YouSaid · the spoken record

Erik Serrano

lines on the record: 96
first: 2024-01-02
most recent: 2024-01-02
sittings or episodes: 1
sources: podcast

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“Actually, it means being willing to say something tricky. Between both of you. And then my mom, after my dad had passed, and I was at University at the time, she was like, whatever happens, I'm going to be okay. I'm an only child. My mom's an only child, so she doesn't have a lot of help. She was like, you need to go live your life. And now as a parent, I'm like, wow, that's amazing. I want my children to be with me forever. Like, I don't want them to leave home. And so that for me is really the kindest thing to put others first in that way is true kindness.”
2024-01-02 · Invest Like the Best · Erik Serrano - Investing in Investment Firms - [Invest Like the Best, EP.358] · IDENTIFIED FROM THE TRANSCRIPT · source
“So I gave this a lot of thought. I love that it's predictable as opposed to all your other questions, which make you think really hard. And it's not super original. I think I find most people or many people go here, but I think it has to be my parents. And one thing that was really meaningful in my life, unfortunately, my dad passed when I was 18. And while he was sick, he died of cancer. The only time I'd seen him cry was when I'd gotten into Oxford Free University, where I went to undergrad. And then the second time I saw him cry was when I came back home and found out that he was sick. And I was like, dad, don't cry. You know, you'll be fine. And he's like, no, I'm not crying for me. I'm crying for you because, you know, I might not be here. And becoming a dad has been a really amazing experience because for me, kindness has this element of self-sacrifice, but also willingness to be uncomfortable. So like telling people the truth or uncomfortable things I think is quite kind. Like when you forecast something or predict something, being kind.”
2024-01-02 · Invest Like the Best · Erik Serrano - Investing in Investment Firms - [Invest Like the Best, EP.358] · IDENTIFIED FROM THE TRANSCRIPT · source
“Sure enough, yeah. You have to be honest with yourself of attributing your success to what factors, and I think just starting early, you had more time to get it right. It wasn't like you were this sort of genius.”
2024-01-02 · Invest Like the Best · Erik Serrano - Investing in Investment Firms - [Invest Like the Best, EP.358] · IDENTIFIED FROM THE TRANSCRIPT · source
“And that's maybe just compounding, right? Just staying in the game. It's like you're not smarter or anything, you like have more years in a way. And that's why these big legends sometimes as well, you'll notice they all live quite long lives.”
2024-01-02 · Invest Like the Best · Erik Serrano - Investing in Investment Firms - [Invest Like the Best, EP.358] · IDENTIFIED FROM THE TRANSCRIPT · source
“Maybe if your returns go from 19 to 18 or your wealth goes from like 7 billion to 6 billion, but it's not linear. Like you spend a lot more time with people you loved.”
2024-01-02 · Invest Like the Best · Erik Serrano - Investing in Investment Firms - [Invest Like the Best, EP.358] · IDENTIFIED FROM THE TRANSCRIPT · source
“A good relationship with your team is actually really important. And I don't always find that consistently. I do think there is a price and a cost to pay. And people don't talk about it a lot because it's a high cost. A lot of really successful people, you see that it comes at the cost of not spending time with their wife or husband or not spending enough time with their kids. But I do encourage people to try and find a balance through some structure when I've seen founders struggling not being judgy is really important. That's one thing that the market is bad at, as I mentioned. It doesn't encourage true feeling revelation. I tend to share my own life journey or issues in security. It's a two-way street. You need to earn the right for someone to be truthful and show their vulnerabilities. And in the investing world, because it's all focused on money and returns is a bit difficult. But I think that's one of these learnings of talking to really successful people that”
2024-01-02 · Invest Like the Best · Erik Serrano - Investing in Investment Firms - [Invest Like the Best, EP.358] · IDENTIFIED FROM THE TRANSCRIPT · source
“Super underrated about getting married is that people don't tell you what a better investor that probably makes you if finding a life partner is something very important to you, which it was for me. Obviously, some people might not think that's the case. And then they'll have to find extra bandwidth on another development of their life. But I think I do think there's this harsh trade-off that is not spoken about. It's a bit taboo because it's sad and harsh to some extent, which is every hour you're with your family or with your kids now as a dad is an hour you're not investing. There's very little substitute for hours because all those hours compound, be it your knowledge or your network or your analysis, whatever your edge is in investing. And here I'm sort of bringing back to investing, but I think it applies to life and whatever your mission and calling is. But I think that's an important thing to think about. And for me, a balance that still retains a happy, stable life at home, but also...”
