The Exchanges

Q Why don't we just start with an open-ended question of how you're viewing the market day to day now. And Mario, why don't you kick it off?

A The market day-to-day now is really uncertain. I was telling someone the other day that in, oh, wait, it was a little easier. It was worse. But in, oh, wait, it was binary. Either the world was going to end economically or we're going to be fine. And that was kind of it. It was one of the two, and you sort of knew which way it was going to go, but you didn't quite sure. This doesn't feel binary. This feels like we don't know what's going to happen to inflation. We don't know what's going to happen to interest rates. We don't know what's going to happen to the economy. We don't know geopolitically. I personally am far less bearish than what I think consensus is, but who cares? Because you can create a scenario with a complete degree of credibility that paints very, very different outcomes. So as we look at investing in that environment, whether you're doing public equity, private equity, whatever you're doing, has a degree of uncertainty that I don't think we've really had to deal with for quite some time.

AI assessment note: “The market day-to-day now is really uncertain.”

Q I'll turn to another interesting area, maybe risk, maybe opportunity, which is China. How are you guys thinking on a go forward basis about the investments you make in China?

A That's a very, very hard one. I think that one of the things that we are all going to have to deal with as a change in this world is that it's going to be an increasingly bipolar world. And I'm not in the de-globalization camp, so I'm not going down that road. But I think, I use the example of Apple. If you wanted to make money in smartphones, 20 years ago, whenever it was, you invested in Apple, and you had a global industry leader. That's not going to happen anymore. You will have Apple US, Apple China, And as investors, we have to recognize that, particularly as U.S., this is going to be the first time, at least in my career, that where you are geographically will make a difference on how you're investing geographically. So a U.S. investor investing in China is going to have to be very careful, both because of U.S. restrictions that may or may not occur, and Chinese restrictions on U.S. investors that may or may not occur. Europe, probably the same way. If you're a Middle Eastern investor, it doesn't matter to you because you're probably not going to be affected by that. So it is not this global pattern you used to have for basically our entire industry's lifetime. And that will continue to be part of how we are going to evolve and have to deal with. That is not going to go away in any reasonable timeframe.

AI assessment note: “a U.S. investor investing in China is going to have to be very careful”

Q So Mario, when we're going through this period of time where folks like you will make these harder decisions about where to allocate capital in the next funds, who are you seeing ends up as winners and losers from the GP side?

A I think as you enter this world where it's not like it was five years ago, I suspect the winners will be those general partners, those groups that have had a pretty good strategy of how they're going to grow. They haven't just chased, you know, I'm going to have 17 funds because my competitors have 17 funds. I think people with longer track records will be winners. Unfortunately, that means that a lot of newer managers are going to struggle. I don't think being a newer manager in the next two or three years, unless you have some incredibly great area you're in, or have something unique, are going to do very well. It just seems like the more conservative, I'll call them, organizations are Probably going to be winners over the next two or three years, and as general partners position themselves, I suspect that's part of what you will now begin to hear, because three years ago you heard, I am cutting edge, I am new, I am unbelievable. In the Marvel universe, you've just never seen me before. Now it's going to be, hey, I'm Superman, I'm Batman, you know me, you know what I've done, you know how I am, and I'm tried and true, I've been through all these villains, and I can get you through this one. That to me is probably going to be the characteristics of the winners.

AI assessment note: “I suspect the winners will be those general partners... people with longer track records”

Q Mario, thoughts on implications from the financial markets?

