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Today's show is also brought to you by AlphaSense. AlphaSense is the market intelligence platform trusted by institutional investors worldwide. It gives you access to over 500 million premium sources, from company filings and broker research to news, trade journals and over 200,000 expert calls. This October, AlphaSense is hosting its inaugural Alpha Summit 2025 in Brooklyn at the refinery at Domino. Alpha Summit will discuss how AI is reshaping investment research and decision making. Featuring leaders from ubs, Wells Fargo, Accenture, Google Stripes Group, the Carlyle Group, and new speakers announced each week. What makes Alpha Summit unique is that it's not just about ideas, it's about showcasing the real workflows and strategies top firms are using today. Join AlphaSense at AlphaSummit 2025 October 6th 8th. To register and to see the full list of speakers and agenda, go to AlphaSense.com capital that's Alpha sense.com capital. Please enjoy my turn on the other side of the microphone with Michael Sidgemore on the Alt Goes Mainstream Podcast.

Michael Sidgemore (5:45)

Ted, welcome to the Alt Goes Mainstream podcast.

Ted Seides (5:47)

Oh, Michael's fun to be on the other side of the mic Right after you are on Capital Allocators, it is.

Michael Sidgemore (5:52)

Two podcasters walk into your room. What happens? You've built an Amazing business at Capital Allocators. And I'm sure some know this, but others may not. You have been an allocator Yale Endowment, and then with PROJ Partners, the hedge fund side, hedge fund to fund. So you have a wealth of experience on the institutional allocator side. So we'd love to just hear your journey to where you are today.

Ted Seides (6:12)

You got most of the highlights. I graduated from Yale in 92. My first job out of college was working for David Swenson at the Yale Endowment long before he wrote his book. He had been there for seven years when I joined and I worked with him for five, covering mostly public equity, US International managers. They had an internal bond portfolio that was index plus. And I ran that actually in 94, which was the year of big interest rate spike. To create an index fund wasn't that interesting, but it was an interesting time to do it and just learned a tremendous amount from David and the team.

Michael Sidgemore (6:44)

What did you learn that's probably been most impactful on your career?

Ted Seides (6:48)

You could look at David the person, David the investor, David the leader. And there are things in each of those categories. As an investor, he approached the world from. He called it first principles. But think of it as basic economic principles rooted in research that would guide you to where you would go. So back then for Yale, that meant you had long dated assets and liabilities. You had pretty reasonable spending over time. You had to keep up with inflation. So that led to equity orientation. You said you want to be diversified. Back then, most people had US Stocks, if not US stocks and some international stocks. And so there became known as the Yale model or the Endowment model, this multi asset class approach. But it was rooted in this idea of what are you trying to deliver? What's the best thing for Yale in particular? And then he had this extreme discipline I think most great investors have, and what that discipline is guided towards can change based on the strategy. But to see that every day, before you knew anything else, I was right out of college. To learn these incredibly valuable lessons at a visceral level, because you were there experiencing it was just an extraordinary investment in education.

Michael Sidgemore (7:55)

That's so interesting when you think about the evolution of the Endowment model. On the institutional side, how do you think about how the Wealth Channel can look at the way institutional allocators have approached both public and private markets and take some lessons, maybe also not take some other lessons if they're solving for different needs in certain cases. But what do you think that the Wealth Channel can really learn from the institutional allocator mindset and specifically the endowment model.

Ted Seides (8:25)

So David wrote a second book that didn't get nearly the traction of the first book and it was geared towards individuals. There are certain aspects of the model that can apply broadly and I would think about that as what's the market giving you? And then what can you extract from the market? So the market's giving you beta. And if you're starting with stocks and bonds, there's a lot of different betas you can create to have better diversification over time. And that's what he preached in this book. It was early ETFs and you could do a REIT ETF for your real estate and you could do a bunch of different things so you can learn certain disciplines. Like what? That asset allocation framework is rigorous rebalancing, things that just can add value over time at a low cost. And lots of people preach that. David did preach it for individuals. Warren Buffett clearly preaches it. The other part is what can you extract from the markets or the alpha piece? And that's where it gets a little bit tricky because everyone thinks they're going to pick outperforming managers. By definition, everybody can't. It's not like Wobegon. When you get into the alt space, you have this wider dispersion of returns between the top quartile and the bottom quartile. And the median does get the job done maybe by a little bit. And I can say the median private equity fund probably does a little bit better than the market. The median hedge fund probably doesn't get you that much. The median real estate fund probably gets you some beta of real estate. It gets you there. The real juice is if you can get to the top quartile. And that's where you have this difference. In the institutional world, there's so much knowledge, experience, attention, resources deployed to try to get at who's better. And I'm not sure the Wealth Channel's caught up with that yet.

Michael Sidgemore (10:07)

So that brings up an interesting point though, which is one of access some respects. Now access is being unlocked and some of the best performing managers and managers with the longest track records are now providing access to. Do you think that now that access is being opened up, then that does change the equation a little bit for the wealth Channel, Maybe they can get access to the same quality managers that an institution could.

