← Capital Allocators – Inside the Institutional Investment Industry
Capital Allocators – Inside the Institutional Investment Industry
Meghan Reynolds – Art of Capital Formation (EP.438)
01:07:16
Meghan Reynolds is Partner and Head of Capital Formation & Talent at Altimeter Capital, a leading technology-focused investment firm founded by Brad Gerstner. Meghan joined Brad three years ago, after decade-long stints at Goldman Sachs and TPG....
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- [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 WCM is committed to defying the status qu by dismantling outdated practices, believing in the extraordinary capabilities of its people, and fostering optimism to inspire each individual to become the best version of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. 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. Capital Allocators is also brought to you by our friends at Iconnections. We wanted to share a game changer for anyone hitting the road this year to raise capital. Our friends at Iconnections just rolled out a roadshows feature that lets you set up meetings and travel in just a few clicks. In their mobile app, you can share your schedule visibility with your clients and prospects and sync with whatever third party calendar you choose to use. It's also smart enough to account for travel time in between meetings and suggest optimal times should the inevitable delays and rescheduling arise. It's really purpose built to take the administrative burden out of your day to day and focus on what's important, like being a good partner to your LPs. Give it a look. We're all about highlighting our partners, anything or anyone that's bridging knowledge gaps and helping make valuable connections amongst institutional investors. And what Iconnections has coming down the pike on the tech side does exactly that. Visit iConnections IO platform to learn more. Hello, I'm Ted Seides and this is Capital Alligators. This show is an open exploration of the creatures behind capital allocation. Through conversations with the leading predators in the money game. We learn how these holders of the key keys to the kingdom use their sharp teeth to capture their prey. You can learn more and escape their clutches@capitalallocators.com my guest on today's show is Megan Reynolds, Partner and Head of Capital Formation and Talent at Altimeter Capital, a leading technology focused investment firm founded by Brad Gerstner. Megan joined Brad three years ago after decade long stints at Goldman Sachs and tpg. She's like the private equity version of my friend and partner Rahul Moongal, bringing a keen understanding of LPs and a relationship focused approach to her role. Our conversation covers Megan's experience building and maintaining great LP relationships over 25 years at both large and smaller firms. She discusses the role of capital formation, approach to serving clients, process of seeking prospects, and the parallels between venture capital today and private equity a decade ago. We close with the discussion of what Megan is hearing from ELPs before we get going, we're coming up on the eighth anniversary of the podcast, a duration I never imagined seven years and 50 weeks ago. Much of this we owe to our great guests. Some we owe to luck, mostly from getting started early in a podcast S curve. And definitely we owe a little to our natural curiosity and passion to innovate in the space. Four years ago we added Capital Allocators University to help allocators network with each other and level up their skills. Three years ago we created our summits to bring together leaders to connect and learn. Two years ago, Rahul and I started advising a few managers together and this year we added video content to our library. Each of these has been an incremental enhancement to serving this incredible community. But what we have in store next isn't something we wanted to do, it's something we felt we needed. We're changing the name of the show and platform subtly from Capital Allocators to Capital Alligators. Our research shows that in order for us to continue to grow, we need to reach a broader demographic, and our new name and logo will do just that. You'll have to trust me, I've been fighting this tooth and nail with our team. But I believe in the business aphorism grow or die. And the data we gathered told a clear story story when the facts change. I guess I have to change my mind too. Now this isn't totally off base either. From the many conversations I've had with managers and allocators, it's become clear that what I thought I knew about their relationship with each other is just flat out wrong. It's just not the case that GPS care about LPs or vice versa. They don't actually care about partnerships either. Instead, what's become clearer and clearer over time is that the almighty dollar wins. This business is about return, full stop. And it's also about job risk. The CYA that comes from making sure you stay in the seat you're in for as long as you can. These are harsh truths I think we all know but haven't wanted to say aloud. So there you have it. You'll see our new logo on the show starting today, renamed Capital Alligators to better reflect the predators in our midst. Thanks so much for spreading the word about the April Fool's Day joke on capital allocators. Or is it Capital Alligators? Please enjoy my conversation with Megan Reynolds. Megan, it's great to see you.
- [06:51]
Megan Reynolds
Thanks so much for having me.
- [06:52]
Ted Seides
Ted, I would love you to take me through your journey that's landed you ultimately at Altimeter.
- [07:00]
Megan Reynolds
Sure. Happy to. So I started my career at Goldman Sachs. Spent 10 years at Goldman. Very lucky to start my career in private equity and alternative investments. At the time that asset class was just beginning. Exponential growth. Spent a decade there. Always focused on the investor side of the business. Product management, fundraising, campaign management, investor relations, jack of all trades. After 10 years I was recruited to join TPG. Very lucky to spend the next decade there as alternative investments expanded, grew and we had the advent of big multi product platforms and mega firms of which TPG was one of them. So I joined the firm when it was 40 billion in assets at its peak. When I left it was about 125. That's 240 billion today. And in 2021 I joined Brad Gerstner at Altimeter, which is a technology focused investment firm to help Brad really change the face of his investor relations capital formation in what I think is one of the most interesting places to be in the world right now, which is technology.
- [08:15]
Ted Seides
I'd love to dive in a little bit on each of those three platforms and how you've thought about the role. So you're starting at Goldman, Big investment bank, big operation. What did you see in terms of that capital formation role in that seat.
