Loading summary
Transcript76 lines
- [00:03]
A
Welcome to the Investor, a podcast where I, Joel Palo Thinkle, your host, dives deep into the minds of the world's most influential institutional investors. In each episode, we sit down with an investor to hear about their journeys and how global markets are driving capital allocation. So join us on this journey as we explore these insights. This is in real time, so hey everybody. I am live today with a good buddy of mine from New York, Matthew. We've done coffees, cocktails, we've built community together. Matthew Bobro is a partner at Fox Rothschild. He develops legal strategies to help investors and sponsors achieve their financial goals through the investment fund life cycle, from formation to liquidation. Matthew has also been a mentor in our fund accelerator, so managers who are looking to kind of develop, build and scale their first fund. Matthew's been just a really good sounding board and mentor, coming in with support and mentorship. His clients include private investment funds, public pension funds, institutional investors. He advises them on regulatory compliance and governance matters and represents them through all stages of fundraising, including fund formation, offerings, side letter negotiations. That's another one. Placement arrangements, secondary transactions this is a disclaimer. Statements and views expressed in this posting are my own and Matthew's own opinions and do not reflect those of his law firm and intended for general, just informational purposes only and do not constitute legal advice or a legal opinion. So did that to cover you, Matthew. I know you got your own disclaimer, but that's the intro.
- [01:50]
B
No, thank you for that, Joel, and it's a pleasure to be here with you today. So I know we've certainly done a lot together, but I feel like there's always more wood to chop, there's always more work to do. So, you know, I can maybe give you just a brief overview of my background, which should be helpful for the audience. And so I guess just to start, my experience going to law school was always with an eye towards helping people and public interest work. And so that eventually led me into the world of big finance after I grew up during the financial crisis. So my first jobs out of law school were at Morgan Stanley and Credit Suisse, and those were very intellectually stimulating opportunities. And eventually I got the opportunity to work for KKR when I was at Debavoice, one of the largest law firms. And so when I was working with them, there's a few other large asset managers I was working with. KKR is really the only one that I'm able to speak about today, but that that world is really different than what you see in the middle market and emerging market for asset managers, we're talking about global flagship fundraises of the tune of 20 billion and up usually for these funds.
- [03:05]
A
Yeah.
- [03:06]
B
So it's, it's much more different in terms of just the type of investor, the amount of capital flowing, the deals that they're doing. Usually these are PE buyout funds or large real estate development type funds or infrastructure funds.
- [03:22]
A
Yeah.
- [03:23]
B
And so with having that experience, I started to realize I really wanted to still help people. And the KKRs of the world don't necessarily need Matt Barbro, they have an army of lawyers. So my representation switched to be more focused on the investor side where I started to take up some of the public pensions you mentioned. And some of the world's largest investors really anchor investors in the world's largest funds. So I've kind of seen both sides of the coin and in my investor side representations I really started to focus more on helping those in the emerging manager community and the middle market asset manager community. And that's just really because I'm usually, I'm seeing what's going on in the broader market from our investor side representation. So I see all the Coleslaw funds, Sequoia, you know, qt, whatever it is, I see it extrapolate out of those fund managers the best lessons learned for our emerging managers and middle market asset managers really to help them get up to that next level. So I'm just really happy to be here with you today to help the community and see what we can do. So, yeah, happy to answer any questions.
- [04:37]
A
Yeah, no, like, I mean, I think it's super important to really think through, through. If you're building a fund, obviously you want to have that foundation to learn how to be an institutional investor. So, you know, a lot of the things that we support people doing with the foundational work is just, you know, learning to evaluate a deal and just helping understand if that is a good investment in your opinion. Right. In venture, you're only going to know maybe 10 years from now, but there's still a, there's still a professional discipline to source deals, screen them, underwrite them, perform the right level of different types of due diligence. Right. There's legal diligence, there's back office due diligence. And then a lot of times if you're going to invest in a direct investment, it's not uncommon to ask for bank statements and kind of really do a thorough analysis because you want to make sure that you do have the opportunity to raise another fund. Right. And not, you know, kill your Reputation. So I think some of the things that I think we can talk about, you know, hot topics, just what are the building blocks? What are the steps to first build a fund? I think a lot of times when managers come to our platform, we try to give them the, the frameworks and the thought process around, like, how should you construct the fund? Right. And one thing that I've been doing, obviously we have so many Excel templates and deck templates that, you know, some of them we've open sour on our website. But I think what's really interesting is, you know, with the, with the future of AI, I think there's opportunities to actually use platforms to kind of wysiwyg a fund and really concept that. So I'm gonna see if I can share just something really quick. And this is something that we've open sourced. Can you guys see my screen?
