← Capital Allocators – Inside the Institutional Investment Industry
Capital Allocators – Inside the Institutional Investment Industry
CIO Greatest Hits: Multi-Family Offices – Stan Miranda (Partners Capital)
00:55:40
This week’s Summer Series is a multi-family office twofer, with Stan Miranda, co-founder and Chairman Emeritus of Partners Capital and Jenny Heller from Brandywine. Both firms started as multi-family offices that have evolved in different ways....
Loading summary
Transcript106 lines
- [00:02]
Ted Seides
Capital Allocators is brought to you by my friends at WCM Investment Management. To outperform the markets, you have to do something differently from others. In my 30 something years investing in managers, there may be no one I've come across who does that as clearly and as well as wcm. I've seen it up close. As an investor in their international growth strategy for the last five years, WCM is a global equity investment manager majority owned by its employees. They believe that being based on the west coast, away from the influence of Wall street groupthink provides them with the freedom to live out their investment team's core values, think different and get better as advocates of integrating culture research into the investment process and advancing wide moat investing. With the concept of moat trajectory, WCM has delivered differentiated returns while building concentrated portfolios designed to stand out from the crowd. WCM is committed to defying the status qu by dismantling outdated practices, believing in the extraordinary capabilities of its people, and fostering optimism to inspire each individual to become the best version of themselves. To learn more about WCM, visit their website@wcminvest.com and tune into this slot on the show to hear more about WCM all year long.
- [01:27]
Podcast Announcer
This testimonial is being provided by Ted Seides and Capital Allocators who have been compensated a flat fee by wcm. This payment was made in connection with Capital Allocators testimonial and production of podcasts and is not depend on the success or level of business generated. The opinions expressed are solely those of Capital Allocators and may not reflect the opinions of others. Investing involves risk, including the possible loss of principle. Past performance is not indicative of future results. Please visit wcminvest.com for WCM's ADB and further information.
- [01:52]
Ted Seides
Capital Allocators is also brought to you by AlphaSense. AlphaSense has become indispensable in modern investment research. It's the market intelligence platform trusted by the world's top institutional investors and for good reason. AlphaSense combines premium content with powerful AI to deliver clarity fast. From company filings to over 200,000 expert interview transcripts, it helps investment teams zero in on what matters most when deeper insights are needed. AlphaSense's expert call services provide direct access to high quality vetted experts on demand. Unlike Traditional Expert Networks, AlphaSense Custom sources experts to fill specific research needs. Whether validating a thesis, pressure testing an idea or gathering real time field intelligence, all without the friction or price markup of legacy models, what truly sets AlphaSense apart is its ability to surface proprietary insights combining expert access with AI purpose built to extract qualitative intelligence at scale. The result is differentiated perspectives and decision making confidence delivered faster than ever. See it in action at alpha alpha sense.com capital that's alpha-sense.com capital.
- [03:25]
Hello, I'm Ted Seides and this is Capital Allocators. This show is an open exploration of the people and process behind capital allocation. Through conversations with leaders in the money game, we learn how these holders of the keys to the kingdom allocate their time and their capital.
- [03:44]
You can join our mailing list and access Premium content@capitalallocators.com All opinions expressed by.
- [03:53]
Podcast Disclaimer Voice
Ted and podcast guests are solely their own opinions and do not reflect the opinion of Capital allocators or their firms. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Capital Allocators or podcast guests may maintain positions in securities discussed on this podcast.
- [04:11]
Ted Seides
With eight years and over 500 podcasts under my belt, I'm often asked to recommend my favorite episode. But I can't really answer that question. I feel like I have 500 children and don't think I've disowned a single one. So when asked, I usually offer up a great recent episode to get a listener started. Finding the best episodes in a big library of content isn't easy, so we thought we'd help. Each summer going forward, we're going to share our best. Over seven weeks, we'll replay conversations curated from our favorites and yours, excluding those from the last 12 months. Our 2025 Summer Series focuses on CIOs. We're blessed to have an incredible library of long shelf life content, and we just couldn't pick seven. Instead, we'll share a dozen gems, canvassing every type of institutional asset owner. This week's summer series is a multifamily office twofer with Stan Miranda, co founder and Chairman Emeritus of Partners Capital, and Jenny Heller from Brandywine. Both firms started as multi family offices that have evolved in different ways. Partners Capital has grown and scaled as a leading ocio, while Brandywine has remained a boutique with a fixed set of family clients.
- [05:37]
Podcast Announcer
Before we get to the interview, a quick announcement. We've set new dates for our Capital Allocators University for investor relations and business development professionals. Those dates are December 3rd and 4th in New York City. Later in the year is just a better time of year for this gathering. It's post AGM season. Travel starts to wind down. It's right before the holiday crunch time and it's a great time for capital raisers to reflect on their previous year and plan for the year ahead. December 3rd and 4th in New York City. CAU for IRBD is a closed door gathering for capital raisers to connect with peers, learn from Allocators and other experts and really share invest practices with each other. You can learn more@capitalallocators.com University. Thanks so much for spreading the word about Capital Allocators University for investor relations and business development professionals.
- [06:26]
Ted Seides
Please enjoy my conversations with stan Miranda from 2023 and Jenny Heller from episode seven back in 2017 and a follow up in 2021.
- [06:38]
Stan, great to see you.
- [06:39]
Stan Miranda
Thank you Ted.
- [06:40]
Ted Seides
Why don't you take me back to the founding of Partners?
