YouSaid · the spoken record

Erik Serrano Berntsen

lines on the record: 75
first: 2021-10-18
most recent: 2021-10-18
sittings or episodes: 1
sources: podcast

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“This might sound evident, but I didn't realize that time is finite and that you can't buy time, so no matter how successful you get, you can't buy more of it. And not everyone will always be their parents, friends. So don't delay things you want to get done because you might never get the chance to do them.”
2021-10-18 · Capital Allocators · Erik Serrano Berntsen – Backing Alternative Founders at Stable Asset Management (Capital Allocators, EP.218) · IDENTIFIED FROM THE TRANSCRIPT · source
“It must be going back to that feeling of positivity that we're here for a good time, not a long time. So the importance of enjoying life, seeking to make those around you happy and surround yourself with people who make you happy.”
2021-10-18 · Capital Allocators · Erik Serrano Berntsen – Backing Alternative Founders at Stable Asset Management (Capital Allocators, EP.218) · IDENTIFIED FROM THE TRANSCRIPT · source
“Assuming other people know what they're doing or believing them if they tell you they know what they're doing? And I think the learning there for me was you have to trust but verify. You have to do your own work. And very often I think you can really improve on how things are being done because people haven't actually thought that hard about why things are the way they are.”
2021-10-18 · Capital Allocators · Erik Serrano Berntsen – Backing Alternative Founders at Stable Asset Management (Capital Allocators, EP.218) · IDENTIFIED FROM THE TRANSCRIPT · source
“But you can have a lot of fun at the same time, and I don't know why oftentimes those two things are perceived to be opposites. But one thing he did amazingly well was he taught me the power of words, how important it is to be understood. And it really takes a lot of work to find the right words, to express something, and in your head you think you're being understood. But actually, unless you make very precise and relatable word choices, you're not going to get your message across. So he didn't only teach me to think about business. I think he taught me how to speak about it.”
2021-10-18 · Capital Allocators · Erik Serrano Berntsen – Backing Alternative Founders at Stable Asset Management (Capital Allocators, EP.218) · IDENTIFIED FROM THE TRANSCRIPT · source
“I think I have to go all the way back to university. My tutor at Oxford was a gentleman called Larry Seedentop. And I think the reason why I would have to choose him as one of the two is he just got me on the path we are now. I do believe in self-determination and choosing your own path, but I also do believe in that sliding doors thesis, the kind of path dependency. I think there's these very punctual moments in life where there's a fork in the road. And very often you're not conscious. you're in it. But for me, I think him giving me the chance, accepting me, giving access to this boy from Madrid to this prestigious university, seeing something in me really made a huge difference and enabled me to be where I am today. I think the second one also formative experience had to be at Bain. One of the main partners, so a gentleman called Jimmy Allen. And he taught me two things. First, that you can work extremely hard.”
2021-10-18 · Capital Allocators · Erik Serrano Berntsen – Backing Alternative Founders at Stable Asset Management (Capital Allocators, EP.218) · IDENTIFIED FROM THE TRANSCRIPT · source
“It has to be when you observe a failure in someone to change their mind when the evidence changes. And I think we've been seeing a lot of this very recently as there's more and more esoteric reasons why markets are moving and companies are succeeding or failing. I think stubbornness is fantastic when you're fighting a majority that has a different view from you, right? Like that variant perception does require faith in what you believe. But when you're just fighting mounting evidence against your thesis, I think the issue is our industry tends to penalize changing your mind because it's seen as some sort of weakness or vulnerability. But actually changing your mind is the most logical thing ever if the evidence is changing as well.”
2021-10-18 · Capital Allocators · Erik Serrano Berntsen – Backing Alternative Founders at Stable Asset Management (Capital Allocators, EP.218) · IDENTIFIED FROM THE TRANSCRIPT · source
“Think it has to be computer says no, and computer says no is when you hit an obstacle and you start questioning it and there's absolutely no good reason why that obstacle exists and no one can give you a good reason why the answer is no, but it's just no. I find this happens a lot with airlines or interactions with governments, but it also happens a lot in investing. And I wish computer says no was deleted as an answer.”