- [06:32]
B
Yeah. Yeah.
- [06:33]
A
Okay. Yes. If you go to vc, private equity dot com, there's this thing called a fund model. Again, this is still very much a beta, but really, when we think about a fund, how big is the fund, what is the period of the fund and then how are you building the fund? In this example here, there's 17 Series A checks, there's 20 seed checks that are 500K, and then there's a couple Series A's, right? And then you can really see kind of how much dry powder there is. And then again, this is all illustrative based on some data in terms of what that could look like. But in my opinion, like, before you kind of go through the entire legal process, you want to really think through, like, why are you building the fund? And then on top of that, what is your strategy with that fund size? Because they always say, like, your fund size is your strategy. Right. So I think once you've kind of pinned that down, then I think that's kind of where I think you lean in, Matt, and it's like, look, you know what, let's get into a little more of the logistics of obviously making sure that you're following the proper compliance protocols, but you necessarily don't have to form the entire fund already through the entire legal process without actually getting, you know, hopefully some soft commits or some interest in, in some product market fit, essentially. Right? So walk me through kind of, you know, when we, you know, typically, like when we hand off fund managers that have kind of come up with like the idea of potentially wanting a fund. You know, walk us through that process, working with you, you know, in terms of how they should think about that. In, in their mind in terms of like what, what are the, what are the orders of operation that they should think about in terms of setting a fun one?
- [08:18]
B
No, yeah, that's, that's a good intro question, I think. And I, I do have a number of clients that have been successful, I mean first say, first very successful in certain other ventures. And you know, these are people who are kind of masters of the universe in their own respective industries. And maybe they founded a healthcare company that had a giant exit or a climate company. And so the, the focus for them is really how do we take that those lessons learned and multiply them. And really usually the goal is to use third party capital to kind of pour fuel on the fire. That is their thesis, their, their secret sauce. That is really the thing that has given them success in the past and let them stand out among their peers. So when these new emerging managers come to us, I mean I, I certainly can't pretend to, that I am a financial due diligence whiz or, you know, a mathematician and able to, you know, do quantitative research and all that. That's certainly not what I do. But what I can do is I can sort of give the guidance of what an early stage manager investor would be thinking about in these situations. And a lot of times when I have these conversations with first time fund managers, I can kind of tell the light bulb kind of goes off in their head because they stop thinking about the asset management business like a startup, like their original company. They, they start to think about it in a very different way and you sort of start to see them realize all the different complexities and layers that go into setting up this business. So I'll give you an example. Like when it comes to picking a strategy, like we have a few clients that have come to us and they're kind of even in between PE buyout and hedge fund strategies. And they're sort of saying like, I know how to work the market, I know how to do this, but I also have really good insights and access points. And I'm thinking about trying to just do five or six big deals instead of trading systematically. And so what we're really trying to do in those situations isn't quantify which strategy is going to be more successful, but we try to really almost do a psychological discussion with the founder about what they view as their secret sauce and what is sort of differentiating them from the market. And it could be their thesis in terms of the type of sector of the market they're going after, or it could Be just super broad, like we're an AI fund, but we're going to do it operationally in a very different way or we're going to have a staff set up that compensates people in a different way that could lead to better results. So there's usually something that they can point to to say like, yes, this is why we're not like vanilla and we are something that the market really needs and there's a niche for us in that space. So just as a preliminary step, it's always let's pin down what the most successful or most differentiated strategy could be and then once you get a hold of what that underlying strategy is, you start to really understand what the underlying assets are going to be. And then once you have a sense of what the underlying assets are going to be, you can really start to think about what the fund structure should look like. Yeah, you know, obviously we have funds that are VC funds that are more early stage and the assets are going to be much more illiquid for longer periods of time. And on the flip side, we have hedge funds that are super liquid and are able to generate liquidity for the investors really whenever they need, sometimes daily. So just even these are two extremes. But those different asset classes will mean that one fund will be better suited to be open ended or evergreen and the other fund is more suited to be closed ended. And those just that initial decision as to are we doing an open ended structure or a closed ended structure is one of the most important decisions you're going to make and it's just completely tied to what the asset is. Sometimes you're not making a decision open ended or closed ended, you're making a decision on what type of assets we're going to be focused on. So that's, that's sort of the initial question. There's obviously a lot more that goes into all the different features of a fund, the term, the investment period, things like that, those will all stem from again the underlying asset and, and what that secret sauce opportunity is. So yeah, that should round it out.
