The Exchanges

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

A I think the two people that I credit with just being amazing professionals, one, Erin Callen, she was a banker that I worked with at Lehman Brothers, and the best combination of intellect and relationship capabilities of any professional I've ever seen. So, It taught me that having that two prong approach, knowing your stuff is important, but the relationship angle is equally as important. And I thought, Aaron, it was truly the pinnacle of those two areas. And then Tony Tutron at Neuberger Berman, absolutely a fantastic professional. He is laser focused on every single investment that goes through that place. And just watching him manage a team, Manage a portfolio. Give his team the type of, quote, leash that they need to develop their skills, but also be there as a sound mentor and guiding force throughout. I think that I've learned a tremendous amount from Tony, and I'm eternally grateful for my time with him.

AI assessment note: “one, Erin Callen... And then Tony Tutron at Neuberger Berman”

Q And what were some of those other bricks?

A Well, the biggest brick, it's probably a lot of bricks, was a public company called Neuberger Berman. And so that became the vast majority of what was Lehman Brothers asset management effort. We bought a, a fixed income business called Lincoln Capital in Chicago and, and A number of things in alternatives, but sort of swept it all together. And, and that's what ultimately was Lehman's asset management arm. That was part of the management buyout post bankruptcy that ultimately became Neuberger Berman and where we launched the dial business. But really as part of that whole long arc of acquisitions, every time we did one of these minority stakes in hedge funds, we started with GLG and then we did a firm Called Marble Bar and Osprey and D.E. Shaw. We were doing a lot of work in a lot of other areas, and these 20% stakes in hedge funds were paying the bills. The mailbox was full of checks from these guys, and, and the management team at Lehman said, what are we doing for all these big checks? And it turns out we didn't have to do anything. We had to be a passive minority partner and, and sit and wait and collect checks. So that's how the whole genesis of the idea started, and And how we got thinking about how you could participate in the economics of, of the hedge fund industry without owning and controlling a hedge fund outright.

AI assessment note: “Well, the biggest brick, it's probably a lot of bricks, was a public company called Neuberger Berman.”

Q Well, why don't we start with your background? You can go all the way back to diapers. Doesn't matter to me where you start.

A Yeah. Well, you know, if you want diapers, it starts in Pittsburgh, Pennsylvania. Hopefully over the course of our chat today, you'll hear some good Steelers stories. Born and raised there, went to school there at the University of Pittsburgh, and then hopped up to Boston where I studied engineering at MIT. Was an engineer through and through and figured I'd spend my entire career at Alcoa or somewhere in the mechanical engineering ward of some big company. And then while up in Boston in, in All of the, quote, really smart kids started going into the dot-com world, and that left us lowly engineers with these great interviews for, you know, this company called Goldman Sachs and McKinsey, and it was amazing. You know, I'd never heard of it. I thought, well, that probably can't be as good as Alcoa or Eaton Cutler Hammer, but I'll try this interview out. So it was a, one of those really unique times. There's a lot of luck and timing in anybody's career arc, and it just so happened that Engineers got a, a knockup on the pecking order in the 1999 timeframe, and I was able to use that to get into finance.

AI assessment note: “if you want diapers, it starts in Pittsburgh, Pennsylvania.”

Q So you mentioned the top 250 firms. Is there an implication there that you're looking for large firms?

A Yeah. The dial business has focused in private markets on the largest. We, we had a hypothesis and a view in 2015 that the big we're going to get bigger and the strong we're going to get stronger. And it looks really smart in the rearview mirror, at least through the last seven years. I do think there is good consolidation at the top, and I do think the larger firms are going to take share over the bottom of the pyramid. More Investors in this space are larger government institutions and sovereigns, et cetera. And they really prefer the type of service that you get from the bigger firms in the industry. And so as incremental flows come from those big guys, we really see it concentrating on the top two 50. There aren't many peers or even competitors for what we do, but they typically focus on firms that are a notch smaller, maybe favoring growth, et cetera. We, we still Believe that the growth dynamics are more attractive at the larger end of the market, but we certainly think the stability is much stronger and the longevity is going to be much stronger for the larger firms. One of our newest and strongest relationships was CVC. I mean, that machine is going to be around for a long time. We're proud to be partners. And that's the kind of firm that you would have never had the opportunity, particularly on the hedge fund side to say, There's real enterprise value there. You look a…

AI assessment note: “Yeah. The dial business has focused in private markets on the largest.”

Q So it's Capital ESG data science. What are those other pillars?

A Well, there's talent. Of course, we help identify great candidates for certain C-suite roles. We help our partners with organizational design. Come November, December, we're always helping with comp benchmarking. So talent is a, is a big part of it as well. And then Operations, tech, infrastructure, just good old fashioned blocking and tackling that your COO and your CTO at a large firm would love to lean on. There's so much to running one of these large institutions these days. If any of them want to go out and put in a new system X, it's probably likely that our team has interviewed everybody in the space that does that and can get you to third base pretty quickly without, without wasting too much time.