2021-10-18 · Capital Allocators · Erik Serrano Berntsen – Backing Alternative Founders at Stable Asset Management (Capital Allocators, EP.218) · IDENTIFIED FROM THE TRANSCRIPT · source
“I think it's book ending my day with positivity. So I think that can take many forms. For me, it's like a cuddle fest and a compliment fest. So telling my wife and children I love you, you're awesome, and receiving that back. I think it just allows you to recharge in the morning, get ready to deal with all the challenges and the setbacks that undoubtedly will come during the day. And it gives you that positive energy to fight. And then no matter what's going on during the day, you know you're coming back to your happy place as well.”
2021-10-18 · Capital Allocators · Erik Serrano Berntsen – Backing Alternative Founders at Stable Asset Management (Capital Allocators, EP.218) · IDENTIFIED FROM THE TRANSCRIPT · source
“I think it has to be eating, so I will travel far and wide for best places to eat. You know, when I plan my investment research trips, I always plan where I'm eating every meal. I think it's because so many great things come together in a great meal. Chefs are obsessive about their craft, but at the same time, breaking bread is such a bonding experience. And when I look at Of the most fun times in my life. They're often around a table with people I love.”
2021-10-18 · Capital Allocators · Erik Serrano Berntsen – Backing Alternative Founders at Stable Asset Management (Capital Allocators, EP.218) · IDENTIFIED FROM THE TRANSCRIPT · source
“Time and money thinking about what are the tools that we can develop in order to be better partners to our founders? But at the same time, we can always do more. What I worry about is, are we doing all we can do to maximize the probability of success with our founders? So what I would love to see us doing over the next few years is investing further in our capabilities to help the founders. And also be able to support them in that journey. And all of those things require fresh capital. They require potentially capital in different parts of their capital structure, working capital, GP commit. And, you know, we'd love to be able to help founders with any of those strategic needs as they build their business so they can focus just on delivering returns.”
2021-10-18 · Capital Allocators · Erik Serrano Berntsen – Backing Alternative Founders at Stable Asset Management (Capital Allocators, EP.218) · IDENTIFIED FROM THE TRANSCRIPT · source
“The dream stabled from the beginning has always been We would love to back talented founders who want to run their own investment firm. And we would love to be able to do that no matter what type of strategy, in what asset class, in what sector, in what geography you want to do that. And finally, after 15 years were an overnight success and we feel that we've built enough trust with our investors and our partners to be able to do that. What I would love is to just be able to be even more helpful to those founders. And that means investing in our operational support, in our distribution support, in our technology. Because as you scale, I think a lot of that founder coaching and help is very personalized. We've invested a fair bit of time.”
2021-10-18 · Capital Allocators · Erik Serrano Berntsen – Backing Alternative Founders at Stable Asset Management (Capital Allocators, EP.218) · IDENTIFIED FROM THE TRANSCRIPT · source
“That the market, the allocator community feels there's some sort of issue. And we feel that either that issue that's perceived is not real, and then there's issues which the market correctly identifies as an issue, but we think we can fix. And these are things to do with what we've been discussing today around maybe the founder is great at investing but terrible at attracting talent or building a business or explaining what they do. And that's the gap that we fill so that together we complement a founder and we can then create a much more attractive value proposition for investors.”