Ted Seides (10:31)

Just like David would say, you have to go back to first principles and that starts with who do you think will outperform? There are some, I would say more luck than skill that the Wealth Channel is going to benefit from which is that there is more persistence in private equity than in the public markets. The large public alt managers who are the ones attacking the Wealth Channel, they're really good. You're not going to find a lot of people that don't know what they're doing at an Apollo or a Blackstone or a kkr. They have to battle size and scale and size is always the enemy of performance. So you have that trade off. One of the things, particularly in private equity, the public markets have been shrinking. The Wilshire 5000 now is 3000 companies and 600 of them are biotech companies. The S&P 493 has not performed well. Mag 7 has. And there is this question if you look at what's a properly diversified portfolio, should you have access to all these other companies that are private? And I think the answer to that's yes. Which would tell you that even if those large alt managers are just providing some form of beta and access to a large portfolio of private companies, that could be a good thing for the portfolio. I think that's most of what the Wealth Channel today is going to get. Median, maybe median plus maybe you can get to top quartile with some of these funds. But at 20, $25 billion private equity funds, it's hard to do that, particularly when they're buying businesses from the middle market and the lower middle market at premiums. And maybe those are the managers that are going to outperform because they still have that multiple pop when they get out.

Michael Sidgemore (12:04)

Where my mind goes, when you talk about helping advisors and the Wealth Channel, think about constructing a portfolio or accessing certain parts of private markets. Do you think that there should be or will be a fr. Just like some of the institutional community adopted the endowment model. Do you think there will be a wealth model?

Ted Seides (12:21)

I don't think there's anything new under the sun for that. Most everything if you look at it from a risk perspective comes down to some stock bond risk. And depending on the person, is that a 60, 40 risk or 70, 30 or 50 50? Advisors are amazing at figuring that out for their clients. Then the question is what do you put in to populate those? So I don't think it's the model that changes. It's just a question of the advisor community getting a little bit more sophisticated on what can get to the return needs that their clients have to meet their objectives over time.

Michael Sidgemore (12:54)

The other thing on alpha, I want to talk about alpha and beta. I think it's interesting to deconstruct that in private markets. So on the alpha side, is alpha really going to come from in private markets manager selection, particularly at the smaller, more niche manager category?

Ted Seides (13:10)

Well, let's define alpha as outperforming everybody else to better than the median return. It can come from lots of places. It can come from the deals that a private equity firm selects is that certain sectors they focus on that end up being better places to be, like software has been for a long time. It could be the management team, private equity, but they pick a management team, they have control. Can that CEO deliver better than the next one? And then on the other side for the allocator, it's are they picking the better manager who's driving returns through one of those two things? And ultimately the drivers of private equity return are financial leverage, operating improvements, and what happens with the multiple entry and exit. So you can simplify it to a couple of factors and any one of those, if you're better than the average, you can drive a so called alpha.

Michael Sidgemore (14:04)

So you talk about better than the average. You talk about private equity. You've done a bet before, hedge funds versus the S& P. When you're an allocator in the hedge fund world, you're now thinking about a similar bet, but with private equity. Talk us through that and what is your thought process behind that bet?

Ted Seides (14:25)

So we'll leave aside the old one that I made with Warren Buffett a long time ago, that was hedge funds against the market and I had a dog in the fight then I was managing hedge fund portfolios. I don't have a dog in this fight. Ever since that Buffett bet, no surprise, people have said, oh, you should do this, or what about this bet? And none of them really were an important of enough issue to have in public to say, oh yeah, that's something great to do, but this one's super interesting, particularly as the Wealth Channel starts to embrace these alternative assets. It's not a perfect comparison, but will private equity over time beat the market? And there's a pretty simple trade off at a high level, which is you can access the market at much lower cost. So private equity has to make up for the fees if you constructed it similarly. So let's say it's US Buyouts. Private equity could be venture capital, it could be a lot of things, but if it's US Buyouts, you actually have roughly similar economic exposures. Largest sector of US buyouts is software. Mag7 is software, and so on. So it's not anywhere near identical, but similar economic drivers, similar return drivers. So it's actually a reasonable comparison of the underlying businesses. And then the real question is, can you make up for the fees? So how would you do that? One is leverage. There's more leverage in private equity that benefits private equity. Generally speaking, private equity is smaller companies over long periods of time, small outperforms large, though it hasn't for a long time. Private equity has control. There's a liquidity premium. In theory, maybe there is, maybe there isn't today. So there's a bunch of different factors that would tell you maybe structurally private equity is better and has been, but fees are high and can you make up enough of it? So I just put that out there to say this would be an interesting bet. Now, it's hard to measure. I don't know what'll happen, but there's a lot of interest and so I think maybe something will come of it.

Michael Sidgemore (16:05)

If you had to take one side of the bet, which side would you take?

Ted Seides (16:08)

I wrote in this piece that I think the chances of private equity average. So the medium private equity outperforming S and P is 40%. You can measure out based on today's interest rates, today's credit spreads, how much do you think you'd benefit from leverage based on some return? You can look at the historical small cap effect, and those together will make up about 80% of the gap of fees. So that means the average private equity manager has to deliver 100 or 200 basis points a year to break even. That's not what people sign up for. What people are signing up for is top quartile. And if you get to top quartile, I would definitely bet on the top quartile private equity manager over the S and P. But the median's a tougher comparison.

Michael Sidgemore (16:49)

Do you think top quartile will remain the same as it has in the past? And if I peel back the layer on that question a bit more, what I'm getting at is I think we're seeing to some extent this bifurcation in the market. There's a number of scaled firms who are becoming very big scale can actually be an advantage at times. I think at times being smaller can be an advantage, as you discussed, a bit in terms of lower middle market. You can buy at lower multiples. Do you think that top quartile performers will look like a certain flavor and the firms that have done it in the past will likely persist and continue to be top performers going forward?