AI assessment note: “Well, there's talent. Of course, we help identify great candidates for certain C-suite roles.”

Q So I'd love to walk through your investment process and maybe we start with just sourcing these things. How do you get to the point where you're ready to sit down at the table and do a deal?

A Well, we've seen probably two or 3000 flip books from private markets firms, and I don't think there's one that we've seen that doesn't have the old sourcing funnel in it, and that you see, you know, 5000 deals we saw, and 200 we did, and whatever that funnel looks like. We're the only firm that, at least to my knowledge, that doesn't have a funnel. We never, ever let go of a opportunity, because firms change and evolve over time, And people move around the industry. So we're constantly talking to the top 250 firms in the alternative space, talking to them about their business, understanding their goals and objectives. And there are some conversations that we have that we know at the beginning of the hour, this isn't going to be a deal that we're going to do anytime soon, but it doesn't mean it falls through the bottom of our funnel never to be found again. So we continuously travel the world. Luckily, most firms are in the top five or six cities, which we can all think of. And we just really build long-term relationships talking about what it means to run a firm, what it means to run an enterprise. And we offer help. We offer guidance. We tell them that a deal might not be imminent. It might not be for two, three years or seven, eight years. And in a number of cases now, we've been doing it for long enough. We are actually consummating deals that started with a coffee 10 years…

AI assessment note: “We're the only firm that, at least to my knowledge, that doesn't have a funnel.”

Q So these private market firms, they have long duration capital. It's locked up. They're never going to shut the lights off overnight the way hedge funds. How are you thinking today about some of the larger hedge fund firms?

A Well, I think we've seen some of the larger hedge fund firms turn into really stable organizations. A lot of them though have decided that there is real value in having locked up capital. So they're moving more towards the private market side sort of day in and day out. There aren't many of what we would have called scaled liquid hedge funds in the year, 2002 that exist today in a similar fashion. They're much more institutional. They make longer term bets if they are at this scale, and a number of them have migrated their capital to be more, more long dated. We've always talked about the blurring of alternatives and hard to really describe what is a hedge fund anymore. I think that will continue, and I think some of the bigger platforms will want to do more with their clients and do it across the liquidity spectrum.

AI assessment note: “we've seen some of the larger hedge fund firms turn into really stable organizations.”

Q What are some examples of that advice that's resonated with some of your partner firms?

A Yeah, we break it down across about six or seven areas. Really, fundraising is still the, the 64,000 dollar question for every organization. You could probably count on one hand the types of firms that can snap their fingers and hit their hard cap. So we're out there across three different areas helping them raise capital. One, we've got a big team that has institutional relationships. Think of it as almost cap intro, but much more focused on our partners and And a longstanding relationship that lasts many, many, many years. So we help them with institutional clients. We also have a great team that helps them navigate the wealth channel, which is a huge part of fundraising these days. How do you get on the private banks, the wire houses, the RIAs? And so a lot of firms, even big ones are tiptoeing into this space for the first time, and we can be really value creating there. And then consultants from The dawn of the industry, consultants have played a major role, and so we have professionals that help them really navigate and get to understand the nuances of the consultant landscape. So we always say about half of the advice comes in the form of helping the fundraising team and the, and management hit their objectives in fundraising. The other pillars are really interesting, and they evolve over time. We have a new effort, clearly, that's important and changing in ESG and DEI. …

AI assessment note: “we break it down across about six or seven areas. Really, fundraising is still”

Q 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. So you have these conversations regularly with these partners. At some point in time, a conversation might lead to a potential deal. When you then are doing due diligence and get under the covers of these businesses and the financials, what's been most surprising to you?

A Well, it's not something we like to shout from the rooftops, and I guess here I am shouting it from the rooftops, but these businesses can be extremely profitable. I think the old adage that the management fees keep the lights on, I think that's a good motto. I'm not sure how accurate it is. I think what we've seen is for the bigger firms, there is an ability to generate really good profitability, which generates longevity and stickiness because you can incentivize a broader team, Bring more individuals into the ownership, broaden out the carry base. And, you know, you see that from the very top on down, the sort of Blackstones and KKRs of the world have realized that scale has a huge benefit. And I think that doesn't just extend to the, the 10 to 12 public companies. It goes across the next hundred or 200 as well. There's a real benefit and advantage to the resources that you have as an organization at scale.

AI assessment note: “these businesses can be extremely profitable. I think the old adage that the management fees”

Q How do the fluctuations of the public company multiples impact these conversations about valuation in the private market?

A Yeah, we have a chart that shows the average multiple of the public companies, the Blackstones, Apollos, KKRs, and it's like a mountain peak. It goes up, it jags around, it goes sideways, it comes down. And all the while, the valuations that we're paying for private markets firms are very consistent and flatlining across it. So maybe at times we're not getting as big of a discount where the public firms are trading, but there are times when we're getting tremendous discount. We just think the Intrinsic value of these firms is significant, and because of the, the lack of available capital in the space, we're able, knock on wood, to generate really good risk-adjusted returns for our clients by, by utilizing this pricing dynamic.