- [13:01]
A
Yeah, absolutely. What are the biggest differences that you've seen with hedge fund managers versus just private equity fund managers? Now obviously we all know like the difference between the asset class, but what are some characteristics that you or nuances to think through maybe from the fund strategy perspective, but also on the compliance and legal perspective as well?
- [13:25]
B
Sure, yeah. I think, you know, internally probably one of the most important differentiators that certain founders don't really think about initially is the economics of staff, how the different strategy will impact your ability to pay staff over different time horizons. So you know, hedge funds are going to have different vesting periods for carry interests and the GP for different staff members. And strategies that are able to demonstrate profitability a lot quicker are obviously going to lend themselves to being able to create quicker incentives for those staff members that are actually performing the investment decisions. And then on the other side is you know, re see or buyout and you have asset managers that are creating value that might not actually be realized for 10, 12 years down the road. And so they have more complicated decisions on how compensation should work for those staff members. And you know that I'll cut to the chase, the vesting periods are really the main differentiating points there. So you'll see more variability and cliffs and overall vesting period lengths themselves and maybe even you get creative on performance features or attributes of the vesting period. So it's not just time based. So there's a lot that the asset managers will do to make that a function of again the underlying asset and what, what capital and economics are really available. And I'll also just call out too that you know, even initially when you're seeding these funds, a hedge fund, it's the, the lending that you're able to attract. The, the credit that you can attract in these different strategies will be vastly different. So certain asset managers will warehouse like a PE buyout opportunity that they're going to put into their fund if that is a revenue generating business. If there's hard assets there, it's a lot easier to get a market rate loan or even a below market rate loan to warehouse that asset, collateralize the fees that you're going to get from the fund. And it's very easy. Then you can kind of see a world where you don't need even to soft circle capital before you're out there able to start making investment decisions. So, and that's very different from the hedge fund world which operates more on a margin type protocol. And so you're, you know, you can't buy a basket of equities and do that without the margin that you know that'll lead to higher interest rates.
- [16:03]
A
So. Well, I think also with hedge funds I mean there's real time settlement at the end of the day, right. So you'll know if you're up or down by the end of the day versus in private equity you can you know, hypothetically warehouse some deal that hypothetically could be a portfolio company and, and it's more of like a showcase vers Sources with hedge highly liquid. So you should know immediately what your sharp ratio is and if you've delivered any returns at all. And then, and then I'm assuming, have there been any redemptions. So that's kind of an interesting concept as well, where it may not be relevant in private markets.
- [16:43]
B
No, that's absolutely right. I mean, the liquidity features alone are going to completely change the dynamics of those funds. So you're absolutely right.
- [16:51]
A
What are some observations that you've seen with these crossover funds? Right, because crossover funds for the audience are essentially a hedge fund that, that does some private markets investing. So you know, obviously Tiger Global was one of the notable ones. There's a handful of other ones. But what are some trends that you're seeing with kind of cross cross strategies where there's a hedge strategy and then they're also doing maybe some growth equity deals that maybe flow into public markets one day as well?
- [17:20]
B
Yeah, no, it's an interesting question. I've actually had a handful of clients that have come to me with this very strategy in the past week. It's, it's usually with an eye towards trying to eventually pick one or, or because it's coming from a place where they have an investor that's asking them for one strategy and then they have another investor that's asking them for this and they're, they're trying to kind of, you know, do both at the same time.
- [17:46]
A
They're trying to do both to, to get that investor, essentially get both the investors.
- [17:51]
B
But also, I think there's a strategic niche too. If you can do that strategy correctly, you're able to leverage a lot of the insights from private markets and help inform public market activity and vice versa. So you're kind of hedging your bet in both strategies if you can do them correctly.
- [18:09]
A
Yeah.
- [18:09]
B
So I do think that one thing we've noticed is SMAs have become useful in that regard. So a separate managed account up above can create a situation where those investors can actually have exposure to the hedging activity directly from the hedge fund. And then if they don't want any of the private asset exposure, they don't get it. They just don't invest in the commingled fund. So that creates optionality because now you're able to satisfy both of the investors that I just mentioned and then a third investor who wants access to everything. So there's certainly a lot of structural options there that can lead to their investor opportunities.