- [06:44]
Stan Miranda
Okay. This is right after the tech bubble burst. I'm sitting in my kitchen, as the story goes, with my next door neighbor Paul Dimitrik. We have both been private equity investors. Paul started Investcorp in Europe and I was working for Evolution Global Partners, which was a Kleiner Perkins spin out. As the tech bubble burst, our balance sheets reflected that because we were very concentrated in guess what? Private equity, the asset class that could never go down just went down a lot, especially if we had tech oriented investments. So in our minds we were embracing diversification as a solution to that problem. And in the weeks prior to that we had been meeting with various private banks, mostly the Goldman Sachs, Citibanks, UBS of this world. And it was just shocking what we learned. I mean number one was just the conflicts, the number of Goldman products or Citibank products. It was just astounding. And if they did have third party managers, there were generally no benchmarks. And if you did find a benchmark, it was the wrong benchmark. So you had not only conflict of interest issues but transparency issues. We couldn't get to the costs in many cases of the assets. When we went through the manager's performance, we realized that most of the managers had no alpha, so why would we ever hire a private bank? And we thought about where do we find the solution? And it just, and we're both very entrepreneurial and we thought we should just start this. We should build something that's completely independent, uses proper analysis and honesty in evaluating performance, and is totally transparent with the costs and the performance with the clients. So we called it the island of Integrity in the investment management world. So it was a wake up call for us that we needed something so desperately and it didn't exist and so we thought we'd create it. And with my strategy consultant Business school Hat on. I thought what we need is the equivalent of Michael Porter's book on corporate strategy, but for the institutional investment world. What is that? This is no joke. It was sitting on the kitchen table. It was called Pioneering Portfolio Management. So we read the book and felt it would be the cookbook that would get us started. The end of the story around the founding is that I had a set of friends that had the exact same problem and they were mostly private equity GPs. So before evolution Global Partners, I was at Bain building their private equity consulting practice, which meant we did due diligence on mostly buyouts and then we did all the post acquisition operating value added work. I knew European private equity world cold. So it was the premiers and CBCs and BC partners, but also Blackstone and Bain Capital. These were all clients and friends and classmates. And there were 43 of them, to be precise, on April 1, 2002 that signed up, recognizing that Stan and Paul knew very little about anything other than maybe private equity. But they trusted us to figure it out.
- [09:55]
Ted Seides
What was the capital base you started with?
- [09:57]
Stan Miranda
$7.7 million. You can do the math on 43 clients. They weren't giving us their whole balance sheets at that time.
- [10:05]
Ted Seides
So how did you take that initial.
- [10:08]
High level idea and dive in and start to learn how you were going to go about implementing this strategy?
- [10:16]
Stan Miranda
One of the things I learned at Evolution Global Partners was to take things slow because we took it really fast there. The backers were Bonderman and Coulter of TPG and Byers and Schlein of Kleiner Perkins. And then there was a Bain investment with John Donahoe and they were just pushing us so hard. We hired 35 expensive people overnight, built these two offices that never spoke together. It was not a good way to build a business. So I took it really slow. We started with three employees with one in Boston and two in London. We just chose the very next asset class and it was right on the back of the tech bubble. Nobody wanted any more equity exposure. So what did the doctor order? Absolute return hedge funds. We just started studying the hedge fund space. It was very much the market neutral end. So equity market neutral strategies, Merger arb, Fixed Income arbitration. And we just found, and we got access to just through relationships, things like Tudor and Caxton. And so we were off to the races. We just went to the next asset class and the next asset class and the next asset class, pulled out a blank sheet of paper, reminded ourselves what the Swenson book said, but really pulled out a blank sheet of paper and Said, how do we invest in municipal bonds? What's the right way? Should it be high yield? What duration? Just every single aspect of every asset class. We just started from scratch and analyzed it very deeply on each of those.
- [11:41]
Ted Seides
How did you go through the process of blank sheet of paper asset class that a lot of other people understand and know about, but you don't yet and you need to learn and get up to speed.
- [11:51]
Stan Miranda
We believed in something we called steal from the best, but it was also more euphemistically called triangulation. So we just talked to a lot of people and that was only confirmatory or it was something that would narrow down the universe. So we literally had a database where we had number of hits on this particular fund, but that just got us down to the six or so final candidates for any particular strategy. But also it had to be rooted in some deep insights about each asset class. And it always started there, not with the managers. That was another topic we picked up with friends at McKinsey Investment Office at Yale and at Stanford Endowments family offices. And we talked to them, you know, what do you avoid in this asset class? What do you focus on in this asset class? But in the end it was our data driven analysis. We hired whatever we needed as time went on, rooted in investment decision making, but we weren't necessarily hiring the person exactly in that lane of the asset class.
- [12:51]
Ted Seides
How did you go from the initial seven and change million learning these different asset classes to beginning to scale into what became an OCIO business?
- [13:01]
Stan Miranda
So we had to get $25 million in year one or something called US blue sky laws would have made our legal bills just astronomical. We hit 25 million at the end of the year just by adding the two asset classes, absolute return and and municipal bonds for the US taxpayers. Then in year two, we'd hired people like Will Fox, who's still running North America with us today. And we said, we're not paying ourselves anything if we don't get to $100 million. Recognizing that break even was probably $300 million. If we didn't have the momentum, we weren't going to carry on. But in that second year, 2003, we actually got institutional clients. They were the institutions that knew about the Yale model, the Endowment model, but they were a little bit rebels. They weren' traditional. People are worried about what somebody else is going to think. And so they were going to hire the new guys on the block. Gonville and Keys College, Cambridge hired us in that year and we hit the $100 million target with a mix of high net worth individuals, private equity GPs mainly, and smaller institutions. And then the next year Will Fox and I said the same thing. We hired John Collis, who's just retired after 20 years, who ran Europe, and we started adding clients to in the institutional market, mostly in Europe. At that point we hit 400 million in 2004. We were calibrating how much we grew by. And in 2005 we hit 1.5 billion. A lot of institutions, a lot of private equity gps and we shot and we got our Excel turned into more institutional technology and so forth. The next year was three billion and we capped ourselves about one and a half billion a year until the global financial crisis. But even in that year we added a one and a half and we lost one and a half. So we flatlined then and then since then carried on growing. We let off the 1.5 billion limit and it's now today at about 4 or 5 billion dollars a year that we net.