AI assessment note: “valuations that we're paying for private markets firms are very consistent and flatlining”

Q So what pushback do you get for people who look at what you're doing and decide not to invest?

A Oh, it's always about the duration. If we would have just said, this is a 10 year fund, our lives would have been so much easier. Um, I'm glad we didn't because here we sit, uh, you know, fund one being about 10 years old and we would have this unnatural position where we would have to quote, wrap it up. So we didn't do that. We stuck to our knitting, but it's made fundraising harder. There are still to this day, many organizations, many investors that do not have an ability to invest in a quote, permanent capital vehicle. Um, And so, while it was tempting to say, okay, fine, it's a ten-year fund, we've held out, and that's worked to our advantage. Number one, because we raised the capital we wanted to, number two, it kept a lot of people out. This industry, and you hear a funny quote from time to time that's becoming a saturated industry. They're, like I said, in the sandbox is ourselves and two other players, and a few others that are trying, but there have been a lot who have tried and haven't succeeded. And so, It's far from saturated. It's probably the one area of private markets where there's the biggest opportunity compared to the fewest number of competitors, perhaps, like I said, in any space and alternatives.

AI assessment note: “Oh, it's always about the duration. If we would have just said, this is a 10 year fund”

Q do you think about the return profile of what you get back, right? So in the hedge fund world early on, it was cash on cash and presumably really low multiples if you're talking about 25% cash on cash. There's enterprise value, there's cash flow, there's carry in these businesses. How do you model out what an investor in dial thinks about in terms of what their returns would be?

A From an underwriting perspective, we still use that original lens of cash on cash returns. We certainly don't get the type of cash on cash returns that we got back then in the hedge fund space with 25% yields, but we really think about it from an underwriting perspective as how long till we can get our money back How long until we can make a private equity like return? And those are cash based. We do believe that there is enterprise value at the end of the rainbow here, but we don't want to underwrite a sale. We don't want to underwrite that we can achieve that, that value. We want our investors to think about this as a long dated cashflow stream that will be very attractive for them. And if we can unlock an enterprise value exit, then we've got some ideas around that. But if we can, it's going to be upside. So we can get investors a private markets like return that is cash flow based, but much smoother earlier out of the gate, no J curve. So it has a really attractive return dynamic because we still keep that original cash on cash mentality.

AI assessment note: “From an underwriting perspective, we still use that original lens of cash on cash returns.”

Q So when we talk about the Dial product, how do you think about portfolio construction within a particular vintage fund?

A We really don't lead with portfolio construction. We don't say that this fund is going to have two buyout firms and two real estate, et cetera, because that sort of forces you into a, an unnatural position where you have to go out and find somebody at a given time, even if they're not ready, or if they're not as high quality as you would want. So we really focus on those longstanding conversations with the best firms that we think are going to be around for a long time. And if it shades a fund of ours towards one sector or another, then we're okay with it. Of course, we put limits on it. We don't want to end up with 25 VC firms in a fund, but it doesn't necessarily ever happen that way. It's been a nice blend, and we had a few people and clients that would start our quarterly reviews with, tell me about those, those energy firms you invested in. Those aren't looking too good. Well, Now they're looking great. So there is always the proverbial, the only free lunch out there is diversification. There's a benefit to having a little bit of everything. And if we're, if we know we're partnering with the better firms or even the best firms in their relevant segment, then we're comfortable that they'll see their way through different cycles. And what was energy at the bottom of the periodic table a few years ago is flipped to the top, just like growth was at The top back then and is now…

AI assessment note: “We really don't lead with portfolio construction.”

Q What are some of the use cases for that growth capital?

A Well, I always tell the story about Bain Capital. I give them credit. In just shortly after the financial crisis, there were questions around skin in the game from the perspective of investors and investors were saying, yeah, your performance in the industry hasn't been that good through this cycle. And so how do I know you're in it? How do you, as these firms get bigger and bigger, how do I know you're focused on my money and you're not focused on management fees? And so the response from Boston up at Bain was, well, We're going to put a billion dollars into this next fund, and that really reverberated through the industry, and there probably hasn't been since that time an investor meeting where a question wasn't asked, well, how much skin are you going to have in the game? What is your GP commitment? And so as we embarked on this really nice growth trend from 20 10 through today, as funds got bigger, as the GP commitments got larger, and as the funds came faster, there became a strategic need for GP capital. And that's really the void that we stepped into and filled. As these firms did get bigger, they were using up a lot of capital, and that's been the major use case for almost all the capital that's gone in the ground over the last decade. There are, there are secondary use cases. Of course, there are, there are times when we're buying out a retired partner or a set of reti…

AI assessment note: “that's been the major use case for almost all the capital that's gone”