2021-10-18 · Capital Allocators · Erik Serrano Berntsen – Backing Alternative Founders at Stable Asset Management (Capital Allocators, EP.218) · IDENTIFIED FROM THE TRANSCRIPT · source
“Shoes, headline issues. You know, if you take teams and you put them inside large bureaucratic pensions or sovereigns, I think it's hard to do right. But there's this middle ground instead of just being a passive LP, you can also build strategic partnerships somewhere in the middle where you're still a co-owner where your incentives are still aligned. So we're seeing a lot of that. And that's happening both in public and private markets. We would love for more people to do what we do. There's a scarcity of willingness to go early. But there's so much talent out there that doesn't get funded. And often they don't get funded because they don't fit the right buckets. They don't have the right pedigree. They're not very good at presenting. And that for us is a hugely interesting and arbitrageable opportunity because at the core, when we back a manager, what inefficiency are we arbitraging? We're really finding a manager”
2021-10-18 · Capital Allocators · Erik Serrano Berntsen – Backing Alternative Founders at Stable Asset Management (Capital Allocators, EP.218) · IDENTIFIED FROM THE TRANSCRIPT · source
“There's a number of new entrants who realize the power of not only owning these businesses, but having a closer relationship with the managers that they back. And we're seeing also in private markets, there is a new wave of investors that are very interested in establishing strategic partnerships with emerging managers. And we're seeing it both in terms of actual institutions, large sovereigns around the world, large pension funds are really coming around to the realization that if you can partner with a manager in a more aligned way, you're bound to make better returns and you're bound to extract more value from that relationship. And some have tried to internalize a lot of these teams, but I think there you really bump into compensation issues.”
2021-10-18 · Capital Allocators · Erik Serrano Berntsen – Backing Alternative Founders at Stable Asset Management (Capital Allocators, EP.218) · IDENTIFIED FROM THE TRANSCRIPT · source
“We think this business is a fantastic business to be in, not only because it makes great returns, but because it creates all this optionality and alignment. There aren't actually that many players that do what we do. I think historically in public markets there were more players, but typically they came from Fundafund backgrounds or allocator backgrounds, and they took a very strategy focused lens on backing new founders. So we think our approach of being more operator focused has been differentiated, and that's helping us not only attract the best talent, I think, but in maximizing the probabilities of success. There's actually even less competition. There's less systematized approach to backing emerging managers. But we're seeing that change.”
2021-10-18 · Capital Allocators · Erik Serrano Berntsen – Backing Alternative Founders at Stable Asset Management (Capital Allocators, EP.218) · IDENTIFIED FROM THE TRANSCRIPT · source
“Post mortems as well as pre mortems. And we find that managers that use technology in the way they invest, not only as an input into what they invest in, are the ones that are going to have an edge. And in terms of our own investing, we're actually avoiding areas where we think the technological cost or complexity is too high. So for example, in public markets, I think there's huge money to be made in high frequency trading or in strategies.”
2021-10-18 · Capital Allocators · Erik Serrano Berntsen – Backing Alternative Founders at Stable Asset Management (Capital Allocators, EP.218) · IDENTIFIED FROM THE TRANSCRIPT · source
“Data management and essentially knowledge management. So what's kind of fascinating is that although investment firms do a lot of work on the investments that they make, they often don't take the same approach and the same critical and analytical lens on themselves. So what we find is that in investment management, there's actually quite a gap in terms of technological use for the business of investing. One thing that we're doing is we're trying to get involved with firms that are in the invest tech fintech space, which are firms that are allowing founders to be finding better data to inform decisions, but also to manage that data better internally. So it's about tracking how the idea came on the radar, tracking what work was done, tracking how it actually went, doing”
2021-10-18 · Capital Allocators · Erik Serrano Berntsen – Backing Alternative Founders at Stable Asset Management (Capital Allocators, EP.218) · IDENTIFIED FROM THE TRANSCRIPT · source
“So clearly technology is disrupting investing, and we think about it in terms of how it can produce more data to make better investment decisions. We think about it in terms of how can you use these technologies in your own firm to make better decisions. And then we think about it in terms of how is that technology going to disrupt the businesses that each strategy is investing in. And where we're focusing our efforts is on the middle part of that value chain, which is really about what type of technologies can we use to run better investment firms. And a lot of that has to do with data acquisition.”
