E313: Why the Endowment Model Doesn’t Work for Taxable Investors

Summary

Podcast Summary: How I Invest with David Weisburd

Episode: E313 – Why the Endowment Model Doesn’t Work for Taxable Investors
Guest: Anit
Date: February 26, 2026

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Overview

This episode explores the complexities and limitations of applying the "endowment model"—traditionally designed for tax-exempt institutional investors—to taxable investors such as families and private clients. Host David Weisburd and guest Anit discuss why this model often falls short for taxable portfolios, the rise of the taxable investor, key tax considerations, governance best practices, and how private market trends are reshaping the opportunity landscape. The conversation is rich with insights on asset allocation, fee structures, co-investments, and the critical role of governance and documentation for multi-generational family wealth.

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Key Discussion Points and Insights

1. The Rise of the Taxable Investor & Asset Allocation Nuances

• Taxable Investors vs. Endowments
  • Unlike institutional endowments, taxable investors must prioritize after-tax returns, manage unpredictable cash flows, and fit investments with softer financial objectives.
  • “[Asset allocation] is oriented around the family’s own desires that may not be prescriptive, such as a 5% mandate.” – Anit (00:06)
  • Technology and new private market structures are democratizing access and enabling broader tax-efficient options for private investors.
• Tax Awareness in Modern Portfolio Construction
  • Taxation can erode returns by 30–40% if not properly considered. For coastal clients, after-tax returns can be vastly different (e.g., 15% gross reduces to 10%, or even 8% for high short-term income assets).
    • “If you don’t appropriately asset allocate or asset locate those investments, you can lose 30 to 40% of your total return right off.” – Anit (01:37)

2. Tax-Efficient Structures for Private Clients

• Example: Infrastructure Strategies
  • Some joint venture infrastructure vehicles distribute income as a return of capital, allowing basis erosion and long-term capital gains treatment. This also dovetails with estate planning via step-up in basis.
    • “Because of the joint venture structure ... they’re able to deploy all of the income distribution as a return of capital … now it’s all long term capital gain along the way.” – Anit (02:05)
• Deferral and Step-Up
  • Key tax strategies: defer taxes for decades (minimizing real value paid), and receive step-up in basis at death for generational transfer.
    • “Defer for decades where the net present value of those taxes are essentially near zero, or die and then your kids get the step-up in basis.” – David (02:47)

3. Problems with Applying the Endowment Model

• Three Main Challenges:
  • Determining the appropriate allocation to private markets.
  • Sourcing quality investments commensurate with the illiquidity given up.
  • Pacing commitments amidst the more variable cash flow and liabilities of private clients.
    • “The three biggest challenges ... are the right number [to allocate], sourcing, and pacing.” – Anit (03:15)

4. Fee Structures & Recent Trends in Alternatives

• Alternatives to 2-and-20
  • Growing use of: co-investments, independent sponsors, and continuation vehicles (CVs).
  • Co-investments offer lower fee exposure and access to private equity-like returns—but come with risks (e.g., “buyer beware” with unfamiliar GP partners or multi-layered SPVs).
    • “You’re seeing a lot of buyer beware moment here on SPVs … co-investment deals get structured with GPs that you may not have historically worked with.” – Anit (04:18)
• On Fees—What Matters Most?
  • Both 2% management and 20% carry matter, but net returns (after all fees and taxes) are what truly count.
    • “We always think about the world on a net of fee basis, net of total fee basis … optimizing for lower fee on the front end is [not always rational].” – Anit (06:04)
  • Growing investor sensitivity to the compounding impact of long fee payment periods is driving interest in evergreen and other structures.

5. Capital Calls, Liquidity, and the "Denominator Effect"

• Managing Capital Commitments
  • Funding capital calls from similar (growth) assets is best, but market downturns complicate this.
    • “In ordinary times it’s like for like assets … The biggest issue during times of distress is the denominator effect.” – Anit (09:25)
• Denominator Effect
  • In downturns, private investments become a larger portfolio percentage as public values fall, creating rebalancing problems.
• Numerator Effect
  • In up markets, public assets outpace private; pacing and discipline becomes essential to maintain targets.

6. Governance: The Unsexy Cornerstone

• Investment Policy Ranges Over Precise Targets
  • Best practice: set allocation ranges, not strict numbers, to enable flexibility and avoid forced rebalancing.
    • “Having things like ranges in your IPS allow you not only operational flexibility, but rebalancing flexibility … and investment flexibility.” – Anit (13:47)
• Momentum Effects
  • Over-zealous rebalancing risks sacrificing performance gained through momentum.
• Long-Term Institutional Governance
  • Policy statements and governance frameworks should outlast any single trustee or employee, maintaining continuity.

