The Exchanges

Q So both of you alluded to private equity owners and that maybe this isn't the last transaction in your careers. How do you think about the future of your businesses now knowing there will be some other events down the road?

A It's super important to define what that event is. I have no interest in working at a different place. I've had the great fortune of working at one place for a long time. I'm really excited to join Pastone, and I don't want to go and work somewhere else, and I think that is true with my partners. I absolutely expect that there will be more than one transaction at the private equity sponsor level. Somebody's going to come in and buy out the early private equity investors or just join as a third private equity sponsor of Pastone to continue that growth. I think that is the likely Next series of transactions, and that doesn't scare me at all. That's changing the capital base, hopefully adding strategic partners who believe in what we're doing and add value. Different story if Pathstone itself is bought by a different firm, becomes part of some gigantic investment management firm. I don't see that in the near future, if in the future at all.

AI assessment note: “I absolutely expect that there will be more than one transaction at the private equity sponsor level.”

Q So Simon, in theory, You're bringing your same investment chops with a whole bunch of added services. This is just even better for your clients. How did your clients respond in practice?

A Very similar to most are a version of, you know, if you're happy, we're happy, and they get the strategic rationale, and they importantly get that it's a way to keep the team together, hopefully for decades. The single criticism that keeps coming up is rarely well articulated. It's a version of they're backed by private equity, and that's bad. And you're going to have some kid looking over your shoulder, and you're going to have to learn about, they're called KPIs. And that, it's just easy to hate, apparently, the private equity folks. Our experience, I must say, with Lovell Minnick and Kelso, the private equity sponsors for Pasadone, has been great. There are much more traditional growth investors than It is a growth story. I think that is, well, it's certainly clear to me when clients stop and think about maybe connecting the dots about how capital is required to innovate and add additional services, and that this really is a growth story and not a consolidation or a cost-cutting story that come around to it. But that initial reaction of, I hate that there's private equity involved, runs pretty deep.

AI assessment note: “most are a version of, you know, if you're happy, we're happy”

Q Let's dive into the process that you guys each went through. Simon, why don't we start with you? At what point in time did this process that led to the transaction with Pathstone begin?

A So there's really two moments in time with a pretty big gap in between. The first was in the winter of 2021, in the middle of the pandemic, when really for the first time in a long time, I think all of us had the time and space to think critically about our businesses. I went on a walk with a mentor, a guest of your show, one Bill Ford, wonderful human and said, Bill, like I've been doing this for a long time. Just help me think about what's the right direction for the business. That was a moment, and it really got the wheels turning, but we didn't really act on it until early in 2024, when it actually started, the two managing partners and myself, Sarah Stein, Eric Alt and me, decided that we really needed to pick our head up and make this a professional project of figuring out what's going on in the marketplace and whether we should do something. And it was important to us that we consider doing something only at a point of strength, and that was a point of strength in the firm's history. So I had lunch with John Prouzan, who was the chair of the board of a nonprofit that I was on years ago and has become a friend and mentor to, and said, we need help. What should we do? He said, you should hire this guy, Terry Sullivan at UBS. I hired him many years ago. He's terrific. I'll call him and tell him to be nice to you. And that was the start of this professional journey.

AI assessment note: “The first was in the winter of 2021... but we didn't really act on it until early in 2024”

Q So Simon, I want to come back to this question of if you were fully integrating with Pathstone, that quote unquote cultural alignment has to be super tight. So what was it that you learned in your diligence process that made Pathstone the right cultural fit?

A There's some things that are super important and headline-y. And some things that are just convenient, that it's a little bit like pushing the easy button. So in the convenient category, Pastron is this beautiful national business. They have no office in San Francisco or New York. Our offices are in San Francisco and New York only, which is great. They have built out a fabulous trust business in Jackson. We built a trust company that we own in Reno, Nevada. In the world of trusts, that's a flywheel effect. They don't cannibalize each other. So those things were convenient. You know, I'd say they're little things like in office time and lunch once a week in the office. Those kinds of things were convenient and useful and a nice validation of the way that they treat people is similar to the way we do. There's also some really important strategic alignment, starting with, for us, which was a threshold issue of not selling products. And Tim mentioned this too, but it's easy to say it's hard to execute having a pure fiduciary business, which they most certainly do. We also really like the leadership. Matt Fleissick, who's the CEO, is a super ambitious, super energetic guy who has built a leadership team around really terrific partners that they have picked up along the way through a series of combinations. And we just really enjoyed the leadership team.