2024-01-02 · Invest Like the Best · Erik Serrano - Investing in Investment Firms - [Invest Like the Best, EP.358] · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, so there is data on the impact of divorce on performance. As you can imagine and forecast, it's not good. One of the things we do, it's stable before we fund a founder is to ideally, if they have a partner, meet the partner, go for dinner. I think it's so important to have a support network around you. And that can be provided by a few things. It doesn't necessarily have to be a partner. It could be religion or it could be sports or it could be something that you feel you belong to. But when those darkest times when returns are really poor, there's an old aphorism that you should always back a married founder. And that's something that I loved about getting married. I didn't realize this a priori. But after I got married, and I love these surprises because in life, things I didn't predict are huge teachers. And one thing I was like, wow, I have like 20 or 30% more mental bandwidth after I got married. And that was basically I was spending 20 or 30% of my time looking for a great life partner. And I was so lucky to find them. And that was a huge bonus. I think that's something.”
2024-01-02 · Invest Like the Best · Erik Serrano - Investing in Investment Firms - [Invest Like the Best, EP.358] · IDENTIFIED FROM THE TRANSCRIPT · source
“High returns and wealth and financial success will come through that too. But I think at least personally, my aspirations is I want to be a good citizen. I want to be a good husband. I want to be a good dad. And so there's other definitions of success that I encourage people to try and make contiguous to building a great investment firm and delivering great returns. And I think our conclusion there was that it's not a consistent game strategy to necessarily always win and crush the opponent and that things like generosity being helping people who are coming behind or even just in a transactional relationship, making sure that the other party is also winning is something that compounds your own success.”
2024-01-02 · Invest Like the Best · Erik Serrano - Investing in Investment Firms - [Invest Like the Best, EP.358] · IDENTIFIED FROM THE TRANSCRIPT · source
“I like to think, and I'm a bit of an optimist, delusional optimist somehow. We do these things called Seeds of Wisdom at the farm, and we wrote a piece around do nice people finish last. And I think about that a lot because I think particularly in investing, there seems to be some return to disagreeableness. When you look at the people that succeed in our industry, and again, I'm giving success a pretty narrow definition of financial.”
2024-01-02 · Invest Like the Best · Erik Serrano - Investing in Investment Firms - [Invest Like the Best, EP.358] · IDENTIFIED FROM THE TRANSCRIPT · source
“Sort of bootstrapping phase is that then you can take more risk. You don't have to rely on luck and path dependency to get there. Taking risk is a huge privilege, which again is something I tell my founders. People who have very little, they can't afford to lose it. So being able to put chips on the table means you have enough chips to lose them because we're not always going to get things right. And so actually one thing that's quite encouraging for that Fundless sponsored GP listening is that it actually just gets easier in a way because you can afford to trip. Whereas early on Those first eight, nine years of the business for me were incredibly stressful because I knew that I didn't really have that much margin of safety. There wasn't that much buffer. And when things started going wrong, things just got incredibly close to that line on the inventory where we weren't coming back.”
2024-01-02 · Invest Like the Best · Erik Serrano - Investing in Investment Firms - [Invest Like the Best, EP.358] · IDENTIFIED FROM THE TRANSCRIPT · source
“Make sure you're taking bets that if they don't go well, you still have time to go back to the table. So it's almost this live to fight another day. Because if you get lucky and your outcomes are good to the upside, then it might have seemed like the right answer. But what I see funless sponsors getting wrong often is that they might take excessive risk because they want to get there faster. But if you're just patient and more long-term and you are in investments that even if they start going wrong, there's ways to correct them so that the outcome doesn't end up being bad. And that might be cutting your losses or pivoting or exiting that investment and trying a new one. But just make sure there's this operations concept that I liked where it's like a quadratic equation of inventory of when you need to have more inventory. And I think of life a bit like that. You need to stay at this level where it goes down, down, down, but you can't go over this alert level because you're not going to come back from that. The beauty after the funless sponsor.”
2024-01-02 · Invest Like the Best · Erik Serrano - Investing in Investment Firms - [Invest Like the Best, EP.358] · IDENTIFIED FROM THE TRANSCRIPT · source
“Insight there again is a bit what we've been talking about, which is I was focused all the time on the firm, the business, the founding team that I was putting together. And I failed to really focus on the asset owner side of the equation about who am I serving? What does a capital want? What are the risks they're facing in backing me? I mean, it seems like most insightful things, they seem very insightful in hindsight, or once you're explaining, they seem quite obvious, but I didn't, I wasn't quick enough or smart enough to figure this out. On the asset owner side, you need to make sure they can build a portfolio because all of these things won't succeed. And so I think of one advice for the funless sponsor phase.”