- [14:56]
Ted Seides
How did you figure out what product you were going to offer in that initial? Very fast growth those first couple of years?
- [15:03]
Stan Miranda
It was always the endowment model. We were always going to have all asset classes. It's just that most of our clients were overweight private equity. So that was low on the list initially, but we had the full endowment mod by 2003. We only started investing in private debt in 2009. That was asset class after the initial set. But we had hedge funds, fixed income, liquid credit, private equity, including venture and property. That was our lineup in the end of 2003, beginning of 2004.
- [15:35]
Ted Seides
Every client has their own reason for being their own set of values, their own goals.
- [15:41]
How did you scale trying to do.
- [15:43]
This for lots and lots of clients?
- [15:45]
Stan Miranda
First of all, you're right that almost all our clients want something highly customized. And the primary reason that would make sense is if they had a very different risk profile or they had particular biases against their current balance sheet of property and private equity and so they'd have a different allocation. But in the end, the private equity GPs ended up doing something that looked a lot like the endowment model. And of course the institutions did. Even the customization is generally about asset allocation and not about which asset classes are included. Almost all asset classes are included in almost all client portfolios, even the private equity GPS today. So the customization came down to really sizing of managers or simple allocation decisions, whether it's 8% private debt versus 10% private debt.
- [16:37]
Ted Seides
When you initially sought out to say we're going to replicate or triangulate on the Yale model. What did that mean to you and what you were delivering for your clients?
- [16:47]
Stan Miranda
After 19 years at Bain, you just had an appreciation for the fact that there was a best way of doing almost anything. I'm an academic purist and our mission is to take the most advanced, proven institutional investment approach to our clients. The endowment model in our definition, and may not be your definition, may not even be David Swensen's definition, but it had three pillars. Number one, high static risk. So static means no market timing and that was definitely David Swensen platform. But also the high meant it's long term money, you can take the volatility. Secondly, multi asset class diversification with a bias towards illiquid assets, but not necessarily defining them as illiquid, but just you can take higher risk, you can take the illiquidity. Let's go for it. So that was certainly the second pillar and something we definitely copied of the Yale model was that you don't give money to the big retail, publicly listed asset managers that are in the business of churning out 40 new funds every year. You went with the concentrated specialist, entrepreneurial owner operated asset managers who had the bulk of their balance sheet in their own funds. So their skin was in the game. And so those were the three platforms that we followed. And that was enough work. Really. The focus in the early years was just being a deep expert on every asset class. We always had a benchmark that we wanted to beat for every asset class. So in hedge funds, it was Blackstone's bam outfit, their performance was ahead of everyone else's. We just had to make sure that we could beat them on each asset class.
- [18:25]
Ted Seides
When you applied this concept of there's a best way of doing things to manager selection, in addition to those couple of criteria you mentioned, how did you go about the process for manager selection?
- [18:38]
Stan Miranda
Different asset classes, really three things. Number one is the Malcolm Gladwell phenomenon that the team has to have had a lot of reps. It's really important and it's really hard in asset management because of the timeframes. Secondly, it was narrowing down your field of investment choices through quantitative techniques, mainly beta and factor analysis, multiple regression, which goes way back in my history, is in my blood. And then thirdly, very importantly is knowing the psychology of a great asset manager. So it's psychometrics basically on the reps. I always think, who do you want doing heart surgery on you? You want somebody who's done a lot of them right. And so it's the same in the asset management world. If we've got a client, some big institution, first question they should ask us who's making these decisions on asset managers and how many experiences do they actually have and how are you capturing that inside your organization? So one individual gets the benefit of another individual's reps. The most important thing is not just how many mistakes you've made, but did you stop, analyze it, codify it and teach it? Did you educate your team about why that was a bad idea, why you succeeded with certain managers?
- [20:01]
Ted Seides
What are some of those mistakes that you made that you've tried to transfer onto the team?
- [20:06]
Stan Miranda
Commodities is a great one, okay. As we say today, it's a graveyard of failed investment decisions. Because almost every strategy that we were looking at had commodities in there. And they're active commodities, not passive commodities. Because you learn about commodities, there's no yield, there's no income. So over time they actually go down because of economies of scale. It turns out in commodities, to know enough about what you're investing in, you have to specialize. So you just do energy commodities and you are whipsawed all over the place. So it's up 80, down 60. You have to own four or five of them. But they go out of business after three years. That was a big learning. So we don't do commodities today. That's a whole asset class learning. And there's more specific learning about individual managers in every asset class.
- [20:57]
Ted Seides
How about some of those other ones?
- [20:59]
Stan Miranda
We started life with equities actually saying, this is too hard, we're just going to go with Mr. Vanguard, that's the best way. Nine basis points. We know what's going to happen here. But then we thought, wait a minute, this is 30% of our clients portfolios. We're not generating alpha for. We gotta crack this. So we started with the private equity approach to public equity investing, as you'd expect us to, because that's deep fundamental analysis. And that's the only possible explanation for how you could have security selection alpha. That worked actually from about 2005 to about 2009 when it stopped working because growth was introduced and the value factor killed the private equity style managers. I'm not naming managers that we necessarily invested in, but that was the SPOs and the CVNs and Value Acts. That was a bad factor trait. We migrated into the growth sector and we believed in the extreme focus in biotech or China or emerging technology because these were deep experts. It's inefficient. And what did we learn there? We learned that there's a lot of risk other than equity beta in these portfolios. Okay, China, there's geopolitical risk and biotech, there's basic regulatory risk, small company size risk, unprofitable or profit tomorrow, company risk. And all of those are risks that you're going to get paid for. But you're way ahead of your budget when the market goes down. You give so much back. So anyway, public equities, we're learning from individual managers through time how difficult that really is today.
