A (3:07)

You mentioned that within Carlisle, there was no intellectual hierarchy. In other words, people were able to speak up in the room. I bet a lot of CIOs would want to create this culture. How does one go about creating this culture where there's a willingness to speak up by junior personnel?

B (3:25)

It's a great question. I think there's one really key tactic. I kind of mentioned it in passing earlier, but it's this phrase, expect what you inspect, right? The questions we choose to ask, the people to whom we ask those questions, the frequency with which we ask those questions, the setting in which we ask those questions, signals to people what matters to us, how decisions are getting made, the fact that there's opportunity to speak up. Also how we react when we ask a junior person a question about a tense moment in the room where a big decision is getting made. Do you ask it to be performative or do you ask it to actually see if they have something different? Or insightful to add. Bill Conway, another co founder at Carlisle, was famous for this, and I think it's a great strength. Usually when the conversation would get most tense among a lot of really senior people, he would look to the most junior person in the room and say, what do you think? And it wasn't performative. And it wasn't meant to put someone else on the spot by having a junior person speak for or against their position. It was honestly to figure out whether there was a different viewpoint or a balancing viewpoint that could help the room understand. And I think over time, when you see that happen repeatedly, people understand, oh, wow. When I speak up and get asked a question, my voice is going to be heard, it is going to be taken into consideration. And you don't have to have been here for 30 years to have a monopoly on kind of an ability to influence decisions.

A (4:34)

And when you're dealing with that junior person in the room, you're in a boardroom and you put this junior person on the spot is the best practice to have kind of kid gloves on, meaning almost over respect his opinion, or do you want to treat him or her as a true peer?

B (4:51)

You want to treat him as a true peer. But the way you set people up for success is by doing this constantly, right? So the worst thing to do would be to listen to this podcast and then in your next investment committee meeting, your formal IC meeting to put your most junior people on the spot. In my view, the right way to do it is starting next Monday. On your Monday, all hands call, you start asking these questions, right? You let your junior folks update you on the pipeline. You let your junior folks update you on portfolio, and you start throughout the week and the subsequent weeks to be asking these questions. And over time, what you'll see is people will understand what matters at ic. For example, they'll understand what these senior leaders are looking for. So when you do ask these questions as a peer in an IC meeting, obviously the junior person is not going to have all the information and they're not going to have the experience to fully understand all the dynamics, but they're going to come into it knowing what they're most likely to get asked and why. And over time, they'll realize it's not performative, Right? Whether it's Monday pipeline calls or IC meetings across the industry, I see so many people talk because they're expected to and no new information gets conveyed. And that's not a knock on them. It's just a cultural norm. We've created the best gps I work with are a lot more efficient because they institute this culture over time where they really focus on what matters to us. How do we expect what we inspect over time? By asking these questions and then in these high stakes formal meetings like investment committee, I know I can look to a junior person or a mid level person or that newer MD or even an MD in a different sector who's there observing. They know there's a chance I'm going to ask them for their insight. And again, it's not to be performative, it's to make sure we're making the best decision as a team. So you, you build this into your culture over time through kind of the repeatability and consistency in which you do.

A (6:18)

It at that point in your career. You're chief of staff for David Rubenstein. So you got to see the entire interworkings of Carlyle. What made Carlisle such a special organization?

B (6:28)

One of the things I was sold on when I joined by Glenn Youngkin and I saw this a lot over the years, which is tough in this industry, is I think we tended to have a lower jerk factor than maybe some other places out there. You know, I was hesitant about that when I joined as to whether that was true or not. But I found over the years there was kind of a level of collaboration in which I was surprised to see in a firm like Carlyle and an industry like ours, where again, the stakes are so high, people really did seek to work collaboratively. They sought to be productive communicating with each other. There was, you know, there's always incentives you have to deal with and gaps in alignment and different personalities and different level of maximization. That's true anywhere and especially in our industry. But I think we did a good job of selecting the type of talent that wanted to be bought in on the bigger picture and to figure out how together as a team to do that. And so I'd say that low jerk factor really stood out to me both at the selling point and what I found over the years.

C (7:20)

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A (8:45)

Was it the incentives I was driving this behavior or was it at the point of hiring that you were hiring more collaborative people? And is that even a thing or does it always just come down to some incentive?

B (8:55)

I think it's a great question what I would say, and this is not just true of Carlisle, but for everyone in the industry. In my experience it rarely comes down to the dollars and cents at the end of the day in terms of attracting and retaining good talent. Obviously you have to have market comparable compensation packages. Obviously you have to figure out multi currency compensation plans that reward people for delivering people work in businesses to be financially rewarded, among other things. But I think an assumption that some folks in the industry falsely make is that that's how you really win when it comes to securing talent that could go to a lot of other places. I think what we found over the years in different businesses was it's the culture. People showing up to work every day, who they get to work with, what the firm's trying to accomplish, what type of partner you are in a market as an investor. But I think to put it more bluntly, I found that the non economic factors are the biggest drivers of talent attraction and retention in the deal space. Much more than the financial piece, which surprises a lot of folks.