2024-01-02 · Invest Like the Best · Erik Serrano - Investing in Investment Firms - [Invest Like the Best, EP.358] · IDENTIFIED FROM THE TRANSCRIPT · source
“Sometimes assessing fundless sponsors where there's a fine line between keeping the confidence and it coming together and then over promising or being disingenuous about is the capital really there is the team really going I think honesty and reputation is something that you'll take a while to build and you'll lose really quickly. Doing it one at a time. It's a lot of sweat equity. I was the de facto sort of team member at a lot of these firms because we didn't have resources to build it. So each firm I was playing a role. And for me, the hardest part was the distribution side because I was coming and an analyst at Bain. I felt like I had a good grasp of the investing side and also the operational side. But the distribution side is very complicated and raising money no one tells you how to do it. And I have huge respect for salespeople because it's a really tough job. It's super hard on the ego. You get so many no's. You often don't know why people say no. But that was the last piece for me that the”
2024-01-02 · Invest Like the Best · Erik Serrano - Investing in Investment Firms - [Invest Like the Best, EP.358] · IDENTIFIED FROM THE TRANSCRIPT · source
“The name for it, but often they're called fundless sponsors now. And I think necessity is the mother of invention. And when I was starting, I didn't have a track record of doing this. Again, most people laughed me out of the room. I managed to find an asset owner who believed in the mousetrap. And when I was putting together the first investment firm that I helped launch, it was really difficult because you're trying to build a plane at the same time as you're flying it. And you're actually, you need to be really on top of both sides of the equation. You need to be on top of the investment. So putting the team together, the founder, the talent, the business building there. And at the same time, you have to make sure that capital is there. But there's nothing really to due diligence yet and hasn't built yet. So you need to keep the capital aware. And I think there it's all about candid communication to both sides. I think there's a potential risk that I see.”
2024-01-02 · Invest Like the Best · Erik Serrano - Investing in Investment Firms - [Invest Like the Best, EP.358] · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, absolutely. So I think the deal by deal on the public markets is start with a very small amount of capital and sort of try and scale that. It's a bit difficult there because one problem is that investors would often not give credit for your performance on return if it's a really small amount. And sometimes it's fair and sometimes it's unfair. So what I would tell GP would be founders on the public side is make sure it's externally validated. You have a law firm or an administrator or someone who's validating that you weren't changing with benefit of hindsight, but also make analysis of things like liquidity or pricing to say, hey, I could have put, you know, I only had 100K or a million dollars of whatever you're able to scrape from your friends and family. But actually, here's all the data that shows I could be at a much larger size. And these are the externally auditable emails where I said or interactive brokers or something like that. On the private side, absolutely. When I started, I didn't even know.”
2024-01-02 · Invest Like the Best · Erik Serrano - Investing in Investment Firms - [Invest Like the Best, EP.358] · IDENTIFIED FROM THE TRANSCRIPT · source
“You get is a sort of administrative statement once a year, and maybe there's an annual meeting for a few hours with a nice lunch. That to me feels leaving huge amounts of value on the table because that founder you've entrusted with your capital can get you ideas, insights, access, all sorts of other layers of value.”
2024-01-02 · Invest Like the Best · Erik Serrano - Investing in Investment Firms - [Invest Like the Best, EP.358] · IDENTIFIED FROM THE TRANSCRIPT · source
“I'm making this amount of return IRR amoic or annualized or whatever your strategy is measured in. And this amount of risk, however that's measured. And that's sort of a big philosophical question. Is volatility really risk? In privates, you get rid of that. But are you taking more, it's often hard in our view to measure how much risk you actually took for the return? It's really hard to do. In addition to that, then it's also, are you providing knowledge transfer? Are you providing for a way for them to allocate more capital as you grow? Because it's such a big investment to get to know a founder that I think most asset owners would like those relationships to be pretty long term. And that essentially means are you providing capacity, discounted fees, access? All of these things other than performance are really important to asset owners to get more value out of the relationship. I think the less collaborative the relationship is, the less the asset owner gets out of it.”
2024-01-02 · Invest Like the Best · Erik Serrano - Investing in Investment Firms - [Invest Like the Best, EP.358] · IDENTIFIED FROM THE TRANSCRIPT · source
“So that's a sort of more ongoing, forward looking help. A lot of it is future proofing, and a lot of it is firefighting. Because again, going back to the travails of an entrepreneur, I think people forget that founders of investment firms are also entrepreneurs and entrepreneurs, there's just stuff blowing up all the time. And don't get me wrong, every year something that hasn't blown up blows up in new and wonderful ways. And then we learn. But you have this institutional legacy knowledge about what problems arise, how they go wrong, what are the best ways to fix it. And so that's the proposition product, as you mentioned, on the founder side. It's the capital and it's the support. And then maybe moving over to the other side of the equation on the asset owner side, I think that goes back to a bit of what are you actually providing your asset owner with? First and foremost, returns, risk adjusted returns, what do you need to hit, what tolerance do they have for losses? There's not only this basic”
2024-01-02 · Invest Like the Best · Erik Serrano - Investing in Investment Firms - [Invest Like the Best, EP.358] · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, that's just like you've been there. It's like we've watched the whole box set. I know what happens in episode eight. It's like, be careful if what happens in episode eight is bad, let's not go into that room, you know.”