- [08:33]
Megan Reynolds
I was very lucky in that it's a huge organization, but I was part of a very entrepreneurial group. We were building from the ground up. We were creating marketing materials from scratch. We were creating reporting and a fundraising function for an asset class that was new to most institutional investors and high net worth investors in the world. The exposure to private equity and venture capital for most institutional investors. When I started there was probably less than 1% on average. And by the time I left it was probably five or 10. So you can imagine the growth and the transformation that was happening. But I was doing it as part of a larger organization that had a very established sales function. We had distribution coverage all over the world. There was deep investor knowledge, the reach was very broad. It was organized by channel, meaning type of investors, endowment and foundations, consultants, pensions. And I learned about the nuances between all of those different types of investors from those salespeople. And they knew how to run a campaign very distinctly. It is a machine, and you learned from being a part of a very well oiled machine.
- [09:52]
Ted Seides
I don't want to say you were a cog in the wheel, but that was a big strong wheel.
- [09:56]
Megan Reynolds
Interacting with the capital sources for the firm, people that were running communications, managing any sort of transparency. I was hire number five or six on that team. And for many years it was three or four people. You can imagine what needed to be built at a time that the firm was trying to move from private equity into credit, into real estate, into growth. We had to very quickly apply some form and function and structure and hire in order to accomplish what we needed to accomplish. And it was learnings from Goldman that we were able to apply. And there were a few of us that had come from that big Goldman Sachs infrastructure and other banks. That was certainly not by mistake. It was by design because they needed to establish those processes inside the organization.
- [10:46]
Ted Seides
So when you show up, you're drinking out of a fire hose. Somehow, even though there weren't people in the role, there was 40 billion in assets, probably hundreds of LPs, questions coming in. And then you have to go try to build the infrastructure to help the firm grow as it did. You mentioned some of the components, but what was it when you started to 10 years later when you left, that created the base of what that infrastructure became?
- [11:14]
Megan Reynolds
Ted, just to overlay the fire hose that we were drinking from, I wanted to say most of our clients hated us at that moment because it was 2010, just on the back of the financial crisis. TPG had raised a $20 billion fund that had started to deploy very quickly into mega buyout deals right before Lehman fell and the financial crisis began. The first deal in that fund was Washington Mutual, which went to zero before the capital was called. That is the framework. I had no idea. I really respected the firm. Goldman was an investor. I knew people there. All of the talent from Goldman was going to places like tpg. I thought this was the best job that I could possibly have and to build something from scratch. But it was somewhat of a hostile environment when I stepped in. What we needed to build was basically three things that I think now define what is the role of capital formation? We had to establish strong investor relations. That's just the administrative layer of how does a client efficiently interact with an organization to get its annual reporting, to attend an investor meeting, to update its address when it needs its capital calls sent to someone new. There is this whole component of basic administration that at that point was built on very limited infrastructure. There's what I would call product management, which is how you source capital for a given strategy. What is the right capital base for the investment strategy that I want to pursue? Who are the right investors for that strategy? What is the campaign around that? And as the capital gets invested, is the strategy reflecting what your investors expect? There is an involvement from people in my role that around the course of how a fund gets invested that where you constantly need to weave that in to the investment strategy and you need to communicate that in some way back to your investors. The third piece of it is what I would call relationship management. Distribution, sales. How do you raise new capital? How do you build new relationships? How do you maintain relationships and putting some organization around that before you're able.
- [13:38]
Ted Seides
To jump into all that? It can't quite gloss over jumping into a firm that you think is going to be great, that's getting crushed by the markets. What happened in that period of time as you're trying to build out some of this infrastructure where your clients don't like you? You can't imagine what fundraising is going to be like. And the relationships may have soured a bit because of performance in the short term.
- [14:00]
Megan Reynolds
You learn so much in those moments. I tell all of junior people that I work with or people that I mentor, if shit goes wrong in an organization, start listening and just hang on tight and write everything down. Because I look back at that moment in time and so much of what I've learned about how to communicate well, how to respond to investors needs and how to be resilient as an organization came from that time. We had to do what we called at the time a contrition tour, which was essentially David Bonderman and Jim Coulter traveling all around the world, apologizing to our investors. We gave people an option to take their money out. We gave people an option to reduce their commitment. It was a $20 billion fund, so we still had a lot to work with, but those were the types of motions that we had to undertake in order to start to turn around relationships. It was humbling for a lot of people around the organization, but I think it made the organization so much stronger at the end of the day. And I think when we look forward 10 years, we had very high NPS scores from the clients that we did retain and the client relationships that we built over time. That came from the increased transparency, the increased humility, the personal connections that you needed to make during that time to build from the bottom.
- [15:37]
Ted Seides
How much of the success of that effort do you feel could have come from the bounce back that started in 2009?
- [15:45]
Megan Reynolds
Not as much as you would think. I don't think that performance is sufficient. First of all, we're in private markets, so it takes a very long time to bounce back. And we didn't have the time because the opportunity set in some of these other asset classes that we wanted to expand into was so immediate and tactical. The credit opportunity was in 2009 to build the talent acquisition strategy that was happening by the firm because of the displacement of so many talented investors from other banks and other institutions that had faltered. That was the now. And so we didn't have the opportunity to wait for a performance bounce back. All of it came from great communication and great relationship building. When I think back about that.
- [16:34]
Ted Seides
Yeah, as you do think back, was there an example of maybe a meeting that you had that you had some trepidation going in, and because of the nature of that humility and that transparency, you felt a real shift in someone who might not have been happy with you going in and then was excited about where the direction the firm was headed coming out.