2021-10-18 · Capital Allocators · Erik Serrano Berntsen – Backing Alternative Founders at Stable Asset Management (Capital Allocators, EP.218) · IDENTIFIED FROM THE TRANSCRIPT · source
“How do you think about that in the context of the increasing use of technology across industries in this case as it applies to asset management and the need to have resources to be able to invest into the next frontier of technology?”
2021-10-18 · Capital Allocators · Erik Serrano Berntsen – Backing Alternative Founders at Stable Asset Management (Capital Allocators, EP.218) · IDENTIFIED FROM THE TRANSCRIPT · source
“Or legacy, and that's all great for humanity, but I'm not sure it's great for performance in your day job. And so for that reason, we believe that if you look under the hood, the strength is actually in that more small to medium-sized managers or the ones that indeed grow big but manage to retain that founder mentality. And I think we've seen it. When you look at performance of large asset managers, that tends to be very inversely correlated with size. And there's great data around this. And I'm not sure anyone would dispute it. But of course, I do understand that it's an easier investment to go with a large established player. And that's a bit what we fight when we're backing founders and trying to build these insurgents.”
2021-10-18 · Capital Allocators · Erik Serrano Berntsen – Backing Alternative Founders at Stable Asset Management (Capital Allocators, EP.218) · IDENTIFIED FROM THE TRANSCRIPT · source
“A founder has more bandwidth to invest when the firms are smaller because there's less firm to manage. The firm is more nimble. You're in one office. The team fits in a broom. You don't need to fill in a form to get a new laptop. There's less reporting lines. There's less politics. And on the emotional side, which I think is the more fascinating one, when you're smaller, you're hungrier, you have to prove yourself. You're typically younger, you have more energy, you have less distractions, and you have less inherited biases. And that reflects in firm culture. We all see insurgents continually disrupting incumbents. And we think all those advantages tend to disappear as you grow. And I say tend because some founders and some firms do manage to retain that founder mentality, but very few do. So once you're successful, you go from competing on performance and self-improvement to competing on status.”
2021-10-18 · Capital Allocators · Erik Serrano Berntsen – Backing Alternative Founders at Stable Asset Management (Capital Allocators, EP.218) · IDENTIFIED FROM THE TRANSCRIPT · source
“And one has to do with the emotional side. And I think the returns to scale and the returns to success affect both the founder in these three areas and the firm itself. On the investment side, when you're small, you're the insurgent, you're disrupting the incumbents, you're more focused by definition, you have less scope. And in our opinion, narrow focus is typically a big plus in investing. Of course, you need to have cross-disciplinary mental models, but you need focus in terms of area of expertise and circle of competence. So we find that when you're smaller, you have more original ideas and how you source deals can be differentiated. You have to be more innovative by definition. And you don't have these disadvantages of scale where you have to do the next mega deal if you're a private manager. You need to do that next mega trade if you're a public manager. On the operational side, similar story.”
2021-10-18 · Capital Allocators · Erik Serrano Berntsen – Backing Alternative Founders at Stable Asset Management (Capital Allocators, EP.218) · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, so I'm obviously biased here and I don't like monopolies or oligopolies. A lot of the consolidation in the industry is attributed to this narrative that the bigger you get, the more resources you have, so the better you are. I have a controversial view of this. I actually think a lot of the consolidation of assets in the industry is more correlated to the allocator side of the equation. Like I mentioned, this career risk and desire to play it safe. And obviously, I'm generalizing here, but I think allocators will avoid going emerging for the wrong reasons. And we've discussed ways to mitigate that. Our view is actually that growth is good up to a point, and then it reaches diminishing returns. And so the way we think about it is at sort of three levels. One has to do with investing. One has to do with the operational.”