- [18:52]
A
Absolutely. And then walk us through. Maybe we start with private equity and venture capital the steps to actually get the fund off the ground, get it launched. Right. So obviously in the past, you know, we do have some templates that Matthew shared in terms of like soft circling. So how do you actually think through, you know, getting interest before you actually, you know, spend all the money and do all the work? Are there, are there ways to kind of just, number one, see if there's a minimum viable fund or is there a product market fit or interest in your strategy? And I think you make a good point. There's a lot of strategies, I feel, that lean into what the manager's background has been. Right. So if you worked in supply chain, there's a good friend of mine, she's worked in supply chain and logistics for decades and now she's like, her fund is focused on the supply chain. So it makes total sense. And when you think about your fund story, it resonates with people. There's a manager, I think we have a common friend. This person, unfortunately, you know, dealt with cancer but survived cancer and now has a fund called, that's focused on the, the entire ecosystem around cancer technology. So you can lean into who you were and help that form who you want to become on the asset management side.
- [20:20]
B
Yeah, no, I agree. I think the, the managers that I've seen most successful are the ones that do lean in or have, you know, some, some secret sauce that they're able to really demonstrate. And just to your point about getting off the ground, I think, you know, certainly warehousing aside, you know, there, there's a template that I like to use that's essentially a blank term sheet where I suggest to early stage managers that they essentially do a form of market sounding before conducting their securities offering. So in this way, they are essentially taking the temperature of the market and trying to understand what terms would be palatable if they were to go forward with the offering. So a good example is a client who says, hey, this is my deck. I had an attorney review the deck. And that process of reviewing a deck can be two to five hours. It's not going to break the bank. And you put that deck into a data room that has an NDA type disclosure confidentiality agreement as a wrapper for anyone who goes into the data room. And in that wrapper you would also include a traditional accredited investor question as well. So even in the off chance that anyone ever said this was an offering, you already have a questionnaire process where somebody's essentially said they're accredited anyway. So this is literally the most conservative approach. And at the same Time creates very, very little cost for an early stage manager. All they need is a data room, a deck and a blank term sheet.
- [21:57]
A
Sure.
- [21:58]
B
From there you go out, you have the conversations with the market. People will say, I love your deck. If you have a good secret sauce, good strategy, I love your deck. Tell me how much this costs, what are the fees? And where we see a lot of early stage managers stumble is they say what the fees they want to be are. This is 2 and 20. And what ends up happening is those investors might have had a number genre in their head where they said, okay, I'll go, you know, 1 in 10 for this type of fund, or I will only do 2 in 20 if it's has been around for X number of years. So what's really more helpful is to say, what do you want the terms to be, Mr. Investor?
- [22:44]
A
Yeah.
- [22:45]
B
And in that way we've seen a lot of success.
- [22:48]
A
And the important thing is this is a non binding agreement. Right. They're, they're kind of, I mean they still sign it. Right. But it's not, it's not binding.
- [22:59]
B
Technical difficulties. Joe, I can't hear you. You're cracking up.
- [23:02]
A
Can you hear me? How about now? Any better? I can hear you. Okay, I lost you. I lost your eye. I see you and I see.
- [23:15]
B
I can't hear you. Joel.
- [23:19]
A
Let me just check my audio here. Sorry about that. How about now? Any better?
- [23:28]
B
You sound a little choppy. I can't really understand you.
- [23:34]
A
Here, let me do this.
- [23:39]
B
Now I can see you.
- [23:41]
A
Is that any better?
- [23:43]
B
It's a little better. I can see you now.
- [23:45]
A
Okay, Yeah, I can hear. I can hear you fine. You can't hear me at all or it's just a little.
- [23:52]
B
Now I can hear you a little better. Yeah, before I see you and sounded a little. You're not clear, actually.
- [23:58]
A
Okay, great. Cool. Yeah, sorry about that. So what I was going to say is, you know, the important thing is that agreement is not binding. Right. So it's, it is an agreement that they sign. It's a letter of good faith. It's not binding, but at least you can develop some type of relationship or just a documentation of some interest and then maybe that can upgrade to a binding level of interest once there's that trust built and credibility built.
- [24:28]
B
Yeah, no, I think that's right. And if it's a situation where you've done what I suggested and they fill in the term sheet themselves and they say, well, heck, I would do it for 50 million if you did it this way and that Way and that way.
- [24:43]
A
Sure.
- [24:43]
B
I think you'll find that it's. You're, you're not. That person is rarely going to go back on what they said. If they said this looks good, I would do it this way. And please go and draft everything. You're, you're usually able to sleep at night. So it, I think that's usually the best approach.