7. Family Wealth Preservation & Governance

• Front-End Work and Education
  • Multi-gen planning requires buy-in, education, documentation, clarity on roles and responsibilities—a lack of this is a key driver of family wealth erosion by the third or fourth generation.
    • “The biggest thing: roles and responsibilities ... how do you teach that, ingrain that into your children, your grandchildren?” – Anit (16:29)
• Common Mistakes
  • Frequent issues include poor documentation and ad hoc investing (“scattershot, buckshot” allocation), lack of process, and inadequate operational resources.
• Best Practices
  • Implement clear documentation, create an investment committee, limit small "fun" checks while requiring committee approval for larger bets (e.g., NYC family office’s $10k limit).

8. Trends in Co-Investing & Rules-Based Approaches

• Automation and Systematization
  • The rise of structured, rule-based co-invest platforms is making inroads in the taxable space.
    • “There’s going to be a co-invest platform that can help you get to that point … I’m excited to see where this goes.” – Anit (23:49)
• Risks in High-Profile Private Trades
  • High fee multi-layered SPVs (e.g., for SpaceX) require careful underwrites of both outcomes and costs.

9. Lessons on Investment Style, Genius, and due Diligence

• No Immutable Laws
  • Beware applying historic relationships as rules—markets often shift and rarely offer permanent truths.
    • “There’s no immutable laws in finance. … Things can change permanently, and they do actually change permanently.” – Anit (26:00)
• Manager Genius Is Context-Specific
  • Top investors succeed in narrow domains; “what makes Warren Buffett great wouldn’t necessarily work in venture.”
    • “What makes Warren Buffett, Warren Buffett … is so idiosyncratically different … Good investors have very specific strengths which are oftentimes very specific weaknesses in another context.” – David (27:46)
  • Overly structured due diligence can unintentionally weed out idiosyncratic “genius.”
• Generalists vs. Specialists
  • Allocators should preserve and grow wealth steadily, not chase asymmetric fortunes—find, partner with, and underwrite top specialists but focus on repeatable, process-driven outcomes.

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Notable Quotes & Memorable Moments

• On Applying the Endowment Model to Taxable Investors:

  • “In private clients, you have unpredictable liabilities: buying a house, funding college, death, a new business … pacing is very important.” – Anit (03:15)

• On the Power of Documentation & Governance:

  • “You must have a document that will outlive the trustees … it reinforces the permanent nature of those pools of assets.” – Anit (15:53)

• On the Pitfalls of Ad Hoc Family Investing:

  • “Just because you have amassed a ton of wealth doesn’t mean you should be aloof about asset allocation.” – Anit (20:00)

• On Recognizing Genius and Process:

  • “If you take a committee to everything, you will dilute yourself and the value of the investment down to … medium-like outcomes, if not worse.” – Anit (29:32)

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Important Timestamps

• 00:06 – Taxable investor needs and democratization of private markets
• 01:23 – The massive impact of taxes on returns
• 02:05 – Infrastructure as a tax-efficient investment example
• 03:15 – Three big challenges of endowment model for private clients
• 04:18-06:46 – Fee structure critique and co-investment trends
• 09:25 – Managing capital calls and denominator/numerator effect
• 13:14-13:47 – Importance of governance, policy ranges, and momentum
• 16:29 – Family governance and role clarity
• 19:50 – Common governance problems with family offices
• 23:49 – Rules-based co-investment platforms
• 26:00 – Lessons from the “replication crisis” in finance
• 27:46 – The idiosyncratic nature of great investors
• 29:32 – Committee decision-making can dilute “genius”
• 33:23 – Business-building challenges for fund managers

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Summary

This episode delivers a nuanced, practical deconstruction of why the classic endowment model isn’t fit for taxable investors—due to taxes, liquidity, unpredictable cash needs, and governance complexity. Anit and David highlight the importance of after-tax optimization, disciplined but flexible asset allocation, robust governance (including documentation and clear roles), and the need to balance process with the recognition of manager “genius.” The discussion is candid, filled with actionable examples, and makes clear that true, enduring wealth—whether institutional or family—rests more on unsexy operational rigor and adaptive thinking than on any specific investment formula.