A I think certainly on the venture side, there's no doubt that you're going to see a lot of venture companies just hit the wall. They benefited from just a ton of liquidity, and as John's alluded, that liquidity is gone, and it's going to be gone for quite some period of time, but you saw in the aughts, the venture world just kind of cratered, and a lot of that is going to happen this time. There are a lot of really good companies, and they'll do fine. Everyone tells me, well, hey, Google was formed during the Great Recession, but yeah, so were a hundred companies that went nowhere, and so I think we're going to be in that kind of period on the venture side. People will make a lot of money, and there's going to be a fair amount of money lost. In terms of the financing markets on the regular private equity world, if rates stay where they are, and in my world, obviously, they're not going to go up that much, this isn't catastrophic. I get people saying to me, well, four percent, I mean, how can private equity operate? It did pretty damn well at four percent for a very long period of time. It's not as though, wow, we've never seen this before. I mean, to me, zero rates Sort of turbocharged. It was private equity returns on steroids. So we'll go back to a pre-steroid environment and everyone, they'll all look like me rather than someone who's actually bulked up. And so I think that t…

AI assessment note: “on the venture side, there's no doubt that you're going to see a lot”

Q As you look out a couple of years, Maya, you alluded to the denominator effect. What are you seeing in terms of the LP demand for funds as they're thinking about the next fundraising cycle?

A I think this is where the industry will have its biggest shift from the last 10 years, and I don't think this is driven because the market's gone down. I think this was something that was destined to happen. The industry has simply outgrown both in terms of its size and its desire for more size. Has outgrown the limited partner capacity to fund it for a period of time. There's just not enough money in the world to give GPs everything that they want, whether it's a much bigger fund. They've all raised their flagship fund, then their flagship fund that's a little smaller than their flagship fund that's a little smaller than that, and then their flagship fund that doesn't cover anything the other funds did. They all have multiple products. I think LPs are sitting there going, Now what do I do? Because I don't have enough money to do everything I want to do, given what I've been doing for the last 10 years. So I think this is really where the industry is going to have a pressure point over the next two, three, four years. This is not a, oh, the market goes up 20% and everything's magically solved. LPs are sitting there going, if I have a hundred to invest, I really wish I had 500. So what do I do? Do I cut back the number of managers? Do I give everyone a little bit? And I think those are the discussions that are going on, and GPs are frantic around it because they obviously want t…

AI assessment note: “Has outgrown the limited partner capacity to fund it for a period of time.”

Q I'd love to go through each of those. So if we start with decision making, On the margin, what do you think makes for an effective decision-making organization within a private equity manager?

A I think it has to be some kind of shared decision making. I think it is very hard to have a firm where someone does everything alone. One of the things that's always struck me as interesting about the private equity industry is when you look at certainly some of the firms we all know, they had a shared decision making structure. When you look at KKR, there's two people. When you look at Carlyle, there's three people. When you look at some of the great firms, That have done really well in our industry. It is not one person and it's not 15 people. So I think you have to have this group of people that are cohesive and a decision making structure that is not totally centralized, but that is centralized enough that it is not diffuse around the entire organization. And that, that's a hard thing because it means the people have to trust each other and be willing to have a realistic back and forth. And for someone like me looking at it from the outside in any firm, or someone looking at our firm from the outside, it's hard to know how real this sort of, oh, we're partners, we love each other, and we work together, how real that is. And I think when you discover it, probably it's in downturns, unfortunately, when you see what really goes on.

AI assessment note: “I think it has to be some kind of shared decision making.”

Q We did talk about technology and how you're trying to use it for portfolio construction. I'm curious, as more and more data gets into the hands of the investors, how do you think they'll change the way they invest in the space?

A Well, I think as more and more data gets to investors, they'll just invest more and more. I believe in 10 years, 15 years, that portfolios will, by and large, be 50% private, 50% public. I believe that there will be more and more private investing, and part of it will be because of data, because people will be able to look at what's in their portfolio, how it behaves, and they will become more comfortable that there's some transparency, That there's some understanding like there is on the public side of what's going on. There'll be different structures around liquidity, but that's a different story. I just think that the data is the key. If you can't know what is in your asset allocation portfolios, how the hell are you really going to get anyone to invest a ton of money in it? You won't. It will always be this weird little part that exists over here is kind of this separate thing that people tell you and you believe is doing well.