Ted Seides (17:24)

I don't think large becomes top quartile, small becomes top quartile. What you've seen historically in private equity is that over longer periods of time there has been persistence of who's generally in the top quartile and then there'll be a slip. So if you're generally a top quartile manager, you're top quartile now you're in the second or third for one fund and then you go back. The large alts managers have all effectively part of the reason they're able to grow and command assets is because they have delivered for a long time. So that bias probably I think if you looked at managers has always been there but today you'd look at that and say, well, that survivorship bias. The ones who have made it have made it because they've outperformed. Does that tell you they're going to continue to outperform? There's a lot of structural advantages in continuity from one fund to the next. So I don't think it's any different. Meaning that the ones who historically have delivered, whether they're large or mid sized or smaller, probably on average will continue to more than others. But there's always movement.

Michael Sidgemore (18:28)

You mentioned S&P 500. You mentioned the Russell 5000. Public markets are shrinking and private markets are becoming a much more investable universe. How much as you thought about your bet and just as you think about private equity, both in general and intellectually, is it going to be about diversification now again to your point, I agree returns have to be there and they have to outperform, particularly if the fees are higher. But how much of it is also about diversification?

Ted Seides (18:55)

It's very different than 20 years ago. I think most of it today is about diversification. It used to be the case that you only participated in these alt strategies for alpha good to have a little different beta. But boy is it easy to get in the public markets and it's liquid and you can change your mind. And the beta in private equity is not that much different. Now that there's so much scale and particularly at the company level, there are very few executives who seek to be public companies. It used to be this was a prestigious thing. You go to the country club, you tell them you're a public company but get into the next club. And now it's probably better if you're private equity owned. Nobody wants to be a public company. There's a lot that would have to change at the regulatory level to make companies want to be public. I don't know how that's going to happen anytime soon given the scrutiny quarter to quarter, all that kind of stuff. So it does feel more and more like getting sufficient access to private markets helps fill out a broadly diversified portfolio. It's not clear that you can get the globally diversified portfolio of assets just in the public markets, the way you definitely could 25 years ago.

Michael Sidgemore (20:06)

The other interesting thing there, and this is a good segue to your career in the hedge fund world, evaluating managers, investing in managers, and you've seen the arc of the hedge fund industry as well. What do you think the private equity industry can learn from the evolution of the hedge fund industry?

Ted Seides (20:22)

There are a lot of parallels structurally, what's happening right now in private equity compared to hedge funds, say 15 years ago. And most notably, there was a movement when hedge funds started creating Rick products so they could deliver 1099 instead of a K1. And the wealth Channel was going to adopt hedge funds. Ultimately, you need to deliver performance. And right around the time that started happening, the hedge fund products were pretty watered down. The hedge fund managers saw that they were capacity constrained. They didn't want to give their best stuff. So we'll give you the long book and we'll hedge a little bit. It'll be fine. That product just didn't work that well. There's a risk of that. The timing. If you looked over the last 30 years, maybe if you're putting new money in the ground and private equity today, it's interesting. There's not a lot of deal activity. Maybe you can get cheaper buys, but valuations aren't cheap. And if you just do the math of, well, if you buy a company at 10 times, you do better than if you buy it at 14 times. There's this question of can you deliver enough to make up for the fees? And the fees of these products that are going into private wealth are high. There's interval fund fees, fine. But then often there's an advisor and the advisor has to get paid. And there's this magic 8% that you saw in the institutional world that, roughly speaking, if you hit 8%, everybody's happy. There's very few pools of capital that can't survive and meet all their spending needs. At 8%, you start getting below 8%. And then people start sharpening the pencil saying, what am I getting out of this? And that's kind of what happened in hedge funds. You had this 1 1/2 and 20, and the net returns were 10 to 12, and everyone was happy. And when they got to be six, all of a sudden people have scrutiny. I think that's the concern with private equity today. There's this log jam of exits. And the institutional community is wondering, well, if you exited today, what would the IRRs be for the last couple of vintages? Are they good enough? So it's not so much the activity of private equity of owning those types of assets, it's what are you paying to get access to it? And that's where I think the private equity managers addressing the wealth channel are going to have to be careful over.

Michael Sidgemore (22:29)

Time on that point. As you think about the evolution of the hedge fund industry, certain firms managed through that and became much bigger. Now, hedge fund industry is a little bit different than private equity, although there are probably some parallels there too in the sense of you have these multi strategy pod shops, Citadel, Millennium, et cetera. In private markets, you now have multi strategy firms that are one stop shops. They have different strategies across private credit, real estate, infrastructure, private equity, et cetera. What do you think the private equity or alternative asset managers can learn from the hedge funds that successfully managed through that period and built their business into these large platforms?

Ted Seides (23:07)

It doesn't matter if it's the hedge fund industry or beverages. Every industry as it matures gets concentrated into winners and then some losers and then specialists that have a place but are smaller. Saw that in hedge funds and you're going to see it in private equity. There's going to be a shakeout of, let's call it the messy middle. The non differentiated mid market private equity firm that's buying at auction. That's not their story by the way. Their story isn't we buy at auction, we do nothing and then we sell at auction. But people can piece through that and if the returns aren't differentiated and you're not of scale, you're not going to have a place. So you're going to see that shakeout. One of the things that happens when you get larger is that the required rates of return of larger and larger pools of capital are a little bit lower. So if you're a very large sovereign wealth fund or your UBS platform or JP Morgan private bank and you need access to large dollars to put to work, you don't necessarily need to make as high a return as someone who's smaller and has a wider array of investment opportunities and they can say no, I want the higher returning ones within that array of opportun. As you get bigger, your opportunity set shrinks. So if you're one of the big players, that cost of capital is lower. You've seen that in insurance with private credit, just lower cost of capital. You'll see that continue, you'll see more concentration in where the assets go. In private equity in particular, it's interesting because the strategies don't scale. So if there's demand for that, what do they do? Maybe they just keep the fund sizes what they are. That's not the nature of dynamic organizations. I wrote a little thing a couple months ago asking the question will Blackstone become private equity's millennium? And the millennium model was there are all these portfolio managers, most of them can't really be in business on their own, but we've got a really interesting box. It's a risk model and if we plug people into that box we can give them capital. Maybe that happens.