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For private investors, family offices, and advisors: This conversation is a toolkit for navigating the modern world of alternatives, taxes, and multi-generational governance.

Transcript

[David]

What would most people be surprised about how you go about investing $15 billion in the market today?

[Anit]

You have to have a clear line of sight on asset allocation around things like cash flows, taxes, financial plan objectives that are oriented around the family zone desires that may not be prescriptive, such as a 5% mandate.

[David]

This rise of the taxable investor is a new phenomenon.

[Anit]

It's such a hugely important phenomenon going on and it's I think the segue a little bit into, you know, the democratization of private markets and all of the different investment vehicles that we are seeing come into markets. But you know, this gets into a little bit of the, how do you take a institutional like framework and apply it to private clients? So it's one thing to be able to say, hey, we treat you as a multi generational client the same way we treat you as a, you know, perpetual and down to earth foundation. The reality is in past, in history it used to be very difficult to take and express the same investment ideas would have for that institution and, and employ that for a private client. I think in this day and age now, if you set everything else aside so all else equal, now we've solved that sourcing conundrum so we have the ability to bring our own internally sourced private market investments for all of our clients. And we do so using technology and a couple of different relationships. We have to create a simplified investment structure for, for private clients. You know, one of the nuances there is that perhaps didn't exist, you know, five even, maybe even 10 years ago was being more tax aware in that process.

[David]

At the low end for, for coastal clients it could mean 35% difference in return. So you get a 15% now you're 10%. At the high end it can mean 15% to 8% if you're investing in hedge funds or private credit that have the short term income.

[Anit]

Part of the response to that is not only different products and structures, but also being very thoughtful about how they're deploying those investments and generating returns, be that vis a vis capital gains or through the income lens. And to your point, if you don't appropriately asset allocator or asset locate those investments, you can, you can lose 30 to 40% of your total return right off of that.

[David]

What are some logging fruit in where taxable investors can use specific structures in order to maximize their after tax return? Give me an example of that.

[Anit]

So infrastructure is a good example. So there's a couple of different strategies in the market right now where again these things didn't exist a Handful of years ago where you're making infrastructure investments in and because of the joint venture structure of the underlying investments, they're able to deploy all of the income distribution as a return of capital. So if you're a private client, you think about that after 10 years you've eroded basis and so now it's all long term capital gain along the way. You've cut a coupon, clipped a coupon that's been tax efficient by having the ROC return of capital benefit on there. And then if you're estate planning, you can use that to your advantage by having that asset flowing through an estate plan. Therefore there's a step up in basis and then you defer that capital gain even further. So little small myopic way of dealing with taxes from an income seeking and

[David]

that seems to be a lot of the tax strategy which is either defer for decades where the net present value of those taxes are essentially near zero, but you still technically pay the taxes or die and then your, your, your kids get the stuff up in basis. Many private investors use the endowment model language when they talk about their portfolio, but they don't really apply the principles. What are most private investors missing when it comes to applying the endowment model to their own approach?

[Anit]

I'll give you three challenges. So one, what is the right number? What is the number in terms of asset allocation that you're willing to put towards private markets? The second is okay, you've got the number, how do you source for it? How do you make sure that by locking up the liquidity you're getting a better than public market outcome? And then pacing. So in private clients you have I'm going to buy a house, I have to fund college, we had a family member pass away, we are buying the small business, we have these other tax considerations, we have all these investment cash flows. Whereas an endowment may just simply have hey, we have to spend 5% is what it looks like over the next year. So pacing becomes very important to how am I going to build to that number once I describe that number? Those are the three I think biggest challenges in taking what we would say is a traditional endowment approach and applying product line.

[David]

There seems to be this trend in alternatives away from this 2 and 20 model into different things. Independent sponsors, co invests, even CVS and continuation vehicles fall under this trend. Do you think this trend is here to stay? And if so, how are you able to capitalize on this?