- [25:00]
A
And then you get those soft commitments and then just, just to kind of think about the logistics, right? So you get those soft commitments into the fund, you had some warehouse deals and then what's kind of the gradual next step? It's like look, I have these deals you soft committed. Now we're doing our first close. Now this is real. We're actually going to be doing our first close. You have a date, right? And usually the first close is probably like a fourth of the fund or something like that. It's like look, we're doing our first close on March 1st. So look, this is the deadline and then I think at that point that's when you, they can hopefully get the subscription documents and kind of. And so it's essentially, you know, walk us through this. But it's usually three documents, right? It's a subscription document, the limited partnership agreement and then the offering memo usually. Right?
- [25:47]
B
That's right. I think you'll see some variability in that. You might see early stage managers use just two documents, the limited partnership agreement and a subscription booklet. From a legal perspective, that's totally fine. What we really need in the subscription booklet is the risk factors and really clear comparison of the risks and the potential rewards. So usually seeing that summary of principal terms section that you would normally see in a PPM or offering document and just essentially copying and pasting it into a subscription booklet with a set of risk factors and usually some bios about the principles. But with those basic points of information, it's usually a lot cheaper for a first time fund manager than doing a full offering document like a PPM that goes into usually just too much detail for like there's not usually a lot of track record or performance history first time. So the sub doc process is usually the better way to go. But I will also just say as well, so after you soft circle, if you actually have an anchor that is saying hey yeah, if you do it this way I'm in for X amount of millions at that point you can go to your lawyer and just get those documents drafted and I would immediately do that. I mean you really don't need to be waiting until you've soft Circled enough capital that closing, I think you get one good anchor, soft circle. Go get the offering documents drafted, get that investor to sign a subscription booklet, formally committing based on the terms that he just wrote out and then move on to the next one. And you know, I think you'll find that if you can do that in a consistent way where you're just gathering signed sub books, you don't really need to think too hard about, okay, what, where, when is my closing? It'll just happen naturally. You'll say, oh well, I just got the other investor I needed to go and do that deal. I saw let's do the closing next month.
- [27:53]
A
A lot of times too, it's like, you know, it's all about momentum, right. So you got, let's say you got 20 million in soft commitments, but you got one anchor that's going to write a 30 million dollar check. A lot of times like just saying, hey guys, by the way, want to get you fired up. You know, we're doing our first close in March, but we already got an anchor. It's this XYZ endowment. How can you kind of plug that in a way that you don't piss off the endowment? You probably want to get some permission and say, because it's going to help the endowment too, right? Because they're going to, they're going to be, they're going to want to know that they're not the only investor in the fund. So is there a way that you can get permission to say, hey, you know, what is it okay if I say that the, you know, the Ford foundation invested, you know, they're an anchor, by the way, you know, do you new usually need to get some type of permission to kind of plug their name in? Because I feel like it's a win, win across the board for everybody. Right. The Ford foundation, obviously, if they're the only anchor, they're, they're, they're underwriting their risk. They want to make sure that the fund gets close and they're not the only investor. Right. So I think using their name definitely helps. What, what are the nuances with that from a legal perspective?
- [28:58]
B
Yeah, sure. And you cracked up just a little bit at the end.
- [29:01]
A
Any better now? Is it okay?
- [29:03]
B
Yeah, I think I got the gist about endowment and how to not, you know, necessarily annoy your earlier investor, but maybe get the ability to use them in your fundraise efforts. Is that, that's kind of just. Yeah. So I think certainly there's a lot of ways to do that. So I think More and more we're seeing GP staking occur with our early stage managers where the anchor investors are actually taking interests in the platform itself, not just the fund.
- [29:34]
A
Yeah.
- [29:35]
B
And when you see that those types of gp, GP staking arrangements or GP financings, the sponsors involved in that usually do not want their information shared unless they actually are investing in the fund as well. So when you get somebody who's an anchor investing in the fund and JP staking opportunity at the same time, it's almost like a JV type of arrangement where you have an investor who maybe is, to your point about our mutual friend in the distribution vertical, like maybe they're getting a family that owns a distribution related business as their anchor and that family is going to introduce 10 other families or endowments or other investor types that are interested in the space. So they sort of feel like entitled to part of that GP upside that you know, the fund manager would normally get. So we're, we're seeing a lot more of that where I think fund managers as a whole in the market have sort of realized that there's, there's enough pie to go around and it's definitely a lot better to have half of the whole pie instead of like you know, a quarter of nothing. So I think if, if people are out there and there are opportunities to introduce new investors, our early stage managers have become a lot more open to allowing that type of economic arrangement where, you know, maybe we are allowed to use the name of this anchor investor and use it as part of our marketing efforts. And the way that that anchor investor feels comfortable with it is there's some economics that they're receiving as part of their first investment on, on top of the traditional discounts you would see.