2021-10-18 · Capital Allocators · Erik Serrano Berntsen – Backing Alternative Founders at Stable Asset Management (Capital Allocators, EP.218) · IDENTIFIED FROM THE TRANSCRIPT · source
“I want to turn to how you think about stable in the business in the perspective of the industry, in the landscape itself. And so the first obvious question is small versus large. So we're seeing in all of these alternative asset classes an increase in concentration with legacy players more and more assets going to the big hedge funds, the big private equity firms, the closed venture capital firms. How do you think about the ability of someone that you're backing to have a competitive advantage against some of these larger incumbent players?”
2021-10-18 · Capital Allocators · Erik Serrano Berntsen – Backing Alternative Founders at Stable Asset Management (Capital Allocators, EP.218) · IDENTIFIED FROM THE TRANSCRIPT · source
“To adversity, but it's also things like being an immigrant or growing up in a different country to the country you study or work in. All these indicators actually have great basis in data and studies. And we try and always ground it in data because I think often we have these heuristics that we develop over our life that potentially biases us in the wrong way. And typically most research shows that we pick people from similar backgrounds to us or who agree or look like us. So we're trying to correct all those. And what we end up with”
2021-10-18 · Capital Allocators · Erik Serrano Berntsen – Backing Alternative Founders at Stable Asset Management (Capital Allocators, EP.218) · IDENTIFIED FROM THE TRANSCRIPT · source
“A duo setup where you have a very young founder and an older founder, so TPG, you have culture and Bonderman at Blackstone, you have Schwartzmann, you had Peterson. And I think all those dynamics show they kind of aggregate into a meta structure where there's two drivers of success. One is varying perception. We mentioned that before. It's basically seeing things others don't see, believing things others don't believe. If you want to make money in investing, you just have to be contrarian. And you have to be comfortable being in that minority. So if there are things in your life that made you that minority because you were poorer than your classmates or because you were the only Catholic kid at a Jewish school or vice versa, that will mean that your variant perception is stronger. The other thing we're looking for is resilience. It's really never giving up. And again, that's very tied to.”
2021-10-18 · Capital Allocators · Erik Serrano Berntsen – Backing Alternative Founders at Stable Asset Management (Capital Allocators, EP.218) · IDENTIFIED FROM THE TRANSCRIPT · source
“Not the fact that later in life you realize this was a very lucrative industry, so you wanted to be a part of it. And actually on that age aspect, we did an interesting project we called Project Legends, and it's across asset classes. But we took, you know, in our view, all the best public and private investors. And the age at which the public managers launched their business was 33, which I think shocks people because they probably think that's too young. But I think that's correlates with the data that shows that if you're really passionate and have a clear idea of what you want to build, you tend to be quite impatient and you want to do things your own ways, which ends up meaning that you launch things sooner. And in private markets, the age is a bit higher, which I think is due to the fact that private markets are more relationship-driven. You need more time to establish the networks. They might put a bit more weight on gray hair and so forth. But even there, interestingly, a lot of the better private equity business builders, you actually see like”
2021-10-18 · Capital Allocators · Erik Serrano Berntsen – Backing Alternative Founders at Stable Asset Management (Capital Allocators, EP.218) · IDENTIFIED FROM THE TRANSCRIPT · source
“Potentially a more traditional LPGP encounter wouldn't allow. We're looking for background and personality traits. So how do we try and tease that out? So on the background side of things, over the years, we add to it and it becomes longer and longer. We have a questionnaire and it's called past, present, and future. And what we're trying to do is we're trying to understand where you come from, what do your parents do, when did you start being interested in investing? And all of these questions are linked to research that shows that, for example, managers, founders from poorer backgrounds tend to outperform managers from richer backgrounds or managers that lose apparent young or have divorced parents or face adversity young are better performers or managers that show passion and interest at a very young age also typically correlate with more passion”