2024-01-02 · Invest Like the Best · Erik Serrano - Investing in Investment Firms - [Invest Like the Best, EP.358] · IDENTIFIED FROM THE TRANSCRIPT · source
“LPs do and need to be very careful about assessing what the patient's downside appetite, particularly an open-ended or sort of public markets investment firms. What are the tolerances there of other investors? Because other investors will, it's not only the investment strategy risk, but other investors' behavior will become a risk for you as an investor. So those are the things that we're helping on pre-investment and post-investment, it's more about being a support function for how do we do this new thing? We've built a lot of businesses right now, so we understand on the life cycle what is happening four, five, six years now the line. We call it future-proofing because you don't know what the demands are going to be in the future. So you structure in a way that you future proof it so that you know that your product is life cycle insulated from the demands future on. But that's not like smart or common sense, no matter what amazing.”
2024-01-02 · Invest Like the Best · Erik Serrano - Investing in Investment Firms - [Invest Like the Best, EP.358] · IDENTIFIED FROM THE TRANSCRIPT · source
“That's been around for a year or two. It's still small, and that's more of an acceleration investment. But we want to be sure that we're supporting you in building your operations to top class standards. So this is hiring the right people, making sure the service providers are right. But it's also nuanced things like what is your valuation policy? Have you thought about the asset liability matching of your strategy in terms of redemptions and subscriptions? I can't tell you how many firms and not even emerging firms, but come across more mature firms where it's clear to us that the subscription and redemption or structure of the vehicles is just not aligned with the investment strategy. That creates these huge risks that you're more liquid, people want their money back, there's tons of blow-ups that have nothing to do with performance. It has to do with a sort of emergency forcing decision that has to do with the duration of the capital. And often that's a real issue.”
2024-01-02 · Invest Like the Best · Erik Serrano - Investing in Investment Firms - [Invest Like the Best, EP.358] · IDENTIFIED FROM THE TRANSCRIPT · source
“Because then there's too much excess management fee. But where that capital is being invested in the Copstock varies lifecycle-wise over time as the product. And then we've talked about capital, but what is the proposition on the support side? And this again goes back to VC-like role, which is, I think one of the differentiators of our approach has been we think founders need help more than they need money. Money is almost like table stakes. And it's a bit meta because in investing money is your product. The fact is you're going to need more things. So those things are HR, it's operations, it's distribution. We think about it in two big functions, operations and distribution. And we try and support you on each one. So there's a framework around pre-launch or pre-investment. You know, often we're seeding something from scratch or we're coming into a firm.”
2024-01-02 · Invest Like the Best · Erik Serrano - Investing in Investment Firms - [Invest Like the Best, EP.358] · IDENTIFIED FROM THE TRANSCRIPT · source
“Jugs aside, that's the way to think about a bit of that ticket size from an LP check. And then on your founder journey, the way I think about it, x-axis is time and y-axis is capstack. As time progresses, you go on this curve as the firm progresses and it's like, first is working capital, then it's LP check, then it's co-investment capital, then it's growth capital. And all the needs that you need to satisfy from a funding perspective to build an exceptional firm. And that's all to do really to people, process, all the kind of firm building frameworks. And that's something that founders don't think about enough. Asset owners don't think about enough. It's not a linear sort of fee. This is like, where are the fees going? What are they paying for? Are they making you a better investor? Are they being spent? Because it's not only caption on the portfolio, it's application on the business. So for instance, if you see a founder spending tons of money on fancy offices, we always say red flag is like the water feature when the water feature shows up at these firms. It's like sell, sell, sell.”
2024-01-02 · Invest Like the Best · Erik Serrano - Investing in Investment Firms - [Invest Like the Best, EP.358] · IDENTIFIED FROM THE TRANSCRIPT · source
“Or are there concentration limits? And this again is empathized with the acet owner, are there concentration limits in the asset owner's mind, that they don't want to be more the next percent of the fund or something like that. And you need to get that right in terms of having a size that will actually allow you to raise assets from the LP base that you're targeting. And it also, to some extent, is also there's some levels as humans, we like round numbers and we like these watershed type of pivot points like is it 50 million? Is it 100? You know, everyone's always raising a round number. We joke at the office that whoever comes and says, I'm raising 327 million will definitely fund that founder.”
2024-01-02 · Invest Like the Best · Erik Serrano - Investing in Investment Firms - [Invest Like the Best, EP.358] · IDENTIFIED FROM THE TRANSCRIPT · source
“And also to be part of the conversation, what deal sizes are you doing in certain credit strategies, you need to be a certain size to be on the creditor committee. And maybe you're going to be activist or whatever it might be. So there's a lot of nuanced drivers of what size you need to be from an investment point of view. The second one is more operational. So this is back to what is it going to cost to run the business, where the management fees? Are they coming up front on committed? Are you going to have to wait on invested? And then on the commercial side, that's more around what is the perceived minimum efficient scale from the market?”
