Christy Hamilton (3:27)

Religion and politics.

John Bowman (3:29)

Well done. 100% early in the morning. I'm suggesting, based upon some of our back and forth media banter, that maybe we should add private market valuations to this list of toxic topics that inevitably, as we know, result in vitriol and misunderstanding. So today's episode, our inaugural episode, as we said, of capital decanted, we're going to lean in to this divisive and complex topic. We're going to break all the rules of American Thanksgiving and we're going to own it. But as the identity and purpose of this show promises, we're neither going to shy away from a healthy, comprehensive debate, nor are we going to result to juvenile attacks. So adults only in studio, as we say, there's no doubt that the topic is nuanced, that it's layered. Anyone that suggests that this is simple and black and white, I think is missing it. And our aim is to peel back those layers, equip you to think more carefully, to come to your own conclusions. Christy and I certainly have our opinions, as will our guests, but this is to equip you to come to your own conclusions. And to do this, my superstar co host, Christy Hamilton, is first going to set the stage with some background, how does this process work? What are the methodologies used? How has it evolved over time? The seats that she sat in are going to provide awesome perspective, real world perspective on her experience with this. And then I'll come back, provide a bit more flavor of why this seems to be so topical, perhaps so emotionally charged today. And then we'll welcome to the show our guests to help that topic breathe a bit more, just like a fine wine. And joining us today, drumroll please, Andrea Auerbeck, global head of private capital for Cambridge Associates, and Scott Cooper, managing partner of the iconic venture capital firm A16Z, or as most of us still call it, Andreessen Horowitz. So with that, Christy, off to you, Professor. Help us understand how we got here.

Christy Hamilton (5:26)

Thanks, John, for that wonderful intro. And I'm really excited to hear more from our guests in a bit. It's going to be a really great conversation. As you pointed out though, it's really important to understand how we got here in the first place and what we're even disagreeing about. So yes, valuations are obviously a subject that evokes passionate debate. As we untangle the sides, the debate is often more so about these two different and distinct issues that are debated in tandem. But weirdly, it seems as though neither side is actually speaking the same language.

John Bowman (5:56)

Are you suggesting that investment professionals might conflate two different issues, Christy? My goodness, I know.

Christy Hamilton (6:03)

We are fallible humans. Knowing is half the battle, as GI Joe used to say.

John Bowman (6:11)

Love it.

Christy Hamilton (6:12)

So I really think the first layer of the debate is do private investment valuations and private investments reflect reality? Are they well calculated? Is there a process through which they're struck? And then the second part of the debate is do private investments benefit from unique characteristics and pricing frequency that actually in a way confers an unfair advantage from what some professionals have termed volatility laundering. Although I personally like to call it more of a quantitative mirage. And by that I mean just the quote unquote lower volatility benefits that privates often have. That for the most part is just the result of some quarterly pricing issue versus daily or some ongoing market driven pricing.

John Bowman (6:54)

The fact that we are debating two different things and talking around each other is a common problem in our industry. And it's part of the reason the insight that we're here at Capital Canton to help explain.

Christy Hamilton (7:07)

Yeah, so private market participants often want to focus on the first layer of the debate and that is are private markets fairly valued and does an LP's current portfolio reflect reality when it comes to pricing versus that second layer where it appears that in striking a price we often end up comparing these private markets to their public market counterparts in a one to one way that often I would say creates a lot of bad blood. And so let's go ahead and isolate and we'll first talk about the current valuations practices. These are basically just a logical outcome of a lot of different concerns, including the need to balance more accounting focused factors with their financial counterparts in the last, I would say 15 to 20 years. In particular, this includes pushing back on the historical use of holding investments at cost. On the private side, we recognize that this is technically more conservative, but from an accounting perspective it doesn't actually reflect a true picture of what that fair value of the investment is, which is more so what the practice of Accounting guidance has moved towards. And so present day the expectation is that private assets will reflect something approaching fair value, which means that every single quarter you're going to go into your portfolio and you're going to mark your investments and you're going to mark them up or down on some logical fair value metric or using some sort of methodology to ascertain that fair value metric. You could ask yourself philosophically then, what is fair value? But the standard really used for measuring is calculated based on one of three different methodologies and the first one is intrinsic and it's going to be familiar to anyone who has taken a business valuations course. And that's basically using the standard cash flow model to determine the price of a company, which is obviously methodical, but it does still in fact allow for some creativity in the underlying assumptions.

John Bowman (8:54)

I was going to say that was kind word, but there's many others you could choose.

Christy Hamilton (8:59)

Oh, there are. Obviously any model has an element of garbage and garbage out, but it is defensible in that way. But then you also have two more relative valuation standards, so you have public multiples and then precedent transactions, which again provide a value that is basically derived relative to the value of some other asset. And basically which method you use is generally based off of whatever strategy you're using as a GP or as an investor in your seat.

John Bowman (9:27)

Christie, I'm just curious, based upon your own intimate personal experience, but also the circles you rolled in and still roll in on the LPs, the allocators, how much engagement was there from you with your GPS on which of those methodologies was used, whether it was appropriate, whether the assumptions were creative, to use your word, or was it largely an acceptance of what the GPS shared?

Christy Hamilton (9:56)

I think it really depends on the strategy. A lot of that would happen in advance of ever committing capital to the fund. So actually looking at their valuation methodologies as they stated in their process, but they have previous funds being able to match that then with what they stated. I don't want to say fact checking because that sounds so. I don't want to say stringent, but it doesn't sound as much of a partnership word as I like to use. But I would often go back and look to see how valuations would change around their fundraising times because I read a couple of papers back in the day basically talking about how as funds raise money there is this bump that their valuations get just because they want to show a good total value TVPI in their fund. It's not always, and again, I think it comes from A very human place. I don't think it's people trying to pull the wool over anybody's eyes and it's not so egregious that it's terrible, but just showing that they're adding value as a fundraise happens, I think it's the natural progression. So just checking for that and making sure that everything is acceptable and within a range you would expect. But I think as far as LPs are concerned, it really depends on. I rarely went back and fact checked valuation multiples. I would go back and look at the process and see how they were struck, but I didn't go through and ask somebody to send me the discount or the DCF model that their analysts used. And particularly in vc, you can't just go back and look to a model because a lot of times it's based off of something completely different or it's based off of a multiple or a different transaction. So I get the sense that people are typically look at it in the due diligence process and then just fact check it over time back to that. Obviously any changes in either the valuation standard or the valuations themselves begs questions, but for the most part, I don't think everyone is going in every single quarter and kicking the tires on every single company.

John Bowman (11:41)

That's very interesting, Christie. That'll be the beauty of our conversation with Andrea and with Scott, because Andrea's vantage point is about as wide as anybody in the world on LPs temperament, approach, attitude towards this. And of course, Scott has one view, but it's a massively influential view from as far as VC models, to say the least. So. Well, tell us a little bit more about, just as a refresher, these three valuation methods.

Christy Hamilton (12:09)

Before I jump in, I would like to go back to what you just said and point out that LPs are so varied. I worked for a small health institution. It was a multibillion dollar one, but it was still very small in LP terms. I know that pensions obviously have entire teams that can be devoted to this stuff. So yeah, I'm really excited to hear Andrea's standpoint from that perspective. Okay, so yes, with that we will get into the three methodologies. This will be the true professor side. I wish I had brought my glasses.

John Bowman (12:36)

Buckle up.

Christy Hamilton (12:37)

Let's go ahead and start with discounted cash flows. The DCF model is most often used to determine the fair value of mature businesses. So more so relevant to LBO private equity specifically. And it's gotta be used by some company that has some symbionts of cash flows. So as a quick refresher for those of you who haven't revisited your finance undergrad books in a while, in a DCF model, you basically create, you know, an Excel spreadsheet. In each of the columns, you estimate a business's annual cash flows. You have some sort of terminal value at the end of the final period, and then you apply discount rate and that will bring you back to a value that represents what the company is currently worth today. So you're literally valuing the assets based on those cash flows at some terminal value at the end. And like I said, this is great for mature companies and companies that have cash flow. And it's good for developing an intrinsic value and an understanding of what you should pay for those companies based on what you expect to get out of them. But there are also drawbacks. What do you do when you have a smaller stage company or companies with negative cash flows, or if you're building towards an outcome but you aren't quite there yet? And in those instances, DCF isn't a very good measure of valuation, given that it's harder to plug in if you don't have those things. In examples like that, you may have to use one of the two relative pricing methodologies. And the first is public comparables. So finding a company that is similar to the company that you own privately and then applying a multiple to your ebitda, assuming you have positive ebitda, and if not, then you just adjust the EBITDA and apply it to adjusted ebitda. If you're looking for a peer comparable or a peer public comp, you'll be looking by industry, by size or by some other key statistic that usually loosely is around what the or the metrics that managers in that industry manage to. And then you apply that peers multiple on EBITDA or earnings or in some cases revenue, or I guess possibly eyeballs in some instances, if defensible. But there are drawbacks here too. Using public comparables in the sense of what if your company doesn't have a natural competitor? What do you do? What if you're new to an industry? Or what if you're a new entrant and you're completely different? Or does your peer comp basically adjust? Or does your modeling adjust for the differences that come from a company given differences in operating? It's not as easy as one would think when you drill down into the particulars. The last methodology, which is precedent transactions, is also relative, much like public comps, but it can be used at all Stages of private equity. Although I will say that this is most often used by venture capital. And that's because when you're raising a round, and in particular when you're raising capital for a round, it in turn prices that round and thus it creates a price that people can go look to. And it's interesting because I think that sometimes people miss that in the application of how venture capital pricing applies to the broader market. So as companies then raise money, you can move back and apply whatever pricing a private comparable or private venture fund recently received and then apply that to your company and to the equity specifically. But again, you have drawbacks and one of them is effectively what we're going through now. The major problem is that in periods when transactions are non existent, it's effectively impossible to price what your company is worth. And so if nothing's getting repriced, particularly in a downturn, I think a lot of times when the private strategy is then compared to public markets and public funds, managers on the public side will then wonder why they're getting compared to this thing that's not getting written down. The markets that they're invested in repriced six months ago. Again, it's like a tied together thing.