- [16:56]
Megan Reynolds
I recall a very specific meeting with a California state pension plan, one of the big ones. You can imagine the boardroom with 30 people. I'm with Jim Coulter. I'm with some of the other investors from the TPT Capital team. I'm with the relationship manager, and I was very lucky to be in the room just representing product and product strategy and prepared to go through details to the extent that we went there. But the first 25 minutes of the meeting were just Venting. It's an hour long meeting, it might have been even 35 or 40 minutes. And here you have a very high powered group of people in the room, including Jim Coulter, who is incredible leader in investment management and has many things to bring to the table in a discussion around private equity and tpg. But Jim just sat and listened with great humility. And that is the biggest lesson that I took away from that moment is you can't move forward until you really understand where someone is coming from. And letting them voice their concerns and their frustration is so critical.
- [18:13]
Ted Seides
As you went to help build TPG from the 40 billion when you got there to triple that size when you left, what did you see that worked in the addition of adjacent investment strategies?
- [18:26]
Megan Reynolds
What works best, and what I would still say to people as they're building new businesses is you cannot just fundraise for the sake of fundraising. It has to come from a very tangible opportunity set that is immediate and actionable. And what I mean by that, it is not enough to say we took this team from Goldman Sachs who ran the special situations group there and aren't they very talented and we're going to build what we built there. Now here at TPG under The banner of TPG Special Situations, which is now called 6th street, it was coming to people with a specific list of opportunities and a specific hunting ground to say, you don't want to miss this opportunity. This is a market opportunity that's tangible today. Bottoms up. Based on everything what we're seeing, this is the amount of capital that we need to go after it and this is why it has a place in your portfolio. Even though no one really understood private credit, people understand deals, they understand actionable opportunities. It's not enough to be hand wavy and say we deserve to be in a market because we've got a great group of people.
- [19:44]
Ted Seides
What were some of the maybe experiments or strategies that TPG tried to pursue that didn't get the legs that a 6th street did in your time there?
- [19:53]
Megan Reynolds
We had very few failures, which is good. We tried to scale biotech and if you look back to 2010-2020, there was a biotech winter happening in the asset class. It made it very difficult to scale. And once you have difficult scaling, then you have some team dysfunction. People get frustrated and as a snowball that starts once you have trouble getting real traction, my reflection there is not because we made any footfalls on our marketing. My reflection there is because there was a winter going on in the asset class and the macro matters a lot that's the key question. I look at the last few years and make a comparison. People that wanted to raise growth. It doesn't matter how great your growth tracker was. Very few people able to raise growth in late 2022 and 2023. The tailwinds just aren't in your favor. It doesn't matter how good you are.
- [20:58]
Ted Seides
So you have this great run, great success at tpg. What led you to leave and join Brad and now what's effectively a single sector, Maybe you could say single strategy firm.
- [21:10]
Megan Reynolds
When I left tpg, I was co leading the fundraising group there which was a team of about 40 or 50 people with a partner of mine that I had worked with from the time that I was an intern at Goldman. It was a dream role for me and it was fantastic. But I realized that I craved an entrepreneurial role again. I craved a building and growing versus a scaling to the moon. And TPG was on the precipice of going public. You could see where that was heading. And when I really did the soul searching that we all did during COVID I came out on the other side of it. And so I took some time to reflect on that. Helped some friends in the venture community that were thinking about their fund and I was thinking about what I was going to do next when I was approached by Brad. Altimeter seemed like a really unique fit for me, particularly because I had these curiosities around what was happening in venture as an asset class. There were clearly things happening venture in 2020 and 21 that I saw as so similar to what happened in buyout in 050607 and the years that followed. And I had a thesis around that what was going to happen to LPs, what was going to happen to venture firms? And Brad and I shared some great conversations around that and. And so that with the combination of being able to work in technology which is on the advent of AI, really created the best role that I could think of. Altimeter to level set is 30 people. Very different than the several thousand and the tens of thousands that we had at Goldman.
- [22:58]
Ted Seides
I'd love you to describe what you saw in that thesis for what venture was becoming that you had seen in private equity.
- [23:05]
Megan Reynolds
The boom that happened in venture during the period that capital was free in 2020 and 2021 felt very similar to me as the boom of excessive leverage in 050607 in that you had investors that were increasing allocations to an asset class which were allowing firms and funds to scale to meaningful size to A level of scale that we had never seen before. And a lot of value that was captured within the asset class in terms of TVPI or total value sitting on investors balance sheets. That helped like great returns on paper that fueled new commitments. But that was stuck within a fund. If you are an endowment, you had incredible returns coming from your venture pool. But if you actually looked inside it, that a lot of that was paper returns and had yet to be returned back to investors. So everyone felt great about your venture and growth commitments and supporting your GPS because they had performed so well for you. But eventually investors tap out and eventually people start to question what happens to the track record of a fund that gets very large. And I knew that either capital was going to remain free and we were going to have a problem because we're just going to start scaling beyond how venture was historically defined or interest rates were going to rise, there was going to be some downturn in the markets and investors were going to be totally overallocated to the asset class. And there was going to be a reckoning of firms to say, should you be as big as you are? Does it make sense to have mega venture funds? Should this be a cottage industry? All of this is just pure pattern recognition. If you apply what happened in 0506 07, it is identical to what happened to venture.
- [25:14]
Ted Seides
What you're describing is running towards private equity right before it collapses and then running towards venture right before it collapses. So that seems different from the kind of opportunity you want to pursue.
- [25:28]
Megan Reynolds
I'm a glutton for punishment.
- [25:31]
Ted Seides
Why don't you take me to the side of that is why does that create an opportunity that you were excited about?