2024-01-02 · Invest Like the Best · Erik Serrano - Investing in Investment Firms - [Invest Like the Best, EP.358] · IDENTIFIED FROM THE TRANSCRIPT · source
“Or lower size, but in private markets, the minimum efficient scale of LP capital is typically higher. And when we think about the sizing of the LP check, again, it's a bit of an art, not a science, but it's multivariate. And it sort of falls into three categories that you need to consider. In our due diligence and proposition design, we think of investment issues, operational issues, and commercial issues. So if I talk about each of those in turn, the most important one is investing. So you think, okay, I'm going to build a portfolio, a portfolio of investments. Either on the public side or the private side. Each of those investments will have a minimum size, and I need to have a portfolio construction framework where I'm diversifying risk. So you kind of, to make things easy, I'm going to invest in 10 things are going to be 10 million each. And I'm super streamlining this. I'm sure a lot of people are going to be like, life is messy, and this is nonsensical. But just from first principles. Yeah, bear with me. You'll have a sense for what is the minimum size you need from an investment point of view.”
2024-01-02 · Invest Like the Best · Erik Serrano - Investing in Investment Firms - [Invest Like the Best, EP.358] · IDENTIFIED FROM THE TRANSCRIPT · source
“Forward are having co investment capacity that's much less. There's all these ways to reduce fee load, to be appropriately and justifiably rewarded for initially being very thoughtful about, no, I'm coming to the table to tell the founder, I'm happy to pay high fees. Like that's an eye-opening discussion when I'm talking to founders. They're like, oh, I'm definitely going to need high fees. And I say, yeah, absolutely. And they're like flabbergasted this stuff. Like, what? I don't have to argue with you about this. I'm like, no, that's the whole point of a partnership. I'm not paying you excess management fees to go and buy planes and boats. You're going to be spending it on your business, which is what management fees should be for in the first place. So it's a much shorter discussion with them. And I think it's a good first meeting. In terms of back to the product design or the proposition design that we bring to founders, after working capital, then you need investment capital. So that's the LP check. In public markets, again, you can kind of scale that in. You can start at a lower base.”
2024-01-02 · Invest Like the Best · Erik Serrano - Investing in Investment Firms - [Invest Like the Best, EP.358] · IDENTIFIED FROM THE TRANSCRIPT · source
“And just to make the numbers easy, maybe if we're giving you 100 million and we're paying 2%, again, 2% is a high number and probably not what people are getting paid. But we tend to pay at the beginning high fees because we want to make sure you have enough capital to cover your costs. And that's, again, one of these misalignments of the LPGP relationship. It tends to be quite adversarial in the sense that the founder says, oh, I want high fees. And the capital says, oh, I want low fees. But actually, that sort of shooting yourself in the foot as an asset owner because you do want your founder to have enough money to attract good talent and pay for the right service providers and pay for deal fees and technology and whatever they need. So I try and turn it on its head and I say, actually, we're collaborating with you. We're happy to pay high fees at the beginning. But as our relationship grows, those fees are going to come down and down and down maybe as a function of us receiving part of the revenue from incremental management fees and enterprise value and all of that. But maybe also having capacity of discounted fees go.”
2024-01-02 · Invest Like the Best · Erik Serrano - Investing in Investment Firms - [Invest Like the Best, EP.358] · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, so I think that let's separate the two stakeholders again founders on one side and asset owners on the other. And let's maybe start with founders in terms of the audience. So the way we think about supporting founders is we have this founder cap stack, which is a concept that we came up with to distinguish it from a cap stack of a company sort of equity and debt and growth and IPO. Think about the life cycle of a founder. And so anyone who's listening and who wants to start their own GP or is in the early stages of their GP, what they will be thinking about, and here's what is the stable product to the founder. One is capital and one is support. So on the capital side, when you're starting your own investment firm, probably what you want first is working capital. So we need to find a way to provide working capital to you. That might be a working capital line, or it might be we're going to give you an LP check. So we're going to invest in the fund.”
2024-01-02 · Invest Like the Best · Erik Serrano - Investing in Investment Firms - [Invest Like the Best, EP.358] · IDENTIFIED FROM THE TRANSCRIPT · source
“Over longer periods of time. And then on the carry side, again, on the public side, it's typically lower multiples on the private side, but you're valuing it from a DCF like a normal cash flow business. And then I think in investment firms, there's also huge value to brand and goodwill and trust because, again, managing people's money is a real trust-based exercise. And coming back to your question on the role of emotion or the role of likability, I think if you're someone giving your money or the money of the people you represent, like pension funds, their members, it's a real responsibility, right? If you manage a huge pension fund, the retirement future, well-being of thousands and thousands of people depends on what you do with their money. So in my experience, the CIO of public plans in the US are incredibly thoughtful. They're incredibly mission driven by serving those members.”