A (9:50)

Yeah, I think it also has to do with incentives in the long term. So I think everybody's incentivized is just whether short term or long term. The stereotypical banker that's been in the industry for 15, 20 years, they just learn to work in a transactional manner. Their brain is rewired. Even if it started highly long term, it becomes transactional and there's a lot of strengths to that. And then asset management, at least until recently where everyone's gathered a lot of assets. People's brains have been wired to think more long term than kind of transactional.

B (10:19)

Quarter by quarter. Yeah. And I think one thing I would say highlights this is when I think back to all the scenarios across my career. Carlisle. And also with my clients today, where you have a senior investment professional that says they want to leave. They either want to go do their own thing or they're being headhunted away. They're coming back to you to figure out if there's something to do in lieu of that. It's almost never the money that keeps the person in the long run that ends up being the window dressing that people talk about in these negotiations. But in most of the scenarios where people end up getting retained by their firm and staying there for a long time, the financial piece is the method through which they talk about or expect the business to identify what the real issue is. Hey, I'm focused on the wrong sector. I'm not getting enough support from junior and mid levels on a deal team. You've not given me enough opportunity to interface with LPs over time. I'm more of a sorcerer than an executor and you have me executing. The list goes on. Usually there's something like that that I find the best firms hone in on. And again, we're just talking about talent retention here when someone chooses to leave. But I really think it underscores this point that yes, we're all here to make a lot of money. Any person in any business, that's a component of why they're there to do it. But at the end of the day, people like to do things that they're good at and things that they're fulfilled by and things that they're good at tend to, you know, the outcome is financial reward, but feeling like they're good at it, seeing that output and also feeling fulfilled by it. Those are the areas that I think teams spend a lot of time on who are successful in the space. Especially given the talent mobility is so high right now.

A (11:41)

I think a lot of times people are almost guilted on, well, I shouldn't be working on this thing that I'm really good at. I should be doing my taxes or doing these kind of paperwork where this is actually the alpha. And being in an organization where you could focus on your strengths is actually a very rare thing. But when you're in that position, you could not only be much more fulfilled, but you could be extremely, much more successful without this guilt of having to do everything Exactly.

B (12:03)

You know, at the end of the day, people will end up doing things that they're good at and are fulfilled by. Whether they do that at your firm or not is up to you. And the reality is you can't. There isn't always a space or room in the budget for people to be doing things that they're good at and fulfilled by. And that's part of the art of managing a business and managing talent. But it's something that I think we under index on in the industry a lot. We try and will our way to success by using the old mindset of people should be happy to be in private equity. There's a lot of potential economic reward at stake. You get to be on a deal team at a firm that has dry power to invest. You should be happy to be here. And I think that's a really bad and unproductive approach to trying to get the best talent. When you think about, I won't take us down the rabbit hole, but we draw a lot of analogies from other industries, pro sports being one of them. I couldn't imagine the GM of a team saying, hey, I'm sure they do say this, but we're the Yankees, you should be happy to be here and you should take below market comp. And we expect you to produce record breaking years for that. That's typically not how that plays out in a lot of other sectors.

A (13:02)

So today you work with firms, your sweet spot is a few hundred million to a few billion dollars. What unique challenges do these firms face today?

B (13:11)