[Anit]

The pick in the Python moment for private equity is real. So you have a general exit problem. So you know Things look a little bit better than they did say 12 months ago, 24 months ago for certain. But still CV is going to play a role, there's no question about it in that, in that world. And for those trophy assets where we are working with sponsors that we know can continue to extract value relative to public markets, those are interesting opportunities and they will continue to be interesting opportunities. Again, I think the spread of outcomes there is going to be very wide as you'd expect, similar to what we would see in traditional biotic growth. But that's something that's out there. Co invest, interestingly, co invest is, you know at a, there's almost two versions of this. One there's just co invest strategies writ large and they want to invest dollars into co investment funds and take advantage of you know, private getting private equity like returns without the fee burden necessarily. So there's, there's that component, there's also just the increasing component of co invest opportunities that are arising from a lot of late stage unicorns in the market. And, and you know, this is again they need exits, they need to deploy dollars and they're looking beyond the traditional VC realm to be able to track those dollars and they're looking at RIAs as a functional part of where to get that investment, those capital commitments. And so you're seeing a lot of buyer beware moment here on SPVs but you're seeing a lot of co investment deals get structured with GPS that you may not have historically worked with. And you have to ask yourself the question why am I seeing that at co investment opportunity? Obviously but for us we've seen more and more of our, I would say our higher conviction gps that we are currently invested with bring us, bring us an increasing number of co invest ideas.

[David]

Is it the 2, the management fee,

[Podcast Host/Announcer]

the 10 year 2% that bothers you

[David]

or is it the 20% carry? What is it that bothers you exactly?

[Anit]

I don't know that either one of them bother me to be completely honest with you David, whenever we underwrite it's we always think about the world on a net of fee basis, net of total fee basis. And so we have underwritten expectations that we, that we expect out of strategies. One of the reasons why we re up with managers is because they've hit those buggies generally speaking. So we like to stick with proven managers that we've invested with. But I think for your average RIA or indiscriminate investor that doesn't know how to measure what success may look like on a after fee basis after tax too for that matter. Simply optimizing for lower fee on the front end is rationale to go after that investment. So I think yes, it's good, but it's also but be careful, copy it.

[David]

After a lot of LFPs telling me it's what irks them a little bit is the 10 years and sometimes the 12 years of paying. Obviously it stuffs down over five years, but that really accumulates. It's, it ends up being, you know, 20 plus percent of the actual investment that gets paid in fees, which is pretty crazy.

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[Anit]

that's, I mean there's a, you know, the, the and perhaps people more sensitivity to it now because you know, investment periods are longer, hold periods are longer, fund ages are longer. And there's a lot of different reasons to start looking at the compounding effect of that math. But I do, you know, again, I'm not apologizing for it, but I think a lot of that is being also used to drive dollars into the evergreen space because of the natural immediate compounding that they allege the benefit you get versus say a traditional drawdown structure. So it's hard to draw the similarities. It's hard to draw the, the parallels and there's certainly nuances there, but fees are a problem across the private market industry. And Evergreen will do its job, I think to drive more competitive fees across

[David]

the industry on the capital commitment. So you invest into a fund and it draws down over two to three years. What's the best practice in terms of how you manage those liabilities?

[Anit]

In ordinary times it's like for like assets, you know, you're funding a growth asset or should it, should it should be sourced from a growth asset to keep your asset allocation in check. Of course, I think what happens a lot of times is the market's in disarray or something's going on when you do get those calls. And so the question that becomes more muddied. Do you sell a depreciated asset in your growth assets to fund that? You know, in other words, just to put a finer point on this, do you sell Your S&P 500 position to fund your, your, your buyout growth, your growth equity commitment that you've just been called for? Ordinarily we would say yeah, that makes sense. The reality is if the market's down 20%, the S&P 500 is down 20%. There are, you know, you just start to have these probability, the probabilities start to go in your favor of keeping money there instead of taking money out. And so you have a different problem there of sourcing from maybe relatively appreciated assets or assets have done better than the growth asset that you've, that you've just talked about. The biggest issue during times of distress is, is denominator effect. You know, in times of duress you have public markets are decreasing and your private markets are staying relatively intact for all the reasons we know. And so you have a higher proportion of private assets than you would have otherwise normally thought prior to that decline in public markets. So that causes a little bit of friction too.

[David]

You're not keeping the money in cash, you're keeping it in some, some asset that is liquid. And then as the, as the capital call comes in, you're, you're transferring out

[Anit]

of that asset the nuance there is for short duration strategies that we may be deploying it. Cash is probably the right thing. If you're talking about private equity, the six year investment period, that's a different liability construct. So it really is just, it should be dependent on what that investment period looks like, informed by your own pacing assumptions. And so you don't want to scenario you don't want to be in ultimately is a short duration liability vis the Capital golf funded by a long duration asset like public equity. That's where you have to be mindful.

[David]

And this denominator effect, essentially public markets go down. Your private markets on a percentage basis are now a larger part of your portfolio. Why not just under allocate to private markets ahead of this knowing that there'll be this drawdown in the next 10 years or what other tools do you have to, to solve for that?