2024-01-02 · Invest Like the Best · Erik Serrano - Investing in Investment Firms - [Invest Like the Best, EP.358] · IDENTIFIED FROM THE TRANSCRIPT · source
“Discounted cash flow like any other business. And actually, Assad managers, investment firms are just amazing businesses because they're capital light. They have huge margins. If you look at even publicly listed investment firms, they tend to have 50% margins. And I think private investment firms are even higher. So just as a business, they tend to be beautiful businesses. And some famous investors have used things like insurance companies and float to really maximize their returns. Obviously, like the buffets and mungers of the world, I think the understanding of the power of that capital light scalable model, investment firms are almost like software. Like the incremental cost as you scale, it's a bit heavy on the private side, but on the public side lesson. So FR and PRU get multiples and the longer lockup capital gets higher FRE multiples because obviously you're just discounting management fees.”
2024-01-02 · Invest Like the Best · Erik Serrano - Investing in Investment Firms - [Invest Like the Best, EP.358] · IDENTIFIED FROM THE TRANSCRIPT · source
“Keep volatility low and sort of in public markets. You can do that in some ways. In private markets, there's like volatility dampening on how books are marked and things like that, which gives private GPs more stability. And there's great literature on whether investors actually want that volatility dampening. There's this whole philosophical debate and a few great academics that are shining a light on that. But that discussion aside, I think this misalignment between LPNG grows with scale. And a beautiful way of mitigating that misalignment is for the LP to participate in that upside, as you mentioned. And so enterprise value is really a function of what are the revenues of the GP and the parlance in the industry is FRE and PRE. So FRE is fee-related earnings, PRE is performance-related earnings, which on the hedge fund side, it's performance, on the private equity side tends to be called CARI. And those are valued on a multiple with a”
2024-01-02 · Invest Like the Best · Erik Serrano - Investing in Investment Firms - [Invest Like the Best, EP.358] · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, it's early, but also our day job is very much around helping with product design, talent acquisition, the role that a VC partner would play for a tech firm is kind of very similar. And also shoulder to cryon, cheerleader. Like, so much of this is just helping the person because it's really tough. But anyway, other than the VC downside is not the same. The upside is quite concentrated. There is a lot of power law outcomes. So there are some similarities. But back to your question was on how they're valued. These firms have educated the market that look, there is a huge amount of value as well in these businesses. And so we think that for alignment, it's fair for asset owners to participate in that because as firm grows, like one of the misalignments is when you're smaller, management fees aren't a source of profit. And as you grow, there's a misalignment where the GP wants to scale AUM, maybe.”
2024-01-02 · Invest Like the Best · Erik Serrano - Investing in Investment Firms - [Invest Like the Best, EP.358] · IDENTIFIED FROM THE TRANSCRIPT · source
“To some extent, the VC nomenclature is a bit scary in the sense that people might think eight things out of ten go wrong. When things go wrong for us, we don't lose a ton of money. You have sort of ways to in publics will have risk parameters with maximum drawdowns on the private side. ways in the LPAC to ensure that we're not going to blow things up. So it's VC-like in the sense that.”
2024-01-02 · Invest Like the Best · Erik Serrano - Investing in Investment Firms - [Invest Like the Best, EP.358] · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, so that's changed a lot. I think when we started the business, there was not this appreciation that GPs were also businesses. And so there was very little institutionalization around what these businesses are worth. And there's a few firms over the last 15, 20 years that done an amazing job at almost developing this industry. So there's a few sort of 80 pound gorillas. The biggest one is Dial, now Blue Owl. was a Newberger Berman firm and both Blackstone and Goldman have teams that do this and they're 80% of the market or something. In terms of capital raised to buy stakes in asset managers. So for us we're builders. Think of what we do as stable as building asset managers.”
2024-01-02 · Invest Like the Best · Erik Serrano - Investing in Investment Firms - [Invest Like the Best, EP.358] · IDENTIFIED FROM THE TRANSCRIPT · source
“Basis or emotional, as you say, but actually they're really, really good at making money. And I think that's a really difficult decision. Personally, at least for us, I always say to the team, I'd rather we back eight, nine investor who's a good person who we can see ourselves being partnered for a really long time. Because for us, this is more like a marriage. Not only do we lock up our capital, but we're trying to build a business and building a business takes longer than an investment to play out. It's just a longer commitment. And so for us, we'd much rather have an eight, nine investor who's a good partner than a number 10 investor who's actually just not that pleasant as a human, who's like a bit unpredictable, who maybe has values not aligned with us, who's going to create a culture that we don't think is a good environment for their team.”