Yeah, it's a great question when you think about why someone chooses to spin out of a firm and launch either an independent sponsor or an emerging manager. Typically it's because you have a line of sight on one or more proprietary deals and probably a line of sight on anchor capital. And so you step into that role, you do a couple of good deals, you end up at a couple hundred million of AUM with a pretty good track record if you've done it right and some anchor LPs that are happy. But then what Right, you need to continue to grow because you need more capital to deploy. You need a team to be able to support a growing portfolio, growth for growth sake. And what a lot of people struggle with is, you know, they've left a firm where maybe they underestimated how much the other functional areas in the firm carried in terms of fundraising or people management or expertise in a lot of these other areas. And that's not to say you can't be good at that by Spinning out. But I think a lot of the folks who spin out and start their own businesses, unsurprisingly the core of their expertise is in sourcing and leading deals in the space where they want to go source and lead deals. And I think sooner than most of those folks expect, you get to a couple hundred million of aum. Now instead of when I launched this thing, it was about finding deals and executing them and assembling a firm structure around that. Now it's how do I build a business right? How do I build an LP pipeline that's not just the anchors that came with me. How do I build a team that can continue to lean into a space where we're building a brand probably in smaller size deals than I was doing at my prior firm? How do I compete with other firms who are five vintages in who not only have all the good connectivity with the stakeholders in the market and get a lot of good inbound on deal flow, but they have a great stable of operating executives and other portfolio company management level and board level support and the list goes on. There's kind of a lot of competition, There's a lot of learning about how to run a business and there's this uncomfortable reality of you have to delegate the actual deal work sooner than most people expected and sooner than they probably would have had to do it if they stayed within a firm versus spinning out. So you have these intrinsic challenges of a change in skill set and a change in what you're good at and what fulfills you the occupies your day. You also have higher competition from established players and new competitors with obviously a lot less track record in history as an independent firm. And then you have this drive towards growth, right? You have three things that I think pull people towards scale. You have LPs, right? You get quasi institutional or institutional LPs who want to underwrite. Obviously they're committing capital for 10 or 15 years, but they want to be able to re up with you in three to five assuming your strategy is good and they want to allocate to it. So they want you to continue to grow. You've got talent that you bring in. People want to be part of growing firms. But also when you're recruiting talent, that talent usually there's on paper economics around current funds that you can allocate carry from. There's also handshakes and discussions around subsequent vehicles that are planned, the quantum of potential economics that can come out of that. And people factor that in. So they want to see continued growth. And then finally you've got GP staking that served as a great catalyst for people to think about scaling as well. And so I think a lot of folks historically have spun out again because they have a line of sight on a couple of great deals and some capital, and a lot of them in history have been pulled into this scale cycle whether they wanted to or not. And there's a lot of challenges that are unique that come with that. I think the balancing point to it though is you have this bifurcation between the independent sponsor side and the emerging manager side in this market and you're seeing a whole ecosystem around the independent sponsor side. You're seeing firms raise funds to be able to fund independent sponsor deals more quickly. And so people get to ask themselves the question in the mirror and I advise them to do so. When you spin out, do you want to do deals or do you want to be in the business of doing deals? Because there's a pretty big difference and you don't want to find out the hard way when you get to a billion of aum, which is great in many ways, but you look at your day to day and you look at your day to day for the next five plus years and go, boy, this is not what I was looking to do.

A (16:39)

How do these investors that want to be fulfilled in their career and want to do deals and how do they solve around these other issues that you identified? LPs, recruiting, admin, et cetera?

B (16:53)

Part of it's intrinsic at the outset. You have to know that that is both something you will be spending your time doing, so are you fulfilled by it, and also something you need to be good at in order to compete to win. So you have to ask yourself before you, you know, optimally, before you leave your firm, am I actually good at attracting and managing and retaining talent? Am I actually good at conceptualizing an investment thesis and then going out and raising capital against it, Maintaining those LP relationships, sourcing deals in a space through building a brand and a network, executing those deals, attracting talent, managing those assets. Like, is that holistic skill set something I have or something that I can immediately build around me or not? Is that something I want partners to do? If you're an emerging manager today, and many of my clients are not, all of us are experts at all these things, of course, but part of, part of it is, I would say, really clear intentionality around every hire you make, which is unsurprising to anyone who's building an emerging manager. Of course the P and L is tight, but you know, whether it's figuring out if that CFO hire earlier actually opens up a lot of doors from a capacity standpoint for the leadership to focus on some of these other issues, whether you're going to bring in an internal IR person or work with placement agents. If you decide you're going to work with placement agents, it's diligence in what that looks like, right? The great one's going to even consider putting you on their dance card. If not, are you willing to go through kind of the rigmarole of trying to find the right single shingle placement agent? And, you know, plenty of them are good, and plenty of them are maybe not as good and the list goes on, but I think they're kind of. There's this deep introspection that's required around the reality of internal and external resources you're going to need around you, what that's going to cost and what you really need to get to kind of the outcome you're looking for. You know, and some folks, they are able to create a strategy where they are able to stay small and manage around some of these things. But I think the fact of the matter is if I'm thinking about spinning out and launching a firm, I'm doing so again because I have confidence on a pipeline of deals and some initial capital. My time would be, I would recommend, be much more spent on how am I going to surround myself with the expertise that I do or don't have around these firm management issues.

A (18:52)

One of the big trends in alternatives is the rise of retail going into the industry. The other big trend is a lot of the big funds, buyouts, the large venture capital funds. Everybody's amalgamating assets, they're raising tens of billions of dollars and LPs are in many ways being forced into the middle market and lower middle market, those that need to generate above data returns for those LPs. What should they be looking for in emerging managers that prove that emerging managers are not just good investors? They might come from Carlile or from abc. Great firm. But how do they suss out whether they can actually build a great franchise that an LP would want to partner with?