Michael Sidgemore (25:01)

I think you bring up a really interesting point around talent because it's a fascinating question and thought experiment to think through. If scale really does matter in this world, particularly as firms go to the wealth channel and if the net new investors as lp' private markets or the wealth channel and insurance and a bit of sovereign as well, Some sovereigns are under allocated to, but if it's really the wealth channel, you need the infrastructure and the machinery to be able to do that. Now a small manager who's going off on their own, they don't have the scale to be able to handle all the things outside of investing. So there's a world where maybe some people choose to stay at larger scaled shops because a they potentially can make more money both in terms of their funds performance, the infrastructure they have and then the stock price appreciation. If they're at a large public firm, that may be better than actually going off and starting their own firm, which may have not been the case 20, 30 years ago. Sure there'll always be entrepreneurs who decide to go start their own business. But then if some of these dynamics are happening in the industry, what does happen to the talent? And do you think this is a world now in private markets where the way in which talent migrates is different than maybe it was 20 years ago?

Ted Seides (26:09)

It doesn't change in the sense that what you saw in the hedge fund industry I think is more likely than not to happen in private equity. And I would describe it in a couple different ways. The first is these are great businesses. Someone's given you money and given you a revenue stream for 10 to 15 years with an option on making more money. You don't have to be very big for that to be an incredibly lucrative proposition for you. And as a result of that, there are a lot of smaller private equity firms that will absolutely keep going and doing what they're doing because it's an incredible business. And you've seen that in hedge funds. There is a long tail of mid sized hedge funds that still exist. I'd be very surprised if you don't see one of the larger private equity players try to grow through acquiring teams. They are long capital and short origination or deal making capability relative to the capital they could command. So it does make sense that if they can find talent and pay them as much or more as that person would be on their own, that they could fold them in. There are different challenges with it. Millennium or Citadel has a certain box and they could put someone in a risk construct. And private equity has different deal teams. I was like, well they do, but you could have the mega cap deal team and the large cap deal team and the mid cap deal team in the same sector. I'd be very surprised if one of the big players doesn't try to do that over the next five years.

Michael Sidgemore (27:33)

I think there's another interesting thread in here and this gets to your hedge fund background, but understanding and evaluating investment culture, I think that's so core to really navigating private markets. Well, I'd love to discuss how you think about evaluating investment culture and understanding a manager, a firm, how they think about things.

Ted Seides (27:54)

So much of it is qualitative that it's hard to put your thumb on it. But to the extent that's art, there's a big part of it that's science. It starts, I would say, going back to my time with David with first principles. What is the investment philosophy of this organization that will eliminate about 60% of all organizations who actually don't have a very clearly defined philosophy of how they think about what works in their markets.

Michael Sidgemore (28:19)

How do you best discern that? Ask, what do you ask?

Ted Seides (28:23)

What do you believe? There are different ways of saying, why does this work? What is it that you think works that leads to how you go about investing? And there are some examples that are totally obvious. Like Apollo says over and over, price matters. Price matters. Oh, they're value investors. They believe that if you buy something cheaply and fix it up, that works. There are software investors that believe software is going to grow. You have to have your beliefs aligned with theirs. But there are a lot of organizations that just go out and do deals and they believe they can create value. Okay, great. How do you create value? What are those very specific levers? What's the plan for you doing it? So then you're marrying what they say the philosophy is with the strategy and then using all the examples to figure out the implementation and what you're looking for is something that very perfectly aligns.

Michael Sidgemore (29:08)

When you were an allocator at Protege, did you have a certain set of questions that you would ask every manager?

Ted Seides (29:14)

No.

Michael Sidgemore (29:15)

Why not? Because asking a number of fund managers the same question, would you have been able to discern different answers? Or was it just through the course of conversation you could tell the difference?

Ted Seides (29:26)

I look at it a little bit differently. In order to underwrite a manager, there's a lot of information you need and that information might be the same. So you could have the same outline of what you're looking for. And we did. We had a very long memo that had an outline, and until you could fill in all the boxes of the outline, you weren't ready to know. If you wanted to make a decision. The specific question you would ask to get to that outline could easily change. No different from when we're doing a podcast together. Whoever's on which side of the mic have a pretty good sense of what you want to cover, but you don't have this specific question. That's where the allocation side of investing is the most human of all investing. You are making judgments about people. You want to know what they say their strategy is and you have to get through that. But ultimately you're making an investment in a person.

Capital Allocators Host (30:19)

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Ted Seides (30:25)

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Ted Seides (31:19)

Now back to the show.

Michael Sidgemore (31:22)

Do you think that aspect of understanding and evaluating people will change with the advent of AI and technology being applied to diligence processes?