- [22:43]
Ted Seides
How about venture capital managers?
- [22:45]
Stan Miranda
The learning there is more about the asset class than the individual managers because of the Kleiner Perkins association, that we believe what everybody else believed, which was if you weren't in the top eight, 10 managers, you just didn't go there. But. And you needed the early stage. And the early stage was really where all the real returns were. Back in the early 2000s we couldn't get access to them. So we did some alternative things like the tiger globals of this world. But we didn't have much early stage at all. And that did really well thanks to the tech bubble that we rode. But today you don't get early stage from those managers because it's a tiny percentage of their overall book. They're getting the early stage somewhere in their house, not necessarily in your portfolio, but they're accessing the best early stage. So they have proprietary insights and access to the late stage. So you want to invest in their late stage. And we do, but we don't get any of the early stage venture capital. And it's our assertion that's a much higher return because it's higher risk. But you want it. There's lots of data that you pick the right time frame. Late stage is the same as early stage returns. But if you adjust for tech bubbles, tech bubbles included in both the beginning and the end, the early stages where you definitely are generating superior returns. So you want some of that. And it's uncorrelated to late stage and equities. But how do you access it? Emerging managers, as it turns out, the second tier isn't necessarily any worse than the emerging managers. And the emerging managers are small enough where they can make the small investments in 50 different deals and they benefit from the home run, if you will, of early stage venture because their mind is totally focused on the unicorn. The total addressable market has to be big enough that that company can realistically become a unicorn. And if that's your lens, that's a great investable emerging early stage manager model.
- [24:46]
Ted Seides
How do you reconcile the difference between the belief that emerging managers in venture capital are the way to go with what you originally said of the importance.
- [24:56]
Stan Miranda
Of reps, we almost never invest in early stage manager without reps so they've almost always come from another place. And our classic example is hig, we love this manager. There are a lot of spin outs which got superb training and not all of them have been terribly successful but many have and that's a classic example of what we love doing.
- [25:18]
Ted Seides
So reps being the first of those three pillars Let me walk through the second and third.
- [25:22]
Stan Miranda
The second is we've got this funnel, we've got access across the globe to all these managers. So guess what? Our funnel is really, really wide and we narrowed down the funnel with this triangulation approach but more importantly, just quantitative statistics and, and what thoughtful investors have realized is that you're not just being paid for equity beta. There's credit beta buried in there, there's inflation beta in there, there's certain aspects of sectors, there's factors, there's so many things in there. So Peking Public equities as the most obvious example we run massive regressions against their historical performance and we attribute that performance to certain factors that we can replicate and we create the multi factor replication benchmark and if they didn't beat that by a significant amount, they don't get through. That knocks out 95% of the equity managers over a five year period minimum. And then we have to stop and do all kinds of thinking about whether they did pass that test, can they continue doing it? And by the way, there are some managers that didn't pass the test and we didn't invest with them because they didn't meet the alpha test that we just talked about but we thought they would based on changes in a team and so forth. And so we went into that firm having not passed the quantitative historical test but they definitely passed the reputational test and just certain team changes made us think that they were going to be a success. So that's a quantitative screen that saves us in every asset class. We even apply it to private equity, the multifactor, what we call beta replication tool.
- [27:01]
Ted Seides
So you have reps, you have your.
- [27:02]
Stan Miranda
Quantitative filter, we've got the psychometrics. The shorthand is the best investors are square pegs. There's lots of exceptions in the investment world. There's lots of investment rules that have exceptions. We see that more often than not that they're not balanced individuals, they're workaholics, they're highly ambitious, energetic people but they're highly analytical, high integrity, very trustful people. And so there's more than just the lack of balance. They're forces of nature, really. They identify a goal in terms of what they want to achieve in terms of performance or where they see the insights. And they're just going to walk through walls to get to that other side of the wall.
- [27:45]
Ted Seides
How do you tease out positive psychometric elements in your diligence process?
- [27:50]
Stan Miranda
We send more senior people in that have seen this across a number of different reps, if you will, in the first instance, some people, you see the real person very soon, always. And so I'd say number of hours with them, and it's at least the fourth or fifth meeting. We do on average 300 to 500 hours of due diligence on the average private equity fund, for example. So later in the due diligence, we learn that, but also from references. We do a ton of reference, typically 20 references. So ideally with people that know them very well and will be honest with us about them.
- [28:26]
Ted Seides
As the years have gone on, 20 years plus, since David wrote Pioneering Portfolio Management. How have you evolved how you've thought about the endowment model?
- [28:37]
Stan Miranda
So number one is risk. You think about the result of an endowment model, you end up with, pick a number, 60, 200 managers, and you think you understand from their exposure reports what you own, but you don't know what you own just from their exposure reports. So you have to go really deep in knowing what you own. We understand the underlying stocks that most of the portfolios have. We get all that data and then we run it through our factor models to know where we've got over and underweights, because one manager may be doing the same thing as four other managers, and all of a sudden we've got tons of exposure to clinical trials risk. Okay, that's the single biggest change in the endowment model, is the risk management. And that's what risk management means to us. We show our clients what we call the risk dashboard, which has over 16 different metrics, including the value and quality and ment momentum factors, as well as liquidity factors, currency. You have to understand all of this because odds are when you got an overweight that was unintentional, it goes against you. And when it goes for you, you call it alpha and you don't pay attention to it, but you should, you should pay huge attention to any source of alpha. It's probably beta.
- [29:52]
Ted Seides
When you do that quantitative assessment to figure out what you own underneath, how does that then impact the way you construct your portfolios?
- [30:02]
Stan Miranda
The main impact is that we will counterbalance certain overweights that we don't want as intentional overweight. So we have to have enough liquidity in the portfolio where we can use ETFs or index funds or futures that we can offset those. That's the primary implication. But there's a positive implication of having so much data on what we own. You can actually then fine tune your allocation to different SKUs. So if you think structured credit at this point in time is cheap, we can do something with that. We'll find a manager and add to them or whatever it takes.
