The Exchanges

Q So what was your path at Wellington from large stock picking to getting involved in privates?

A For the majority of my career at Wellington, I was a diversified portfolio manager on the public side over the course of that first decade. And during that, I was starting to notice that companies were starting to stay private longer. And I think a lot of this came out of Sarbanes-Oxley and some of the issues from the last recession. Companies were starting to look for alternatives for capital because it was a little more onerous to go public. The regulatory framework was a little higher. The cost of going public was a little higher. I started probably as early as 2006 in making some investments out of my public funds into some private companies because many of those funds had the latitude to have illiquid securities. After the great financial crisis, companies like Uber and Airbnb and Peloton and many, many others were seeking capital from a variety of opportunity sets, and that included the mutual fund companies like ourselves and the Fidelities and the T-Rows. But I started to realize That, that model of taking illiquid securities and putting them in daily liquidity vehicles maybe was not the best model for the longer term because it's just uncertain. Obviously right now we're seeing this where the IPO market has shut down and now you're ending up holding these companies for three, four, five years rather than 18 to 36 months. And so I went back to our alternatives group and…

AI assessment note: “I went back to our alternatives group and I said, hey, would we consider doing”

Q How did you eventually find your way to Wellington?

A I came out of business school in 1991 in the middle of a recession. So there were not a lot of jobs out there. My choices were between this job at Cigna as a tech analyst, and then I was to be a institutional salesperson at Smith Barney. But based on what I wanted to do, that was going to be the best job. And then I was fortunate that eight months after I got there, the old State Street Research, we're looking for a tech analyst and somebody to be an associated portfolio manager. And so within eight months, I was in Boston. And then I actually left Boston and I went to Montgomery Asset Management on the West Coast. Turned out my family didn't like being on the West Coast. We ended up going back to State Street Research where I then ran a small cap fund. And then about a year later, myself and another portfolio manager spun out. We started a hedge fund when hedge funds were still reasonably new. And I did that for a couple of years. Wellington was looking for some younger portfolio managers. I started talking to everybody there and I just loved The vibe in terms of how collaborative everybody was and how collegial everybody was, and so after the typical 25 Wellington interviews, I finally got an offer to go there, and I was gonna run an institutional account and also part of one of the hedge funds. I was running maybe one hundred twenty million dollars. I really felt strongly th…

AI assessment note: “Wellington was looking for some younger portfolio managers... in 1999... I joined Wellington Management.”

Q So I'd love to walk through that part of the investment process of how you do it. Once you turn on the spigot to being open for private market investing, where did these sourcing opportunities come from?

A That was probably the biggest question mark around if we can do this successfully longer term, but it became very apparent to me that we were going to need a dedicated team in order to address the sourcing part of the equation, the top of the funnel per se. We started taking our team, which were all hybrid investors back in 2014, they all were doing public and privates, and we started to transform that team over the next eight years to a team of dedicated Investors. So our first hire was Matt Withheiler, who made the Midas list and came to us from Flybridge, and then we've hired a series of investors subsequent to that. In doing that, we now, I think, have a really strong sourcing engine, and we're now looking at north of a thousand companies every year, and we're probably signing NDAs with about a 150 to 200 that lead to, call it, 10 to 12 investments on average per year, and so I think we've done a really good job Of building that funnel and being in a position that there's very few late stage deals that we're not getting a bite of the apple.

AI assessment note: “we were going to need a dedicated team in order to address the sourcing part”

Q Outside of generative AI as a huge potential opportunity, what are you most excited about where you're seeing the fundamentals play through?

A So if you take it sector by sector, if you look at the consumer sector, there's still a number of really interesting direct to consumer slash omni-channel models that are developing. And I always look at the consumer that somebody's gaining share and somebody's losing share every day of the week. And there's still these models that we're seeing really ramp up super fast and resonating with their customers and addressing parts of the market that there's either very established companies that lost their way. Or haven't really moved with their customer base. And so we still see a lot there. We still see a lot in terms of marketplaces being able to really drive supply and demand. And so we still like those areas of the consumer space. And it's an area that we've been very active in and seeing some good opportunities. SeatGeek is a perfect example of that. That's basically a marketplace. You go to the healthcare area. There's always exciting med tech companies. There's still a lot of differentiation And exciting opportunities happening in the med tech space and also in the service space. What we're seeing is there's a lot of therapeutic areas where the managed care companies cannot get on top of the cost structure. And there's these companies that are able to optimize for various parts of the cost structure. So for instance, we own a company called Somatis. That company is involved …

AI assessment note: “So if you take it sector by sector, if you look at the consumer sector”

Q Why don't you take me all the way back to your beginning in the investment business?