John Bowman (16:20)

I think this will be a good discussion with Scott too. On the venture side in particular that I think is much more dependent relatively on former transaction or former rounds, is that you might not have ebitda, heaven forbid, you might not even have revenue yet in early stage venture. So how do you price this thing? It really is napkin business model. And as a result all you've got to defend them a little bit is previous round. And just as you mentioned, the greatest irony or dilemma is that at the moment you might logically suggest a markdown, there's no transactions or rounds going on. So you just don't have that methodology at your disposal when you need it most.

Christy Hamilton (17:04)

Exactly. And I will add to that as well. I know it's something you and I have talked about and that's. Does it matter? I mean ultimately. So okay, you mark down your venture capital investment, but are you actually asking to price it out today? Do you really need liquidity from the market? Is it a necessity right now? I get it. If you were using your financials as an organization that invests in private investments, if you're using that to raise debt or something, because then yeah, you need a fairly accurate representation of what your assets are worth at that moment. For ratings, however, you know, kind of beyond that, I struggle with how people get so caught up on that Side because you are partnered in that fund for 10 to 12 years plus two one year extensions at the election of the GP plus one or two at the election of the LP. So anywhere from 10 to 15 to 17 years, depending on the fund, it gives you that ability to hold the asset. And I would argue that it's bad fiduciary practice to sell it at a depressed value anyway, so what difference does the mark actually make? Make? Sorry to go up into left field and get all philosophical.

John Bowman (18:16)

No, far from left field. I think you're just getting to the good stuff. In a few minutes from now, bring us to present day.

Christy Hamilton (18:23)

Yes, so to present day, basically, I think one of the things to remember as we're talking about this is that while 2 and 20 is the fee structure that we expect to pay on privates, it's 2 and 20 plus expenses. So there's the added expense to LPs valuations. And that's one of the main reasons why valuation and repricing a portfolio is so infrequent. I will close with the idea that constructing a private investment portfolio and being thoughtful of what assumptions you're using to value it is an exercise that can actually be done pretty thoughtfully. So I think a lot of people struggle with the opaqueness of the process and the questions that it creates. Is it done correctly? Is it fair? Which brings us to the second layer of the broader debate that I wanted to cover very quickly and that's does private equity benefit from the quantitative mirage of that lower equity that comes with infrequent pricing? And I would say to a certain extent, yes. And that's particularly for pension funds who don't actually want a ton of volatility in their funded ratios. And so there is that benefit. But more broadly speaking, I think that it's difficult to apply that to everybody. So yes, while it is a reality that we see particularly on the public pension side, more broadly, I don't think that most LPs are sitting there thinking that their private equity is actually less volatile than public markets.

John Bowman (19:49)

Well, brilliant job, Christy. Really interesting background and I think masterclass on how this works and how we should think about the trade offs and the imperfection. I think you were clear the imperfection of each of these options. There's no holy grail or perfect option. I think that's a really important point to leave with the audience. It's not that you choose the wrong one or the second best one. They're all less than perfect themselves. And so you need a bit of a mosaic to do this.

Christy Hamilton (20:18)

Well, exactly. Thank you for that. I will add, I think we sometimes forget this happens in public markets too. All over the place. So for example, if you have a liquid stock like tech stock, small float, you see bid ask spreads, you see all sorts of valuation differences. So I don't think even public markets have the lock on perfect pricing.

John Bowman (20:37)

Well said. Good background. We are going to transition to setup and I'm going to spend some time just talking about as we get closer to inviting our guests in. Why is this so charged right now? I made mention of two prognosticators. I alluded to two opposite ends of the spectrum in my intro and Christy, I think we owe the audience a bit more explanation. Some of you might already know who I'm speaking about and what I'm speaking about, but if not, I want to first say that I want to showcase these two as fairly as possible. I want to be equitable in how I position their views. As I've said a number of times already, it's not that Christy and I don't have opinions, but Capital Decanted is about making sure everybody has a fair voice and is heard. So we're trying to represent them fairly and objectively. But I do think setting these two up are a helpful archetype of the raging debate that is going on and I think very symbolic. So in December of last year, that's 2022, Chris Schelling, director of Private Investments at Caprock, wrote an op ed for Institutional Investor. And we should just pause here and mention that Chris, amongst his time at Mercer and Calamos and Bear Stearns and others, he also spent several years at two large pension systems, Kentucky and at Texas Municipal, and he conducted manager due diligence on thousands of gps. He allocated billions of private capital and hedge fund mandates. So it's fair to say Chris has been around the block. He sat in the seat for a long time. And I should also mention in full disclosure that Chris is a friend. He's a volunteer for kaya. He writes for us both on the blog and the KAYA curriculum and he holds the designation. So I just want to be fair in mentioning that. So in this aforementioned editorial that I mentioned late in 2022, he defends the process of private marks and turns the tables on this fictional debate opponent that the op ed is addressing. And he asks whether in fact it's the public market volatility and our frenzied comparison of the two. You just alluded to this, Christie. These are two different things. Should we really be comparing them that the public market volatility, Chris argues, is in fact the problem was that in fact the bug in the system rather than private market methodology, we should shift the spotlight. So in other words, these are apples and oranges interacting and we're fooling ourselves, we're conflating things back to the word of the day. So Chris lays out a case that the public markets do a very poor job of predicting future earnings growth, corporate health, and therefore, as Ben Graham once said, they're nothing but a public sentiment voting machine, at least in the short term. And as such, and we all know this, at least to a degree, regardless of where you stand on this debate, humans overreact on both the upside and the downside. And so they render the voting machine about as accurate as Krish says, as a coin toss. Now clearly that exaggerates in the peaks and the troughs, which is I think why right now this is so raging. So private markets on the other hand, just continuing to explain or represent shelling due to the frictions of transaction costs, the locked up nature, the long term nature of the investment vehicles, this is patient capital, he argues. They operate on the other hand like a weighing machine, again channeling Graham's language here. And as a result they have much more stable prices through the life of that investment because they avoid the emotional or irrational whipsaws of the public markets. And he goes on to say that not only are they less volatile because they're a better representation of value, but most portfolio company valuations he suggests, are held at conservative, actually below value prices as LPs would be able to see right through the GPS that are using artificial or disingenuous attempts at inflating or bloating these valuations. So this is a really important point that I want to make sure everyone tunes into is that Chris says that bad funds or shady GPS would quickly get exposed by allocators if they were doing their homework. Now maybe that's an if to Christy's point, maybe size, when they engage, what part of the cycle they happen to engage would affect how much homework they can realistically do. But the reality is Chris suggests that the market would spit them out if this was a pattern of bloated valuations or short circuited methodologies. This conservative approach, that's Schelling's argument. And this conservative approach seems to be reinforced by a recent study that Stepstone, I think most of you know Stepstone, that's the private markets advisory firm they recently actually wrote for our blog, the Kaya blog called Portfolio for the future. So I'd encourage you to check out the whole post, but what Stepstone found in the study was that The S&P 500 carries a consistent and material multiple premium against both the average and the median private equity firm since the end of 2017. Or what they Stepstone argues is the golden age of private equity transactions. So here's how this study worked. They use implied total enterprise value to EBITDA multiples and they argue, or they show, I should say, that public markets reached a peak separation from private equity late in 2020 and the difference at the time was 19 times EBITDA for the S&P 500 versus only 11 times for the private equity median. Just quick math, that's an 82% premium, which shocked me. So at the end of 2022, however, they showed that the S&P 500 crossed through and it was briefly lower than the average private equity multiple at that time, which was the end of the study. So they were showing a reversal of this huge premium that had perpetuated for several years. Now, of course, Christie, had they run this study today, given public market performance so far this year, I suspect this premium has reestablished itself, has ballooned again. But we'll leave that to your imagination. Stepstone also in this same study, this is really interesting, they looked at the appreciation in the last few years and even quarters before exit. And they argue, and this is critical, this is the hypothesis of the entire portion of the study or this portion of the study, they say, quote, implicit in the concern about private equity valuations is this idea that GPS game the system to inflate valuations. And so what they're posing as the question of this science experiment is that if this behavior were typical, we would expect to see little appreciation in value over the final year or so of the investment. End quote. Makes sense. So in other words, they would have rung out gps, would have wrung out all the upside of the transaction premium in these bloated fictional carrying value of the marks throughout the life of the fund and there would be nothing left at the point of transaction. Well, interestingly what they found however, was just the opposite. So they looked at 2,400 secondary exits and the average transaction value was 24%. That's basically a quarter, 25% above the carrying value 3/4 prior, only 3/4 prior to the transaction, and a 42% premium to 5/4 prior. The whole outcome of this study, Stepstone argues, is that there was plenty of upside left during the transaction for the strategic buyer against the GP Controlled marks. And just continuing along this line, Hamilton Lane who publishes a really comprehensive annual private markets annual report in their 2023 version reported reinforce the stability and quote conservative philosophy of valuations. So in an interview with the Financial Times, their chairman Hartley Rogers draws on history to support this claim. He notes that despite some high profile failures, private equity as a whole held up much better than the public markets during the dot com bust and the GFC obvious question is why? Well this is debatable but Rogers argues that the oft cited more aligned governance model and we're going to ask our guests about this higher revenue and profit growth of many of the operating superiority I think he would argue and access to more financial mechanisms to cure stress in these times of difficulty than public market governance models and leadership. But he adds a really interesting point. That's the general private equity view of Hamilton Lane but he adds a really interesting point that I don't think should be overlooked. And this is much more a modern issue with the S&P 500. And that is as Hartley Rogers suggests, the recent concentration and dependency up and down of the S&P 500 on Big Tech. The private markets very diversified across all sizes and industries and business models and therefore balanced. The S&P 500 on the other hand, the top seven stocks. Do you know the answer to this? Top seven stocks make up what value of the S&P 500? Christie, any guesses?