[Anit]

Let's use today as a good example. So The S&P 500 has been up, you know, it's doubled in 545343 and a half to five years. Whatever it is, it's up, you know, Double digit percentage points, 20 over 20 over 20, 18, whatever it was last year. And combine that now with the fact that you've had realizations anemic. You have capital call investment that have, you know, commitments that have been called increasingly now but also very slow. So you have this natural fatigue of like why am I locked up in private markets? I'm looking at the S and p going up 75% in three years is the benefit here. So now you have the inverse of the denominator effect which you have increasing public market investments and lower proportionally numerator effect. So we have to figure out how you actually go about solving that. And for us right now it's simply just making sure that we have the number. We have this saying here. Our head of sales says if you don't know where you're going, any road will take you there. That's the same construct and asset allocation. If you don't know the number, you will have a very hard time ever getting to that point. Time versus being disciplined about the S&P 500 is going to be volatile no matter what. You know, that's, that's why it has the 18% standard. It's going to go up and it's going to go down. Over time it will go up. Private markets are going to be a staple and stable part of portfolio. How do we get to the number that you want over time? And so pacing models are very important part of that. Once you describe the number that you want to get to ultimately and that's being committed through time, over time by Vintage and David, to your point of how do you anticipate drawdowns? I think it's very hard to create expectations on pacing around probability of market outcomes. We have to assume certain things in the public markets and then we react accordingly on the funding side of the equation for those commitments.

[David]

It's interesting Because a lot of this actually comes down to the least sexy, most important thing in investing governance, which is what's upstream of all your decisions. And the best endowments I talk to, which I think are the best private investors, they give their investment committee ranges versus specific, specific number. So they don't allow themselves to optimize on arbitrary asset allocation numbers that keep them from this flexibility. I interviewed Brent be sure who has this really interesting 30 year private equity fund and he predicts every decade there's going to be some black swan event.

[Anit]

Yeah, that's so true. And for the majority of our clients and just kind of focusing on the endowment foundation side, they are operating with that sort of framework. So you have to have one codified investment policy statements. That is a fishery practice that every institution should follow. And then what you do inside of that ruling matters, that sets the tone for the investment committee. It protects the organization or the corpus of the assets from decisions that the committee may have otherwise made. So there's a interplay there that I think is very valuable that leads families and family outcomes also, in a similar way, every investment policy statements are and should be a key front end deliverable for clients. To your point around the ranges, that's a very, very, very important thing because you know what gets lost I think a lot of times in markets is the power of momentum. And if you rebalance too much, you lose the momentum effect. And that gets, that gets, that can be meaningful for people. So this idea that you want to be so precise every day and tout that as an asset sort of sets aside the fact that there's this thing called momentum and that you may actually do better by letting it run a little bit before rebalancing. So you can quantify some of this stuff obviously, but those things are real. And having things like ranges and your IPSs allow you not only operational flexibility, but rebalancing flexibility and then investment flexibility for us as decision makers to be able to make decisions and not be held to an excel sheet for all intents.

[David]

Yeah, the 10 person IC, there's always that one bad apple, especially when the market's down 20%. It only takes one panicked IC member to destroy the entire investment policy. Instead of ruing that, you have to really think from the corporate governance side. And I think few institutions have really gotten this right like Alaska Permanent URS, UT Retirement Systems. And instead of sitting around hoping that human nature won't surface its ugly hat again, they created these governance awaiting this kind of next crisis and making sure that the investment Team itself is able to navigate some of these difficult times without kind of being captured by the ic.

[Anit]

Yeah, yeah. And that's so true. You have to have a, you have to have a, a source or a document that will outlive the trustees of a given and the employees of a given, of a given institution. It's it, it reinforces the permanent nature of, of those pool of assets.

[David]

What's some of the best practices that it comes to families that are looking to preserve their wealth over several generations? What are some governance principles that they could institute in order to avoid what I would call the Nepo baby or other, other issues that might come downstream? Not that it ever happens, but just theoretically speaking. Hypothetically.