B (19:32)

You know, whether you're an lp, whether you're a gp who's launched or is going to launch a firm? I think you have to go back to basics, right? What is the vision? And this is going to sound overly simplistic, but you'd be surprised how much ground you can gain here. What's the vision for this business? What's the strategy? I'm going to use to get there. What are the tactics are going to let me deliver it? Let me unpack that a little bit. We are again, because we're in an industry where you raise a fund and management fees are contracted for 10 plus years. It's so easy to be reactive. When I think about great investment firms that endure, emerging managers that have broken through, there's a pattern, bigger and small, that I see across all of them. And there's three things. Intentionality, innovation, succession. On the intentionality side, again I come back to are you going to raise the fund and say, great, we have contracted management fee revenue and as long as we manage our team size and deliver the deal outcomes, we're going to be in a good spot. Great. That's one vintage. You're not managing a business, you're managing a fund. And the fact of the matter is your LPs, yes, they want you to manage the fund, but they've also locked UP capital for 10 or 15 years and they know that team turnover happens and they know that the market shifts. And so if they want to be confident that the second half of that fund is going to be managed in a way that's going to deliver them the returns that they're looking for, they need to know that you're building a business with intentionality that can adapt to different market cycles. So that even if the subsequent funds you're investing 10 years from now look nothing like what you're doing today, you're still able to attract great talent and great resources and other things that benefit the portfolio that you're putting into the ground today. People look for that intentionality. Right, versus what do you want to be? Well, I just want to deploy the dry powder I have and manage those deals and deliver the returns for my investors. Of course, course, that's quarter what we do. But I think it is a mistake and it's kind of a straw man that a lot of people use falsely when I work with them on strategic decisions for their gps where it's, look, Chris, if I don't deliver returns out of my current portfolio at the level my LPs expect, nothing else matters. And while that's true, it's also a straw man that people use to avoid positioning their business for changes in the market, new opportunities, changes in talent, changes in LP appetite, et cetera. And so I think the best LPs ask the questions that the best GPs are already, you know, asking themselves, which is, what am I really building here? So that's one on the innovation piece on the innovation piece, whether you, if you're a gp, whether you realize it or not, your competitors are in the lab right now coming up with things to out compete. Right. Like there's, we're. It's on the highest levels of competition for capital deals and talent we've ever seen in the industry. People are trying to figure out how to come up with something new.

A (22:08)

What's an example of that?

B (22:10)

It could be anything from product extensions, it could be product structuring like Evergreen, it could be investment thesis development. Right. As much as we as an industry like to articulate that we're really good at investment thesis development from a top down standpoint and then we go out and execute deals against it. The reality is again, we're reactive in many ways. We kind of generally know a sector we want to be in. We dynamically, because we have good fingers into the market, understand where the best opportunities are. We go execute against those we make money. That's great. But over the long run, I think those who are more thoughtful over a multi year period around here are trends that are emerging that are going to create investable opportunities. We either can't access those through our existing structures and strategies today or we need to come up with something new. Those are the people that you're seeing capitalize on those opportunities versus others who are reactively looking into their LPA when the market shifts and saying how do we figure out a way to do.

A (23:02)

How do you know when a GP is too early or too late to specific trend and is it a mark that they should be a little bit too early in order to become a market mover? Or should you try to time the market in terms of product innovation?

B (23:16)

This is a big one. I would say, based on the last thing you said. Timing the market is not something that anyone does well in any context, right? On an individual basis, clearly there are investors and firms that have made some great trades.

A (23:28)

It's almost a pejorative word, timing the market. Maybe I should say going into the market at the right time.

B (23:32)

No, but it's a great point because people. See, I'll give you an example. I get the call all the time. You know, five years ago was should we get in three to five years ago it was, should we get into infrastructure, renewables? You know, two years ago it was, boy, this private credit thing's really cooking. We know our space well because we're equity investors. Wouldn't it make sense for us to adjacently move into private credit or, you know, these evergreen things are, are really attractive for a lot of reasons nowadays and they seem to be scaling quickly. Why don't we extend into that? I think people, it's good to ask those questions, but you don't want to be doing it on a reactive basis. But because by the time people have picked up on that and are asking that for themselves, there's probably some clear moats around key competitors. And there's also a much bigger question you have to ask yourself around. You know, should I be extending into that space? And I know I'm taking us in a little bit of a direction here, but it's kind of a key thing that we see with a lot of our clients on product development. Right.

C (24:23)

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B (25:32)