Christy Hamilton (29:32)

I'm actually not sure where it is right now though I know at the times in the past it's been material.

John Bowman (29:37)

Yes, indeed. So the top seven and when I say this just for everybody's understanding, that's Apple, Alphabet or Google Meta or Facebook, Nvidia, Microsoft, Tesla and Amazon, those are the top seven. They make up 30%, almost a third of the value of the S&P 500. And get this just to go a little bit deeper, again peeling back the proverbial onion, Apple's market cap and I used to be involved in running Russell 2000 mandates very early in my career. Apple's market cap is larger than the Russell 2000. So just let that sit and marinate or decant maybe I should say on this show. But listen, the reality is that regardless of your view on this overall picture and debate, the concentration of The S&P 500 makes this comparable to very little. And I think we just need to be cognizant of that. Hartley Rogers admits that the exception is vc. And Kristi, you've already covered this. The valuations there are more anchored to the last funding rounds. So we'll need to unpack the differences across the stratifications of private equity. We don't want to throw private equity all into one bucket because mid market and VC and traditional buyout are all very different industries. So that's what you would argue the interim valuation doesn't matter argument led by our friend Chris Schelling. But I think it's important as we promised, to take a look at the other side. And I don't know about you Christy, as you think about arguments again at that Thanksgiving table, but I think it's fair to say that Cliff Asness did not agree. Just to put a finer point on it, Cliff suggests that Chris's op ed made his cranium explode. Cliff Asness, for those of you that don't know, is of course the brilliant and mercurial founder of the quantitative hedge fund aqr. We need to be clear here. And by the way, this is a complete coincidence. I'm in the middle of reading More Money Than God, which is Sebastian Malaby's account of the history of hedge funds, and Cliff has his own little chapter in it. So it was a funny aligning of the stars for me as I prepared for this episode. Cliff, brilliant guy. We need to be clear here that Cliff, as any honest hedge fund manager must be he is not a homer for the efficient market hypothesis. He does not suggest that public market indices are the answer to all of our problems. He understands that unconstrained strategies, the way they make money, are in inefficiencies and mispricings. And Cliff would never suggest that we shy away from that. He's also, interestingly, been very public about some of the benefits of illiquidity in private markets. I've quoted Cliff on this. He argues, quite playfully, or he did a few years ago, that maybe there should be get this an illiquidity discount because the inability for clients or investors to trade when they're behaviorally most tempted actually protects them from themselves. The lockup period is a gift that you should pay for. So interesting. I don't think he means that literally, but I think a really important element or attribute of private markets is that it stops you from doing foolish things. To wrap that up, Cliff as a prerequisite for his position, he is far from a private equity hater, to be clear, but there's no doubt this rejoinder to Schelling's op ed was scathing. He makes a very interesting point. The summary point is that unlike the private markets, public market investors quote, can't hide behind oversold equities simply because they think the market is wrong. I love this quote because they think the market is wrong. I don't know if this reminded you of everything just viscerally but by the way, one of the best financial books ever written, maybe with the exception of Liars Poker, is Roger Lowenstein's amazing account of the Long Term Capital Management collapse when genius failed. I don't know if you know this story, but 1998 enormous hedge fund fails Long Term Capital Management started by John Merriweather. Meriwether had brought on a couple Nobel Prize winning academics to help him with this hedge fund. Bob Merton was one of them. They had just won. He and his partner had just won the Nobel Prize only a year prior on the black scholes model in 1997. And the famous Merton quote that I was reminded of when I read Asness's response to Schelling was that Merton said effectively in a discussion with Lowenstein that their models weren't wrong, but rather the market was wrong. And Lowenstein has this amazing quote, listen to this. This is wonderful literature. He says quote, stuck in their glass walled palace far from New York's teeming trading floors, they had forgotten that traders are not random molecules or even mechanical logicians such as themselves, but people move by greed and fear, capable of the extreme behavior and swings of mood so often observed in crowds. If you've read Intelligent Investor, Ben Graham's protagonist in that classic book, Mr. Market, Ben Graham calls him the wildly emotional guy you wouldn't want to have as a partner. Why am I spending so much time on this? Because I think as we're going to get back to later, Christie, if you are passionate and intense about the breakdown in the comparison between public markets and private markets, it does lead you to discussion about the accuracy of the public markets. You just have to go there. And I think it gets you to this idea of do the public markets do really a good job at any given point of suggesting or expressing fair value. And so I mentioned this as just examples as you think through and process this larger question. So back to Cliff. So Asness, if you can't argue the market is just plain wrong. He says, by the way, I'm not sure I agree with that. But Asness in building his case says that if you can't argue the market's plain wrong, the market's the market. He argues that, quote, determining what you would get if you sold these companies today, these private companies, it shouldn't be a tricky question for these sophisticated financial wizards. This is not magic. And while perhaps exaggerated, he says you have to be able to accept that the public markets are at least directionally right, that the drop off is non trivial, it's not completely fictitious. And he goes on to say in the sound bite of the piece, I think the title, as I introduced this position, that the lack of honest mark to marking and resulting outperformance is nothing more than quote, volatility laundering. There it is. There's that phrase again. So in other words, it's the graceful swan above the water hiding the chaos of the webbed feet frantically swimming below the water. It's a mirage, to use your word earlier. And he ends the piece with a doozy. Really a doozy. And you skirted over this. I even see you alluded to it, but there was a touch point where I almost brought it up, but I thought I would save it for my piece. But Cliff suggests that part of this smoothing is the result these are my words of a principal agent problem, meaning that LPs are paying exorbitant fees to GPs. Back to Cliff's words now so that they can report unrealistically rosy and calm returns. They are an accessory to this, he's arguing. That last point is a whopper that we need to definitely unpack with Andrea and Scott because it stands in complete opposition, which is why this topic is so interesting for our first episode. It stands in complete opposition to Chris's statement earlier that LPs are the gatekeeper of truth, that they would spit them out if there was these shenanigans going on. So we'll park that for a while and see what Andrea and Scott have to say about it. Let me just also mention that superstar reporter, by the way, I think really highly of Pitchbook reporter Jessica Hamlin and she had a March article that developed this point volatility laundering or inflated prices a bit further. So in her reporting there is some evidence that there's an upward bias and manipulation of the numbers as well. One of the major auditors she cites for private valuations, Eisner Antner, admitted that while GPs adhere to most of the best practices set out by our friends over at ILPA or the Institutional Limited Partners association, they certainly aren't following 100% the principles and no one GP is following even most of the same ones. It's a box checking experience is what this argument suggests. And further, perhaps the most alarming part of her article is that was a discussion with a professor at Harvard, former mid market private equity professional gentleman by the name of Brian Bake. He contends that since the firms, the GPs decide who to hire as an auditor, who are those third party valuation experts, it's very likely that the auditor will okay whatever valuation the GP says. So barring an egregious error Brian says, or legal risk, it's probably going to be waved through. Please proceed and look the other way even if the choice of methodology is more favorable or the comparables are cherry picked. Again, I hope we have represented those two sides fairly. We have hinted at some of our own opinion and we will get back to that later after our guests. Before we invite Andrea and Scott in, we are going to move towards halftime where we're going to hear a little bit more from our title sponsor, Franklin Templeton Alternatives. So stay with us. Well, as promised, we are here with Dave Donahue. Dave is the co head of US Wealth Management for Franklin Templeton Alternatives. Dave, welcome to Capital Decanted.

Dave Donahue (38:55)

Thank you John. Great to be here. And thanks for you and Kaya for everything you're doing for the alternative industry. Truly appreciate it.

John Bowman (39:01)

Well, we are grateful for your participation. Franklin Templeton Alternatives is the title sponsor for this season of Capital Decanted. And we are grateful for Franklin Templeton's long standing devotion to client first mentality, to ensuring that clients build diversified portfolios. So this was a really great match and partnership for for our first season. Dave, maybe a couple questions for you because I think a lot of listeners might be unfamiliar with the sheer scale and scope and M and A activity of Franklin Templeton over the last several years. Tell us a little bit about levelset for us, the alternatives offerings and scale at Franklin Templeton.

Dave Donahue (39:39)

Absolutely, John. So Alternatives are just a natural extension of what you described earlier as a client first mentality. For 75 plus years we've been focused on helping clients solve problems in the investment landscape. This is a part of that, but you're right, a lot of folks aren't aware of our size and scale today. Alternatives by Franklin Templeton is now approximately $260 billion in assets, making us a top 10 player in alternatives globally. And we cover all the major food groups from private real estate, private credit, private equity and hedge funds. I think we do it in a unique way, focusing on acquiring best in class and differentiated institutional alternative managers, leaving them 100% alone from an investment perspective and then bundling the resources of Franklin Templeton around them to help bring their business to the private wealth space. We're really excited about that.