- [30:36]
Ted Seides
How do you balance the notion of static risk with the concept that there may be something like structured credit that you think is an opportunity?
- [30:45]
Stan Miranda
So we break our tactical asset allocation model into three layers. We call layer one is just absolute risk. So we convert all those different betas and factors into one measure. We call it ENIB equivalent net equity beta. It's equity like risk. And we set the target, say at 75 for a given endowment. And then when markets move it to 73, we rebalance up, markets move to 77, we move it down. So we never time markets on level one. Level two, we have 13 asset classes or seven beaches, whichever way you want to look at it, and we've got targets for each one of those. Markets move those. Or we have valuation views on level two, say one of the 13 asset classes, emerging market equities. If we think that's gotten cheap, we'll do something there that's also very difficult to do. So we don't do a lot of it. The third level is sub asset class tactical modes. So those are where our managers are giving us some insights. Railways. That was one of our recent ones we had as an unsuccessful one, community banks going into 2023. Okay, anyway, that's our level three tactical moves. And those, those tend to generate at least enough alpha to pay for our fees, if not a little more.
- [31:57]
Ted Seides
So we're all paying fees to active managers and sometimes you're buying the package that they're delivering. Once you start disaggregating this composition of returns and understanding what the alpha is, what the beta is, how do you then go about applying what you've learned to the implementation of your investments in a manager? When it relates to fees or structure.
- [32:18]
Stan Miranda
If it's a manager with very constrained capacity, we have no influence over that manager. Over time it's getting better, mainly just through relationships where we're working hard to actually add value to them, even though they've got limited capacity. We're competing with all their other LPs and we will do things like educate them about the energy transition, we'll talk to them about the best incentive programs we've ever seen for hedge funds or how big an average compliance team is. So we're always trying to add value to those individual managers. But in the case of a lot of the private equity, private private debt managers, especially if they're fund two or three, we're allocating so much capital to them that we can talk about separately managed accounts, we can negotiate terms. We're always trying to make sure we're only paying performance fees on the Alpha, not the Visa. And so those sorts of negotiations do take place.
- [33:10]
Ted Seides
We're going to take a quick break in the action to tell you about macabacus if you're in private equity, venture capital, investment banking or asset management, you know how much your team relies on Excel, PowerPoint and Word to deliver financial models, presentations and investment committee memos. Today that work is time consuming and error prone. But what if Please Fix was a thing of the past and your workflows were seamless with models, slides and reports working in sync, free of errors and fully brand compliant? That's where macabacus comes in. Macabacus is the leading productivity and brand compliance suite designed for financial and professional services. With features like Seamless, Excel to PowerPoint, linking model check for error free financial models, shared library for brand consistency and digital asset management, and tools like AI writing assistant, Doc builder and logo library, your teams can get their work done faster and more accurately. Every spreadsheet, every slide and every document is a reflection of your firm's reputation. That's why teams at the world's leading private equity, venture capital and investment banking firms trust macabacus to help them deliver polished error free deliverables so they can focus on insights rather than edits. Get started@macabacus.com cap that's Mac abacus.com cap.
- [34:42]
And now back to the show. What else have you done in the more modern version of what you've applied to the original endowment model?
- [34:51]
Stan Miranda
I mentioned two so the risk management and then the tactical asset allocation. The third one is just focus on being a value added LP is very intense. We have actually a best demonstrative practices book. It's about 70 pages on post acquisition operating value added that we share with private equity managers. So that's a very meaningful part of it. On top of that, I'd say this focus on beta as a risk measure, not volatility, is very important. A Lot of people out there in our business think about the average endowment portfolio should have 10% standard deviation around its annual returns. 10% volatility budget it, which makes no sense because what happens when markets go down? Volatility goes up. All of a sudden your portfolio is over risked. What do you do to de risk it? You sell right after the market got cheap, so you're selling into lower prices. And the opposite, when markets go up, volume goes down and you're buying at expensive prices. So that's another aspect of it. There's some main changes.
- [35:58]
Ted Seides
How have you thought about in the public markets you said in the old days you thought maybe Mr. Vanguard was the right solution. Then it was such an important part of your portfolio, you started looking for active managers. And now it's just increasingly hard with all these other factors to prove that you're adding value. What have you done about that?
- [36:16]
Stan Miranda
There's a portfolio construction solution. Turns out information ratio is probably the most important metric in liquid securities or asset classes. Okay, so how much alpha do you expect is the numerator? How much volatility, single standard deviation around that alpha do you expect in any one year? And if you think about that all the time and you're adding managers, theoretically what you do is you start with the highest information ratio manager, allocate as much as you think you can based on that volatility. Maybe it's 6% of your total portfolio is a large allocation for us. And then you add the next highest information ratio and then you look at what you own underneath that and you find oh, we've got a lot of growth in there and you have to rebalance it. So that's the basic portfolio construction model for liquid securities. Credit's a little bit different because there's a lot of tactical asset allocation in there. So we're always taking a view on the different sub asset classes of credit.
- [37:17]
Ted Seides
How have you thought about internal capabilities compared to giving money to external managers?