This kind of dovetails with new product decisions. We've been part of many dozens of product launches over the years, seen success, we've seen failure, we've seen what works, we've seen what doesn't work. We've created this proprietary 23 point new product criteria that don't worry, I won't walk you through on this podcast, but I always get asked, what are the top two or three things that really sink people when they're launching new products? The top one is getting led into a strategy by an LP passively. And that's not to say you can't make money by having a great LP partner come to you with an idea and say, hey, we want to invest in widgets. You guys should raise a widget fund and do that. It's doing it reactively and falling into what I call the anchor trap, which is you've got an established LP in your flagship fund. They come to you and say, there's some new strategy we want to be in. We're going to do it with somebody, whether it's you guys or one of your competitors. Here's what size fund we think is interesting. We're willing to be 10 to 20% of that as an anchor out of the gate. And the GP says, wow, we can launch an adjacent strategy. We have an anchor coming out of the gate. The math we've run on the fees they'll pay us allow us to hire those one or two people to actually go execute against that. This feels like a free option on growth. And that's not to say you can't make money or it can't be a good decision, but. But I see a lot of people kind of, that's where the depth of the decision making goes. And then they kind of structure around how to launch this product. Where that kind of leads to is the second biggest fallacy that comes up, which is miscalculation of the distraction cost. When anyone launches a product, we all do the same math, right? We sensitize how much money we think we can raise, what range of fees we think we can charge, what size team we need and what that's going to cost, maybe what our excess org costs are and a couple of other things. And we say that math works or it doesn't work at a certain size. What we don't do is ask ourselves how much is the organization going to have to change to be able to operate two strategies instead of one? Right? When we're in the market talking with existing LPs, how do we handle two products instead of one? Do we have to build a whole new pipeline of LPs for that strategy that don't overlap? We have to manage multiple deal teams, multiple portfolios. We have to get up to speed on a sector as an investment committee that we might not be as familiar with as our core strategy. We have to build a network of portfolio company executives and board members that we can recruit in. The list goes on. And I find over time the distraction cost can be much greater than the on paper tangible cost of extending. Extending into new products. Which isn't to say you shouldn't do it. But the exercise around evaluating how it will change your firm is something that fewer people do than they should. And then the last point I would make is the internal alignment piece around what partners want to extend into adjacent strategies versus not usually within the GPS that I see in the industry, there's a group of some partners who've maybe made money, maybe their track record's a little more seasoned. They tend to be more interested in extending into new products, building the business, playing for enterprise value. There's a lot of reasons behind that, many of them good. There tends to be the other side of the table, which are maybe less experienced partners who are still trying to build their own personal brand and track record. Maybe the clearest line of sight on wealth they have is from the current fund that they're investing out of. They're more resistant to new product. What happens if you don't acknowledge that gap and work to manage it is you get passive aggressiveness, whether intentional or not, and you end up launching products that are suboptimal. There's confusion in the market. They're kind of half assed. I see this all the time. And so when you have any group of people, you can't always 100% bridge the gap of alignment because if you have two or more people in the room, they're never going to be 100% aligned on what they want and what they're doing. Life circumstances dictate. But if you're not getting ahead of that and understanding that and very open discussions among the partnership. This is where I see people making a lot of these strategic decisions suboptimally.

A (29:09)

I think calling out the misalignment and saying we're aligned 80% here, and here's where we're misaligned. I think is could be extremely powerful and extremely trust building to show where you might be misaligned. And that's okay. But as long as everyone understands the misalignment, it actually ironically tends to align people better.

B (29:25)

When I think about like stability versus instability among partnerships that I work with, it seems counterintuitive. But the more stable partnerships, maybe like a lot of the relationships we have outside of the professional world, are the ones where there's more honest and candid communication. There's a willingness and an intentionality around for bubbling issues up, addressing them head on, even if there's disagreement about it, having tough conversations, even if they're iterative. You know, the, the teams that come to me that are very clear about strengths and weaknesses, warts and all, are the Ones that I think have the best base to be able to navigate problems going forward. It's the ones that come to me who might be great. You know, they might have billions under management, be highly successful, have great track records. You sit in the room and you say, wow, these people love each other. They're. They're friends at work, they're friends outside of work. They seem like they have everything figured out. What I worry about the most with them through experience over time is, is that often when people tell me they have a really collegial partnership, when I dig in, there's always some element of avoidance that comes with the toughest conversations. And while that might have worked until now, what happens is, as your firm grows, maybe you have more fun products, maybe you don't. But the stakes get higher. People's lives progress. The gaps between individuals widen, right? People's individual desires about what they want the firm to be, what they want their day to day look like. Economic incentives. Those gaps widen. And what happens is you get to a point where, if you haven't been working on that openly over the years, you get to a point where there's this kind of going back to what kills products. The number three thing I said in the last question was this misalignment of partners on what you're trying to build. And so you don't want to be in a position where there's a market opportunity to pivot the business or launch a new strategy. You get everyone in the room and say, here's the on paper, perfect playbook for us to execute this. And half the room goes, we have no interest in doing that, and we're not going to lend our full effort into doing that. It's kind of a terrible time to be figuring that out.

A (31:12)

Maybe it doesn't sound the best, but I think all relationships are transactional to a point. There's transaction value going back and forth. And the only times people realize their transactional is when it's off. When it's 1 plus 1 equals 3.5, and it fluctuates from 3.5 to 3.2, everybody's happy. But when it starts to be 1 plus 1 equals 1.5, people are like, well, you did this, I did this. Whereas if you look at relationships, for example, with my business partner, Curtis, I'm oftentimes very explicit. I just had a podcast. I wanted to do it. It had no strategic value to us. And I'm just like, I want to do this. This is a passion of mine. I think you'll make a good episode and he's like, sure, happy to do that. And then when he wants something, we just again, a lot we call out this misalignment and we're, we have a super good relationship because A, we have trust, but B, the pie is so big that even taking a small slice, it just no one even notices. It's almost like this, this invisible force. Oftentimes, gps will come to you with their hairiest problems, things that they would never bring up to their LPs. What are these problems that GPS, for lack of a better word, hide from LPs that LPs should be aware of?