John Bowman (40:33)

Fantastic. And maybe as we think about Franklin Templeton's history, I think most people would come to mind, would be a very reputable and a long standing history around public equity, mutual funds, international investing, particularly the Templeton portion of the brand. When was this moment of realization that you needed to diversify and how has the organization gone about building out this stable of offerings you've referred to?

Dave Donahue (41:03)

I go back to our CEO Jenny Johnson, who I know you know well, Jenny's always thought long term about this business. Franklin Templeton, if we flash back in time, invented the mutual fund in many ways shape and form to help democratize access to public markets for individuals. And we're doing that here. About five years ago, we took an approach that said traditional investments will be a key part of our business going forward, period. But there's this growing landscape of alternatives where technology, operations and regulatory structure are making them more accessible for the individual. And we want to participate in that. So while a lot of traditional firms have dipped their toe into the pool of alternatives, we've really tried to take a cannonball into the deep end. We've done four key acquisitions over the last five years that have scaled our business to the 260 billion we're at today. And what's really important to us, John, is three things. One, I mentioned this earlier, best in class and differentiated institutional alternative asset managers. Every firm that we own in this space source 98 + percent of their capital from the largest institutions globally. We don't want to change that. What we want to do is maintaining their investment integrity, find ways to package and bring those products to the wealth space. And we've dove in the deep end there by building a 40 person end to end distribution team in the UF focused on private markets and hedge funds to complement the work we do on the traditional side as a trusted brand to advisers. And the benefit we're seeing in conjunction in partnerships with firms like Kaya is really that trusted voice that we've built over decades is allowing us to help educate the next set of advisors to adopt alternatives on how to do so responsibly and appropriately for their client portfolios outstanding.

John Bowman (42:49)

And I think listeners, you hear that devotion to client first threaded through all of Dave's answers, which we really appreciate. Dave, obviously you don't want to give away trade secrets or maybe bring out the crystal ball, but as you mentioned, several food groups that you guys have been active in building out, as I said earlier, this stable of offerings. Are there gaps or particular aspirations that you think we might expect to See whether Build vs Buy Franklin Templeton continue to grow their business in.

Dave Donahue (43:20)

If I think about gaps first, our gaps are in the real assets and the infrastructure space. We have a great real estate business through Clarion Partners, but we don't do real assets or infrastructure today. The other big notable gap is on the private equity side, where we do growth and venture, where we do secondaries through Lexington Partners, but we don't have an LBO buyout business. I'd say our aspirations between those two gaps really do lie with the infrastructure space, and our CEO Jenny has been public about that. You have to do it with the right firm at the right price and the right time. But infrastructure is a future focus for us. And I would tell you, John, our overarching focus today is on execution. We've acquired the right managers, we've left them in place to do what they do best, which is manage capital. We've built our team and now we're laser focused on being the right partner and friend to the distribution teams we've worked with for decades on the traditional side.

John Bowman (44:14)

Outstanding, Dave. Well, really good flyover of what you guys are doing and it is very dynamic. There is kinetic energy to what you're building. The enthusiasm really just comes through each time I talk to to a portion of your organization. So on behalf of the entire Kia community and all of our listeners, thank you again for your support and partnership for this podcast and listeners. Stay tuned. We're going to move on to our segment where we invite our guests in. Thanks again. Well, welcome back to Capital Decanted and this episode one of season one on private market investing. As we promised, we are now joined in studio by our special guest, Andrea Auerbach, Global Head of Private Investing at Cambridge Associates, and Scott Cooper, managing partner at a 16Z. Welcome.

Andrea Auerbach (45:06)

Thank you.

Scott Cooper (45:07)

Great to be here.

John Bowman (45:08)

Well, you are on a maiden voyage. I think you know this. This is our very first episode and this story wrote itself when Christy and I were brainstorming what do we want to focus our first episode on? How do we get out of the gate? Sprinting with a bang. And of course, private market investing, and particularly valuations of private capital was the obvious answer and you two were immediately the two that came to mind. So thanks so much for joining us. We're really excited to continue this discussion that we've begun. Let me start with you, Andrea, if you don't mind. And the listeners have heard, as you know, Christy and I have spent a little bit of time unpacking why this is so charged right now, why this is so top of mind and in the media and on our minds and I'm sure in discussions with your clients of all flavors and sizes. So let's just start at the crux of the debate. Let's get out with an obvious black and white question, which I know the answer can't be black and white, but are private market valuations a good reflection of value, or are they simply make belief and why or why not?

Scott Cooper (46:15)

That is a wonderful question. And obviously the answer is it depends. Of course, when you're looking at private market valuations and private market investments, the average hold period, as we know from Cambridge Associates monitoring the space for decades, the average hold period for private investments is about seven years, both for private equity and for venture capital, actually. And so from the moment you've made that investment for the seven years on average, that that investment's going to be held, that investment's going on a journey. And depending on what kind of asset it is, if it's a buyout with referenceable profitability and revenue and clients, it may have a more steady journey on its way to its ultimate valuation. At the end of the day, if it's a venture investment, depending on what stage precede seed, A, B and onwards, it's going to have its own version of that journey. And that journey might be more volatile because there are fits and starts, zigs and zags when you're building something from complete scratch out of your garage. What I would say is private market valuations, as you get closer to that exit date, that valuation should start to more accurately reflect what you are likely to receive when you finally monetize that asset. And I think one of the reasons why we've had a bit of a why this is your very first episode's focus, is that in the 2020, 21 era, in 1H22, valuations seem to have run away with themselves and really following that public market up considerably. And the private markets are the local train to the public market express train. And so we're watching a slight divergence, if you will, of trajectory right now. And it's because those investments that were made in that time frame are still incredibly young, 1, 2, 3 years old. And so we don't really know what we have from a valuation standpoint, but yet all eyes are on that cohort. It's a wonderful question to start with, and my answer is it depends.

Andrea Auerbach (48:11)

I think Andrea laid it out really well. I do think there's a couple things to think about, and one is exactly, I think, what she said, and I'll speak particularly about venture Obviously, which is where I have a little bit more experience. I do think you have to bifurcate between early stage and later stage investments. If I look at broadly across the industry, just from talking to a lot of our different limited partners about what valuation reports they're getting from their GPS in general, I think most people would describe what Andreas mentioned, which is as you get to the later stage companies where, okay, we know what the public comps are, we have revenue, whether it's revenue multiples, whatever you are, there's always often a lag a little bit in particular where you market like this, where you had a massive Downdraft obviously in 22, and of course you had high growth Companies trading off 60, 70, 80% from their highs. And then of course, we've had this pretty significant reversal in 23. But a lot of it has been driven by, as we know, a relatively small number of companies in the S&P 500 that are the big cap tech companies that creates a little bit of volatility. But I would say in general, my impression from talking to LPs is probably the later stage companies, I think are at least as fairly valued as I think people can be with reference to public companies. And then as Andrea mentioned on the early stage companies, I think you can do a little bit of finger in the air and say, okay, are these companies on track, off track, and if so, do we make some kind of marginal adjustments? But I think that's where there's probably a little bit more variability to how different GPs value their investments and obviously how you think about those. And not surprisingly, you'd expect probably to have a little bit less volatility in those earlier stage marks for a lot of the reasons that Andrea mentioned in terms of just these are new companies that are well away from exit and so their correlation between what happens in the public markets is just much more muted than if you had obviously companies that are farther along in their life cycle.

Christy Hamilton (49:50)

Great points all around. I want to take it back and stay with this line of questioning, but where are we in the current cycle of things and how should we think about the trajectory of markdowns relative to public markets? Are they a good comp? Bad?

Scott Cooper (50:04)

It is exactly what all of us on the investor and the LP side are dealing with right now. A lot of what we try to do at Cambridge Associates is look at past cycles as indicators of valuation movement. When will the private markets catch up to the public markets? And so obviously, as Scott mentioned, in 22 everything started to pivot. And when we look at the typical trajectory of private market valuations finally coming into line with maybe the long term glide path of public market valuations. Typically, what we've observed going all the way back to tech rec one GFC and now today is it can take anywhere from 12 to 18 months for the private market valuations in aggregate to really achieve where they should be, if you will. So coming down from the 21 highs, there are many wrinkles to what we've been experiencing lately. And one of the wrinkles that we've been grappling with on the LP side is obviously let's take the S&P's rebound. When we've watched Tech Rec1 from 99 or GFC, the public markets come down and they stay down, they don't reverberate back up. And I think with the rise in interest rates, this has been an interesting like, wait, what I think that could throw a wrinkle into private market valuations really reflecting the true expected fair value of those assets today because the public market comps have rebounded in certain sectors and that's going to create a little noise in the system actually, if that gives you a sense of our expected time frame.