- [25:38]
Megan Reynolds
One of the first times I met Brad, he had just raised a $1.6 billion fund which was three times the size of any previous pool of capital he had raised. We are in late 2021. Maybe the market's starting to wobble, but really not. I told him, your next fund, you should expect that half of the capital will come back from your existing investor base. He looked at me like I was crazy. And he said, why do you say that? And I walked him through my thesis and I think that made him want to hire me because I was a truth teller. First of all, I think he saw he could understand the risks to the business that nobody else was really talking about. I think the value in my role and why that opportunity attracts me is, is because capital formation becomes more valuable in a world where you get by just on returns. If you can get by just on Returns and returns go up into the right forever. You don't need me. You're never going to value me. You're going to think I'm administrative, that I just accept the checks. But where I become valuable is in knowing how real relationships are built, how to build a sustainable firm, how to weather storms, ups and downs. It didn't scare me that venture was going to go through a down cycle because cycles happen. I've been through so many of them. Things come back and technology isn't going anywhere. And technology is going to lead us into the future and ventures will be around and new models will present themselves for how to invest in technology opportunities. That's what happened. Maybe might move to TPG was somewhat naive and I didn't see that then, but that is actually what I learned, that when you get through the other side of it, you've created stronger relationships, you have new opportunities, you're more creative, and you can scale in a sustainable way. And that is fun and exciting.
- [27:45]
Ted Seides
How did you think personally about you could be having this conversation with Brad and hang out for a couple of years and then come in after the crash as opposed to jumping in when you thought it might happen, knowing there's pain to come?
- [28:00]
Megan Reynolds
I could have just stayed on the sidelines and waited, but I knew that my skill set was needed and that I would have fun getting my hands dirty. Turns out I joined Brad the first week on the job. Our largest position in both our public fund and in our venture funds that we had distributed some, but far from all, was down 30% my first week on the job. Brad looked at me at the end of the week and said, are you okay? Are you gonna stick around? And I said, I think this might be divine intervention. I'm here for a reason. I know what to do. And we linked arms and here we are.
- [28:48]
Ted Seides
I'd love to chat with you about the types of conversations that you had both with prospects and existing investors in your time with Brad. So let's start with the former when you're thinking about raising capital. We talked a little bit about what that's like in the tough times, but let's just say you get through that. How do you go about the process?
- [29:08]
Megan Reynolds
So let's start with existing investors. There is a framework of communication that I think about as it relates to the communities of people that you're interacting with, the communities that are most critical to your business. I put those in three categories. They would be your investors, your employees, and then the companies that you're invested with. We level Set the communication patterns of the organization to make sure that our messaging is consistent and clear and and concise across those three sets of constituents. And I think that's really important and I think it's something that sometimes people take for granted. Let me give you an example. You could have change in your organization. Someone's going to leave. Your investors need to know that your employees need to be on message and the portfolio companies that that person may have worked with need to understand. If you're communicating different things to different people or communicating those things on a different time FR frame, you have a problem. Because if your investors are hearing something from someone else in the network that you haven't told them, it's a problem. And likewise, how hurt are your employees if they're finding out something that you've already been talking about externally? So make sure that we've level set of all the key messages that we're sharing with each constituent is consistent and clear and timely. The second piece of it is just do people really understand what really matters? Are you communicating to your existing investors what really matters? Your plans for the organization over the long term in the existing portfolio, where are the problem children and where is the promise in the future? Where is the return going to come from going forward? If people have a good handle on that, then they will continue to support you with more clarity and more conviction. If there's any gray area around that. The plans for the organization. Are you going to try to expand into new businesses? Are you going to fire your team? Are you going to make changes? Are you going to hire or if they're not clear on what's going on in the portfolio, you're going to have a lot of trouble raising new capital from them.
- [31:29]
Ted Seides
You have different conversations with different LPs at different times. How do you calibrate to make sure that those messages you want to deliver are consistent and heard by everyone?
- [31:41]
Megan Reynolds
You have to use a lot of different channels of communication because we're a very small team and we can't get to everyone in a timely way. And so you have to be flexible in the way that you communicate. We move from an annual report that was not particularly powerful and maybe was hiding some good news and maybe some of the bad news. If you deep into the reporting. One of my pieces of advice to GPS and people in my role is always don't assume your investors are reading the annual report. They're most likely not and you have your key investors that you're going to get to first. But how are you going to Reach everybody else. So I'd say have your list of decision makers, have your bullet points that you get out to people. The most critical people at every organization. Have a concise communication that you share broadly with your team. Leverage the investors on your team to help communicate some of those messages for Brad. Sometimes he talks about what's going on in his worldview publicly. He might do it on cnbc, he might do it on other platforms. But connecting all those dots and not being rigid on, we have to wait for a quarterly or annual report to get that out or wait for me to call everyone is what's critical. Use the different channels to get things out more timely, more consistently, more actively.
- [33:05]
Ted Seides
How do you think about communicating bad news?
- [33:09]
Megan Reynolds
I think about this a lot. I reflected a few months back on all of the great things that have happened. The wins that I've been able to celebrate with LPs and the bad things that I've had to communicate. And the bad things outweigh the good by five times. And I've worked for amazing investment organizations. It's just that shit happens. Markets turn. There's fraud in a portfolio company. Someone leaves, you're going to mark down a business just because it's the right thing to do. It's just the nature of the business. Great exits come around not that often. And when they do, you celebrate the heck out of it. Bad news, different thing. I have a very specific framework for bad news. You get out quickly and you address very clearly what I call pie or pie, which is what is the problem that you're dealing with? Person, company, market change, interest rates, you name it. That's the P what's the problem? What is the impact of that change? There's fraud in a portfolio company. The impact is that company is going to zero, or there is litigation or you name it. That's the I, what's the impact? And then E, what is the investor's exposure? What can I expect to happen to my fund as a result of this problem? And that is simply putting into people's hands an answer to the question that they are inevitably going to get to the constituents that they report to.
- [34:49]
Ted Seides
You mentioned celebrating wins. What's an appropriate way to go about celebrating wins in the portfolio or in the business?