A I always think of myself as kind of the accidental investor because I had no inkling of this business. I really was not involved with it growing up. The deepest I ever got was checking stock quotes from my dad in the New York Times. But I remember getting a call from a headhunter and he said, hey, I got this great opportunity for you. There's this job at Sanford Bernstein. It's on the sell side. You'll be working with this analyst and doing research. And I said, that's amazing. But what's the sell side, and who's Sanford Bernstein? I had no clue about any of this, and so I took the interviews, and I met a bunch of people there, and it sounded really interesting, and then eventually, I was super lucky, and I got the job there as a research associate, and it was love at first sight. For me, someone who loved numbers and loved to think about the future, this was the perfect job, and I was working, I don't know, 7080, 90 hours a week, but I just loved it. I was on the technology side, and that was my initial introduction, because I knew nothing about technology. I mean, when I went to college, I think literally one person had a PC, and I was working with the PC analysts and the workstation analysts, and I was in the room when all these new inventions were taking place, and it was just a super exciting period in technology. It was the advent. They were talking like, 1988 at this poi…

AI assessment note: “that was my entree into the business as sell-side research associate.”

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

A So the first one I would say would be John Gooch. John Gooch, who's now 82 years old, and I always tell him that on a age-adjusted basis, he's the most aggressive investor in the country. He's still, you know, emailing me all the time. He's like, hey, what do you think about Snowflake? What do you think about MondoDB? And he's like, amazing. He hired me at Wellington in 1999. He was the guy who took a chance on me, coming from a hedge fund, but he saw something in me, and he hired me 24 plus years ago, and not only was he an amazing boss and an amazing mentor, but he is also a really great investor, and I've learned a lot from him on all aspects. He now splits his time between Florida and Maine, and we'll basically seek him out and see him in all those places just to continue to get his pearls of wisdom. And then the second person is going to definitely be my wife, Pam. I don't think That whatever level of success I had in this business would be possible without her. She's just been that rock, the person that absorbs all of my stress over the years, and also, I would say, is one of the best consumer discretionary investors that I know. She does nothing on the investment side, but her gut in terms of understanding what's going to work and not work has always been great for me over the years, and she is always the person to remind me when things are not going well that I need to …

AI assessment note: “the first one I would say would be John Gooch... second person is... my wife, Pam”

Q What have you learned about how your decision process differs investing in private companies than your prior experience on the public side?

A On the public side, my philosophy and process was one where I was trying to identify companies that had accelerating growth and improving operating margins that was going to lead to better than expected growth. So a lot of it was really trying to figure out where there were companies that were being underestimated by the consensus. When you're on the private side, you lose all that. There's no consensus, so you're really trying to find companies that are going to be able to grow over time. It was really much more About identifying, understanding the fundamentals and the sustainability of those fundamentals versus the street was predicting 20% growth next year, but you thought it was going to be 40% growth, and you knew that was going to be the biggest driver of the stock price. So that was probably the biggest difference. And I think that has led us to be very eclectic in terms of the kind of companies that we've invested in, because sometimes there's companies that are not necessarily made as much for the private market because they have a very specific way of looking at things. But we understand are going to work really well on the public side. So you take an example like DraftKings, which was private for a number of years, but there came a point. I remember saying to Jason Robbins that I think we've tapped into all we can tap into on the private side. And I think this is goi…

AI assessment note: “When you're on the private side, you lose all that. There's no consensus”

Q As you turned from doing deals to your support of the companies, how's that changed given the changes in the market environment?