Andrea Auerbach (51:30)

Andrea, I'd be curious if you agree with this. I don't know, but my impression is in general you know this data much better than I. But my guess is GPS are probably slower to mark down when you have very significant downdrafts like you had in 22. So anecdotally at least again when I had conversations with our LPs, if we were having the conversation, let's call it second quarter of last year of 22, there was probably some GPs who had done some meaningful markdowns, but I would say it was very uneven and probably on average people were slower because to be fair, nobody knew where this market was going. And then I think the big forcing function, at least in venture, and I don't know if this is true in private equity, Andrea, is when you get to year end audits, when you finally get to Q4 numbers and you have the auditors come in, that tends to be not just obviously a more involved process, but also you've got input from the auditors on those things. And so by the time we got to early 23 and people were now seeing Q4 numbers, maybe not across the board, but I would say it was probably more uniform in the sense that people were starting to actually show meaningful changes, particularly from their year end 2021 valuations. And now we're recording this in August of 23, we're about to get Q2 numbers, or some people may have already gotten Q2 numbers. I don't want to suggest anything's perfect, but my sense is, to your point, on this 12 to 18 month cycle, we're now closer to that 18 month cycle where hopefully the divergence between what people believe is reality and where they're actually marking things to converge. And at least on average, maybe not across the board, but at least, you know, broadly across the industry. Is that consistent with what you're seeing or you still see other challenges?

Scott Cooper (52:59)

I would say I was obviously looking and preparing to come in and have this conversation with all of you today was I was looking at the movement in quarterly marks both for venture and for private equity and they do seem to have reached a bit of a bump, either a flattening or a slight uptick. I don't think we're done yet, actually with the true value of certain types of companies in certain types of stages, truly acknowledging that value, that last mark we had, we're really not going to exit at that mark. Now. The other interesting thing that we've observed over time is typically gps, when they realize that there is a permanent diminution in value, they will take the mark down because one of the things we found GPs prefer not to do is to disappoint their LPs and they really recognize that value is not going to hold. They will take either an unrealized write down or heaven forbid, a permanent write down. It's the marking up that's been more interesting. So we've seen GPs are more willing to take the write down than to actually take an aggressive write up. And we actually see that come through in what we call Lyft. What is lift? We exited the investment at some value. What we do at Cambridge Associates is we walk back six months and look at what the valuation was at that time and the difference. We call it lift. On average, both for private equity and venture capital, it's positive lift. We're still seeing that today. What I would tell you though is that the rate of change is shifting around a lot. And typically lift is, say if the average lift for a venture capital exit, all the exits put into a pool. Let's see how they all did. In aggregate, I'd say the average lift over the years has been about 15% positive. That's not a big move. But let's say the negative drop. So if something was exited at a negative value, it's only about an, let's say half that. So maybe an 8% drop. So what's interesting to me is GPS on average. On average it's a big cohort. We know this. But GPS on average are faster to take a write down or to acknowledge the value may not be recovered at exit and a little less willing to write it all the way up to what they think it could be worth at exit. The average is 7 years holding period. So we have a long way to go from the 21 cohort of investments to know really what we have like we were discussing earlier. But I do agree, I feel like the market has flattened a little bit in terms of the glide path of marks and I think it's that public market recovery has something to do with that. But we all know in this room that public market comparables are not the only decider here. So there are lots of other ways to incorporate other valuation indicators in what should we do here today in this quarter?

John Bowman (55:39)

I want to make sure I get back to this concept of lift, because I think we cited some other studies that suggested some numbers there as well. But I love both of you touched on this. I'll use Andrea's words specifically. Both of you touched on this perhaps disconnect between short and long term, this idea of a glide path. And this is maybe a good use of the word smoothing, which is a taboo word in most cases in this discussion. But there is a sense channeling, Ben Graham, which we cited earlier too, that in the short term we all know the hyper democratized public markets are a voting machine. They're all over the place and there should be a glide path. If you drew a trend line through that, that largely over some period of time, we could debate the duration that private market valuations should follow. I really like that positioning. Andrea, you've alluded to this a couple times already because you deal with LPs and GPs. We often, I think, channel this debate through the mouths and the ears and the shows that we watch on TV and podcasts that we hear and the constant surge of information and noise coming out on capital markets. I'd be curious in your discussions with LPs just to be very provocative, whether they care nearly as much as we act like we care. Is this something that's on their mind? Are they pressuring gps? Are they asking more questions? Or are they pretty content and we're just a bunch of noise around them?

Scott Cooper (57:03)

Lots of interesting vectors on the question that you're asking, John. And you got a couple of things moving around here. LPs, their roles are invest the capital for the purpose of their mission, their family, their entity, so, so that that entity can continue to fund and do what it needs to do. They have allocations to different asset classes and in certain situations they need to stay in compliance with those allocations. And so if you have significant public market reverberations, it can create a good allocation challenge or a bad allocation challenge. In the early years of COVID from March 2020 through the peak through year end 21, really you had a lot of LPs running to catch Target. And I shouldn't say it quite like that because we move thoughtfully and considerably. But if your total assets under management are growing considerably because of the public market valuation increase, then you as a private investor are suddenly faced with some challenges of but I'm supposed to be delivering a certain amount of exposure to the private markets. And so I need to think about how I'm going to handle that because my board, my constituents, the people I am trying to earn this return for, need me to do that part of my role. And then when the markets pivoted in 22 and have continued to pivot, then it created the bad denominator problem, which is, wait a minute, I was trying to meet the needs of the pool of capital I'm stewarding here and suddenly I'm out of compliance. I'm over target from a private markets perspective. So you have portfolio construction challenges that are created by significant shifts in valuation. And then you obviously have the element of there are many private investor in private investment professionals working as part of a larger organization that may have a portion of their compensation also tied to the return and performance of their portfolio. So a rise in market valuation, maybe it's not realized, but it may mean a rise in the performance which might be good for them from a compensation standpoint as well. And so these two elements, portfolio construction and meeting the needs of your constituents. And then maybe I'm motivated to do that because that impacts my ability to provide for my family. Yes, you have some real focus on valuations now, as I say all those things. A big part of what we focus on at Cambridge Associates is education. This is a long term asset class. Things are going to move up and down in the interim, but eventually they will settle at that long term return expectation that we've all underwritten to. We just need to move through that to get to that point. We have to pay attention to these quarterly, more short term moves, evaluations, but also educating and socializing and reminding that the point of private investments is that they're private. And you're going to have an exit point some point in the future, not today. And so let's keep our eyes on the horizon here a little bit more.

John Bowman (59:58)

Let me just double click on that just because I feel obliged to, given the way we opened this. This really comes down what we're dancing around a little bit. The principal agent relationship, the alignment, and there's a couple ways to look at this of which many smart folks have differing views on, which is on one side of the aisle, if you will, you have a principal agent relationship where the LP is the gatekeeper, where they're going to uncover expose shenanigans if agp, let's just say, was there was a pattern of bloating and holding valuations too high and not adjusting the other side of that argument. And again, I know the truth is always somewhere in the middle, but the other side of that argument is what you're alluding to, Andrea, which is the principal agent problem, which is I'm an accessory to this because, wow, my return structure, my compensation is actually benefiting from these bloated valuations that don't move. So I'm curious how you think, and Scott chime in here too. On the venture side, how are LPs engaging with these questions given those underlying biases that are just natural in our business?

Andrea Auerbach (61:05)

The risk of pandering to LPs, which I would never do. I have a couple thoughts on it. One is, I agree with you that problem exists. And look, principal agent problems exist obviously in lots of different areas of investing. Ironically, as Andrea mentioned, from the GP perspective, one of the worst things we can do is to show inflated valuations to our LPs because it creates exactly the problem that Andrea is alluding to, to which is everybody has a certain target that their investment committee has told them 10% venture, 20% venture, obviously, depending on where you are in your life cycle. When we don't accurately reflect valuations, if we do as a community, then basically we exacerbate those allocation targets and quite frankly the big implication just personally for us means it's very hard then for us to go back to those LPs and ask them to fund our next vehicle because their answer is great, we love you, but we're over allocated to venture. So in that way the principal agent problem should create the right behavior. I say should because of course there's always other issues on the LP side. I agree with you. Right. There's always this compensation challenge. My impression and again, this is not to try to pander to LPs but my impression is the LPs are pretty good on this one, that what they really want is look, they're in this for a long term game. Andrea probably knows this better than I do, but my impression is many compensation structures have these rolling three year numbers and stuff. So it's not as if, if I arbitrarily can just eke it out and hold until June 30th at a high number, I'm going to get paid some astronomical level and then on July 1st I can just let all my marks go down. As an lp, I think there is enough of an incentive structure that hopefully we get to the right answer here. I don't want to ignore the principal agent problem, but I actually think if done correctly it actually points both groups in the right incentive, which is let's get it right because we're hopefully all long term actors here. And the last thing I want to do as a GP is compromise my ability to continue to build out my business by having a group of LPs who come back to me and say great, sounds good, but come back to us in three years when our ratios are back in line and just sit on your hands in that time period and don't execute your business. Andrea, feel free to disagree with anything.

Scott Cooper (63:04)

Or everything I know Scott, obviously as you point out, there are many different approaches to how LPs may be compensated, many different models out there and universe of LPs, tens of thousands of individuals globally, obviously in teams. And I would agree one of the things that has kept me in this space for the 30 years that I've been in it is life is long and things play out and people don't forget if you have gps that are engaging in some valuation shenanigans around their fundraising or around certain periods of market exuberance, most LPs that have even a small modicum of experience are like something is not right here. And that you file that away because to Scott's point, point it is about long term alignment. I mean we're partners with the gps that we invest with until they're done and that could be 15, 20 years. So we have a long time to get to know each other, no need to try anything fast in year three. Hopefully that through line is one that I think we're on from where we focus our perspective here at CA and think about that quite a bit. But what I would say though is we're not just talking about the LPs and the GPS. As Scott alluded to, there are investment committees, there are Boards, there are constituents who are reading the news. And private investments is more and more in the public eye thinking all the way through how to communicate and socialize. Maybe a quarter's worth of reverberation all the way out to the retiree is a different challenge that I think we're all managing through as actually LPs and GPS alike right now.