- [34:57]
Megan Reynolds
I'm a big fan of celebrating with abandon. I actually see people under celebrate all the time because for some reason, and this is a sweeping generalization, that investment management isn't awash with humility. But all of a sudden people have a big win and they say, yeah, this was A really good one for us in a way that feels super humble. And I say if it was amazing, say it was amazing. If this was a historic win, make sure that is clear to your investors. If this is an unprecedented outcome for an industry, say it your investors, don't expect them to read through the tea leaves of your humility. Shout it from the rooftops. Those investors have their own underlying constituents. Nothing feels better than looking good to your boss. And you want to arm your investors with the data points that make them look great to their boss. And so you should be able to say to a state pension, we just had an incredible victory in our fund by a company getting acquired for a 25X and this is going to return our entire fund in distributions back to you over the course of the next year. And we feel very proud about that and we're proud that you're our partner. That is something they can take and deliver with pride, which feels really good.
- [36:30]
Ted Seides
I'm curious how you think about adding value to your partner's beyond just the knowledge and the performance you're delivering. Quite different I would imagine, sitting at Altimeter doing one strategy than at a TPG or Goldman where there's just lots of different inputs and strategies that people may be interested in.
- [36:49]
Megan Reynolds
I actually think the framework of adding value is not different between organizations. We make a point at Altimeter of asking investors when we're meeting them for the first time, what does a great partnership mean to you? If you think of the most important partners to you in your book of investors or your line items of investments, what are the qualities of those partners? Returns are never the first thing that they list. Communication, trust, sharing of insights, sometimes deal flow are almost always the consistent answers that we receive from the largest to the smallest organizations. There's something to learn by that which is if you're in the business, returns are table stakes and this is all about what else you deliver to people. And a lot of that comes down to just great communication. So when I think about what that means at a Goldman Sachs when you have tons of resources to Altimeter, which is a very small organization, to me it's bringing what are the most unique insights that are available to me that I can bring to the investors that I work with. That might be Brad's view on large language models or it might be a sound bite from a Goldman Sachs economist. But the characteristic is the same, which is it is unique and it can be communicated back in a timely way to add value to our investors portfolio or to help them understand what we do and the value that we bring in a more cohesive way.
- [38:29]
Ted Seides
I'd love to turn to prospecting for new clients and how you think about that process.
- [38:36]
Megan Reynolds
The land war that we fight in going around the globe and building new relationships, especially in a world where capital doesn't necessarily flow free these days, it's not always easy. What I have learned is the most important way to build your brand is the great existing relationships that you have. I've asked many LPs how they source new relationships. The number one answer that I get is from other LPs. So to me that says your existing relationships are the key to building new relationships. Having a warm referral, having a great institutional investor. When asked, say who are some of the best partners in your book or who's doing something really unique, or who's your best partner in tech, say your name is a great way to build relationships. I think that's number one. Two, having an understood brand in the market, telling your story when you're not marketing, that could be by being present at industry events. It could be being on cnbc. It could be simply having a presence in places where LPs exist. But it's always wonderful to sell yourself when you're not actually fundraising. The capital should be raised before you're even in the market is something that I like to say. So I think many people think about prospecting that I'm going to go raise a fund and now I'm going to build these relationships so that they commit to my fund. Now that's not the right way. Building relationships is a longer process that comes over brand building and building presence and relationships in a different timeframe?
- [40:32]
Ted Seides
How have you gone about establishing the relationships over time with people that aren't investors, recognizing they have their own set of relationships and they're very, very busy?
- [40:43]
Megan Reynolds
One of the things that I do is think about that same value add that you are providing to your existing investors. How do you illustrate that to someone before they're an investor? So that unique subject matter expertise that you may have as an organization start to prove the relevance to an LP before they're an investor so that they know what the investor experience may look like. Some LPs will say we'd love to do a co investment with you before we invest so we can see how your organization works. That's really hard because you have a lot of mouths to feed from your existing investor base that want your co investment. So I actually would say that's a very hard ask to deliver on in practice. But what they're really trying to say is, I want to understand what you can uniquely bring to me that I'm not getting from other places. And I want to understand how your organization works. For me, that is reaching out to people that I've met that are important, that I want to build a relationship. When something happens in the market like Deep Seek and we have a view, and I share our view with them, sometimes it's inviting them to a webinar we're having with our existing investors where we're going to talk about something topical that may be of interest. They can see what types of content we deliver to our investors. Unfortunately, it's rarely a deal because we have plenty of people that want the deals, but it is that it's around that transparency and unique insights piece.
- [42:19]
Ted Seides
When it comes to communicating what it is you do, what have you found most effective in telling the story?
- [42:28]
Megan Reynolds
First of all, people love deal stories. They love storytelling. If I reflect on the most impactful fundraisers and marketers that I have worked with, they are incredible storytellers. They bring you inside what's happening in a deal. Hearing David Bonderman tell the story of how they bought MEMC for a dollar in 1999 is so incredible and unique and insightful, but also just fascinating. So it's not just about talking about I'm doing this deal or we are involved in this market. It is about bringing that to life and getting the people on the other side of the table engaged and excited about what you're working on. I think Brad is uniquely talented. He knows how to tell a story. And when he talks about the future of AI, you feel something. You have to have the investors on the other side of the table feel something. That is what make someone inclined to action. They also need to connect with you. Personally, I think that we're beyond transactional at this point, especially institutional investors. They're going to put capital behind you. They're going to use their very slim allocation to make a new investment that involves 10 years of relationship and trust and a ride through markets and illiquidity. They really have to have a sense of who you are as a person and your personality is going to help reveal differentiation. There's also another framework that I think that is important in building new relationships around what every manager. You need differentiation at every turn. And I think of it as literally a circle with five components which is sourcing. How do you source your ideas? Picking, winning, adding value, and then how do you think about exiting? If you've left the room and you haven't covered those five things. You've left them wondering about your strategy or how you really are managing your portfolio.
