective, and most importantly, from a portfolio management perspective. Some of the portfolio management guidelines, thinking about risk, how to manage your emotions, those are things where usually you have to learn those through observational inputs by working with a PM. I would say it works very similar to buyout in that, you know, loosely track and in many cases invest with a number of successful public firms that over time produce spinouts. And if you look at a lot of the day one launches that we've backed, a lot of them are folks who have come out of firms that we had supported previously, where we have some perspective on the now new PM in many cases, what the pros and cons of that person look like.

AI assessment note: “a lot of them are folks who have come out of firms that we had supported previously”

Q In a world last 10, 15 years where the public market indexes have been so strong, How have you continued to refresh and underwrite and re-underwrite different hedge fund strategies, particularly long, short?

A The first thing is we're looking for folks that are doing work on the short side. That has gotten harder and harder over time. We're living through another era now where meme stocks are going to the moon, and so the more short of the stock, the more it's being put up on Reddit and Robin Hood and places like that. That game has gotten a lot harder over time, and so we're looking for folks that are trying to generate alpha on the short side, not just pursuing closet beta in that area. We've seen where for a long time managers had a view that I'm not being paid to own Apple. I simply cannot do that. That was NVIDIA or pick your big cap stock. The view of many of the managers, until they'd gotten much larger and had no choice, that was out of their sweet spot, not something they could pursue. More recently, we've seen a willingness to look across the spectrum. We're looking for any new long, short talent. We're first screening it based on strategy, opportunity set, and then terms. We might say, for example, we don't need more biotech right now. We don't do discretionary macro or We really liked the strategy, but it has a five-year lock. It wouldn't work for us. We're mostly hunting. We don't take a lot of inbound ideas. We generally start with what we're looking for. Once we've screened that out, then we're getting into the thornier issues of what's their analytical edge in some fo…

AI assessment note: “We're first screening it based on strategy, opportunity set, and then terms.”

Q I'd love to circle back to something we talked about early on, which is the owner-operator mentality. Now that you've been in the seat and involved in running the business, and you reflect back on that initial mission, Where has being an owner operator met your expectations and what you wanted to do with your life?

A It's been as rewarding as I anticipated. We have over 80 people at GEM and I feel a great sense of duty to help build and grow the firm so they can be stewards of it in the future. That intrinsic motivation has been as exciting and motivating as I would have anticipated. I have strong views on things and tend to want to move fast on ideas when we want to pursue them. I really like the agency of being able to say, hey, this is a new opportunity that we should pursue. And let's go do that. The beauty of having a small independently owned partnership is that we can quickly come to consensus that it's either a good or bad idea. When we do, you have a lot of agency to then go and pursue that. If you step back, in this role, you get to own and run a firm, talk to the smartest people in the world, work with smart colleagues you talk to every day. I can't imagine a better job, honestly. I know I said, I thought I was at the peak when I was in my second year at Stone Point, and I loved my role there. I've been somehow even happier in my role at GEM because that sense of Ownership and agency has been more fulfilling than I could have been managed. To be clear, it comes with a lot of pressure. This is a competitive market. There are all sorts of crosswinds. Obviously, you've talked to other guests about retails coming into parts of our market and consultants doing this. There's all sorts …

AI assessment note: “It's been as rewarding as I anticipated. We have over 80 people at GEM”

Q How did being a military brat shape you both as a kid and then throughout your life?

A As a military brat, you learn pretty quickly to tolerate uncertainty. You're constantly being put in positions where I think my dad retired when I was in fifth grade, fifth or sixth grade. And so all through elementary school, we would move every year. So we lived in Texas and Louisiana and Germany and California and Rhode Island. We were in a bunch of places. You just got used to making new friends and just figuring it out. Both my parents, God bless them. We're in the service. They're both are veterans. You just learn to deal with uncertainty. You learn some grit. Because when you're going to a new school and you just made friends and now you're going to the next one, that's actually served me really well in investing. Being willing to sit with discomfort is something that a lot of folks struggle with. And I'm not saying it's easier. I always am able to do it, but that upbringing has been helpful for me in terms of living with uncertainty and discomfort and being able to soldier through it on to higher and better places.

AI assessment note: “that upbringing has been helpful for me in terms of living with uncertainty”

Q How do you put together the manager roster in both?

A We're life cycle investors. We love doing fund ones. We love doing fund twos. We last year committed to a fund three from one of our early independent sponsors. So we've now got data points of going for a long period of time. That was a fund that was north of a billion dollars. So they're getting up there in size. We have some broad categories that we use within the portfolio. So within buyout or private equity, maybe to start there, you've got middle market and large cap, which is going to be higher leverage, higher prices, higher quality companies, more pro cyclical. I might argue more liquid in the sense that if you ever needed to sell those positions, they're more known flow names that you could get out of. I think they have a role in the portfolio and certainly have done well over time. For most portfolios, they've beaten public stocks and generated some form of excess return. You have what we call small buyouts. So that would be those fund one, two, three, the more emerging manager type situations. You're looking for excess returns in that market. That's the sweet spot of that investor's career when they, 38 and they spun out and they've done independent sponsor and then fund one, fund two. We always joke, you can raise money for a long time on good early results. You're never more aligned with a sponsor than you are in that fund one era when they want to have that stamp.…

AI assessment note: “Our portfolios are going to be a mix of mid and large cap, small buyouts”

Q I'm curious, given the challenges of the public markets and hedge funds being the epitome of active management, which has been under pressure for a while, why do you think there's been less success on the long only emerging managers than hedge funds?