A It's changed a lot in terms of what we've been talking about, because in 20, 20, 21, everybody was sitting around the table wanting every one of their companies to grow as fast as they could. That was the mantra, right? You were gonna get rewarded for growing really, really fast, and nobody cared about your burn rates. Obviously, that is no longer the case. Number one, capital is not plentiful, and number two, capital is no longer free. So the biggest conversation we've been having around the table Is really telling our companies, we now understand the roadmap to the future. You need to have a balance between top line growth and profitability, which is basically the way the world works, maybe 95% of the time. And so we've been telling our companies is you need to be showing that balance. You need to show that every incremental dollar that comes to the top line is starting to show some incremental profitability to the bottom line. And that's what you're going to get rewarded for is your ability to do that. So that's the biggest part of our conversation right now. They're getting that message. And of course, it helps us out in making incremental investments because we understand the playbook going forward that you need to have this balance. And so that's really helpful in coloring the types of companies that we want to look at.

AI assessment note: “You need to have a balance between top line growth and profitability”

Q How does the diligence process work to weed through such a large funnel of opportunities that you now have?

A There's always art and science to anything that you're doing in investing, and there's always a little science in terms of the dynamics that we're looking for companies that are north of fifty million dollars of revenues. We're looking for companies that have other institutional investors in the cap table at the time of our investment. They need to have a strong management team. They need to have a strong board of directors, things like that, and so that eliminates a good amount of companies, but then a lot of it is you have to go down one, two, or three levels to really understand the dynamics Of that company in the sectors that we're focused on, which is generally technology and consumer and healthcare and financial services. It really comes down to a lot of conversations with a lot of companies. When I was on the public side, my superpower was that I do a really good job of taking the quantitative data and matching it with the qualitative data. We see that a lot on the private side. We have a lot of conversations with a lot of management teams before we ever get into a data room and they say a lot of things. Over the course of that process, and then the confirmatory data is what really is going to enable us to really think about if we want to go forward or not go forward with that investment, and it's amazing how many times that the data doesn't agree with the conversations …

AI assessment note: “looking for companies that are north of fifty million dollars of revenues”

Q How does what you learned about portfolio construction and risk management in a public portfolio inform how you think about how you put your portfolio together in the private markets?

A It's an important part of what we do, and it's an important differentiator of what we do in terms of thinking about portfolio construction, because I don't think that that's really a phrase that a lot of people think about on the private side, but obviously when I was a public mutual fund manager, it was really, really important because we were managing to benchmarks, and investors cared about how you looked relative to those benchmarks, and so I always had a view of where I wanted to be and how overweight or underweight any one of the sectors I generally have in my head a purview of how large I'd want any one of the sectors to be, because I always believed that diversification is a strength, not a weakness, because you just don't know. Obviously, two years ago, everybody was super bullish on crypto. Well, crypto's come back a little bit, but that's not worked out quite as well, and obviously, everybody was super bullish on software, and software got to unsustainable levels, In 20, 21. And so our ability to build a portfolio that's more diversified, say maybe 30 to 40% in technology and 20 to 30% in consumer and 20 to 30% in healthcare as well as financial services has served us really well. I always like to use the Wayne Gretzky line. Think about where the puck is going versus where it is. And in doing that, we put ourselves in a position that when we look at 20, 20, 21 vintag…

AI assessment note: “our ability to build a portfolio that's more diversified, say maybe 30 to 40%”

Q So as this is settled out and you're looking in the market today, where have we shaken out in terms of deal volume compared to a more normalized environment? Say you go back four or five years.

A We're massively below where we were at the peak, but I'd say we're probably modestly below where we were four or five years ago. We're getting back to the old normal. We're probably a little bit, but not massively below that. If anything, the market's becoming more and more global. The number of deals that we're seeing in Europe, Asia Pacific, Latin America, that there's been a little bit of a pickup on a relative basis, because what's happened is A lot of the models that have worked, particularly in the US, have gotten exported to many other places around the world, and a lot of those companies that were early stage companies two, three, four years ago are now making their way to the later stage space. The other thing that I point out is that despite everything that's happened, particularly on evaluation basis, the level of innovation has not dissipated. It's still really, really strong. As I was alluding to earlier, the whole AI space is maybe The mother of all opportunities. This could be bigger than anything that I have seen in my career. You look at the number of people that have downloaded or started using chat GBT and these other systems. It's some of the fastest ramp up rates that we've ever seen on any technology in our lifetime. And the use cases are piling up really, really fast. And so the level of innovation, whether it's in technology or been consumer and healthca…

AI assessment note: “I'd say we're probably modestly below where we were four or five years ago.”