Christy Hamilton (64:35)

That's actually a really great point and I think it's been interesting too, particularly with pensions who have to post all of their returns online and how people will pick up on that and it'll hit the news again. It's the narrative around that becomes a different thing versus how we talk about it behind closed doors. And thinking about that, I'd actually like to switch gears for a moment. And Scott, what are you seeing right now in VC funds and portfolio companies? Obviously, valuations are much more tied to financing rounds in the early stage. So what's happening in that space, given that there's been a period of drying up in fundraising itself?

Andrea Auerbach (65:05)

A couple of high level trends that I'd highlight. Let me start with portfolio companies first. The portfolio companies, I give them a tremendous amount of credit, have actually been very responsive to this environment. Don't quote this number, but I would bet that virtually, if it's not 100%, I would say 85 plus percent of private companies in the venture space have done some kind of headcount reduction. Whether that's reducing down their headcount, hiring plans, actually doing, unfortunately, reductions in headcount of 10 to 25, 30% in some cases. Number one, I would say, as all things happen, of course there's always a little bit of delay and nobody wants to accept the new environment. And so in 1Q22, you probably saw a little bit more people saying, well, not sure if this is real or not. And so do I really want to do those hard things. But I give the CEOs across the board and the portfolios a lot of credit that I think almost everybody has done as best as they can to reduce their expenses. The other positive thing that's happened, particularly in the later stage market is Andrea mentioned the positive excitement that was in the markets from really, I would say 2018-21. Many of these companies went into therefore, the 22 environment with healthier balance sheets from a cash perspective than they might have otherwise done, just because there was a lot of what I would call preemptive financing. So companies that may not have needed to raise capital, but were offered capital at very attractive terms by different investors the good news, I would say, if you take the combination of those two things, better balance sheets going into 22 coupled with taking the hard actions in 22 to reduce expenses, I would say again, across the board, most companies have done what I would consider the smart thing to do, which is can we elongate the cash Runway that we have in our business. No one's trying to predict the future, but let's take out the need to raise capital in 22 or 23 or 24, even if we can, and allow ourselves to buy some time both for the macro situation, to stabilize the public markets, to stabilize, give ourselves more control, more degrees of freedom for our business. That's what's happening, I think, on the company side, on the GP side, which is not surprisingly, the knock on effect of that is the pace of investing has slowed down. So again, Andrea probably would know the numbers much better than I. But if you look at just pace of capital calls in 2018-2021 relative to pace of capital calls in 22 and 23, I think they're demonstrably different. I know that's certainly true generally across our peers in the industry here. So you've got hopefully some natural mechanisms to try to help address some of the challenges LPs have. So if LPs are overallocated and they're concerned about investing more capital, the industry naturally has helped ameliorate that problem, I guess by saying, hey, companies are able to defer fundraising for a longer period of time. Therefore gps are also able to slow down their pace of capital calls from LPs. And so hopefully that also gives some time for the broader LP community to feel like, okay, their ratio of venture or private assets relative to public assets is not quite as out of whack as it might have appeared in 1Q22 on a relative basis. So I would say that's generally what's happened. Now let me just counter that with what's also happening from a positive and optimistic perspective. I'm not seeing any slowdown in the rate of new company formation and in the rate of funding, particularly at the early stage level. So I defer to Andrea because I know Cambridge does a wonderful job of tracking these numbers. But while the dollar volume of venture capital is materially down, most of that degradation in dollar volume is in the later stage of the venture market, as opposed to in the early stage of the market. When I talk to our early stage colleagues who were doing stuff in AI or otherwise, nobody's sitting on the beach doing nothing Basically the opportunity for them to see new companies and the willingness of entrepreneurs to still start businesses even in this environment has been very, very strong. So you've got a natural shifting of dollars, basically. I would almost describe it as you had a big influx of later stage dollars in the 2018-21 time period that meaningfully drove just the total volume of venture capital that was being invested in the industry. A lot of that has dissipated in light of some of the macro situations. But greater consistency and less variability, at least from where I sit on early stage company formation, early stage company financing.

Scott Cooper (69:08)

It'S something that we've all observed in this conversation over a really long period of time. So new company formation tends to keep on trucking as it does. And maybe the valuations that are applied at the early at the seed and A, they do fluctuate, but they don't fluctuate as massively obviously as the expansion stage at the later end of the cycle. The other thing I would say, which I think may also have a impact on valuations more broadly is something that we've observed and it's been documented, is that for a period of time there were more non VCs investing in VC than the VCs themselves. And where were they putting all the money? They were putting it at the expansion end of the market. And so if you have folks that might be a little less experienced, have maybe a little less of a framework, heaven forbid coming into the market and setting marks or creating valuation inflation at the upper end of the market. If you're going to be doing pre seed seed A investing, as Scott was saying, you've got to know your space, you've got to know the players, you've got to be able to attract those entrepreneurs, entrepreneurs. And those valuations may not fluctuate as wildly as something we've observed and you can see that in the valuations as well. And so that was something else that I think when the market started to rock and roll in 22, I would say the tourists, everyone who was less comfortable and wasn't aware of the long term nature of what they were doing, no offense to them, probably has exited stage left. And so maybe we've got a slightly more rational investment environment on top of all the other factors that Scott just walked through as well.

Andrea Auerbach (70:37)

I would agree with that. I think that's right. Yeah, there's definitely less participation by whatever definition you want to describe it. But by people who are not full time venture capitalists, there's less participation, particularly as Andrea mentioned, at the growth End of market. The only thing I was going to comment on, Andrea, you were kind enough to reference your 30 years here. So I'm not dating you other than to note that you and I both have experience. I guess maybe that's the polite way to say it. What's really interesting in this market, just speaking to the early stage company formation thing, is again, for those of us who are old enough to remember the.com boom and bum of the 98 to 2000 period followed by 2000 to, let's call it 0405, we did see something different there, which is we really did see slowdown in new company formation. And I even remember this. Having been out in the Bay Area this time, it was very hard even for entrepreneurs and just for generally employees to accept going into startup companies. The idea of taking risk on equity, for example, really was just not something people were willing to sign up to. There was, I guess a flight to cash, for lack of a better word, meaning I would much rather have a salary than have potential for equity. What's really interesting to me this time, and look, I hope this continues, is so far we have not seen that we haven't seen entrepreneurs meaningfully run for the exits from starting companies. We haven't seen engineers and other people in the startup community. And that gives me a lot of confidence. Just despite, look, 2022 was a tough year. I don't think there's any way of missing words on that one. But it hasn't shaken, I would say the spirit and the entrepreneurial and risk taking opportunity that a lot of people have here. And if we're going to some deep recession for the next 10 years, of course we'll have to revisit that assumption. But for right now, that resiliency, at least as we sit here as GPS, really gives me a lot of optimism and confidence that the opportunity set for new investing in this environment will in retrospect turn out to be a very, very attractive period of time.

Scott Cooper (72:19)

It's interesting you say that Scott, because as you were talking I was thinking, well, you had a different type of generation affected by different types of macroeconomic factors coming into Tech Rec one and saying, I'm good, I've already lived through a couple of high interest rates, a recession. I'm just going to go over here and do this thing for a while. And I think the current generations that we have moving through the innovation economy may have a slightly different backing and perspective and that might inform them a little bit. And you saying that, Scott, made me think of that book the Psychology of Money. It was very interesting.

John Bowman (72:50)

I've still got PTSD from Techrec. One little company called Webvan.

Andrea Auerbach (72:55)

There was a lot less traffic on the 101 freeway, at least if you're a Bay Area person. So that was one positive for a.

John Bowman (73:01)

27 year old analyst recommending Webvan. I still have nightmares about that. We digress. Scott, I want to stick with you, but perhaps quote Andrea here on this idea of the lift towards the end of the holding period right before the transaction. Actually in the intro we cited another similar study from Stepstone that showed something similar that there was a lot more upside still to come in the last three to five quarters. And I'm implicit in the argument that these are held at bloated valuations would be that you've wrung all the value out of them and so there's barely a pop. I guess comparing it to our annual tax decision where you don't want too much to be given to the government and yet you don't want to write a massive check at the end. Is there a calibration here? How should we think about appropriate metrics or bogey for the final pop and how you think about holding valuations through the period?

Andrea Auerbach (73:55)

I think there's two things that I would comment on with respect to that. Number one is for some of your listeners this may be obvious, but for others it may not be. But the venture industry, unlike, let's just call it the hedge fund business, the key difference from a GP incentives perspective is none of us get paid on unrealized. No one should feel sorry for us. By the way, I'm not asking for any sympathy here, but I mention that just because the honest answer is the only incentive for me personally to inflate valuations is if, whatever, I'm trying to hoodwink an LP into giving me more money, which as Andrea said, isn't actually what happens. Factually, LPs are super smart and they figure that stuff out, but there's no direct financial incentive for a GP to have higher numbers because at the end of the day none of us is getting paid on that. We only get paid when there is what we call a realization event, either an IPO or an MA event or something. So I think thing number one, just for the listeners to keep in mind is that there are industries like the hedge fund industry and I'm not picking on them, where people do get paid on unrealized. And so you can imagine that has a different set of potential incentives for people to think about the other thing I would think about, specific to your question about Lyft is, and this is just a philosophy I think goes to Andrea's overall argument about long term relationships. For those of us who've been in this business for a while and intend to, the LPs are truly partners. We have to treat them that way. And there's real value in transparency and communication and all the things that matter and trying to understand and deal with the challenges that they have. They've got overallocation challenges. We need to be mindful of that and think about that. So I would think about Lyft in that context, which is I don't think anyone's going through and saying, okay, I'm pretty sure this is going to go public in six months and it's going to be 50% higher. So let's arbitrarily mark it down by 50% today. I assure you that's not happening. But I think what is happening is, okay, how are we transparent and how do we make sure we show consistency in our numbers? And yes, I think it would be a bad thing for us to have a company go public and for us to be so far off from the valuation on the downside that we are introducing a surprise to the limited partners. If I want long term partnerships, which is certainly what we want here at Andreessen Horowitz, I think the best thing I can do is be transparent and communicative and hopefully show consistency. And that means when times are bad, we should not kid ourselves and we should mark things down appropriately the best we can. And then also we should make sure that as things get better. I agree with Andrea too, which is GPS will probably lag the markets a little bit, particularly when you have obviously a rebound like we've had this year. We've got. I don't know what the numbers are now, but NASDAQ at one point was up like 25, 30%. I wouldn't expect to have quarterly changes in VC marks at that amount, just given that. I would say that's the operating principle. So Lyft, I think is a byproduct of that, but I think it's a byproduct of a fundamental operating philosophy, at least that we try to do, which is let's just not have surprises, I guess, is how I think about the world.