[Anit]

Yeah, that's a, it's a great question. All of this work is on the front end and so you have to have familial buy in it's education, it's educating not only Gen 1, but Gen 2, Gen 3, wherever you are in the life cycle of, of the family. And so that's not only getting everything lined up with a advisor, making sure there's relationships built across the firm, that there's trust there, that you have all of these documents in a single place available for all the generations to build an access pool, et cetera. Just basic governing principles for families include having all these documents set up, the estate plan, any governing docs for, for a family, the trust docs, everything spelled out clearly, roles and responsibilities. Probably the biggest thing. What is the role, what is the responsibility? How do you teach that, ingrain that into your, into your children, into your grandchildren and ensuring that you don't have that world of, you know, here's, here's. There's a statistic and it's hard to find this data but you know, family offices tend to start to have problems after gen 4. You know, there's this little kind of behavioral idea that preserving the intention of the founding principles gets diff. More and more difficult by generation, by generation 3, 4. It gets pretty, pretty well diluted out. So how do you, how do you sort of refine and define that over time? Is obviously very difficult. But having govern governing docs is.

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[David]

When families come to you and they've had a bad experience with another RIA or another multifamily office, what are the most common one or two governance issues that were done at this other advisor that you just see happening over and over and over again?

[Anit]

Yeah, no, not clear documentation is one that's, that's clear.

[David]

Just making investments ad hoc. Some family member comes in I want to invest in to this, this private equity fund.

[Anit]

Look at this. This direct investment can please look at this. It's, you know it's a, it's either a real estate deal down the street or it's a buddy's, you know, venture idea that he's raising for past a hat and so putting parameters around that is very important. And again that goes back to the governance and documentation and ensuring why are we investing in certain things. Who has, who has say in those investments is obviously very important thing. Creating an investment committee or an investment advisory function or something that can rest within the family also is something of importance. But you know the scattershot, the buckshot David investments is probably the biggest thing where you have a, you know, just because you have amassed a ton of wealth doesn't mean you, you should be aloof about asset allocation and just mistake number because it's also not willing to deal with a single provider. And I know it's very difficult. There's relationships involved. You may have a business with your, your own relationships there. And so how do you find a resource for you that can bring all of this together? Because it requires a deep middle and back office and significant amount of operational resources to be able to do that. And majority of, of of firms out there or you know, single advisors aren't prepared to do that, don't have resources to do that. So that's, that's another area I'd say

[David]

it's those are related which is you make random investments and you don't even know which random investments you've made.

[Anit]

Yeah, that's exactly. And you know the, the hard part is if you have a collection of private investments, what does that collection even look like? You know, from getting fund updates to understand what portfolio companies are doing, if they're, if they're fund level, if it's private investments, what are your exposures and how does that roll up into your broad overall asset allocation?

[David]

The second order effects of that, let's say you are invested in this friends venture capital fund. You may not even know whether they're calling money in six months or in five years. And the second order of effects of that, why does that even matter? Is that you have to keep all your portfolio liquid. You may be over allocating to liquid. And why does that matter? You're not getting that alternatives premium and the illiquidity premium. So it's not just that you don't know what's going on. It's that you have to be overly conservative if you don't know what's going on.

[Anit]

That's right. That's exactly right. And that's. We see that time and time again. And it's again, if you don't back to that saying if you don't know where you're going, anywhere will take you there. So if you don't have an asset allocation or don't know what you're aspiring to, what chance do you have in making sure that you've got the right underlying investments to get you there? I think it's very difficult.

[David]

A well known single family office in New York City which will remain nameless, they have this policy where I believe it's $10,000, any family member can make these one off investments even in a restaurant up to $10,000. But outside of that it goes to IC and then the IC has final say and this is how they've been able to kind of toe this line between giving the family members some level of autonomy while not just destroying the wealth.

[Anit]

Yeah. And it's not to say that what we say is etched in stone. It goes back to the idea of having a investment policy with ranges around it, having very specific dollars carved out, say for co investment ideas that you want to be interested in that may not necessarily be part of your overall asset allocation. I think it's totally fine. We do this a lot where you have a predetermined or set amount of dollars carved out for opportunities that are being sussed out by internal networks, for example, instead of through our own platform. So those are not things that shouldn't be done. It's just do in a way that's informed by the larger objective at hand. So I think your point spot on there.

[David]

On this co investment I see a trend in the institutional space of making it more rules based or algorithmic versus this kind of one off. Do you see that happening in the taxable space and is there a way to construct these portfolios maybe not to have to be fully passive, but to have some rules based approaches to how you process code investing?