- [37:23]
Stan Miranda
Well, we started life no conflicts here, so there's a high bar on that. But we do have such strong relationships with liquid and illiquid managers. So we do a lot of co investing, private equity and private debt and property in the illiquid asset classes. We've always done co investing. It's been very successful. Our targets today are about 20% in there. But about seven years ago we started co investing in public equities. So with our long hold closest manager relationships, we just talked to him about those positions and said do you care if we double up on them? We're not going to pay you any fees. And most of them said no, you're a big investor, probably be helpful. So that's the closest we come to direct investing. The rule is that if we can't find it externally, we're allowed to do it internally. So we launched something on the back of COVID called the New World Equity Portfolio. The New World Post. Covid was one that was embracing technology, working from home and you can imagine the sorts of things we invested in. They were both overcorrected companies like retail and airlines. We owned those and we owned the beneficiaries like Zoom. And so that was one that we just couldn't find anyone else doing. We did it, it worked. The logical lifespan came to an end and we stopped it. Right now we're looking at one in the energy transition space. It's all about owning brown to green. We cannot find anyone else doing it. How have you structured your team initially? First 12 years we had all client facing people were also research people. Back to the kitchen table with Paul Dimitrik. We wanted the person across the table from us to know what they were talking about. Okay, about this hedge fund manager and so forth. And so we kept that model as long as we possibly could. But now with $50 billion of assets and 360 people, it's not possible. And so about six, seven years ago we created the client CIO. There are about 130 team members under the client CIO. Each client has the primary point person and they historically have probably worked on the research team doing asset manager research. But today that's all they do is construct portfolios and manage the risk of client portfolios. Then there's roughly 64 people that are dedicated to the research team. There's a central research team which does all the macro work under Cameron Mogadam. Then there are four groups of asset class teams. So equities, privates, private debt has its own team because the complexity is there and then absolute return hedge funds and liquid credit. So those teams are roughly 12, 15 people each. We believe in specialization, we don't believe in the generalist model. And so that's all they do is live and breathe their asset classes.
- [40:13]
Ted Seides
I'd love to dive through some of your thoughts and lessons learned across asset classes and maybe start with private equity, where you started in the business. How do you see the landscape today?
- [40:25]
Stan Miranda
So private equity, turns out it's one of the asset classes where you can actually pencil out the expected return. You just pull out an Excel spreadsheet, you put in what you paid for it in terms of multiples on earnings and what you're likely to get for it when you sell it. You've got the debt, the cost of the debt. You've got the 2 and 20 in terms of fees. Most important number of all earnings growth. Put all those together, certain assumptions usually get you to about 15%. Historically with nice growth of earnings and cheap interest rates. We just live around that model. We think about who can grow their earnings the most, what are they paying, what can they sell things for. And that has always pointed us in the direction of lower middle market buyouts and specialists, software specialists for example. And so we've always been focused on that. And we had the data to prove that it's harder to grow earnings in a big company than it is in a small company. The private equity owner can be a more value added owner than a huge Apollo, Blackstone, even Bain Capital today and cbc, they're buying multibillion dollar companies. It's just harder to grow earnings. But then you look at the performance, you realize actually they haven't done any worse than the lower middle market. But if you break out the attribution of that performance. The average private equity firm over the last 10 years earned 15% net. 7.5% of that was from multiple expansion, which is basically referencing the public equity markets, multiples. And those companies get valued in line with those. And so they went up by 7.5% because of the last 10 years growth of the public equity markets on the back of the global financial crisis. The other 7.5% half percent is rather pedestrian average earnings growth combined with some inflation in there. So there's no real value added from the average private equity firm even in the last 10 years if you adjust for the public equity multiples and the debt aspects of it. So if you leverage small cap public equities, we think you could have done better. Okay, but huge dispersion. So there are big exceptions in the mega cap, large cap cap, all the way down to the middle market who would violate that observation.
- [42:41]
Ted Seides
So if you've grown your asset base and grown your allocations to these managers, how have you tackled the sweet spot of this middle market?
- [42:52]
Stan Miranda
So we're now in the fund number two and number three space. That's our sweet spot. We have great relationships with certain names and we get big allocations with them and they've gone up to 5 or 6 billion dollars funds, but still work, working. We can call that middle market these days. But the best solution is just know the middle market Firms that are most likely to create spinoffs and watch and we have our relationships with the search firms and others. So we get usually early heads up on firms that are leaving. We'll typically meet the management team the first time we pass. In most cases, not in all cases. We've done some fund ones, but generally we say we're going to watch you. Please hold some space for us for fund two. And we're in fund two.
- [43:35]
Ted Seides
There's probably nothing that's changed more in these 20 years than hedge funds and your next asset class you tackled way back when. How are you investing in hedge funds today?
- [43:44]
Stan Miranda
So first of all, we break them into two totally different groups. Hedged equities. Anything with a beat of more than 0.2 to the equity markets, we call it an equity manager. And frankly, the learning is the same as in the long only equity space. But we do have more alpha from the hedged equity managers. They just tend to be deeper, more fundamental and more specialists in a lot of cases. So our biotech managers are mostly equity long, short in the absolute return space. First of all, more managers is better than few managers. There's a minimum where you debate whether it's 12 or 20. And you're all about diversifying your sources of alpha. So what we learned is you can create say with 20 managers with the right mix of strategies and a very consistent source of alpha, call it 3 to 4%, not big numbers with only 3% or even 2% alpha volatility. So information ratios of 1.2. And then what do you do with that information ratio? You leverage it. Okay, so that's how we invest in absolute return hedge funds. We create a very stable, solid stream of alpha and then we leverage it.
- [44:57]
Ted Seides
When you think about that area, the 12 to 20 managers, as you define a manager, can mean a lot of different things because so much of the asset assets have gone into these platform hedge funds that are effectively doing that aggregation, diversification for you. So how have you balanced the ability to put capital in some of those strategies with say a millennium or a citadel, an individual single strategy manager.
- [45:19]
Stan Miranda
We probably should have allocated to the citadels and millenniums. Okay, we should have. We just always look at the fees. We have an acronym for everything. As you've highlighted, EROC is our excess returns on cost. The EROC is terrible. And another way to think about it is of the total gross alpha, how much do they keep? It's about 80%. We get 20% of the Alpha. The alpha's huge, absolutely huge. But we could never get comfortable with only getting 20%. So what do we do? We allocate it to their spinoffs and it's mostly Citadel spinoffs. They've done very well and they're closer to 2 in 20. And we get roughly 50% of the gross alpha. And we diversify. They'll be specialists in consumer or specialists in tech. And we have to create a diversified portfolio of those.