A If there's a directly comparable, fully liquid benchmark that produces strong returns over time, there's not a lot of tolerance for being behind it. In many cases, there are, I don't know, a couple of thousand stocks within Acquia, maybe more. And most of the long only managers that we invest with are going to have a fairly concentrated portfolio of fundamentally driven investment decisions. Call it maybe as low as five or six and up to maybe 20 or 25 kind of thing. In most cases, they have very wide tracking error versus that index, which is by design. The nature of their structure is such that we're looking for excess returns. It also means in many cases that they will often not look like the index, and I think during periods where the index is delivering an absolute level of return that people are satisfied with, there isn't a lot of tolerance for any meaningful variance from that. If you go back in history and look at the 2000 when there were more of these launches out there, equities were probably just as volatile then as they are now, but like it certainly wasn't the 15 year march up every year of equities producing a strong return. In a lot of rooms, there are a lot of committees that say, okay, you're targeting a hundred or 200 points above global stocks within your long-only actively managed portfolio, but that might mean you're 300 ahead or 400 ahead or 300 behind. Ma…

AI assessment note: “there's not a lot of tolerance for being behind it”

Q When you and your team have surfaced someone that's come through one of these channels, there's different paths that people take to forming a fund. There are fundless sponsors. There are people who will back deal by deal and get comfortable with someone. How have you decided to approach that space when it comes to making an investment?

A When I originally did the work in 2014 to look at, okay, it appears from the data, if we want to earn strong access returns, targeting emerging managers will make a lot of sense. We presented that as this is an area we want to pursue. We call that our small buyout program. I had a number of folks in mind that I knew from my private equity days that I wanted to see what they were up to in the coming years. We quickly realized that a lot of the folks, when they're leaving their prior firm, they don't jump into a fund one. In many cases, even if the credentials might suggest that they could. The reason I later learned is that when you leave those places, especially when you've been there for 15 or 20 years, is they say three things to you on the way out. They say, number one, track record's not yours. Number two, don't talk to our LPs. And number three, here's a bag of money if you sign an agreement agreeing to the first two things. And so you end up in this interesting situation where someone has Worked at a firm for 15 or 20 years. They're running an industry vertical at a multi-industry PE fund. Trained, track record, team loyal to them. And they've built real credibility, and on the way out the door, the firm says, I'm going to hang on to that credibility. You need to go rebuild that on your own. You have a number of these folks that are very trained and very credible that the…

AI assessment note: “we had to have some way to engage and support independent sponsors”

Q What does it look like when something goes wrong?

A Within the independent sponsor market, I would bifurcate things into two different groups. There are sponsors who have trained at good firms, intend to dedicate their career to being a private equity sponsor, hopefully will raise a fund one day, and view their counterparties as LPs and long-term partners, and so those are the folks that we work with. We're trying to work with the very best independent sponsors, and they see us as someone that they want to have a multi-decade relationship with, and Treat us accordingly. That's going to be a minority of independent sponsors. The majority of independent sponsors are more transactional in nature and quasi deal finders. They've locked up a deal under LOI. They know how to get a deal closed, but they don't know how to run and operate a business. They would be much more likely to partner with another private equity fund or maybe a junior capital provider that provides the debt and the equity and bring some operational chops as well, or maybe a family office. You have to bifurcate those two, because if you look at our portfolio, When things have gone wrong, we've had deals that haven't been successful. It's looked like a private equity fund situation. They bought a business, earnings went down, they had to rectify that and then sell it, and in some cases realized a loss. But from our perspective, other than having a front row seat to t…

AI assessment note: “They bought a business, earnings went down, they had to rectify that and then sell it”

Q How have you put these together, say both the venture side and the buyout side, into the context of a portfolio or sub-portfolio for your clients?

A Both of them fall under the broad equity bucket. So we can get our equity from stocks, we can get it from actively managed equities, from hedge funds, and then from private equity. We view them as, to some degree, distinct betas. You're generally buying control of mature companies where there's a leverage aspect, but they tend to be more predictable over time. If a company's been around for 30 years, probably be around for the next 30 years. If you look at the array of results, if you select well, returns in both have been attractive over time. But buyout has had a much more consistent duration to it in terms of you tend to have a four and a half to six year duration on average, whereas in venture, like, 21, you're getting distributions every day, and the last two years it's been crickets, and so we tend to have a strong pro-cyclical return stream and distribution stream to it. We do believe that venture has an innovation beta that is somewhat correlated with buyout, but really not that correlated with it. Might argue that today, they actually are a bit at odds with one another. You could argue that AI is A much greater threat to the average small business relative to most previous technological innovations. We see a new AI roll up every week where someone's a tech operator and a venture person and a crusty buyout person are going to buy up some legacy industry and then infuse …

AI assessment note: “Both of them fall under the broad equity bucket. So we can get our equity”