AI assessment note: “as more and more data gets to investors, they'll just invest more and more.”

Q So what was Hamilton Lane when you joined?

A It was three or four people who sort of had a notion of doing something in private equity and helping institutions, and it was a young industry. I don't even think I knew what the hell private equity was, to be honest, at the time. I just knew it was people that bought and sold companies, and that's what it was. We were helping large institutions, and that literally three or four people. Steve Schwartzman tells this story. I wish he'd stopped telling it, but he tells it all the time. When Blackstone first came to see Hamilton Lane. So this must've been 92, 93. I don't know. We were all starting together and he knew Philadelphia. So he knew where we were and he comes up and gets lost because we're, we're nowhere, literally four flights up or something. And he said, I come in this conference room and there's Mario sitting at a table. That's a card table with duct tape holding one of the legs together. And he thought, really, this is the industry. This is where we are. That's what it was.

AI assessment note: “It was three or four people who sort of had a notion of doing something”

Q What have you learned over this path about growing an asset management business?

A So my lawyer days were really work out. And so you're dealing, and, and the turnaround I did was basically a company facing bankruptcy. And, and that really gets you very focused. You're going to lose your job. You're going to lose your company. Everyone is kind of on the same page. What I've learned about a growing company in a growing industry is that it is much harder than a turnaround, oddly enough. A turnaround focuses you on sort of the existential crisis. The problem and the challenges for growing a company is that you have a number of different choices. You have a number of different paths you can choose. You have a number of different cultures you can create, and you've got to get everyone focused rather than having this exogenous event making you focused. It's hard. I think one of the underappreciated stories about the private markets is the talent required to build some of these firms into what they are. I don't think people should underestimate the genius, really, in some cases, when you look at a Blackstone, you look at a KKR, you look at an EQT, it's not easy. And there are a lot of companies that failed in this process. You know, you don't hear about Forceman Little. You don't hear about Hicks Muse. And these were dominant companies in the nineties. I'm telling you, They were the ones that if we'd had this conversation in the nineties, Ted, you'd be saying to me,…

AI assessment note: “What I've learned about a growing company in a growing industry is that it is much harder”

Q in particular, there are a few, let's call it technology-focused or software-focused buyout shops. Think of Mr. Tomo Bravo and others who have done really well in an industry. So to the extent that you mentioned that concentration has been one cause of great firms declining, how do you think about it in, say, a sector focus? Where there have been some that have really made it through that specialization.

A I think from the sector perspective, you'd have to look at a couple of things. Is the sector, when they say they're in infotech or software, it's so vast that the drivers of return, the drivers of what will make, the industry will not rise or fall. The multiples may in the public markets because they lump them in together, but the industry dynamics themselves will not rise or fall in unison. And we're seeing that now. There are some parts of the, of the software industry that are fine, some parts that are struggling a little more. So I think from our perspective, that concentration is probably ok. It's like healthcare. It's such a vast thing. Are you doing biotech in healthcare? Are you doing instruments? Are you doing delivery services? They don't all act together. I think where you worry about concentration in an industry is where there is one thing that happens. So if I'm, if I'm concentrated in banks, well, they rise or fall kind of at the same time. If I'm in, natural resources was a big thing. Everyone was in oil and gas for a period of time. It's essentially a commodity play and no company is going to survive when that commodity goes down. They're going to struggle. So I think from that perspective, that's how we look at the industry part of the equation in terms of concentration.

AI assessment note: “from our perspective, that concentration is probably ok. It's like healthcare. It's such a vast thing.”

Q that maybe through this sell off, maybe eventually private markets reset as well. Before that, you probably were at that extreme. I mean, you could look at multiples paid and look at implied yields and say, are you going to meet expected rates returns? How do you respond maybe a little bit less today, but a year ago in your investment pace, knowing that the firms are buying things rich?