B (32:15)

It's a great question. People come to me typically with issues around product roadmapping, building enterprise value at the firm level, and succession. Of the three, succession is by far the most common issue because it permeates every aspect of our business. What do I mean by that? Most people think succession is transferring governance and economics 12 to 18 months out from a founder stepping back from a business. In our view, succession is the transference of knowledge and vision. And this might sound pedantic, but it's actually a really big thing. And so when you unpack it, when you look at most partnerships around the industry, there's a founder, a couple founders, and then a group of next generation partners who are positioned to take over the business. Typically the people who've led deals within that business for a good amount of time. When you look at the professional backgrounds and expertise of those two groups, founders of successful GPs that are in a position to go through succession are typically both successful investors and successful entrepreneurs. They started their firm and built it, in many cases, the next generation of partners, even if they have the capability of becoming successful entrepreneurs from an experience standpoint, they're primarily successful investors. And so we expect them overnight if they get handed the keys. And overnight can be a multi year period to somehow be able to make all these firm level decisions. And we talked about this a little bit earlier, around emerging managers, there's a deal related skill set around thesis development and sourcing and value creation and portfolio management and all of the sub kind of topics within that. And then there's firm level around strategy and vision and capital formation and people and compensation and a whole bunch of other issues. And if we say, and we do this as an industry, I've got a bunch of great smart people around the table who've kind of seen all the information I've taken in, they've seen the decisions I've made and they've seen the outcomes they should know how this works. We have a really bad understanding of how the apprenticeship model works. We're in the apprenticeship industry whether we realize it or not. And I think we overestimate how much learning by absorption happens. The art of being a top decile investor, some of that is articulable on paper. A lot of that sits between our ears, between the information we take in and the decisions we make and how we affect that. And so one of the things that we've done to try and help a lot of our clients with this is we actually just publicly published a deep dive recently on succession where we said, okay, if the problem at hand is knowledge and vision transfer, who else has figured this out? And so we partnered with a great guy, Hazard Lee. He's a Wall Street Journal bestselling author, former chief of F35 training systems, former F35, F16 flight commander. And what Hazard helped with is the fighter pilot community over decades has focused on judgment transfer. They're empowering individuals to make thousands of decisions in very costly planes with lives at stake. So they're highly focused on how you transfer this judgment over time and measure it. And so he helped us put together this framework that we think is applicable for the industry around how you navigate this thing. And we break it down into five different topics. I won't go through all of them, but the two that we bookend the deep dive on that I think are most relevant for GP founders are define the why and the debrief. So on define the why. I come back to when I say the art of being a top decile investor is between your two ears. It's not just going to your analysts and associates and mid level deal team professionals and explaining to them, as the chair of the ic, you know why you gave a go or no go decision on a deal, that's part of it, but it goes all the way up to your number two or number three partners, explaining to them here's why we're going to make this concession or not to this lp. And the side letter, here's how I'm going to communicate that. I think we, the best investors in this industry are experts at multi stage, multi level negotiation. But what I see around a lot of deal teams is kind of a, a version of you anchor low, I anchor high, we meet somewhere in the middle and we're not transferring that knowledge. So explaining why and how we're making these decisions as we communicate not just to our junior folks, but also to our partners, how we help transfer that.

A (35:59)

Knowledge, you Mentioned earlier in the interview. GP stakes. What role do GP stakes play in the GP market today? And how does selling a GP stake factor into the role of managers today?

B (36:12)

If you're an emerging manager, if you spin out today and you actually deliver on the investment performance you think you will, there's a world in which you sell 10 or 20% of your firm before you see a dollar of carry payout, which is not a bad thing, right? That could just be a timing of carry and a duration question. But I bring that up to highlight that it's changed how people think about building their businesses and it's also driven this bifurcation in the market that I mentioned earlier between independent sponsors and emerging managers. So when you're talking about newer firms, people who want to focus on deals versus a deal business, you have the independent sponsor route. If you want to focus on the deal business, you have all the challenges we walked through earlier that are unique to, you know, zero to billion AUM firms. But the flip side of that is if you can navigate that well and you get to a billion of a, you're going to start getting inbounded by some great GP staking firms out there that want to explore partnerships with you on a minority basis. And so I think it's shifted how people think about building a firm versus doing deals and seeing a firm as a vessel through which they can do deals and earn carry. And it's gotten people, I think, to crystallize in their minds that maybe vision, maybe strategy, maybe systems, maybe processes, maybe culture, more critical than you think, because you can monetize it. You know, back in the day, if you and I started a fund, we're either going to keep it relatively small, do great deals, earn carry, everyone's happy, or we're going to try and build a large firm that we could one day IPO and actually sell a piece of the firm itself in addition to our other economic currencies. Today, because of staking, there's obviously a third route that didn't exist before. And so again, I think it's helped focus people on running GPS more like businesses rather than ecosystems through which deals can get done. And I think it's, it's great for the industry. I think it's helped focus us in a really big way.