Ted Seides (31:33)

Everything will change. Some what goes into the diligence process will change. There are aspects of the diligence process that will get automated. It'll be a long time unless you're a Quant manager before the ultimate decision gets made by an LLM.

Michael Sidgemore (31:50)

When you're evaluating people, yes, to some extent. Edge is not just about the people, but in some respects it is. How do you look for edge and how would you define edge?

Ted Seides (31:59)

Michael Mauboussin uses a great acronym, at least in the public markets. Bait B A I T to say edge can be behavioral, analytical, informational or technical. Behavioral means. Markets are rough. Are you resilient? Are you consistent? Are you emotional? Which again, afflicts someone in the public markets, where there's decisions all the time more than the private markets. Analytical is, do you have a better ability to process what's out there than everybody else? Informational is, do you have more information than other people? The data sets that people have been in private equity business for decades have is a big advantage to someone who's new in the business. Technical is more of a public markets thing. Is there something you're taking advantage of in the markets? Are there for sellers? You get that in private markets too. Those are the different types of edges. How you tease that out is just lots of questions. And not just with a person, but in an organization. You're looking for consistency, you're looking at workflow, looking at all these different things to try to get at. Is something likely to do better than the next thing?

Michael Sidgemore (33:04)

Was there ever an investment decision you made in evaluating a manager that was the most impactful on how you then thought about allocating and evaluating managers in the future?

Ted Seides (33:14)

The biggest mistake I felt I ever made, I'll take credit for the mistake, was there was a period of time at Protege where we were raising a lot of money fast, and part of our business was seating new managers. And we had a certain amount of our capital that we were supposed to go into seating new managers. There was a manager that we seated that didn't do particularly well, which was fine. But I felt after the fact that we didn't have time to do the work and we would not have ended up backing that manager if we had. That was a mistake I never made again. But it was impactful because you don't think that's ever going to happen to you. You take pride in doing your homework, but there are pressures that come at different points in time. So not acting too quickly was a good example of that.

Michael Sidgemore (34:02)

So I'll tie that to something else you said recently, which is so not acting too quickly in the moment. That can be hard. But then I think we're always reminded that there's always other investment opportunities out there. There will always be opportunities that come along. You also said recently that today is the hardest time to invest.

Ted Seides (34:18)

Yeah.

Michael Sidgemore (34:19)

What do you mean by that?

Ted Seides (34:21)

So one of my favorite self made cliches in investing is the hardest day to invest is always today. Throughout my career, you could look back at different points in time and say, wow. I'll tell you, the number of people who said they bought the market or bought credit in.09 is far higher than the ones who actually did. We all suffer from revisionist history. If you listen to Annie Duke's thought processes on decision making, it's a behavioral bias. We have two courses, one for IR and BD and one for allocators called Cap Allocators University. And I have a slide that says the hardest day to invest in is always today. And we've taught this course for the last five years. Every single time I've given the slide, I've had a different set of factors for why today was the hardest. And everybody nods. And the next year there's a different set of factors and the next year there's a different set of factors. So investing is hard. I could look back at my time at Yale and say, boy, investing in hedge funds was so easy. You could invest in a diversified group of mergers doing merger arbitrage and make 14% net with very little risk. The hard part was knowing that that existed. And if you did know it existed, getting an investment committee on board with allowing you to do something that was very different from what other people were doing.

Michael Sidgemore (35:31)

How does one modulate their behavioral biases in that context? Because we always seem to learn from our mistakes more than our successes. And sometimes maybe our successes breed overconfidence too. But oftentimes there's an overcorrection after making one mistake and you don't want to make that mistake again, so you're burned by it. You don't do it. Even if the game on the field at a future state might actually present itself to be maybe this actually is the right thing to do, but you may not. Or you may be more apprehensive in doing it because you got burned or saw something similar in the past and don't want to do it again. How should people and allocators manage that behavioral bias?

Ted Seides (36:08)

It all has to be done through creating investment process because we as human beings are hardwired to make bad decisions. And this goes back to Danny Kahneman stuff and Annie Duke stuff, where if you and I were sitting in the bush and you hear rustling, you have a choice. Do you go close and make sure it's a lion or do you just start running? So we learned to just start running, which means in the modern era, if you hear something the system one Danny Kahneman thinking, you believe it's true. And then you later decide if you want to evaluate it. And that's not great. That means we're influenced by other people's opinions. That leads to all these other behavioral biases. And so one of the more recent trends, and you'd say the allocator community is true of managers too, is understanding when you're in a group of people, what's the best way to make a decision? How do you get all of the information available at the time on board? So whoever's making the decision has everything at their disposal. And there are things like the ultimate decision maker should speak last because if they speak first, everyone wants their bonus. And so everyone's going to start agreeing. And the person who's not sure because of this one obscure thing that ends up being the biggest risk factor that no one thought of, it doesn't come out on the table. And you can do things like pre mortem analysis, that helps doing that. So there's a lot of tools that help. You have to keep in mind we're still humans and we're still hardwired to get it wrong. But the way people get better at those decision processes is to write things down and learn from those decision processes and then try to get better over time.

Michael Sidgemore (37:41)

How do you think the current world of now people can use AI and people can leverage that. Some will leverage it only after spending time doing their own work and having independent thought and then using it to augment that. But others might just use it instead. How do you think that will change how allocators do things or think about? And do you worry about AI actually having a negative impact on people's decision making around investing?