- [31:18]
A
Yeah, some of these, I mean, I think the GP staking business is one of the best investments. I mean one of the best strategies from an allocator perspective. If you're a massive family office and you just, you know, have bolted on a GP staking business within your family, I think it's really interesting because you get, you get all the revenue from the management fees over time plus you get a percentage of the, the, the carry. So essentially you're getting part of the business of the fund. And then, you know, the, the benefit to fund managers is really that they can just focus on doing what they're doing, which is deploying capital and finding great companies to hopefully 3x or 5x, whatever the benchmark is. But usually it's like a, for emerging managers, it's like a 5x as a benchmark, cash on cash, you know. So I think that's, it's a great beautiful business if you can get into that space. You need obviously significant amounts of capital. But you know, just the LP position, you know, depending on the net IRR may not be enough to really move the needle. A lot of times those LPs are looking for co investment opportunities to kind of drive the, the top line performance because it's a diversified portfolio, it's a ten year fund. Right. So you're not getting necessarily getting outsized returns unless there's some co investing opportunities. But you get that compounding wealth creation if you're doing the GP stakes and then, and then to your point, like if there's some incentive or if the GP stake, I mean some GP stakes funds or LPs, what I've seen in the past is they also put parameters in where you get, they unlock some of the benefits or the capital. As a GP stakes investor, if capital is raised, so there's some milestones to raise capital because obviously they generate revenue from the management fees. Right. So like it behooves them especially if they're a well known brand to put their name on the logo for marketing efforts because it's helping their fund that they've invested in.
- [33:28]
B
Sure, sure, absolutely. I do think there's probably a lot in the market affecting that rising tide of GP staking opportunities. I think I have a large Japanese client that is investing billions into US based asset managers just because they need more exposure to the US market generally. So I think you're also seeing a lot of investors out there, well capitalized investors that are looking at these opportunities and saying I just need exposure as much as I can get to the US market. So those are clients. I mean that client is starting a GP staking business and doubling down with fund of funds and other big investment banks like the Stifels of the world. But you know there's, there's sometimes just not enough opportunity and so you kind of create new ways of getting in on it. And I think that's a little bit of what we're seeing here too.
- [34:21]
A
I mean the, the main benefit of investing into hedge is the flexibility like to get out if you want to. So you can do, you know some of these hedge. I've been looking at some managers that are hedge fund managers. You can get out within the quarter, you know, if you want. But what they try to do is make it irresistible where you know, they showcase that they generated some, some returns for you. But with venture you're pretty much locked in for a decade. You know, there's, unless there's some secondary opportunities, but that's usually at the direct investment level, not at the fund level. So I think that's kind of the nuance that I've seen. So I think a lot of these allocators have like a multi asset approach. They do some hedge, they do some private equity, some venture, maybe some real estate as well. And then they, at the top level they have some type of portfolio construction at the allocator level.
- [35:16]
B
No, I think that's right. I mean there's a lot of variability in the market but you know, I've seen all different rationales for coming into the base. I don't know if you've seen GP financing start to take off too, a little bit. But also I think I'd be remiss if I didn't mention to the secondaries market and just how that started to impact this space as well. Because I mean we have secondary fund clients now that are open to buying secondary interests at discounts to NAV, of course, but of early stage managers. And so I think that's just creating more of a opportunity for that initial investor because they might not have to really even bet on the full life of the fund. They can say, all right, let's get that one or two good assets that we know are warehoused and experience some dpi, a bump in nav and then you sell it down and you're still up at the end of the day, you know, not even halfway through the life of the fund. So and the secondary fund clients love it too because they're getting more exposure for their clients. So I do think that there's just a natural urge for more of these opportunities and the, the market has just become more creative at creating them through.
- [36:29]
A
So let's talk about that. There's opportunities to sell side pocket deals as a fund manager to your existing lps and then I think there's opportunity to sell pro rata rights as an spv. Right. And then, and then obviously there's some deals that have a small exit and you can take advantage of that. That's, there's a benefit to that because some of these founders that were co founders of these companies, they've been eating ramen for the last 10 years, right? And now they, now they, their kids are, their kids are getting ready to go to college. So they, they would probably be interested in getting some liquidity to be able to enjoy some of the fruits of their labor. And then obviously the fund managers want to put darts on the board and showcase maybe some DPI or some performance or some liquidity that they can give back to their LPs. Talk through how secondaries can help with that. Obviously, double clicking on some of the examples I mentioned, along with some other ones that maybe you've seen.