[Anit]

Yeah, I think that's coming. I mean it's already there, we're already there, but it's going to continue to grow and get better and more evolved. I do think, you know, once you describe the outcome that you're looking for, there's going to be a co invest platform that can help you get to that to that point. So again, a little bit of a technology plus desire thing but I think the large one off co investments that we see through the late stage venture lens are probably just that, that is just simply giving people access to, you know, things that would have ordinarily been in the public market. And so, you know, that's, you know, I'm going to call it whether that's being able to talk about, you know, your investment in SpaceX at Saturday night at the, at the country club or otherwise, that those are a little bit separate, you're going to have more systematic co invest opportunities. And it, it seems like we've seen a couple of platforms and I, I'm excited to see where this goes in the next, you know, 12, 18 months.

[David]

SpaceX is an interesting thing. It went from a family office trade to an institutional trade. So some would argue a family office trade again.

[Anit]

And that's where you got to be careful of. You know, back to the comment by saying you have SPVs being launched all over the place with blind access. In many cases they don't have access and you have multi layered SPVs with fees upon fees upon fees upon fees. Like what outcome do you expect in that? If you're a SpaceX investor on a multi layered SPV, like if the thing doubles now we're talking to $2 trillion company or whatever it is, one, that's gotta be your underwrite and then two, you have to net out the fee burden of all that stuff and then. Okay, is that a rational investment? It starts to get tough. I mean we were simply looking at, I think the retail market now being a liquidity mechanism for a lot of now employees with tenders and other institutions. I think you have to be careful there. But you know, certainly it hasn't changed. I don't think the appetite from private clients to want to get exposed to these companies. And that's an outlier. Again, there's plenty of other firms out there, late stage firms that are interesting.

[David]

The only thing worse than 2 and 20 is 220 on a 224 and 40. Unless I guess you're in Citadel or back in the day. Stephen Aon then it might make sense. You start out as a trader in 1999. If you could go back and whisper one timeless principle in your ear in 1999, order to help you either accelerate your career or help you avoid costly mistakes, what would be that one principle?

[Anit]

It's a very good question and I think about this a lot actually. So I'm a runner, not avid, but I run just to try and stay in shape. And whenever I, whenever I do it, I invariably doesn't matter how much I try to clear my mind. I keep coming back to this idea of replication crisis. And there's this, you know, statistical thing out there that says that the majority of, you know, a significant majority of academic studies out in literature have been difficult to replicate in real time, out of sample. And I think that's very well seen or observed in, in finance. And you don't have to go too far to find that stuff. Whether it's using PE multiples as your proxy for future expected return, whether it's inflation views, you know, views would be the 70s and the way we're printing money today, if you want to call it that, there's all kinds of ideas where if you just simply treat the world as a scatter plot, draw a best fit line and let that drive your decisions, you'd be in a pretty bad place. So I mean, I think there's like going back in time. I think it's easier in hindsight today, but just thinking about the world that way is I think very easy. Important or interesting that those things meaning being able to look at mathematical relationships. We know there's no immutable laws in finance, but look at those relationships with a higher grain of salt. And saying things can change permanently and they do actually change permanently. And even if permanent is only 20 years inside of a career, and that may be temporary on 100 timescale, it's permanent for you inside of that time scale your career timescale. So I think there's a fair amount of like just being more objective about what we see principally through the lens of academia versus what we expect in the future out of markets and out of our careers. So that's probably the biggest thing I

[David]

think in general, just intellectually being honest with yourself, writing down your priors, seeing how markets evolve. We humans have such a desire to just revise our, our investment thesis just in time to kind of hide our mistakes. It's, it's almost like so in inherently human. One of the things that I've been thinking a lot about, I spent on Sunday with, with a very well known investor and he's done deals with Warren Buffett, the Lackman, all these top investors. And one of the things that in retrospect should have been extremely obvious as he was explaining these different, you know, you know, legendary investors, also Tony James and people like that is that they were all so idiosyncratically different. And what makes Warren Buffett, Warren Buffett, what makes Bill Ackman Bill Ackman and what makes Tony James, Tony James is so it is syncretically different. And the reason they were successful is because they applied their genius into a very specific vertical. So another way I think Warren Buffett would be a terrible venture capitalist. Kind of sounds funny to think about that thought experience. But there's nothing, you know, Warren Venture has been around for over half a century in some permutation of the world. There's a possibility that young Warren Buffet would have gone to venture capital and he'd probably be a third or fourth tier investor, maybe he'd be second tier, maybe be first quartile, but he certainly wouldn't be born both. And I think we have this misnomer that good investors are good investors where I think good investors have very specific strengths which oftentimes are very specific weaknesses in another context. And like finding the manager's genius I think is such an underrated thing. And it's only obvious in retrofect. It's like, of course Bill Ackman's a great investor. Yes. But he's very great in this specific domain. And if you had put him in another domain, he maybe not wouldn't have been as great and maybe still be top quartile, but he wouldn't be Bill Ackman.