Ted Seides (38:07)

It's like anything else. It's a tool that is amazing and can make things efficient. Some people use it well, some people use it poorly. The ones who do it well will accelerate their ability to make decisions even more. The ones who use it poorly will make mistakes they shouldn't have made because they're relying too much on just what a model's telling them. So I think that in all aspects of business and all aspects of life, AI is changing what we can do and none of us know where it's headed. And that's the same thing is true in the investment world. Most of what you've seen so far is people using AI to more efficiently process information. So if you're an allocator, can you take all of the letters that a manager has written for you for 10 years, dump it in a model and have the model help you understand? What did they say three years ago that helps you get information? What do you do with that? Do you say, oh, they were a liar, I'm firing them, or do you ask them questions? But it's not at the decision making point yet.

Michael Sidgemore (39:07)

The other thing in there that you just talked about and referenced in your prior comments were around content and how that impacts behavior. Be remiss if we didn't talk about the content business you've built. I'll first ask about content in the context of there's now so much content. How should allocators and investors navigate all of that?

Ted Seides (39:28)

There is, like anything else, a glut of content and people have to decide what creates value for them that can be totally individualized. Is it entertainment content? Is it things that's going to help them? Investment process? Capital Allocators is very tied to the institutional investing community, mostly allocators and managers. And I hear a lot that allocators don't go into a meeting with a manager without having checked. Has there been an interview? Because it just speeds up the process. You can have a full hour of somebody asking hopefully reasonably good questions to get to the heart of what someone's doing. You can then spend your time getting into the next layer faster.

Michael Sidgemore (40:06)

I think you bring up a really important point around content being so core to managers, being able to tell a story. It's connected to the capital raising process. It's a chance for them to share who they are and for people to hear that in long form, which is really impactful for both sides. When you started Capital Allocators, what was your reason for starting it and what was your goal?

Ted Seides (40:26)

This podcast found me. I didn't find the podcast. There was no reason to think that you're going to have a conversation, share it for free, that that could turn into anything like a business. It just doesn't make any sense. At the time I had left Protege, hadn't figured out what my next big thing was going to be. I was on Invest like the best, one of the early guests from having written my first book on hedge funds. And it demystified the experience. It's like, oh, two people talking in front of a microphone. Patrick's amazing. I was like, oh, that was fun. And I woke up one day and said, oh, it'd be fun to run around, talk to My old friends that I haven't had a chance to catch up with. And that was it. There wasn't a thought process of where it's going. Most of my friends are like, are you kidding me? You can't possibly do this. You're gonna have to do this every week. I was like, well, I used to have four or five hundred manager interviews a year and now I have one a week. I actually think it's pretty easy. So there was no plan. It was just, hey, this is a fun way to use some of my time while I was figuring out what I was gonna do next. And there were times where I thought to myself, if this were the thing I was doing, that would be really fun because I loved every bit of it. And over the years, it became that on that point.

Michael Sidgemore (41:30)

And then we'll get to when the light bulb turned on for you as, okay, this is a business and how you've since built it out. But on the point of talking to many managers and your friends, and now that you have done this for quite some time, how do you think it has helped you as an investor or would help you if you were a full time professional allocator?

Ted Seides (41:47)

Again, if I had the time, which I don't, to do anything like investment professionally, I'd say the biggest aspect is how I've learned to ask questions and glean information from people. I look back at how I did that. In all the years as an allocator, I never had a feedback loop. I never came out of a meeting with a manager and said, how did I do? It was always, oh, what do we think of them? Are we going to have another meeting? Or thank God they're in our portfolio or we got to get out of that manager. There was never an evaluative loop. And the podcast, especially initially it was just me. It forces you because you have to edit the podcast. You have to listen to yourself, ask questions and realize, wow, how did I miss that question? And you start to pick up mistakes you make and be able to improve. And then I had a couple different experiences where I was still investing actively. I was on the board of a foundation for a long time and meeting with a manager I knew for a long time. And I had trained myself in a certain style of interviewing. I was catching up with this manager on behalf of this foundation and I just found myself not going in with, oh, let me ask these questions and this questions to understand what's happening with the firm. I was like, hey, how you doing? And get caught up in the same way I do on the podcast and then start asking what's going on. And I learned more about that manager, who I'd known for probably 20 years before that in that one meeting, than I had in all the times that professionally I had interviewed him in the past. And so that would probably be the biggest thing of were I in the seat. Just how I approached getting information from managers and trying to learn in the process of making good investment decisions is totally different than it would have been back then.

Michael Sidgemore (43:31)

Do you think by having the conversations in the way that you do, you're able to just get to the essence of who the manager is in a different and better way?

Ted Seides (43:38)

I think so, but it's a certain style. My interviewing style is very open ended and I let people talk and then I go where they're going. Now, if you put that in the context of more finite time, certain agendas, you can put those two things together in a way that would have been quite different. I think the way that I interviewed in the past would be different if I were doing it professionally. And I think a lot better. That's probably the biggest. It's been 10 years since I was investing professionally. There's been lots of changes in how people think about portfolio construction and value add. But the core investing is the same. You're either investing in series of companies or a series of strategies that you think are going to deliver some economic.

Michael Sidgemore (44:20)

Return in terms of capital allocators. When did the light bulb turn on for you? Because you built a really impressive business. When did that light bulb turn on? Say, okay, this is fun. I'm doing podcasts with friends or people in the industry and I'm having great conversations. But wow, this is a business.