Scott Cooper (76:35)

It's interesting you say that because, Scott, as you were talking, I was reflecting. We measure lift, obviously at the industry level. John, as I was alluding to. We also take a look at it on a GP by GP basis. And what are we looking for? Consistency. So I've had the we need to Talk conversation with GPS that either consistently have material lift of like 70%. You know these assets better than anyone, really? This is the average upside surprise. Is that significant? But you know these assets better than anyone. So what happened? Talk us through that. Or if someone's hyper conservative and is even below the averages that I trotted out, which are not that high by the way, and really talking with them about your valuation methodology, appreciating how consistent you are. Let me show you what the industry is saying about where you are and can we just talk about why or why not you're valuing your portfolio in this way. But I'd say the key thing, which is what Scott just alluded to, is we're really looking for that consistency because we're going to be investors with these GPs for a decade plus. We know where we're going. It's just what are the stops along the way that we're talking about?

Andrea Auerbach (77:44)

The dirty little secret, John, of the industry, which is not really a secret, is Most of our LPs have exposure to assets that are the same asset held by different gps. And a very fun conversation that I often get to have with some of our LPs is, okay, you've got Company X in your portfolio and you guys are holding it here, and I've got it in five different GP portfolios and one's way up here and one's down here. And so I think Andrea's point is the right one, which is, look, the LPs are really sophisticated on this and they've got lots of ways to triangulate data points. And so again, I'm not doing myself any service by being an outlier in either way in that market. The best thing I can do to LPs is represent the valuations as best as I possibly can, understanding that there's always nuances in the market because it helps develop partnership long term. And to Andrea's point also, when we have markets like this where people are worried about am I over allocated to venture or not? Overalllocated, the better information I can give them, the better. Then they can go back to their investment committees and their CIOs and say, hey, don't worry so much because this is where we actually sit relative to what our impressions were or whatever the case may be.

John Bowman (78:48)

I love this point on consistency that the answer is not so much absolute number, but rather consistency is what you need to be looking for. I think listeners putting a Pin in that in this episode, I think, is.

Scott Cooper (78:59)

Critical to that point. As Scott described, there are many instances out there in the world where more than one GP is invested in maybe the same entity, maybe it's two or three in private equity. It used to be quite a few. Thankfully, it's whittled down over the years to maybe one or two. And one of the things we're evaluating is the approach to valuation. I often describe it, at least for private equity and growth equity, as the football field. It's public market comparables, private market comparables, recent transactions, some of the parts, dcf. And then you basically get your range and you weave a line through hopefully all of them, and you arrive at something that you feel is appropriate. And so you can see how each GP may approach their football field differently, may have different things on their football field, may take things off their football field. It is possible for two GPs to arrive at a different number. One of the things that I've been watching for, we've been watching for at Cambridge Associates are changes to valuation policies. I will tell you, in the 21 era, there were a few GPS that were saying, well, DCF is holding us back, so we're just going to move it off to the sidelines right now. And it's sort of like, I'm going to make a note of that, trying to pay attention to the valuation methodology approach. And then the consistency of the application of that methodology is something. I think LPs have an ear tilted in that direction because it's changes in that approach, which also may portend other changes that may indicate a divergence of alignment. Something else I wanted to share.

Christy Hamilton (80:36)

I would love to jump in on that. When it comes to maintaining that consistency, obviously LPs play a role in that. Groups like Cambridge play a role in that. The GP plays a role in that. But what about auditors and these independent valuations experts? Are they a considerable part of this process? And if so, what's your experience? And do they just wave through valuations that they're given? Do they actually take this job seriously or what's going on there?

Andrea Auerbach (80:58)

I'll start. And Andrea, you should jump in.

Christy Hamilton (81:01)

Okay.

Andrea Auerbach (81:02)

Outside valuation experts, some firms use them, some firms don't. I think they're very helpful. And so I think at some people it's more just a resourcing question, which is, do you have the right resources internally? So, for example, we at Andreessen Horowitz, we're lucky enough to have a fairly robust finance team. And so a lot of the work we just do internally, because we have groups who can do public comps and things of that sort. But we have, and we still continue to use some outside experts where we can to just quite frankly help augment some of that work product. I think on the auditors. The auditors are very, very helpful in the process and they push and that's great. Interestingly enough, and this is purely anecdotal, I find I more often have to justify to an auditor why I'm holding a valuation down versus why I'm marking something up, quite frankly. And I say that with all love and respect for auditors, which I do, and ours are fantastic. But I think that's a little bit of the valuation rules that got Revised in, whatever, 2010, 2011. I forget exactly what had happened. I think there was more concern, at least on the venture capital side of, gee, you're holding this thing at cost and then it goes public at 20 times cost. What's wrong with you? You're crazy. You have completely. Even though it's a good thing, you have totally misrepresented what the value of your assets are. The auditor's a great book. I actually find there's more discussions about them encouraging us. Why shouldn't something move up as opposed to. Our natural tendency is. Let's be conservative. Andrea, if you would agree with that or not. But I say that with the utmost respect for the audit community.

Scott Cooper (82:18)

Well, I don't know, Scott, if what you were saying is a bit of a humble brag, our companies are valued. They're clearly worth a lot more. Justin. Jess. Justin. Jess.

Andrea Auerbach (82:28)

Yeah, yeah, Ye.

Scott Cooper (82:29)

But, yes. So auditors are obviously there to vet the process, to look at the outcomes and to ask the questions. I think auditors are good at making sure they're following a process consistently and then asking questions on the edge cases or in the outliers, and really trying to understand from the GP perspective, why are you holding back a rise in the valuation here? And that may result in more education as to. Well, this is a moment in time. We're not actually pursuing an exit for several years. We wouldn't sell it today at whatever price, because we're not done yet with whatever we're planning on doing with it. There's a bit of that. How do LPs deal with the valuations that are coming out, or if the valuations are either behind the public market or ahead of the public market? It's not unusual to have maybe off to the side of your official documents, some sort of accounting for. All right, let's assume a 20% haircut to this market and let's apply that to the value of our book and let's just keep an eye on there's the reported report out and then there's the how do we adjust this for where we believe it's going to be in 12 months or something like that. I would say that information is incorporated and may be adjusted in an unofficial way because obviously these are private assets, you can't trade them on a daily basis. You have to come up with an approach to incorporating the auditor input in a way that works officially and then for where you're really aiming to get to with the program that you're building.

John Bowman (83:53)

So Andrea Scott, this has been massively helpful and I want us to end our time with perhaps allowing you a bit of crystal balling if you were wearing the white hat of the industry. So that's Kaya's role, is that we are meant to professionalize, raise standards, improve, ensure transparency and fairness. The primacy of investment outcomes drives everything that we do. So perhaps briefly, each of you with a final word on how do we improve trust on this, regardless of how it works in reality. And you guys have done a brilliant job of articulating and bringing to life how this works in practice. But is there places in this process that should be a bit more uniform, a bit more transparent? Should methodologies be more standard? If you were to play that role for a moment, is there anything that you would change or guide your fellow gps? Scott, maybe I'll start with you and Andrea in your perch. What would you tell the larger ecosystem?

Andrea Auerbach (84:50)

I have a couple thoughts. One is I do think that it would be helpful if we had more consistency of what I would call audit and valuation standards across the broader audit community. And again, that's not to pass the buck at all to them. But I will tell you, many conversations I have with LPs. Many of us have different auditors who audit our books and as a result different auditors take different approaches to valuation. So some people are more inclined to use last round valuations or some people are more inclined to use what is called the option pricing model, which is like a black Scholes type variation and stuff like that. And so some of this variability could be corrected if quite frankly there were just more bright line rules and maybe less discretion in some cases. So I think that's something tactically that the industry could think about and particularly FASB and the accounting side of the world more broadly. My best advice I would give to a GP is I Just think the better job that we can do as a community with providing transparency to LPs and can't literally just hand over every financial statement from every company, because our companies, of course, wouldn't be happy with that. But I do think some of the challenge in this industry is there's a little bit more of a black box in terms of the communication that happens often between GPs and LPs. And my experience is just that. I think the more that we can shine a light on that, improve transparency. I just think that's better because then everyone at least is aware of what assumptions are you making, and we can all agree to disagree on whether we think those assumptions are good or not. But sometimes it's hard when you actually don't know what underlies some of those decisions. So I feel good about where the industry is moving in that direction more broadly. But I would say I think we could all do a better job of just having those transparent and consistent conversations with our LPs.