[Anit]

Yeah, it's so true today. And it permeates, I think, a lot of manager due diligence processes today where, you know, you may have a process that eliminates that sort of genius because you can't handle that kind of key man, idiosyncratic risk inside of your underwriting. And that's a tough thing. I mean, we've taken the approach that we find smart people, we invest with them. You know, you gotta make sure a lot of other things are right, but if you, if you take a committee to everything, you will dilute yourself and the value of the investment down to, you know, its lowest common denominator, which is medium like outcomes, if not worse. So I think that's a very, very, very important. Important.

[David]

Yeah, that's so interesting. Keyman. So much of this is just framing. It's so important. When I speak to my partner, I'm so cautious not to frame certain things in certain ways. They just come out of your mouth. And there's very few actually terms that are neutral. Keyman, Risk, genius. Those are pretty leading terms and frames to put on somebody. And yeah, we don't have this whole thing where it's very hard to actually frame things neutrally and that, that has downstream consequences how we think of it and shape our, our strategy.

[Anit]

Yeah. And to your point, I think there's a, you know, the, you know, for, for being in my seat or our seats. We're allocators, we're by definition generalists. Our job is to preserve and grow client capital, not create a bunch of asymmetric wealth. You know, our clients already done that in the real economy. So that's, there's a nuance there too of the making sure that we are able to find those people that we are generally not, but also have the discipline to create a process that can be sustained, repeated, and drive success for clients. So that's the punchline for being an allocator versus being a bottoms up investor in a certain asset class like the Buffets and the Acklands.

[David]

Have you found that in your own managers that almost their strength is their weakness? What makes them really good at what they do? They would be very bad in, in other contexts or it Comes with this kind of like double edged sword where they have other weaknesses that if they were in other verticals they would be bottom quartile.

[Anit]

Absolutely. I think there's. It could be not only in investing principles that could show up, but also life principles, how they run their businesses. It's the entrepreneurial problem. Entrepreneurs like it their way. And so, you know, it takes a special person to be able to have a point of view on a market, have that expertise, have the willingness to engage your team, be a team player because they're almost contradictory in some sense and do it for the benefit of an increasing client base. And that's a real I think challenge number one. And then you overlay on top of that you gotta be a good investor and a good business person. That's where the. If there's any sort of arising conflict, it's probably first there from a outcomes point of view instead of, you know, majority of managers probably couldn't make it in other asset classes. I think we all know just they're there for that reason and no other. There are some very exceptional people that can do well whatever they do. We've seen those kind of generalists out there. The real test however is can you not only be a good investor, but run the business effectively. And that's where we see some differences between the good and the bad. It's one thing to get through fund one, raise money. It's a second, you know, if you go from pre fund, pass the hat to a fund one, fund two, you get to a fund three and now you're institutionalizing your business and roles, responsibilities and all those kind of things that you would expect, you know, more complex LPs or platforms to build up to ask questions on that kind of evolving is also very difficult.

[David]

Do you find that oftentimes this is the saying it's the player coach, the great investor is also builds the the firm because out of necessity or do you find that they. They bring in other talent in your actual portfolio? What, what tends to happen and what do you think should happen from a

[Anit]

best practice necessity is never good. It happens but you want to have a, you know, a glide path to what success looks like. We ask those questions, you know, if you're at a Fund 2 or Fund 3, what does success look like? What does a Fund 4 what does a Fund 5 look like? Like what do. What does the resource build look like for. For you internally? And having a business plan or a strategic plan is really important. Oddly enough, you know, GPS will enforce that of their own portfolio companies. Yet if you look at their own businesses and ask them for that, they probably don't exist in many cases. So what is that strategic plan is very important because those are the, those are the, you know, those are the sound bites that get us comfortable with the next fund and then the re up and everything else down the road. And that's where I think there's a little bit of that, you know, a little bit of that dilemma, which is interesting.

[David]

They used to be venture capitalists, didn't use any technology. I think they've since caught up. But it's a funny thing. Well, Anit, this has been absolute masterclass. Thanks so much for taking time and looking forward to doing this again soon.

[Anit]

Thank you, David. Appreciate the time and your wisdom is always appreciated.

[Podcast Host/Announcer]

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