A (37:52)

GP stakes work well, what problem are they solving for managers?

B (37:58)

I'd say most people in the stake space today would say it's still primarily a financial transaction, right? There's secondary liquidity on the one hand, and there's primary capital going in on the other, Whether it's to fund VP commitments or working capital to build new strategies or scale the flagship, I think the industry is still figuring out what the value add piece looks like. It's different depending on which staking firm you partner with. It's different as the firm receiving the stake in terms of what you need. There's kind of an evolving universe of kind of what type of help can be provided, which I think is great because again, all of this is to the benefit of LPs who are having folks focus on GPS being a business itself. And although that seems counterintuitive because as an lp, you say, I just want them focused on my deals, I go back to a point I made earlier. If you're going to commit capital to somebody for 15 years, what are the odds that any team at any company is going to look the same in 15 years as it does today? You need to be betting more on whether that company is going to be in a good shape in 15 years, regardless of what they're focused on, to have confidence that there's going to be good talent and currency around the table managing your money. And I think staking has helped people do that. But there's a financial component, but also on the value add piece, which again is evolving and emerging and you know, year by year you're seeing a lot of new and interesting things pop up there.

A (39:09)

As you mentioned, year by year, GP staking is evolving. It's over $70 billion market today. But a lot of LPs are still skeptical of the misalignment. I sell 10% of my GP. Am I not less motivated to grow the business and to invest into great companies? What do you say to the LP skepticism around GP stakes?

B (39:29)

Can't speak for anyone else, but if I'm an LP and I think about alignment and I think about key person, what I don't want is to worry at night that if one single person, the founder of a firm, decides they're less interested in putting 100% effort in because they've taken some money off the table, that my capital isn't going to be invested and managed and steward in the way that I expected. I think that's a mistake on my end for committing capital to a firm that's predicated on a single person. And this is where I go back to a lot of times I push on this with my clients. As GPs, we seek to be more valuable as a whole than we are as the sum of our parts. That's what any business wants to be more valuable as a whole than the sum of your parts. But you have to ask yourself, why is that? Is it because you have vision and strategy and process and infrastructure and culture and incentives that tie it together? Or is it because you have one or two founders that are kind of holding together a group of fiefdoms within a fund and without those founders you're going to see a degradation in performance. And that's not to say that that doesn't exist everywhere. But I think if I as an lp, we're going to pick on the alignment piece. Look, we always have to focus on alignment, but at the end of the day I'm probably more focused on underwriting a team than I am one person because over a 15 year period you can't really count on any one person to be able to deliver whatever your target returns on for a total portfolio.

A (40:53)

I think one of the biggest misconception about GP stakes is that the money is primarily for secondaries. That is typically a yellow or red flag. The majority of money is still going into the business and we have this consolidation in the market between the haves and the have nots. And if GP stakes could come in and help the emerging managers, the managers with a billion, two, three, four billion dollars compete with the large managers. When it comes to talent systems, LP management tools, all these things, I think it'd be net effect. But the devil's in the details and I think every single deal should be looked upon kind of on a one off basis in terms of whether it's accretive or destructive to the current LPs.

B (41:30)

We have kind of a three pronged currency pool in in the alt space, right? Cash carried interest, firm equity. Most other sectors it's cash and it's firm equity. And you look at series A, B, C, D and beyond, venture rounds and growth rounds after that there are secondary trades that happen there as well. Founders do get liquidity and I just bring that up to highlight that alignment is a bespoke thing between two groups. And to your point, it really depends on the situation. But we actually have more variables at play that we can use to tweak and hone that alignment in our industry than in others. If I were an lp, I'd be less worried about alignment as it relates to secondary interests out of GP stakes transactions and more about what LPs are already focused on from an alignment standpoint, which is where's the carry in the fund coming from, how is it allocated among the team, how is it being used to incentivize attract and retain really good talent. LP is already diligence that, that's, you know, the, the, the value in staking transactions is calculated in a lot of ways. But part of that is the ability to continually raise and successfully deploy funds that generate carry, that help you retain talent, that allow you to continue to raise funds and deploy capital and generate more carry. And so carry kind of ends up being the equalizer here to balance out that, that consideration in my view.

A (42:48)

What have you changed your views on in the past 12 months?