Scott Cooper (86:23)

Scott, I really appreciate the emphasis on transparency. I couldn't agree with you more. There's an element of. But if we share it, we don't know where it could go. We don't know where that could happen. I've often thought of the private markets. There's so much more information that's available to you as a private investor, obviously all behind confidentiality between the GP and the lp, but it's actually a real wealth of information that can be made available. There's some uncertainty as to how it might be interpreted by LPs, but definitely we value transparency with all the GPs with which Cambridge Associates has relationships. We really respect the confidentiality, but have always appreciated that transparency over the years that we've had partnerships with, obviously firms like yours and others. John, in talking about what does the industry need to change, I actually think what I'm paying attention to at the moment is that as the industry continues to grow, the industry will have to change. The industry as a whole are starting to approach the retail investor more and more. The democratization of the private investment space has been on our horizon. I think it's starting to approach us. It's getting closer in the rearview mirror even. And I believe the entrance of that type of private investor is going to require a degree of disclosure on valuation approaches. And there will need to be some consistency and application for those GPs that are providing access to, say, a retail investor through a 401k vehicle. They will have to find a way to deliver the kind of information that we've been Talking about over this little stretch of time to an investor who may not have the decades that we were all joking about of experience and mileage here and really trying to get that point across. And that may drive a certain level of disclosure and valuation methodology that we as maybe long term private investors, we're used to the ebbs and flows of this market. But the next phase of the private market investor is not familiar and may require a very different level of information and explanation. And so I actually think the change will come from the growth of the private markets bringing different demands on all of us. Actually. I think it's going to be very interesting to watch unfold.

John Bowman (88:37)

That's a great word. And Andrea, we did not orchestrate this, but you just unprompted unveiled episode two's topic which is unbelievable, the democratization of private investments to private wealth. So listeners, we look forward to breaking that down. Andrea and Scott, thank you so much. As I said at the beginning, we could not have chosen two experts that were better equipped to have this conversation. Two friends. We are grateful for your time. I wish we had more time. But again, thanks for joining us and helping us think through this layered topic with such grace and objectivity. Thanks for joining. Capital decanted and we will talk to you soon. Well Christy, how good was that? Wow. What great guess they were fantastic.

Christy Hamilton (89:25)

I really liked that conversation. Ended up going a little bit long even and I didn't want to end it, honestly. We could have kept going.

John Bowman (89:31)

I didn't either. Listeners, you can't see this, but there were several questions we had to bail on. I mean it was just so rich and the back and forth was fantastic. So I'm just thankful to Scott and Andrea for that. The final segment of this show is what we are appropriately calling the last sip. See what we did there. I think this gives us the opportunity, Christy and I to just reflect and post mortem on everything we've learned with a final couple thoughts for us to provide our main takeaways and then we'll end with a fun little question. So Christy, I will hand the mic to you first. Bring us home.

Christy Hamilton (90:07)

I could say so many things about this episode. A couple of things that come to mind as final thoughts here are that, I mean first and foremost, as they said, most LPs are pretty sophisticated. Even as more people come in as investors, even as individual investors come in, there is an element of transparency and consistency that is expected and will the hurdle for which will continue to improve over time. I think about when I first started just how it was pulling teeth at times to get data versus now, where a lot of times it's even in the format we needed. I think that the industry as a whole has come leaps and bounds. I think that it's done a wonderful job at standardizing, and I think it'll only get better from there. And then beyond that, it's interesting. I want to go back and refute other people's points that I've had debates with previously, but I may just do that offline or y'all will see it on Twitter. But I mean, overall, I just get the sense that valuations are, for the most part, thoughtfully when they're not. LPs can step in and push for better transparency, better valuation practices. But ultimately you really have to be thoughtful of that on the front end of doing due diligence, understanding the policy and then periodically going back and making sure that the policy is applied appropriately in process and then being able to communicate that to people. So it'll be an interesting thing as we move forward, particularly as the investor pie grows, to have more democratization in individuals. What do you think?

John Bowman (91:29)

Yeah, indeed. There was so much in that episode. But I think that point of consistency and transparency and good communication was the most important thing I learned from at least the guests. As we promised Christy, at the onset of this show, this episode, there are smart folks on both sides of this argument. And I would say that while we learned a ton about it, as I did too, we've been educated with all of you as listeners. There are still some yellow or perhaps even red flags raised. But I guess my biggest takeaway, honestly, is I think sometimes or often we're having an argument inside of an argument, or we're having a different argument than maybe we sometimes think. So I think there's a breakdown in this lag theory argument, or maybe to put it more colloquially, the confusion and frustration from some around why there's quote, so much delay in private valuations following public markets down. By the way, you never hear this. No one complains about private markets going up. Why isn't it following public markets fast enough? There's maybe a question in there on sour grapes, but I do think that if you've got this passionate frustration on the quote lag effect, then you have to, as I alluded to earlier in our intro, you have to honestly assess whether you're endorsing, at least in part, this idea of an efficient market hypothesis. And very few people, I think, when you break it down, really believe that. Because here's the crux, Christie. You can't argue that these very different markets should collide or should follow each other or should parallel each other if one is not the source of truth. So you're making an assumption when you say why aren't these aligning? And honestly, does anyone really think that public markets are a good reflection of true value at any given point? The glide path argument that Andrea said is absolutely the right one. But when the fear is high on the tails, this thing is not a very good predictor, as I think Chris Schelling was right in predicting. So we all have lived this as practitioners. Mr. Market tells you every day you're wrong and your goal as an investor is to remain patient for those moments where value and price converge over a short time, even for that moment that allows you to be convicted and right. So value is not the same as price. Of course these asset classes should diverge at times and I think we're just way too programmed and passionate about comparing them when we shouldn't. That's my view of the world. I do think also there is an advantage in being outside of the frantic and hyper short termism loop of the pundits and the noise that plagues the public markets. So it really allows these gps, these managers, to focus on true long term enterprise value. And I'm not here to say that's worth 500, 300, 100 basis points of illiquidity premium, but I do think it's a superior model of value creation. I want to end with a final thought, which is the other side, which is there is no doubt, and I think Scott said this well, that more industry standardization of methodology, or at least transparency around those standards of methodology, better communication, how the GP is approaching these and holding these portfolio companies. And I think, and I would exhort the LPs to demand this, I think some probably are. I'm sure that most GPS are taking this very seriously, using reputable valuation experts, independents and auditors and documenting their process. But for those few, that could be sloppy, maybe even mischievous. The LPs need to call this out, as Chris Schelling suggested, and publicly pressure the fiduciary responsibility here. Those would be my main takeaways.

Christy Hamilton (94:56)

Well also that brings up another one and we'll be quick with this. But the idea of comparing public and private markets and there's this headline of oh private markets are winning or oh public markets are winning. And it's not one or the other. I mean it's a snapshot in time for a diversified investor. All of it, for example, in private Equity and public markets. All of it is equity for the most part. Are we typically considered under the same allocation or often, I should say there isn't this idea that they have to be jockeying necessarily. It's just more of a data point to inform your ultimate decisions and your forward looking plan.

John Bowman (95:27)

Agreed, completely. So as we close, Christy, let's have a little bit of fun on our way out of Studio Episode 1. So, staying with the decanted wine theme and metaphor, who is the one person dead or alive? So you can pick anybody in the history of the world. In fact, I'll even go more liberal on this fictional or real that you would like to sit down with and have a glass of wine.

Christy Hamilton (95:54)

Oh, man, I cannot think of anything. I mean, it's so difficult because I can think of people kind of in the art world or authors that I would want to talk to. And in advance, I should say that I was told that I'm not allowed to say my fiance.

John Bowman (96:08)

So, yeah, that would be cheating to.

Christy Hamilton (96:10)

Answer any question that he might ask me. But obviously that one is a given. I would love to sit down, and I can still do this because my grandparents are still alive. I would love to sit down with my grandparents and just get the linear story of their life together. It seems like a great story, I mean, just from the bits and pieces that I've heard, but I would love to hear it through their eyes and have that experience. So for better or worse, that's my answer. What about you?

John Bowman (96:33)

Tough to follow that. I'm going to go much less intimate and say, Winston Churchill. Ooh, I admire him. Great. You talk about staring into the odds of disaster as leaders, constantly having to put on a face of optimism and motivating folks to follow you into sometimes odds that are not great. And I would love to just pick apart his brain on what he was really thinking during some of those times of despair. The odds stacking against him. So we know what he said to the public. Those speeches are as famous as any speeches in the history of mankind. But I can't imagine his inner turmoil. And I think that'd be fantastic. If I get a couple glasses of wine in him, maybe he would let me know. I'm not a cigar smoker, so I'm sure he'd be wanting to do that. But at least I would force the glass of wine first. With Winston.

Christy Hamilton (97:25)

I appreciate that. I admire authenticity and leadership. And so I think anytime you get the chance to hear people's actual fears and stuff, I think it's just very Rich. That's a great answer. If you ever get the chance to do that, let me know how it goes.

John Bowman (97:36)

I will. I'll tell you how it goes. Yeah, it's probably doubtful, but I'll let you know how it goes. Well, listeners, that brings us to the end of episode one. Thanks for hanging in there. I hope, hope you learned as much as we did and we will see you next time. It sounds like Andrea already unveiled the secret that democratization of alternatives will be our next one. And thank you for joining us. It's been an absolute pleasure. We'll talk to you soon.