- [37:29]
B
Yeah, sure. I mean, I think in general what's happening is there's just more of an acceptance in the private investment community for secondaries of all types. I mean, I remember when I first started doing this a little over a decade ago, and continuation funds were kind of like a black hole. Like, no one really knew what going down that path would mean for a large asset manager. And fast forward to where we are today, it'd be crazy to not have a continuation fund for some of these larger fund managers. I think also just even in the secondary fund community, there were never options for these investors to exit anywhere close to 10% of NAV or 20% of NAV. I think in the past you were a slave to the asset managers, potentially yearly transfer schedule, or at best, quarterly. And now pretty much all the asset managers in the community have monthly schedules and they don't charge the fees or the expenses that they used to, to facilitate those transactions. So I think there's been just a lot of interest from the bigger investors in those funds to say, hey, look like we've been with you for 10 years and we really like what you're doing, but why can't we get some liquidity out of this and maybe also increase the value of our investment and with that, the value of your platform by just creating a few more options? And, and I think overall, people, I mean, initially, I think. Right. Like, people, I think sometimes forget just how recent the private equity growth in this country has been. But Dodd Frank was what, about a decade ago now? It's not that long. You know, a lot of this risk was on investment bank balance sheets. And now we have private managers like Aries and, and others that are sort of cornering the market for certain types of funds. And with that, you see fee growth kind of pushed up against the wall where the bigger firms can charge more. And that creates an opportunity for these asset managers that maybe 10 years ago there wasn't even the opportunity. Now there is. So you can get the same access. They can go with a lead investor that's, you know, like the person who cornered the market, get the same access and then charge half the fees. And so you're, you're creating a lot more options for the investor to get into the opportunity and at the same time more options for them to exit the opportunity like we were just describing with SPVs and otherwise. So I do think that it's just going to continue. I mean the, the one thing that I would say is there's a lot of risk built into that secondaries market. And you know, the reason why it was so close to the chest of asset managers originally was to reduce a lot of those risks from regulatory to just fraud risk. So you know, it's certainly not escaping people that with the crazy prices we're seeing in the private markets for some of these private businesses that you know, 10, 20 years ago would have just been public companies, now they're staying private for longer. And you know, I think what was it Anthropics closing was yesterday And I, I think there's probably been more fraud in the market for that closing than maybe any other, any other stock that I've seen, you know, a couple decades.
- [40:49]
A
Yeah, I mean that's a hot topic. I mean I, you know I promised we'd bring that up but I mean so, so a lot of the managers, if they're not ready to start their fund, they'll do these SPVs right special purpose vehicles and they, they see these shiny names like Anthropic or open AI. So there's a lot of these hot deals. But I think the unknown is, and you're going to share some, you know, examples too of like Jenna, what you've seen but it's like are you really investing into Anthropic or are you investing in a fund and then are there like three levels below you that, that, that are actually getting into the fund that all that are all charging fees. And then I think the biggest risk is like if you, if you go out and raise capital saying look, you know, I got, I got Anthropic or I got this really hot deal and then the group that you're working with doesn't actually have the deal. That's a, that's a huge concern. So that's kind of the biggest thing that I've kind of heard about in terms of just kind of the supply and demand and then maybe the supply actually not being there but would love your thoughts around best practices are people as people are navigating secondaries and late stage investing, whether it's an SPV or the purpose is to kind of build a track record and say hey I did, you know, I did this really well known late stage deal. How, how should people start thinking about that and Navigating through that.
- [42:18]
B
Yeah, sure. I think I'm happy to speak about this just because the closing eventhropic just happened and I feel like I've had probably 20 clients in the past couple weeks ask about this very issue. I think I just wrote an article that was published a few days ago about it. So feel free to look that up or send it out after this. But there's a few key issues that I think any investor in the space needs to be looking for. So we help sponsors set up opportunities for these types of products and we help investors get into them. So when I have an investor that presents an opportunity and the sponsor is doing literally everything that I would not do, those are usually red flags, as I would say.
- [43:03]
A
So what are those things? Are you allowed to kind of share some of those examples of what you would not do?
- [43:07]
B
Yeah, sure. I'm happy to get into all of it.
- [43:09]
A
Hopefully this episode will create some impact to make sure those people don't do those things.