2021-10-18 · Capital Allocators · Erik Serrano Berntsen – Backing Alternative Founders at Stable Asset Management (Capital Allocators, EP.218) · IDENTIFIED FROM THE TRANSCRIPT · source
“We've put a lot of effort into what we call manager background due diligence. And it has several components, but the objective is to identify certain backgrounds and certain personality traits in people. And we have a data-driven approach where we look for evidence around which personality traits and which backgrounds are more predictive of future success. So we have tools that we've developed around really getting to know the person very deeply. And this is a privilege that we have as a firm because I think we spend a lot more time with each founder than a typical allocator would because we make less investments a year. We partner for a long term. We lock up our capital for a long period of time. And obviously we're building a business with them. So it gives us license to ask very personal questions that”
2021-10-18 · Capital Allocators · Erik Serrano Berntsen – Backing Alternative Founders at Stable Asset Management (Capital Allocators, EP.218) · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, the million dollar question. So this is an area of focus for us. Since we started the farm, absolutely fascinating. I think in general there is a lot of weight in diligence processes put on the investment strategy. But at the end of the day, we're investing in people. And if you have a long-term view that you're going to partner with a person for 10, 20 years, I think understanding the person is as important if not more than understanding their investment strategy. And I would argue in some ways the core characteristics of the person are more likely to stay the same than that of markets. So from a rational point of view, the one constant is the person and underwriting their behavior in 10 years' time. It's probably an easier thing to do than underwriting how their markets are going to be in 10 years, which is an interesting thought experiment. Since the beginning at Stable,”
2021-10-18 · Capital Allocators · Erik Serrano Berntsen – Backing Alternative Founders at Stable Asset Management (Capital Allocators, EP.218) · IDENTIFIED FROM THE TRANSCRIPT · source
“I'm curious when you start thinking about the types of people that have been successful, these number twos, number threes that are now going on to lead a firm, what are the characteristics of those people that you found are conducive to future success with more consistency than others, not that it's ever perfect.”
2021-10-18 · Capital Allocators · Erik Serrano Berntsen – Backing Alternative Founders at Stable Asset Management (Capital Allocators, EP.218) · IDENTIFIED FROM THE TRANSCRIPT · source
“That's on the referencing side, something like paper portfolio, being able to track managers from the moment they leave their firm to the moment they start, that can give us a lot of comfort. And then finally, asking questions around the skill sets that we believe are more portfolio manager skill sets, like for instance, okay, what's your portfolio construction approach? How do you size things? Do you have entry and exit defined? How will that change as evidence to the country changes? It's really a mosaic of all those things put together, but let's be frank, you know, we get it wrong. The thing that we most often get wrong, I think, is that portfolio manager evolution and this organizational alpha identification, I think the way we've managed to stop that from happening is often we will back a person who perhaps was at a firm that didn't do what they were doing before they arrived.”
2021-10-18 · Capital Allocators · Erik Serrano Berntsen – Backing Alternative Founders at Stable Asset Management (Capital Allocators, EP.218) · IDENTIFIED FROM THE TRANSCRIPT · source
“Around these skill sets that we mentioned. So let me touch on each one. On the reference side, we try and go as 360 as possible. So you're trying to speak to ex-colleagues of this person. There's some temporal issues there if the person is still employed. So you might be talking to ex-colleagues who are no longer that firm or colleagues who are aware of this person's desire to start their own firm. But you also want to be talking to market participants. Sell site analysts, people who are familiar with whether or not this particular person was making the calls. And then you also want to be talking to the management teams, similarly to private equity. Go to management teams and ask them, who are the best analysts covering your firm? And often it's an open-ended question. And you're hoping that in the two or three names, the CEO or CFO or COO mentions is this particular person or the firm this particular person works at. And if they mention a firm, and this happened often, you say, who within that firm is asking the best questions?”