2024-01-02 · Invest Like the Best · Erik Serrano - Investing in Investment Firms - [Invest Like the Best, EP.358] · IDENTIFIED FROM THE TRANSCRIPT · source
“So underrated. And actually, I think the best asset owners do think about this a fair bit. And although it's not explicit in our industry, I think the way you're perceived on that emotional plane and more human plane is really interesting. And I think we've seen that in the industry, right? Things are changing. I think maybe there was this allowance in the industry that even if you were maybe not a great human being, but you were a great deliverer of returns, that was more okay in the past. And I think it's a really good development that we are also holding people accountable about how they treat their people and kind of what they stand for in a way. But there will always be that conflict or trade-off between, okay, this is a person that maybe emotionally or values wise doesn't necessarily align with me on a cultural or value.”
2024-01-02 · Invest Like the Best · Erik Serrano - Investing in Investment Firms - [Invest Like the Best, EP.358] · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, great question. Again, I think in finance, we underestimate that because it seems fluffier or softer. But actually, I found that the best investors can build an emotional connection with their LPs in a way that's really around trust and reliability. So you spoke a bit earlier about likability. I think that creating a sense of security for the capital provider that you're going to be reliable, trustworthy, and that you're going to put their interests ahead of yours and act as a true fiduciary is absolutely key. That might sound a bit emotional and fluffy, but I actually think that it's not something that people talk about explicitly. And I'm not sure in investment memos, we actually have in our investment memos things like trustworthiness and expectation of being a good partner. I remember at Bain when we were recruiting there was this question, which was like, how exciting.”
2024-01-02 · Invest Like the Best · Erik Serrano - Investing in Investment Firms - [Invest Like the Best, EP.358] · IDENTIFIED FROM THE TRANSCRIPT · source
“But also time and effort in getting to know you. And they're entrusting you with their capital, right? Like this is the biggest vote of confidence they can give you. And it's their job. And a lot of people at asset owners, again, they're taking career risk by backing someone, particularly if they're emerging because it's easier if you give money to a big brand and it goes wrong. It's like, oh, but it was brand X. Like, how could I, the old IBM thing, the ability for you to have a relationship where they trust you with your money is amazing.”
2024-01-02 · Invest Like the Best · Erik Serrano - Investing in Investment Firms - [Invest Like the Best, EP.358] · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, Harvard's gone through cycles. You know, there's like pros and cons to this model. I feel like Harvard internalizes a lot and then something don't work and they externalize and it kind of goes in cycles. But collaborating with your investors in that regard, I think it's an important part of the equation. So there's these layers. There's another transfer. There's liquidity management. Then obviously there's fee management, co-investments tend to be lower fee than co-mingled fund commitments. And so often an asset owner will be in the commingled fund at a higher fee, but then the co-investments are lower. So they're trying to average down their fee load. So things in product design that allows for the relationship optionality between the acad owner and the founder, the investment firm to be tailored, I think is really important. And part of that is not only on a deal basis, but if you take a step back, think about the relationship over time. So an asset owner's dream to a certain extent is that they're investing so much”
2024-01-02 · Invest Like the Best · Erik Serrano - Investing in Investment Firms - [Invest Like the Best, EP.358] · IDENTIFIED FROM THE TRANSCRIPT · source
“So, over the last 10, 15 years, there's been an explosion in co investing, for example. And co investing has some really interesting attributes. I think asset owners think about it as a tool to actually achieve quite a few things. One thing it definitely achieves knowledge transfer, because in co-investments, typically the GP is sharing more information about the deal. That's great for the asset owner because their team is learning a lot, maybe over time. I have this thesis and in 20, 30 years, there's going to be this harmonization, this sort of meshing together of capital owners and capital managers. And it's happening because a lot of the very large pools of capital now have direct teams as well. That was spearheaded. The Canadians did a great job at that. The Norwegian model of in-housing a lot of their.”
2024-01-02 · Invest Like the Best · Erik Serrano - Investing in Investment Firms - [Invest Like the Best, EP.358] · IDENTIFIED FROM THE TRANSCRIPT · source
“But I think coming back to the product design, I think you need to think about how am I adding value with knowledge transfer. One example is, for instance, macro insights, good investment firms are really good at sharing that. There are some firms that I think add more value through their newsletter or their conference than they do through their performance. But asset owners find that really helpful. And when I talk to CIOs of big asset owners that were lucky to work with, I think they find it quite insightful kind of on the coalface developments that we're seeing because they can apply it elsewhere in their portfolios. And if we also share, we backed over 30 companies now. These are best practices that we see in terms of data collection, organizing the memo, these types of basic things. Like no one teaches you how to invest. That's back to this theme that everyone focus on the output. But what are the inputs? Another one is optionality. And sort of this is like a relationship optionality.”