- [46:09]
Ted Seides
So beyond the equity, long, short, low beta, absolute return, maybe some credit, there's this whole world of alternative alternatives. How have you thought about and participated in that?
- [46:19]
Stan Miranda
So we were early pioneers into that. You know what they say about pioneers. We started with insurance, including life settlements as well as catastrophe insurance, quickly went into litigation financing, royalties, both music and drug royalties, and then one of our favorites is actually clinical trials and sports athlete financing. So that's the journey. Over about 10 years we've been looking for this, the holy grail, which is high 12, 15% type returns that are completely uncorrelated to financial markets. And all of those strategies I just mentioned are pretty much uncorrelated. The problem with them is that they have limited capacity. As soon as I start talking about them on a podcast, then all of a sudden the alpha goes away. But in most of those categories, it has gone away, unless they're in certain specialist areas. But it's been a good asset class. We can't take our allocation in client portfolios up above much more than 5 or 6% today.
- [47:20]
Ted Seides
How about real estate?
- [47:21]
Stan Miranda
Real estate, first of all, stay away from the double promote. You don't pay a private equity firm to pay a private equity firm. Okay, so we go with regional specialists generally and we build a national portfolio. Obviously, real estate has tax implications that make it hard to have a global portfolio. So our Europeans don't invest in US Property. But frankly, the US property market is a lot more alpha rich than European and Asian property markets. So our US clients, a lot of them being taxpayers, benefit hugely from a diversified North American property portfolio. And then our European and Asian clients benefit from European and Asian diversified portfolios that are pulling together regional and sector specialists. So then in terms of office and industrial and residential and hospitality, that's where you can almost time markets, not quite. When you're allocating for the next three to four years deployment, you may still want to be in all. So we do use generalists in some cases regional. But lately, last six, seven years, we have invested almost entirely in industrial, so a lot of logistics and that's been big success.
- [48:35]
Ted Seides
How about real asset?
- [48:37]
Stan Miranda
We've moved Away from them. Early on we invested in oil and gas. Just seen it was a great landscape for real specialists. People talk about reps, these are great opportunities for reps. But the commodity prices take you out. And all our due diligence had us being convinced by these managers saying that they hedge the commodity risk. They don't. The risk has just taken out too many resource companies. So not just oil and gas, but mining. I mean it's a pretty difficult area to invest in unless you really take a 20 year timeframe and you live with this massive cyclicality. So we do not do anything in traditional resource areas. We are primarily focused on the energy transition and those are effectively real assets in many cases.
- [49:23]
Ted Seides
So with a lot of this idea.
- [49:25]
Of taking on a new asset class, having a clean sheet of paper, in the last couple years there have been some opportunities to do that. There's the crypto and the blockchain. We've world or certainly all the developments in AI and would love to hear your thoughts as you've mapped out and looked at these areas.
- [49:41]
Stan Miranda
What you found on AI. It's too early. First high level question is how is it going to affect institutional investing, asset allocation, the timing of various moves, but then how it's going to affect basic fundamental research at the asset manager level. So we don't have an answer to that and frankly it's too early. Early to tell right now, but we will be in front of that when it happens. On crypto, we have studied it and we have come to a decision not to invest other than in blockchain venture capital. The simple explanation is that it's like gold. It has no income, it has a market because people buy it. Okay, so quoting Jacob Rothschild, when the central banks are buying gold. Gold, you buy gold ideally before they start buying, but so crypto's the same. It has its pricing set by the scale of purchases and that is driven by a lot of momentum and psychological factors. If you look at the value of Bitcoin, it bears no resemblance to any value proposition or utility that bitcoin has. Okay, Bitcoin has utility, especially in just moving currencies across capital borders. There's a real value to that. I'm not sure it's legal in many cases, but there's a value to that. It's not $40,000 a coin that's clearly speculation driven. And we'll invest in cryptocurrencies when they reflect their utility or they're cheap relative to their utility.
- [51:18]
Ted Seides
What's different today, managing $50 billion at partners than at different stages along the way with smaller asset sizes.
- [51:27]
Stan Miranda
By far the biggest difference is our relationship with the asset managers. We're just always the top of their table, and so we get every question answered. We get more transparency than the average investor, and we can come up with creative new ideas with them. The managers are getting bigger, but some of them are getting bigger and developing their capabilities even faster. And we want to grow with those, and we're going to do that if we're close to them and we're contributing to their own capability improvements.
- [52:00]
Ted Seides
I'd love to hear what you've learned about succession of asset management firms. You've certainly seen a lot of it in the managers in your portfolio. You've undertaken aspects of it with some retirements, as you mentioned.
- [52:12]
Stan Miranda
It's difficult, but not as difficult as you think. We always assume there's so much more to that one index individual that when they leave, it will be a disaster. It generally doesn't end up that way. Does succession work in all cases? In terms of just the politics and no casualties? In terms of the partner group, no. But asset management firms, if they're good ones, they've really embedded their capabilities so deep in the organization that no one or two people really are that important, Especially in the bigger institutional portfolios, if it's a team of six, succession is vitally important. And so you've got to really focus on that. But it's extremely difficult.
- [52:57]
Ted Seides
How have you gone about it at partners?
- [53:00]
Stan Miranda
First of all, we were a partnership, so it wasn't a single person running the investment decision. So it's not Andreas Halvorsen at Viking. It was Stan Miranda who built a partnership and initially three partners, and now 19 partners. And all the partners were. Were involved in many different specific aspects of the investment process. So no one person really mattered that much. But when I gave up the CIO role, Colin Pan was already doing it. So I think succession in all companies, not just investment companies, is about giving the job to the individual before they take it on. And then it just happens more naturally. And you always expect, as the founder or whatever, some big fanfare, but it's always just a little tiny. Any applause when the transition actually takes place.