2021-10-18 · Capital Allocators · Erik Serrano Berntsen – Backing Alternative Founders at Stable Asset Management (Capital Allocators, EP.218) · IDENTIFIED FROM THE TRANSCRIPT · source
“Varies by asset class. I think in private markets, it's a bit easier. It tends to be clearer in an organization who has sourced the deal, who is involved with management team, who was structuring it. And so a lot of the focus on private markets is to go to previous deal, previous portfolio companies, talk to those management teams, and ask them, you know, who was responsible for making this happen? I think in public markets it's much more complicated. And obviously we're often dealing with”
2021-10-18 · Capital Allocators · Erik Serrano Berntsen – Backing Alternative Founders at Stable Asset Management (Capital Allocators, EP.218) · IDENTIFIED FROM THE TRANSCRIPT · source
“Touched earlier on some of the key aspects of the diligence process. And I'm curious in particular this idea of teasing out on the investment skill side what was attributable to the person versus the organization where they were involved previously. How do you go about doing that?”
2021-10-18 · Capital Allocators · Erik Serrano Berntsen – Backing Alternative Founders at Stable Asset Management (Capital Allocators, EP.218) · IDENTIFIED FROM THE TRANSCRIPT · source
“Huge knowledge bar required, we even backed a healthcare business in China. So you're layering sectorial expertise requirements with geographic focus, meaning even less competition and more edge.”
2021-10-18 · Capital Allocators · Erik Serrano Berntsen – Backing Alternative Founders at Stable Asset Management (Capital Allocators, EP.218) · IDENTIFIED FROM THE TRANSCRIPT · source
“You have to develop relationships with all these service providers and stakeholders in the industry that have early touch points. And at the same time, to be able to triage them because you end up with huge amounts of different leads, you have to have this prepared mind. You have to have a view of what types of strategies you want to being investing. And so, for example, what have we done recently? We've backed founders building equity capital markets businesses, big access alpha. They're playing a role in capital markets on top of fundamental work in private credit. We've done a lot of work on litigation finance, a less mature part of the market, very specific experience and sourcing capabilities, or even royalties. There's some very interesting sourcing and structuring and edge that you can have in music, royalties, sports and entertainment royalties, tax receivables. Or in private equity, we've invested a fair bit in venture and private equity in the healthcare space, even pre-COVID. I think”
2021-10-18 · Capital Allocators · Erik Serrano Berntsen – Backing Alternative Founders at Stable Asset Management (Capital Allocators, EP.218) · IDENTIFIED FROM THE TRANSCRIPT · source
“But the issue is that that creates this sense of urgency to be the first to present this idea. And what ends up happening is the manager doesn't have a well-baked idea on how he's going to structure the business, has not managed to figure out how to explain easily what they do. And that leads to what we call scorched earth. And we have a measure of this in our sourcing. We try to understand, has this manager already interacting with a number of potential investor partners? Because it's very hard to make a first impression twice. And in our industry, we see so many opportunities that revisiting something we've discarded actually has a higher bar than looking at something new, which is also kind of an interesting behavioral bias. And we try and correct that and we actually try to revisit things as much as we can. But all that is to say that the sooner you are in their journey, the more efficient your sourcing is going to be. And then that means...”
2021-10-18 · Capital Allocators · Erik Serrano Berntsen – Backing Alternative Founders at Stable Asset Management (Capital Allocators, EP.218) · IDENTIFIED FROM THE TRANSCRIPT · source
“The timeline is to get regulated, or you want to talk to people who help design logos and pick colors. And it's really about empathizing with that journey. And the sooner you can get involved, the sooner you can build conviction in that manager, the more time you have to spend with him or her, and they have time to spend with you. But on top of that, you can also help them not make the usual mistakes we see with emerging managers. So a lot of emerging managers tend to go to market way before they're baked. And it's interesting because structurally the industry propels them to do so. So for instance, in public markets, you have Capintra teams and private markets, you have placement agents. Their role is to connect managers to investors. And they want to be helpful to the manager because they want to work with them and they want to be helpful to investors because ultimately those are the allocators who are going to invest with the managers they work with.”