- [43:13]
B
Yeah, I mean, it's usually not that difficult to actually do these things. It's really a firm that is actually, you know, established and has been doing this for a while and isn't just fly by night and trying to, you know, take $5 million for some paperwork. They'll. They'll be able to accomplish these things pretty easily if they just hire a good lawyer. Doesn't even need to be me. There's. There's a ton of us out there, but any good lawyer would help them understand these issues. So the first one is really disclosure. So the SEC has informed investor rules that are really based off no action letters and some informal guidance as well that the SEC's put out over the past 30, 40 years. And so those informed investor rules really require an investor to see the underlying asset to understand the risks associated with what they're investing into. So when I see investment documents for an spv, the first thing I ask for is where are the underlying investment documents RSPVs that we form for clients that I'm not going to say, but are very much like anthropic, we would attach as an appendix to the subscription booklet an exhibit that shows the actual document that the SPV is going to sign. So you're able to see all of the risks that are baked into the underlying assets documents, mainly because we don't want to have to rewrite them and redraft them and charge our clients clients when disclosure is already there. So if I get a broker who's presenting my client with an investment opportunity and they say, hey, look at this sub book. It says anthropic on like under the word project. But there's no disclosures whatsoever. There's no investment documents. That's red flag number one. So, you know, no investment documents initially. Just be skeptical. There's sometimes they'll say, we're under an NDA. We can't give them to you. That's wrong. You can redact the sensitive portions of those documents. And the NDAs as well usually have carve outs for investors. So there's really no good reason for you not to at least see some type of underlying document. So that's one. Number two is the status of the sponsor that you're investing with. So a lot of times there's a lot of just messiness in the industry. But the way it's supposed to be done is if you're raising capital in the United States and you're advising clients on where to allocate that capital, like with investment management for funds, you would be either registered with the sec, filing as exempt reporting advisor with the SEC or have some state filing that's being done if you're small enough so we can look all of that information up. You know, the SEC is a public database of these records. And so the form adv is the first thing I would look for. And all of the form advs for our clients that are raising capital have a private fund line item where it says the name of the fund that's raising capital. And you wouldn't think this is that complicated, right? I told you, it's pretty simple stuff. But we'll get investment opportunities from sponsors that have names that sound like registered investment advisors. Or maybe they are a registered investment advisor. But you go to their form advantage and you look on the private fund section and there's like nothing there. Or there's like 20 million in assets, but on their website it says like 2 billion. And you're like, I'll give you a good example. I had a situation, I reviewed a format and it said Silicon Valley bank as the banker for the advisor. And I'm like, this hasn't been updated since Silicon Valley bank was around. And I'm just like, oh wow, these guys are kind of just running around trying to get capital in the door without thinking through all of these issues. And what that really says to my investor is the SEC isn't looking at this guy, right? Like he hasn't really been examined or he's not filing the right paperwork and no one cares. So it just creates another red Flag, like someone who's registered with the sec who has their form ATV updated. I'm like, check box. Like, that's great. Oh, we have the investment documents box. Like, great. You get those two things, you know, you're. You're in much better territory now.
- [47:45]
A
Yeah.
- [47:45]
B
Can't say there's no fraud, but if you. If you can get those two things, usually your attorney, it's usually a badge.
- [47:51]
A
Of legitimacy, too, if you've got some of those checkboxes placed.
- [47:55]
B
Yeah, that's right. I mean, I. I think I'll leave it with those two just because I don't want to, you know, over saturate this conversation.
- [48:03]
A
We'll need another hour.
- [48:04]
B
Yeah, exactly.
- [48:06]
A
Well, hey, so, Matt, why don't you share maybe one or two pieces of wisdom? You know, it could be from a family member, it could be from a mentor, could be from maybe a client that you look up to. Right. So what do you got for us? Whatever you want to leave with us to take away would appreciate it.
- [48:25]
B
Yeah, thanks, Joel. I guess the one thing that I try to do every day is what I'll leave you with, which is make yourself better, but also make everyone else better. And by that I mean to really excel in this industry, investment management on the legal side or the investor side, you need to suspend self interest. You need to really think of ways of putting the investor above yourself. It's literally what fiduciary duties are all about. And I think you'll find that if you're doing that, you're making yourself better, you're making them better, you're going to find yourself in a better place. And even more importantly, you're going to feel good. So, yeah, I'll leave you with that.
- [49:04]
A
I love it. Do good by doing good, right?
- [49:06]
B
Yeah, exactly.
- [49:08]
A
Well, thank you so much, Matthew. Really appreciate it. And we'll catch up soon. And everybody else, have a great day.
- [49:14]
B
Yeah, thanks, Joel. Thanks, everyone.
- [49:17]
A
Bye.
- [49:23]
B
Sam.