- [45:01]
Ted Seides
When you think about that personal relationship side, how do you think about the impact of someone in your seat seat and your relationship with the LP as adjacent to Brad's seat and his relationship with the LP as the person who's managing the capital?
- [45:16]
Megan Reynolds
I think of myself as a really important liaison. I never think of myself as a substitute for Brad in the room. I never will be. But I'm a really important conduit that plays a critical role. One, they need to trust that I'm going to deliver important, relevant information and all the things they need to know. I'm going to make sure they get it. Two, I am transparent and trustworthy. A sounding board for when there's issues going on within our fund or in our portfolio or they have concerns that they can come to me and that I will accept all feedback in a safe place. Sometimes it's hard for people to tell Brad that they're upset with something that we've done or they don't like an investment, or they're concerned about changes that we're making on a team. I know I'm winning when an LP is telling me what they're not happy with. If they're just telling me they're happy, I actually keep digging because to me, the way that I can add value is the feedback loop from our customers are key partners to Brad and not so that he changes the way that he may act or changes the deals that he's doing, but that he's conscious of how the market is perceiving that because ultimately it will impact how we're able to raise capital going forward. When those feedback loops are broken, it's problematic for an organization. I love it when people turn it back to me and say, your most valued partners, what do they do for you? And I say they tell us the truth that tell us what they're thinking.
- [47:02]
Ted Seides
What are some of the most common mistakes that you see GPS make when they're in the market to try to raise capital?
- [47:10]
Megan Reynolds
The biggest mistake that I see gps make is they say too much and they don't listen. If a GP meets with a new investor or even an existing investor and they're raising capital and they have talked through the whole meeting, it's a missed opportunity, it's a problem. You have an opportunity to interact with your customer, partner and understand how they think, understand what's important to them, understand how the organization works, understand their process. You should take advantage of that and know your customer deeply. You should be making decisions about who the right capital is for you. It's not about just them deciding that you're the right partner. Like what is the right capital base for your firm, for your strategy for the next 20 years of your organization? It doesn't all look the same. Not all investors are created equal. You want to make sure that you're getting partners and customers that are aligned with the goals of the organization, that they're going to invest with you over the long term. So that's the number one mistake that I see people make.
- [48:25]
Ted Seides
I'm curious about the difference that you've seen in the hedge fund side of Altimeter, that private fund cadence. Say you're giving advice to someone who's managing a hedge fund or a public equity fund where effectively they're always in the market.
- [48:40]
Megan Reynolds
Public fundraising is so hard. I am so lucky that I built my career for basically 20 years with only having to raise capital. And then it basically sits there and you don't have to fight the redemption and you get a break between fundraises and there's cycles. I have deep appreciation for people that are doing an open ended fund construct and they're constantly in the market construct. At the heart of it. I don't think it's different. I think it's about building relationships before you make the ask. Though you may be in the market, it's about taking time and understanding that there's a sales cycle before you just march in and ask for the check. So though you may be open, don't treat it as such when you're building a new relationship.
- [49:36]
Ted Seides
Megan, I know that you've had a very fun Twitter X account summarizing some of the conversations that you have with LPs over time. And I'd love to just get your opinion on some of the things in the market now.
- [49:49]
Megan Reynolds
Sure.
- [49:50]
Ted Seides
So let's start with fund flows. Been a tough time. What are you hearing from LPs about what their plans are in the private markets?
- [50:01]
Megan Reynolds
It has been a tough time. My reflection is that for the last three years it's been the hardest time to raise capital. In the 25 years that I've been doing this, and that includes 2008 and 2009, it's actually been harder. Why? Because in 2008 and 2009 you had people that were still in building mode that didn't have big allocations to alternative investments. They were blank slates and they knew that this was a good time to invest. So Though very little actually closed during that time. A lot of new relationships were still building, a lot of planning was still going on and there was capital raising going on behind the scenes and capital raising for recovery capital and tactical funds the last few years. There's very few blank slates. There's very few people that are taking their allocation from 5 to 10 to alternative investments or from 10 to 20. If anything, they are grossly overallocated because of the lack of exits. And that is consistent across almost every channel of investors from endowments and foundations to family offices. There's very few exceptions. One of them is the retail channel. My observation from feedback from LPs is this is about haves and have nots. This is a market of am I backing someone that actually deserves to be here, that wasn't just a fluke fund that was able to get raised when money was free, but investment organization that's really going to be positioned to grow for the foreseeable future. I do think that's why there's been safety in larger funds because there's a sustainability to that capital and those organizations versus smaller organizations that don't have the track record, don't have the history of distributions DPI that other firms have experienced. And the result of that is all of this is going to be very scary if you are a merging manager during 2020 and 21. And I define a merging manager of someone that raised their fund one or fund two during that time.
- [52:17]
Ted Seides
So if you bring together, you mentioned the retail channel and the strength of large funds. There's a lot of capital coming into the space at private markets into that. What do you think happens with return expectations?