2024-01-02 · Invest Like the Best · Erik Serrano - Investing in Investment Firms - [Invest Like the Best, EP.358] · IDENTIFIED FROM THE TRANSCRIPT · source
“That we feel passionate about is knowledge transfer. So it's about, I'm not only generating returns on your capital, but I'm explaining to you how things work. I'm explaining to you how I do things. And I'm trying to make you a better investment firm picker. And so a lot of the knowledge transfer we do at Stable is we share how we think about picking founders. We share what processes we use in writing our memos. We share the importance of referencing. And LinkedIn, by the way, has been this amazing revolution in referencing. My thesis is that the younger you can go in the referencing, the more true assessment of a person's personality and motivations are. Because I think when you're younger, you don't think about repackaging yourself for the world. One of the founders, he literally had blown up his dorm room with like an improvised bomb. I'm like, well, there's an omen. If I ever heard one of blowing up.”
2024-01-02 · Invest Like the Best · Erik Serrano - Investing in Investment Firms - [Invest Like the Best, EP.358] · IDENTIFIED FROM THE TRANSCRIPT · source
“That's I think the product design aspect has to start with, again, identifying both stakeholders. So there's you as the founder and then there's the asset owner who are essentially the buyer of this product. And first, I think you need to match this skill set, talent, contextualize that with what platform, what do you need in terms of resources, access, whatever is going to make your interest, passion, superpower, compulsion the best expression of that. And then when you think about product design, you have to think about the asset owner. And I think too many founders again don't try and empathize with what is the asset owner trying to get out of it. And the focus is purely on this very unidimensional return metric. But I think over the last 10 years, sophisticated large investors want to get more out of the relationship they have with the investment firms they entrust with their capital. One very clear one.”
2024-01-02 · Invest Like the Best · Erik Serrano - Investing in Investment Firms - [Invest Like the Best, EP.358] · IDENTIFIED FROM THE TRANSCRIPT · source
“Please taste it Don't ruin it for me. So there's a bit of that in product design, which I think is if you demystify something, it becomes.”
2024-01-02 · Invest Like the Best · Erik Serrano - Investing in Investment Firms - [Invest Like the Best, EP.358] · IDENTIFIED FROM THE TRANSCRIPT · source
“To an analyzer, and a lot of that happiness and hedonism that I get, even like food, just like understanding how it's done. You talk to a chef and they break down like the crunchiness versus this. And I'm like, I don't want to know.”
2024-01-02 · Invest Like the Best · Erik Serrano - Investing in Investment Firms - [Invest Like the Best, EP.358] · IDENTIFIED FROM THE TRANSCRIPT · source
“In this day and age, you need to be careful with that, DeeDee. But yeah, back in the days, the Wild West, when I started the business, some of our first investments, there wasn't even like a site visit. They would just wire money into an account. And that changed a lot post-financial crisis, post-Madoff and things like that. It's obviously an improvement. It was sad that it was precipitated by people abusing trust and misbehaving. But I think the industry has come a long way in that regard. In terms of product design, so there's some mysticism around it, explaining something in life almost makes it less exciting. And I feel this way. I love movies. In another life, I would have loved to be a movie director. I find movie directors to be fascinating humans. And one of them told me that the one thing he hated about becoming a movie director and going to film school is that every time he now watches a movie, he just analyzes every scene and he doesn't enjoy the movie. So there's things like movies or art or certain things that I love that I try not to learn too much about because I will go from like an appreciation.”
2024-01-02 · Invest Like the Best · Erik Serrano - Investing in Investment Firms - [Invest Like the Best, EP.358] · IDENTIFIED FROM THE TRANSCRIPT · source
“But that's so true. And that's really amazing if you can find that and repeatedly do it when you look at some of the better investors. I think they just do very simple things time and time again. And maybe they're good at product design to make it seem that it's really complicated. Product design. I think that's a really underappreciated aspect of building an investment firm, which is most founders don't think of themselves as a product. And I think that's almost an emotional thing because, again, there's some mysticism that there's these amazing stock pickers that see the future in a way that others don't. And this mysticism is beneficial about 10, 15 years ago, we were looking in, and it became almost a marketing moat to say how many PhDs you had on staff. This was like really important. It didn't matter if the numbers were good and the starting, it was like, well, how many PhDs do you own in staff?”
2024-01-02 · Invest Like the Best · Erik Serrano - Investing in Investment Firms - [Invest Like the Best, EP.358] · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, I think you've hit on the holy grail of building investment firms and lasting strategies, which is there is a lot more to investing than just the pure return. And I love that example on your past business that you built successfully. I think there's almost a premium for hard work or complexity. Like people don't want to believe or pay for things that seem simple. And yet that's the most powerful strategy of all. If you can come up with something that requires pretty simple inputs and edges, that's just beautiful. So yeah, I think a lot of investing might be people dressing up really simple things. And often in founders, particularly in public markets, you find this is when you really dig into a founder's edge, they're kind of a one-trick pony, but they're really scared about anyone finding out. So they often don't even tell you, which is self-defeating because then they don't have even a pony, they don't get funded.”
2024-01-02 · Invest Like the Best · Erik Serrano - Investing in Investment Firms - [Invest Like the Best, EP.358] · IDENTIFIED FROM THE TRANSCRIPT · source