- [53:51]
Ted Seides
Where do you think partners goes from here?
- [53:54]
Stan Miranda
I do think we end up doing some more direct investing. We see 1,000 managers a year in any one asset class. We just know so much about each asset manager. Most of us just sit there and perspire over all the opportunities we're seeing that aren't being exploited. So when I Said the rule is we can only exploit those opportunities that haven't already been exploited by amazing people. Outside partners capital. There are a lot. And so I think we're going to cross that boundary at some time very delicately. We don't want to break the rule that created us. No conflicts. But I think there's some opportunities our clients should benefit from where they could see much lower fees and a lot more alpha if we integrate forward into asset management.
- [54:42]
Ted Seides
And how about partners as a business? 3, 5, 10 years down the road?
- [54:45]
Stan Miranda
Road. Privately owned management, run outsourced CIO continuing to be one of the most highly respected in terms of thought leadership and investment management.
- [54:56]
Ted Seides
Great.
- [54:57]
Well, Stan, I want to turn to a couple closing questions before we let you go. What's your favorite hobby or activity outside of work and family?
- [55:03]
Stan Miranda
Okay, so outside family. Family is definitely first protocol. Outside of work, every moment of free time is spent in sports, basically. And I do triathlons, so mostly just the individual. Running, swimming and cycling a lot. But I collect sports. You name the sport. The only one I don't do is golf because it would take too much time and it would take out all the other sports. But I do ice hockey, kayaking, every racket sport you can think of. I just love sports. It may be the competitor in me, but it can't be because I'm not that good at any of them. It turns out focus matters. I may be a good skier. That's about the closest to one. But I am a master of none.
- [55:43]
Ted Seides
What's your biggest investment pet peeve?
- [55:46]
Stan Miranda
Clearly, people who mistake alpha for beta. And we do it all the time. Oh, we just did fantastically well in those biotech firms. It's got to be beta.
- [55:56]
Ted Seides
How about your biggest personal pet peeve?
- [55:59]
Stan Miranda
Okay, I have a lot of those. I was asking my wife, for example. She said, well, plastic bottles, brown shoes. Entitlement is probably the one, because people that are entitled, you don't succeed with them. I think you succeed with people who have a basic philosophy that hard work earns you the right to whatever you have, whatever you experience. So I believe in hard work and focused efforts to get ahead.
- [56:24]
Ted Seides
What investment mistake have you made that you'd never make again?
- [56:28]
Stan Miranda
I think invest in catastrophe insurance. So you already said we're long global warming. That's what catastrophe assurance is. But global warming has always been ahead of pricing, so that was a painful experience.
- [56:44]
Ted Seides
Which two people have had the biggest impact on your professional life?
- [56:48]
Stan Miranda
Number one, it was my second family. I was very close to Dr. Tom Eliason. In Fresno, California, where I grew up, and his wife, who was my den mother in Cub Scouts. And. And I spent so much time with them because their son was my best friend. Dr. Eliason was a leading cardiologist, and he was my role model. The impact he had on me was to be calm and thoughtful. My family was full of drama, and so it must be the Portuguese DNA or whatever it is. But he gave me a sense of perspective and calm that, compared to my siblings, is distinctive. I think most of my work colleagues would say, really, I haven't noticed. But they have to understand what it could have been. And then secondly is a gentleman named Archie Norman. He's a serial CEO and chairman. He was the CEO of asda, turned around asda, Energous, itv, and he's currently the chairman of Marks and Spencer. And I worked with him when he was at asda, when I was a strategy consultant. And he has two unique characteristics as a lead, and one is that he just doesn't like doing anything ordinary, anything normal. He just strives to do things that surprise people out of the ordinary. And he taught me to always be brutally honest and face into the unvarnished truth. I'm the chairman of the board of Partners Capital. You don't go into the board meeting to convince them that our investment performance is great. You find the area that's not great, you spend all the time on that, and you're honest about it, and you focus them on it, and you face into the unvarnished truth. That's what Archie taught me, which I think is incredibly valuable.
- [58:35]
Ted Seides
What teaching from your parents has most stayed with you?
- [58:39]
Stan Miranda
Okay, so 1972, I'm thinking about university, and there's the financial crash, the markets crash. My father happens to be a stockbroker. Okay, this was a bad period for him. He sat down with me and he just said, well, first of all, that college fund, not so big anymore. But secondly, if you do anything in life or in university, have a skill that people will pay for and you will land on your feet. And that just always stuck with me. And so my first degree was in business and accounting, so took care of it. I think that's wonderful advice for anyone early in life.
- [59:17]
Ted Seides
Stan, last one. What life lesson have you learned that you wish you knew a lot earlier in life?
- [59:22]
Stan Miranda
Keep your loved ones close to you. That sounds so obvious. But in a global world where we have the ability to send our children anywhere or they have the ability to go anywhere, and your friends have the same freedom, we all end up all over the world, and I'm at that stage where I'm trying to gather them back into one place and in some ways wishing I didn't have the truly global experience I had because I'm just living on planes, going visiting children and family and friends. So the advice I give to young parents in particular is don't let your kids go to university abroad. Keep them home. You'll never regret it.
- [60:00]
Ted Seides
Stan, thanks so much for sharing your wisdom and experience.
- [60:04]
Stan Miranda
I've loved it. Ted, thank you very much.
- [60:07]
Ted Seides
Thanks for listening to the show. To learn more, hop on our website@capitalallocators.com where you can join our mailing list, access past shows, learn about our gatherings, and sign up for premium content, including podcast, transcripts, my investment portfolio, and a lot more. Have a good one and see you next time.