- [52:33]
Megan Reynolds
So I think that there's going to be a bifurcation of return expectations for mega funds versus smaller funds. And I'm specifically speaking about venture now and the private markets. That's generally the world where I'm operating. And I'm saying that because this is exactly what happened in buyout. You had buyout funds, pre mega funds that were consistently delivering 3x + returns before they got really large. They got really large and then they consistently returned 2x. I just was looking at KKR's returns which were in a Bloomberg article and sure enough their pre 80s, pre billion dollar funds all returned 3x plus. And then after 1987 they raised a series of many billion dollar funds that have consistently returned somewhere around 2x. My theory is that the same bifurcation is going to happen with mega funds versus smaller funds that are able to take advantage of power law and drive bigger returns 2x and participating in that part of the market with a brand that you know and love may be sufficient for certain pools of capital. You will see the institutional investors that have historically loved venture and participated in those big pools move down market just like they did in buyout. All the ENFs left the mega funds between 2008 and 2012. For the most part, I think the same thing will happen. But you saw retail move in. You saw the I capitals of the world like Blackstone selling massively at JP Morgan, kkr. All those mega funds started selling in the wealth channel. I think the same thing will happen and I think that there's plenty of people in retail and high net worth that have no exposure to the asset class that will be very happy to get exposure to great firms like General Catalyst. These mega funds that allow them to participate in a market that they hadn't participated in before.
- [54:39]
Ted Seides
If that leaves a very large swath of smaller funds, some of whom have brands and pedigrees and have succeeded and many of whom may not, what happens with the challenges in fundraising throughout the rest of the venture market?
- [54:57]
Megan Reynolds
I should draw a distinction around big funds and large funds. By the way, I'm specifically talking about classic venture. When I'm referring to that. I actually think there's this emerging understood part of the market, which is growth that is getting redefined at the moment. That does scale because of the company staying private for longer because of the scale capital raising that's being done with those companies where you can deploy at scale. And that's a different return profile. I think that's more of a 2-2-2x and an IRR strategy that's similar to what you would expect in public markets. These are quasi public scale private companies. But your question was around what happens on the venture side into some of these smaller organizations and the constrained capital raising. A lot of the funds go away, A lot of funds cease to exist. There's thousands of zombie funds in the market that will never raise another fund because their track record does not justify it and because people will realize that venture is not a get rich quick scheme, that not everyone and their mother deserves to have. A venture fund that all goes away. I think that it becomes the brands that deserve to be there and the differentiated products and models move forward. And I think fundraising looks a lot like what it did historically, which was a. Like there was a pretty steady pattern around venture fundraising that was going on in 2015 and 2016, 17, 18, even 19. And then it went Crazy. And I think we're just back and I think we're just gonna trudge along like we were trudging along before in a healthy way.
- [56:42]
Ted Seides
So for those smaller firms that you could look and ostensibly have a right to play, they've generated strong results but are still struggling in that fundraising aspect of their business. What advice do you give your friends who reach out and say, how do I do this? How do I grow?
- [56:58]
Megan Reynolds
I say, throw your 2021 fund size out the window. A lot of calls I get are from GPS of funds that are on fund two trying to raise fund three or fund three trying to raise fund four. Their last fund was raised in 2021 and it was 400 million or 200 million. But their previous fund was 50 or 100 and now they raised 50 or 100 and they don't know what to do. And I say, congratulations, that's amazing. Just invest it, Keep going, readjust. Just swallow the pillow and go back to where you were before. Re establish yourself and grow from there. The market is giving you what you deserve. And it's saying that that moment in time was an anomaly and that they want to see more from you and hopefully you run the business that you can live off of those management fees. And I think it's a very healthy gut check to say if you can't, then you need to make changes to your organization, or if that's not enough money for you, you should do something else and that's okay. And by the way, in 2005, 6, 7, 8 funds contracted by 50% when they went to raise their next fund. That happens. And it's a pride swallowing siege, as I like to say. It's a line from Jerry Maguire, but that's just what you need to do to move on.
- [58:23]
Ted Seides
I'd love your view on elpacs.
- [58:26]
Megan Reynolds
I love elpacs. They're the best. Full stop. Sometimes there's a perception that an LPAC is a administrative burden to an organization, that this is a body that you have to create an extra burden, some regulatory burden on your organization. And I think that that is shortsighted. I think that generally LPACs represent the largest and most strategic investors that are a part of your org partnership. Consulting them on some basis on matters that are important, that are tricky, that may be consequential to the business is really healthy and important. If you have something going on in your organization, you want your largest investors on side, so and fully understanding that because most likely you want them back into your capital. And so when you Have a body that can give you feedback and be those truth tellers for you and feel comfortable about what's happening, whether it's a conflict of interest or whether it's because you're going to raise a new strategy and they have approval rights or whatever it is, embrace it and recognize that this is your opportunity to get your most important investors feedback and get them on side because of that and because they often do have rights that could be consequential to the business. Be very careful about who you put on an lpac. Be very thoughtful about it. Make sure that you don't just give away the rights, but that you really have a group of investors that you know will listen and tell you the truth and be rational and understand the organization and governance structure that sits behind them when you're making those decisions. Often I see people have situations where they've put people on their LPAC from an organization. That person leaves, you get someone else and that might not be the champion that you had before. That's challenging. So make sure you take that into account when you're building your lpac.
- [60:43]
Ted Seides
What are some of your other favorite concepts and things you've heard that you've been writing about?