A Yeah. Well, I think you, you respond in a couple of ways. One is you do pull back in certain areas. So for example, in some of our funds, we did pull back on some of the high growth areas. You just do less of it. You just pull back a little bit because at the end of the day, what is hard about private equity in particular, it is a long only asset class. You don't have the ability to hedge. You don't have the ability to short and you can't buy and sell the way you can in the public market. So You can't do this sort of wholesale. I'm out or I'm in. And so you're really dealing at the margin in many cases and figuring out where am I going to reduce risk? Where am I going to take some of that away from the overall portfolio? And in many portfolios, particularly where you have a big fund concentration of where you have a lot of funds, you're relying on the underlying manager to be doing some of that. But they're in a tricky spot because What you hear from managers, which is legitimate, is LPs yell at them if they're not investing. Like LPs hate paying on committed capital that isn't being invested, but God forbid they invested at the wrong time because then LPs yell at them for investing at the wrong time. So it's this sort of delicate balance that they have to play in a sense of, okay, what am I doing? Am I leaning in? Am I leaning back? And so you saw a lot of them, I think, pull …

AI assessment note: “One is you do pull back in certain areas. So for example, in some of our funds”

Q What are you seeing with broad-based LP, call it saturation or indigestion because of both the denominator effect in the public markets and the run up in private assets last year?

A It is the, I think, if it's not the single biggest issue in the private markets, it's one of the top three. I think that it has taken general partners by surprise in terms of, there are two things going on. The one is the one you cited, which is limited partners, the good news is they've done really well, and so their NAV has exploded, and that has put them over allocation, and then you overlay the denominator effect, and you have sort of a double whammy. They don't have enough money. And it's not even that they're worried about what's going on in their portfolio. They just want more money to invest into what they know is going to be a better cycle, or arguably a better cycle, and they don't have it. And then you couple that with the other side, which is the general partner world has exploded in terms of both the size of funds that they want and the number of associated funds they're all raising. It's kind of this two forces colliding, and I think it's going to lead to a reasonable shakeout under any market scenario. I don't care if the market Flattens out here, goes up here a little. It will take a market going up 50% for some of this to ease, and that's not going to happen. So how does that work? I don't know what the repercussions are, because this isn't a normal industry. You know, it's, it's sort of like general partners, they are like vampires. You cannot kill them off. A…

AI assessment note: “if it's not the single biggest issue in the private markets, it's one of the top three.”

Q this shift really since the GFC from the banks, what's your sense of the underwriting that's happened all the way through? Usually these things start well when things get ebullient. Sometimes the standards just to put so much capital to work isn't as strong. So as you're looking at those private credit opportunities, Mario, how are you looking at the underwriting that's happened and whether that's going to hold up?

A I think it will hold up pretty well. There are a lot of really lousy credit groups that have formed. People feel like, hey, I've been a good equity manager. I'll go get Mario and I'll be a great credit manager because he borrowed money for a mortgage. He must know what he's doing. That is something you have to watch out for. But I would argue that the trend behind you is so strong that you're probably still going to be okay in that. I mean, a few things, the movement away from traditional sources of credit Is only going to continue. Banks are getting out of that business, and what's happened in the U.S. with Silicon Valley and Signature, I mean, there's just going to be more need for private credit. The amount of capital moving into that, I think, is going to be helpful. It's not too much. And as you think about the dynamics of that market, we have had more equity in companies than we've had in prior cycles. So if we think about the risk to the credit compared to what it was in The risk going forward of deals that have been done is more on the equity, I believe, than on the credit. The credit is fairly well protected, not everywhere, but generally. I don't think that dynamic is going to change, so I would say as much as I tend to be more bearish on stuff, today I'm embarrassed at all, really. I'm far more bullish on private credit than a lot of the people I hear tell me it's go…

AI assessment note: “I think it will hold up pretty well.”

Q So I imagine with that view, you are trying to get that data. What bottlenecks are you running into in not having it today?