Q Curious today, with almost the flip side of the IPO market from two years ago, very little action happening on the exit. How are you thinking about that flow of capital through your portfolio to the exit strategy?

A The angel question of what happens if the IPO market never reopens again. So we've done a lot of work on thinking about that and reviewing what's happened with the IPO market. And the short answer I always give to clients or prospects that ask that question is that on the list of things that I worry about, The reason for that is that ultimately it's going to open. When I look back over 40 years of data, the market generally doesn't close for more than a year, and when it does close for more than a year, maybe it closes for two or so years. And I look at where we are today, we're now in year two of this, and we're now seeing an improvement in the public markets. I obviously don't have a crystal ball, so I don't know if it's going to sustain or not, but definitely it feels like we're through the worst of it. So I think that we're seeing this improving environment And ultimately, when the public markets improve, the IPO markets improve. And the reason for that is I go back to my time as a public portfolio manager. When the markets are bad, nobody wants to do an IPO because you got 50 fires in your portfolio. The last thing you want to do is sit across the table from a company you don't know, with a management team you've never met, and even think about making an investment in this company, unless it's the greatest company ever. So it's really, really hard to go public. But Once yo…

AI assessment note: “When I look back over 40 years of data, the market generally doesn't close”

Q As you're digging through that diligence on the company, how do you go about leveraging the massive research platform of everyone else at Wellington?

A That's a really, really important part of Successful. And it comes back to why I joined Wellington 24 years ago. I always tell people when they ask, what's the one word you would use to describe Wellington? I always say that it's the collaboration. And I say, if you need a second word, the second word is collegial. I joined on a Monday. I remember literally on Tuesday sitting in my office thinking, I think this is going to work out. The vibe just felt so good. And the discord and the dialogue and the conversations about investments was just such a great level that I just knew this was the right place for me. And that exists today because we can tap into the public side. And being able to talk with a Brian Barbata who's covered the internet and social media stocks for the last decade and take that know-how, what he's learned from covering meta and And Twitter and many, many others, and then apply that to companies that we're looking at on the private side with that dedication and that level of detail is just really, really exciting. The entrepreneurs love it because number one, they get somebody who can walk the walk and talk the talk with them. We've looked at these logistic companies and we'll bring our logistics act, Bill O'Grodnik to the table, and he'll start talking logistics, which is a totally different language. You can just see the entrepreneur's eyes lighting up becau…

AI assessment note: “we can tap into the public side. And being able to talk with a Brian”

Q Bernstein back in the day was known as a value shop. How did technology investing back then blend with the value philosophy of Bernstein?

A You're right. On the buy side, it was very much known as a shop that was really steeped on value investing. On the sell side, it was a little bit broader, so we had a little bit wider aperture to really look at this. It's a really good question because that is the introduction for me as being a growth investor. It was trial and error. One of the things I think I learned was that it's really, really hard to be a value investor in technology And it was really hard for me, from my personality standpoint, to want to be a value investor, because it wasn't really what I was all about. I loved trying to find the new, new thing, really finding that great invention. And I remember being in the room when Compaq introduced the first real laptop. Back in the day, the laptop was this big suitcase you'd be able to carry around. I don't even know if they called it a laptop. I think Compaq used to call them luggables. Rod Canyon was the CEO of Compaq at the time, and I was probably at the Plaza or someplace in New York City, and he introduced this product, holding it up with just his fingertips, which was a big deal at that time. I was so excited about this new product, and it was almost like I had an epiphany then that this is what I wanted to do. I wanted to be there and try to discover companies that were really introducing next generation products and being in the position to invest in tho…

AI assessment note: “One of the things I think I learned was that it's really, really hard”