Ted Seides (44:36)

It was all slowly and incrementally, I would say. There was a point in time, about four years in, where I was still trying to figure out what I was going to do next, where the folks at Northern Trust called and said, hey, do you take advertisers on your podcast? And I responded by saying, yes, we do. And the we was me. And I was like, okay. So there was a little bit. It started with the advertising, the advertising model. The podcast itself as a business is not very robust. It's perfectly fine, pays the bills, not much more than that. So then the question is, you have this interesting platform where for our podcast, there's a lot of great money managers, a lot of great investors that are in this ecosystem. What can you do of value to that community that could turn into a business? And the biggest thing we've done is bring people together in a really high quality way. So we do a couple summits each year. They're very, very different from any other industry conference I've been to because I really disliked going to industry conferences. And then you start thinking about it as a business. If you're putting a conference together. What's the purpose of a conference? It's mostly matching buyers and sellers. How do people match buyers and sellers? In the investment industry, you put the sellers on stage, you bring the buyers for free. They're bait, like fish bait. Sit there in the seat for six hours. Boy, that's hard to do with the phone in your pocket. And it used to be that those people on stage were scarce. Now they're on YouTube or now they're on podcasts. They're not scarce. Well, that value proposition doesn't sound great. So how do you do it differently? And that's what we've done over the last couple of years.

Michael Sidgemore (46:02)

What do you think LPs really want in that context?

Ted Seides (46:06)

All I have to do is ask them. The first, second, third and last thing LPs will tell you is that they value people. That for them it's relationship business and they want to be partners with great people. Yes, there's an investment strategy behind that. Yes, there's a massive analytical exercise that goes on behind that. What a great person is means something totally different from two different allocators. But that's the core of it. If you go to a conference and someone is pitching you on stage, none of that is about who the person is.

Michael Sidgemore (46:37)

It's a really interesting point, because if it's about people, then it's about getting to know them and building trust with them. How much do you think content can speed up the velocity of getting to know people and getting to trust people?

Ted Seides (46:50)

I don't think you and I would be here with other people listening if it wasn't incredibly effective. When done well, it's not the whole process, but it accelerates the process. If someone can reveal through a conversation who they are and get that widely distributed, that's going to have people feeling differently about them than if they went in cold. Or if you're John Gray running around the world taking videos every morning, there's a human side of that that they're bringing to the fore. And now everybody knows that. If you think of Blackstone and you didn't know who they were historically, you're like, oh yeah, the CEO runs okay. I'm a runner too. So messaging isn't easy and differentiating from one firm to another isn't easy, but when done well, it's extraordinarily effective.

Michael Sidgemore (47:34)

What do you think managers still have to learn in terms of a content perspective and how to effectively communicate with now the much larger universe of LPs?

Ted Seides (47:44)

By and large, managers have never been good at understanding the LPs. And by the way, I would say LPs have never been good at understanding the demands placed on managers. There's just a knowledge gap between the two. For managers. They mostly view themselves as trying to tell their story, they're trying to pitch. They don't spend enough time trying to understand who the person is on the other side of the table and what their needs are. The ones who do are very effective. It's the same way you hear people say great salespeople aren't talkers, they're more listeners. And so that's a big part of it. There are so many investment products. I used to tell people certain hedge fund world nothing was unique. When you were an allocator, meeting hundreds of funds a year, you've seen everything more than once. But every manager thinks their story is unique. They think their edge is unique. So you have to really start to understand what is it that you do well? You're a private equity firm. Are you a great sourcer? Are you a great purchaser? Are you great at crushing margins? Are you great at growth? Are you great at exit? Whatever it is, know what that aspect is, have the data to support it and tell that as a story. Most managers don't do that. They give the pitch that they think other people want to hear and it's not customized enough to authentically who they are.

Michael Sidgemore (49:02)

That's a really important point because every firm is different and they have to be authentic in who they are. I think people will see if they're not. But how can managers differentiate with content?

Ted Seides (49:13)

It's hard to get eyeballs. I've always felt that you can't go out and do it for the outcome. You can't go out and do it so that everyone's going to hear your story. You have to do something that's just authentic to you, to your firm, and tell the story. If you are introverted, don't be going putting videos out that make you look awkward. Write something. So there's all different modalities of content and it has to be consistent with who the firm is, with their DNA, and that helps them express what's special about them.

Michael Sidgemore (49:45)

Do you think there's a more effective modality of content in Today's world that is to some extent dominated by social media?

Ted Seides (49:52)

I don't think so. We've played around with the different channels and what works for us, which might be LinkedIn because it's more. Business is different from someone. If you're a venture capitalist, maybe it's TikTok, Twitter X. I don't think there's a way to do it at all. Again, it just goes back to what's the right way for that particular person at that particular firm.

Michael Sidgemore (50:14)

It's such a fascinating point because one, there's social media platforms that have enabled creators to amplify content. Then there's also platforms that enable the creator to communicate directly. I'm on your mailing list as an example. You own the inbox. There's other platforms that do that, substack, Beehive, et cetera. How do you think managers should think about that aspect of things, of being tied to the mass of the algorithm versus owning their own direct relationship with the end customer? And obviously there's regulations for them that us as content creators don't have to deal with. But how do you think about that whole aspect and as you think about the changing market structure of content creation and delivery as it relates to the trajectory of capital allocators?