AI assessment note: “validation of the way that they treat people is similar to the way we do”

Q So Simon, let me turn back to, Terry starts to bring you on this educational tour. What happened as you started to learn more about that market?

A It was fascinating. He carried us along like tiny babies who had literally never even thought about this stuff before, which was just what we needed. Cast a super wide net. We probably met with a dozen firms across a really wide range of business models from big insurance platforms to RIAs to a bunch of others. And it became pretty clear that we should do something. That was probably the first revelation, which was what, man, the world is innovating really quickly around us. And why? Because they have a balance sheet. You know, in our business model, money comes in, we pay people, money goes out. That's how it works. A balance sheet really, really matters. So that was the first revelation. The second was that services as a business was really attractive to us. It's needed. We feel like we had the scale at that point at a firm to grow from a people perspective and From an access to investments perspective and from a systems perspective, but scale has always been really, really challenging on the service front. And that really helped us narrow the potential list of partners from a dozen to a little less than half a dozen. And then it was really just finding what we thought was the best cultural fit, the best strategic fit. We didn't worry for a second about solving capital structure problem at our firm because that's been a 20 year successful journey. Moving equity from the found…

AI assessment note: “We probably met with a dozen firms across a really wide range of business models”

Q So there's a lot that makes sense what you're saying from the perspective of your businesses and trying to compete. How important is growth to what you're delivering for your clients?

A Absolutely critical. Absolutely critical. Growth at our firm has always started with growth opportunities for our people. So in most businesses, I think if you're not growing, you're dying. Certainly that is the case for ours. So the markets help. We invest well and performance helps, and clients generally spend less money than they make. But we need to be growing in absolute numbers of relationships to provide the growth opportunities for people. That's really, really hard to do. I think both of our businesses, we joke that at some point along all of these journeys, it feels like you've reached scale in the next client you can add without adding people. That is categorically not the case. This is like service firms that are wrapped into investment organizations. So it's very, very challenging to grow absolute numbers of clients. The other thing we've observed is that the customer, it's a college endowment or a wealthy family, wants more stuff from fewer people for less money. So that to us has translated to a need to either create or provide services for clients that are more than what we used to do 20 years ago, which is pick great managers and put them together. We started a trust company, we've done a bunch of work on reporting and risk management, but there's always a thirst for more from the customer's perspective.

AI assessment note: “Absolutely critical. Absolutely critical. Growth at our firm has always started with growth opportunities”

Q So Simon, why was the setup, having it wholly owned by Pathstone, a better solution for you than what Tim described with the legacy business effectively staying the same?

A Firstly, that makes a ton of sense. And I think given different fact sets, you're going to make different decisions. So not necessarily better, but for us, we won't have a legacy business that stands independent from the combined business. And our relationships with our clients aren't going to change. We still invest in the same way. We have the same investment philosophy. In fact, the same people making the investment decisions. I imagine over time, Our reporting and risk management will be improved and we'll learn from each other. So I expect there will be some changes over time, but the core of how we interact will be the same. And we'll be able to provide a bunch of additional services for our clients. Pathstone has a lovely a la carte business model around the service platform, which as I dug in, I was like, man, that is a great business. That is just a really smart way to service clients. So most of our clients have solved those problems over the years and won't need Pathstone services, but to the extent that they do, they'll be available and they'll be fully integrated.

AI assessment note: “So not necessarily better, but for us, we won't have a legacy business”

Q How about your internal teams? In both instances, they're by force, by design, there was some knowledge. When the transactions actually got announced, had the teams respond?

A So we have a 180 people, a 125 clients, and we know our people really well. And I would say generally speaking, they responded exactly how their personalities would predict they would respond. There are some who just are wired to love a new challenge. All of them saw the industrial logic of the combination, but there are some who love a challenge or some who are just wired to be afraid of change. Or we have a bunch of highly analytical partners who just wanted to go deep into the details of the deal immediately. As much out of curiosity as what's in it for me, there was a common, common thread of how are our clients going to take this? And is this going to be an easy story or a hard story to tell? And can I say it with high integrity and earnestly? They responded in a very, very human way.

AI assessment note: “they responded exactly how their personalities would predict they would respond”