A Well, we're fortunate in the sense that we have a huge database just because when you have a trillion basically in assets that you're running on real time and doing cash flows, you have a lot of that data, but to have it all, like if I said, let's go get all of the data in private equity, I think we have, I don't know, half of all that's ever been invested in the history of private equity, which may be among the most, I don't really know what some other people have, but you'd have to get all the general partners to agree Okay, we're going to put our data in, and we're going to put it in for real. Good luck. Good luck. Maybe some of the larger ones will. They're public, and maybe they won't have as much issue with it, and you can get it through FOIA, kind of those things that people do, but the venture firms, some of the smaller ones, no way.

AI assessment note: “you'd have to get all the general partners to agree”

Q To what extent do you try to independently underwrite a deal that one of your GPs has presumably knows better and more than you really ever could?

A It depends because on some deals you're brought in so early that you're really doing the deal together. And I think on that there's a much higher standard around what you're doing in some of the, I'll call them smaller deals or more growth oriented deals. You're really doing a lot of that together. Whereas I would say some of the, I'll call them more syndicated deals or some of the larger GPs, they're bringing you a package that is so, no, I'm going to question Bain on this one. Like what does Bain know? You don't really do that. I think there it becomes more a question of area of expertise, portfolio fit. The other thing, so for example, general partners will do different deals at the beginning of their fund than they will do at the end of their fund, and how does that work for you? If it's at the end of their fund and they want a very low risk, but lower return deal, they're looking for more money multiple, that may or may not be what you're looking for. All deals are not created equal in a GP portfolio.

AI assessment note: “It depends because on some deals you're brought in so early that you're really doing the deal together.”

Q How do you go about finding what really goes on?

A There are a few ways. One is just familiarity with the people. I think one of the few virtues of being as old as I am is, you know, you kind of have been around a lot of these people, and you know them, and you know people you can talk to that know them, and that will give you information, and that you won't burn them, and they won't burn you. I think that's, again, we're in a private industry. We can't look up what's going on in the journal, and you don't have public board stuff where you're dealing with all that crap. And so, You have to have a connection of people that you can talk to and go, does Mario really do this alone or with whomever? I think that's unfortunately the best way to do it because, you know, they're not going to tell you honestly. Why would they? I always hear, well, I have dinners with these people. I really get to know them. These are the greatest effing salespeople on earth. They just are. They really are. They're so good. I say that to people all the time. We are dealing with some of the smartest, best, That salespeople will ever meet. And so at a dinner, really, you're going to get, you're going to get to know Mario at a dinner. He's a GP with me. You will, but you won't like it, but you'll get to know me. But I don't know. I think you got to have connections all around the industry to really feel your way through that.

AI assessment note: “One is just familiarity with the people. I think one of the few virtues”

Q have to be facing these same kind of questions. So I'd love to drop down on that a little more. Mario, we can start with you. Capital might not be as abundant. So you have to make effectively capital allocation decisions across your portfolio. And on the other hand, if you do have the capital, there could be some great opportunities. How are you going about making those hard decisions?

A I think that is Bluntly, it's kind of what you're paid to do, and so you try to select on the manager side the best managers, and as John said, you have an opportunity here to either increase your allocations to managers that otherwise were closed off to whatever you wanted, or new ones that just didn't take new investors or you didn't have a relationship with. So you do that. That's part of what you do. I think the trickier question is a lot of our clients make some of those decisions themselves, and then we help them with some of that. I mean, the range of outcomes is unbelievable. You literally have people that are making tiny investments in a hundred managers so that they, it's like you never say no to anyone, and so you just don't. And others that are severely cutting back the number of managers with whom they will commit. And then it has that whole ripple effect with the general partners who now realize, oh my gosh, now what am I going to do? I need to go find new capital, or I need to just sit in someone's office till they finally say yes or shoot me. And that's a lot of what's going on. These are real-time decisions. As I said, I think this is going to go on for quite a long time.

AI assessment note: “you have an opportunity here to either increase your allocations to managers that otherwise were closed”