- [60:49]
Megan Reynolds
Well, I really am interested right now in fund math around venture to understand the dynamics around venture capital as an industry because it is a power law business, how that translates to how you should size your fund and how you should construct a portfolio to optimize returns. It is very different because of the power law dynamic in venture that only a few deals drive the returns for the whole industry than buyout portfolio construction or growth portfolio construction. You have to weight your capital differently, you have to size your funds differently. And in the world where so many people just went out and raised venture funds and everything was working and for a minute there, it wasn't a power law industry, it was everything was delivering great returns. You could get away without having to be thoughtful about that. But if you actually look at the historical data, there's been very few funds in history that have achieved 3x + that were over a billion dollars. And when you dig into the why, it is because you have to size and weight your capital to deals accordingly to maximize those returns. And it's hard to do that at early stages. So I'm very fascinated by this because I think understanding it and having agreement on it across the whole ecosystem between LPs and GPs will make us all more powerful. It will help LPs understand what to do with a track record that's concentrated around one deal. Do they celebrate it or is that a complexity that you need to wrestle with? It will help GPs think about how to manage reserves, how to think about opportunity funds, how to size capital. So that's one little course of study that I've been undertaking. I have follow ups to tweets that I'm keeping in my back pocket for a Saturday or Sunday when I'm ready to get more intellectual.
- [62:53]
Ted Seides
Any other favorites?
- [62:55]
Megan Reynolds
I definitely am unpacking this what's the difference between growth and venture? Growth at scale versus venture? How do we define the strategy or the asset class? Quasi public businesses that for companies staying private for longer. What do we do with that as an investment? That we've never really dealt with that at scale before, although the trend has been there. The existence of companies like Databricks and stripe and even OpenAI, those are truly quasi public. So what does that mean from a return perspective? Where does it fit within a portfolio? Should it actually be getting allocation from the more public side of the book? Investors are talking about this right now, so I'm excited to explore that. One more thing that I'm exploring is co investment. I had a tweet that got a lot of spicy responses. I think I might have struck a chord and it came from a conversation I was having with an LP. Usually my herd from LPs this week always comes from a topic that I happen to be discussing that I think might be interesting to the world that we live in. The tweet basically said very few institutional investors organizations are actively managing public equity portfolio. They're not choosing stocks directly, but almost all of them are choosing in private companies directly and co investing in companies where they have less information, that are less liquid, where there's more risk. So as an organization, if you are not comfortable investing in public companies directly, what makes you sufficiently resourced to invest in private companies directly?
- [64:48]
Ted Seides
Very fair question.
- [64:50]
Megan Reynolds
Just a question I want to make.
- [64:51]
Ted Seides
Sure I get a chance to ask you a couple closing questions. What is your favorite hobby or activity outside of work and family?
- [64:58]
Megan Reynolds
I love spending time outside in nature. California is a glorious place to live to be able to do that. I also grew up at the beach. I grew up at the Jersey Shore and love staring out into the abyss of the ocean and recentering myself. Lately it's been an obsession with redwood trees and getting lost in a forest with my kids. It's very grounding for me.
- [65:24]
Ted Seides
What was your first paid job?
- [65:27]
Megan Reynolds
Well, I grew up in a family that believed that if it wasn't something you needed or you were getting for your birthday or for maybe a holiday like Christmas. And you wanted it, you needed to get it yourself. You needed to pay for it yourself. So technically, my first paid job was scrubbing kitchen floors and bathrooms and doing chores at the age of 6 or 7. True story. For my mom for an allowance so I could buy my own clothes. But my first paid job was working for Hoffman's ice cream in Point Pleasant, New Jersey, A family owned old fashioned ice cream parlor. I applied for the job the day that I turned 14, which is when you could legally work in New Jersey. And I absolutely loved the job.
- [66:14]
Ted Seides
What'd you love about it?
- [66:15]
Megan Reynolds
Oh, delivering ice cream to people and bringing them joy. What's better than that? I love making people happy. That's my enneagram9 coming out. And it was a really great quality product. It was handmade ice cream. We were hand making these ice cream cakes. Everybody in town got their birthday cake from this store. It was just commitment to quality. With so much joy and love put into it.
- [66:41]
Ted Seides
How's your life turned out differently from how you expected it to?
- [66:44]
Megan Reynolds
I never expected to have traveled the places that I've traveled, to have met the people that I've had the pleasure of meeting. Being able to do what I do was beyond the wildest dreams of a little girl that was a child of two elementary school teachers in a hamlet I think you could literally call the town that I grew up in a hamlet by the beach. And I feel so incredibly blessed and lucky to be living the life I'm living. The other piece of it is you have these expectations that you're going to have children one day and they are going to be chips off the old block. And my children are nothing like me. And so that is not what I expected. That I think is probably an experience of most parents that you just throw your expectations out the window when the kids arrive.
- [67:42]
Ted Seides
What's a mystery that you wonder about?
- [67:45]
Megan Reynolds
I wonder about what happens when we die. I wonder about how the life that we lead, the implications of that for whatever happens next. And I live my life knowing that that is a mystery at the end of the day.
- [68:03]
Ted Seides
All right, Megan, last one. If the next five years are a chapter in your life, what's that chapter about?
- [68:09]
Megan Reynolds
That next chapter, I think, is primarily about three things. The first is being a mom to teenagers. My daughter just turned 13. It's the next five years. This is it. This is before they go off to college. I gotta make this chapter really good. And I know having teenagers is going to be a book that I have no idea how to write. So we'll figure that out as we go professionally are about the age of AI and the impact to our business, that is Investment opportunities. That's how we interact with the world, that's how we interact with people. Everything's going to change sooner than later and we're going to figure that out on the fly. Just like being a mom to teenagers. You figure that out as you go. And then I think the third thing would be it's a chapter where it's more about me sharing what I've learned and reflecting on my first two decades as I'm in my third and thinking more about pattern recognition and passing that on to the teams that I work with, the organization that I'm a part of. I'm more reflective in my mid-40s than certainly in my previous chapters.
- [69:25]
Ted Seides
Well, Megan, thanks so much for sharing all of your insights from the past few decades and good luck with the next few.
- [69:33]
Megan Reynolds
Thank you for being interested and chatting through it.
- [69:36]
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.