Ted Seides (51:02)

Well, there's two different aspects of it. One is brand new and the other is direct sales for brand. I don't think you need to worry about it that much if you're planning to go out and create a bunch of content and put it out there so that people know who you are more. You don't have to be as wedded to who's listening. And podcast is a great example of that. We don't actually know who's listening. We know numbers, you get some demographic metrics, but there's no mailing list that Apple will tell you and say, oh, here are your people. So you have to create a mailing list, do something else with it that's different from. You're trying to turn that into something that you can implement and grow. Which then does tie to. Is it a mailing list? Is it something where ultimately you do want to own some piece of understanding who the audience is and for what we've done? It's a little bit of both. There's a mailing list and it's mostly curated content that we share there. We do know who the people are and that grows over time. And then there's a lot. The audience of the podcast is much bigger than that. And I don't know who the People are, but you get lots of anecdotes over time. And so you know, they're out there.

Michael Sidgemore (52:09)

Instead of the audience. I'll ask this to you. I'm sure the audience has plenty of podcasts to listen to, as I have. But for you, is there a podcast or a conversation you've had on capital Allocators that has brought out the most interesting insight or learning for you?

Ted Seides (52:26)

There's definitely not one. I could put it in a couple different categories. There are, there are certain guests I've had where the way they think about investing just opens your aperture. So I'll give you one example. Earlier this year I had Ed Grefenstedt, who's the CIO of the Dietrich foundation. And I'll just tell you one thing, then you'll say, wait, that's possible. 90% in privates, half of that's in venture, as much as 20 or 30% in China. Wait, what? That's even possible? Just opens your aperture now? He happens to be a brilliant guy, has incredible stories on top of that. So there are always things that you'll hear that are very different, have been effective, that open you up to what's possible on the investment side. And then I think I try to keep it pretty focused on our niche. But I do have guests from outside the industry that I think can help people in the industry get better. And those have been people around storytelling, a guy named Don Miller, storybrand Annie Duke with all of her decision making stuff. There have been some leadership expert, somebody like a Randall Stutman or Matt Spielman I've had on the show, and I learned the most from that because they're coming in from a different field, but there isn't one that I could point to and say, boy, that was the one.

Michael Sidgemore (53:40)

That's fair enough. Because you probably learn something from every conversation you have. I think that's the fascinating part about this. I always like to end by asking everyone what their favorite or most interesting private markets investment is. I think you have such an interesting perspective. You've been an allocator professionally, but now you talk to so many people, you're involved with a number of firms and you have such an interesting purview on the market. I'll ask this question in the context of going forward. What do you think is the most interesting investment opportunity in private markets today?

Ted Seides (54:10)

Those are all different questions. I don't view myself anymore as a professional investor. And the biggest difference is, first of all, I don't have time to do real diligence, but I also only invest in things where there's a relationship component to it. For me, maybe that means I think I can help them with what they're doing or it's just fun for me to do that. So there are some examples within that of for what I know asset management, fintech businesses. There are people doing things that are interesting that are addressing the private market world. There's an AI business called Thema in London that I have a small investment in that's categorizing every private company. It's Amazing they're doing AI before AI. I'm an investor in iConnections which was an initial phone call during COVID from Ron Biscardi and has turned into the largest cap intro event in the world. Ron and their team have done a remarkable job, but that's a bringing together business. So the things that I tend to do directly are more ones where I can have some impact because of the ecosystem I'm around. In terms of broader what makes for the best opportunities. How do you not pay attention to AI and everything that could happen? And there are a lot of parallels with the Internet 25 years ago in terms of nobody knows what's going to happen. There are certain models back then it wouldn't have been that hard to say. Yeah, you could disrupt the retail supply chain. Nobody knew what Amazon was going to become. And then there are things like streaming. I don't think anybody thought when the Internet came out that cable was old school, cable was going to. And I think you'll see the same thing with AI. There are some linear things about processing that will become megas. What's interesting is how highly they're all valued today already before they've generated cash flows which we saw on the Internet and then it crashed and then it all came back.

Michael Sidgemore (55:57)

That brings up an interesting point which is just perspective and duration I'd imagine too, which is the Internet was going to be a massive sea change to the way that the world worked. That would make it incredibly valuable. But in the short term that meant some people made money, some people didn't on certain things. But it didn't mean that the Internet wasn't going to be massively impactful. It feels like AI is the same and maybe even at orders of magnitude larger because of how many people it could affect. How should people approach AI from an investment perspective then both over the shorter term and the longer term? Are there parts of the AI value chain that you believe in more? So foundational models versus application layer as an example?

Ted Seides (56:39)

I'm not close enough to the technology to have any differentiated insight. So what I've done throughout my career is try to partner with people who I think are the best at what they do. And I've done that a little bit in AI. So one of the managers I'm close to, guy named Gavin Baker at Atreides, and Gavin, in partnership with Valor, recently raised an AI fund. Gavin, at least in the public markets, is the most knowledgeable person I've ever met on a sector, let alone it just happens to be that sector is AI. It's extraordinary how deep he is for a public market investor. He also invests in private markets. So my way of playing AI is invest with Gavin.

Michael Sidgemore (57:15)

I think you said it before, so much of investing and so much of private markets is about people. So I think that's a great way to wrap this up because that's what you spend your time doing. You spend your time with people, sharing their stories, what they do. You worked with them, you invested in them. I think that encapsulates so much of what you've done.

Ted Seides (57:32)

Sounds just right.

Michael Sidgemore (57:34)

Fascinating conversation. Thanks so much, Ted.

Ted Seides (57:36)

Thanks, Michael. Appreciate you having me.

Michael Sidgemore (57:38)

Pleasure.

Capital Allocators Host (57:39)

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.

Children (Blake Arguela and Galia Auerbach) (58:02)

All opinions expressed by 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 information, 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.