B (42:55)

I think a higher percentage of firms are not going to raise the next fund than maybe people have thought about in the past. And I don't think that means we're contracting as an industry per se. I think competition for capital and deals and talents at an all time high. I think barriers are lower than ever in a good way for people to be able to launch independent sponsors, launch emerging managers, build emerging managers, compete on a number of different planes. But it also means, you know, for those who are even historically top quartile, top decile strategies and relying on existing LP relationships to continue to re up in those strategies, I think your lunch might be slowly getting eaten by your competitors, whether you realize it or not. And I think there's a lot more folks that have come to realize that, as I mentioned earlier, that are focusing on innovation. Because if you're an lp, at the end of the day, discretion has become more important than ever. Right. Like we always focus on fees and we focus on the ability for people to co invest, which dovetails with discretion. I think what I see around the market is LPs seem to be more focused on discretion now than ever. Meaning historically you ought to raise a fund. Your track record is the biggest and most important thing you can talk about. While that can be true, especially if you're a top quartile or top decile investor, the reality is nowadays LPs are underwriting, from what I see your pipeline a lot more. And your ability to source proprietary deals and deliver differentiated value add against that pipeline and the track record itself can kind of be an albatross, but it also ends up kind of representing that there's a lot of firms that have fully ingrained themselves in one singular strategy. I have a series of funds in a particular subsector with a deal team that's really deep in that sector, a stable of operating executives, another talent in that sector, connectivity in that network in that sector. If things slow down, I think you're seeing fewer LPs that say, well let's know you guys have been a longtime partner. Let's figure out how to manage this across different business cycles. I think they're getting more efficient at saying is there someone else we can be allocating to who maybe isn't starting from a position of having a lot of deals in that sector they need to harvest before they're ready to deploy again?

A (44:55)

Going back to when you started in 2009, what is one timeless piece of advice you would have given yourself that would have either helped you accelerate your career or helped you avoid costly mistakes?

B (45:03)

This is a great question. There are mentors throughout my career, David Rubenstein among them, who I think have pushed on the fact that we should all be a little bit more risk tolerant when it comes to experimenting in our careers and taking risks and trying new things. I think as a lot of us move throughout our careers, we really appreciate the non linearity that is the reality of building a career and building an expertise. I think in hindsight I appreciate now is that at a certain point all of us in our careers are truly an expert in something and the decision becomes how we want to employ that expertise in the market and compensated for it. I think if I could start my career by focusing on figuring out what that expertise is, which I found today, but which I. I think I could have probably mentally honed in on earlier. I think it positions you to be able to take more risk in the seat you're in, take more risk into moving into new seats. To ask yourself, you know, if my career is predicated on building the following expertise and creating optionality for me to employ that in whatever ways I want to as time goes on, what decisions would I make differently? Would I be less myopic? Would I be less focused on my bonus this year? Would I be more focused on building expertise and taking risk, knowing that it might close certain doors but open others.

C (46:21)

It's.

B (46:21)

It's kind of that longer term view of what you're trying to build in your personal career that I think is hard to get a grasp of early on. Something that I think a lot of us find as we get into the middle of our career, but something I certainly would encourage everyone to be focused.

A (46:33)

On regardless of where you are being more strategic thinking. Maybe not in decades, but in five year periods earlier on in your career versus year by year, promotion to promotion.

B (46:44)

I would actually think about it in terms of lifelong timeline if you had to, and the answer will change. But if you had to, had to triangulate around one type of expertise, something you're both good at. And that fulfills you even if you can't answer the question today. But if you held that question up every month, every quarter, every year in your career, over time you'll hone in on, here's the thing I think I'm good at and enjoy and that I can be an expert in what decisions would you make differently? And I think people are surprised about the risks they might be willing to take professionally if they knew it was an effort of building a 50 year career around an expertise versus achieving a certain title or a certain economic outcome in the near term. I think a lot of people chase titles. You know, in our world, I see a lot of people chase the managing director title in the first third of their career. And then guess what, you're a managing director for the rest of your career and you're measured entirely on the success of your investment skill set and your track record. And I've mentored a lot of people along the way where I've really had to hammer that point home on, you know, don't, don't chase the title. Don't chase the near term economic incentive. If you have confidence that you can become an expert in something and you're confident that you'll make the money that you need to in the very long run, then take a hard nose towards how do I build that expertise? Because the rest will come.

A (47:58)

The world, and specifically finance world, is constantly trying to commoditize everybody into one track. You must be a generalist at everything. And yet the people like David Rubenstein that end up being these three standard deviation outliers are the ones that hone in and double down on their strengths.

B (48:13)

And I think part of that is coming back to something I said earlier. Having a high level and elite level of intellectual curiosity not only helps you to understand other people's expertise and to learn from it every day, but it really helps shape the universe of the different types of expertise that are out there. And you can really start to map out where you fit within all of that, where you can make yourself indispensable, where you think you really are better than other people in the industry who you consider experts, and you say, hey, I'm at least as good at them at this thing. Maybe that's my expertise. And so I look at that intellectual curiosity and that constant learning from others is kind of a key tenet that I've learned from great mentors and something that I try and hold true and everything I do.

C (48:51)

That's it for today's episode of how invest if you're a GP with over 1 billion in AUM and thinking about long term strategic partners to support your growth, we'd love to connect. Please email me@davidisburgcapital.com.