2021-10-18 · Capital Allocators · Erik Serrano Berntsen – Backing Alternative Founders at Stable Asset Management (Capital Allocators, EP.218) · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, so taking a step back, we think of sourcing in two ways. There's proactive sourcing and reactive sourcing. So reactive sourcing is fairly straightforward. We get approached with tons of ideas. Most of them are lower quality, but there's still some diamonds in the rough. And then we have this proactive approach, which is a bit like that prepared mind approach. We study areas where we think there's higher return potential. There might be structural reasons why we think a founder might have an edge. And then our philosophy is let's start sourcing as early as we can in the founder's journey to start a business. You put yourself in the founder's mind. This is similar to my experience building stable. What are the first things you do when you want to start your own investment firm? You think about, okay, I should talk to a lawyer about the fund structure. I should talk to a compliance consultant to see how much the regulatory fees and how long.”
2021-10-18 · Capital Allocators · Erik Serrano Berntsen – Backing Alternative Founders at Stable Asset Management (Capital Allocators, EP.218) · IDENTIFIED FROM THE TRANSCRIPT · source
“Morgan Stanley, all rights reserved. And now back to the show. Want to take some of these frameworks and put them into practice of how you go about it. So let's just start with sourcing and the identification of managers. So you're looking across asset classes in alternatives. So hedge funds, private equity, venture capital. How do you start to figure out which particular managers you want to take a close look at?”
2021-10-18 · Capital Allocators · Erik Serrano Berntsen – Backing Alternative Founders at Stable Asset Management (Capital Allocators, EP.218) · IDENTIFIED FROM THE TRANSCRIPT · source
“And you have to think long term that these will pay off hugely if this is a relationship you can nurture, earn the trust of, and then grow with. And something I often share with my founders is you want to keep complexity low because I think both complexity and size to a certain extent are the enemies of performance. And a quick definition of complexity when you're running investment firms is number of investors, number of strategies, a number of employees squared. So one of the things you want to keep small is number of investors. Because as we mentioned, managing relationships takes a lot of time. These investors might take a bit longer to do their due diligence or feel that you've achieved a certain track record or even size. So they come later in the life cycle. But they're fantastic partners to have. So you have to therefore be flexible about what demands you have and you have to think strategically.”
2021-10-18 · Capital Allocators · Erik Serrano Berntsen – Backing Alternative Founders at Stable Asset Management (Capital Allocators, EP.218) · IDENTIFIED FROM THE TRANSCRIPT · source
“growing, their very long term, we find them to be more understanding in periods of underperformance because they are so long term, and they have less pressures in terms of clients or stakeholders that some of the other LP segments might have. So it's a very valuable relationship on a long-term basis. And as I was just mentioning, growing with you is what you really want to try and achieve as a manager. And these are the types of institutions who as you grow your investment firm can also enable you to do new and”
2021-10-18 · Capital Allocators · Erik Serrano Berntsen – Backing Alternative Founders at Stable Asset Management (Capital Allocators, EP.218) · IDENTIFIED FROM THE TRANSCRIPT · source
“That's a very difficult question to answer, but I'll try and answer it with some examples. When I started the business, I thought that I would be convincing my founders to keep fees high, for example. And actually, it's been the opposite. I find a lot of my time is coaching and sharing my own experiences building stable with the managers we back around the fact that you have to be a long-term thinker and you have to think about the relationship in a less monetary way, in a more strategic way. Let me give you an example. If a large institution comes and wants to invest with you fairly on in your life cycle, particularly large institutions like pension funds or sovereign wealth funds are quite fee sensitive. But the advantage of partnering with such institutions is that they're very large.”
2021-10-18 · Capital Allocators · Erik Serrano Berntsen – Backing Alternative Founders at Stable Asset Management (Capital Allocators, EP.218) · IDENTIFIED FROM THE TRANSCRIPT · source
“So, when you get outside of the bounds of the relationship that you are having with the GP in any of these strategies, and then start to think about other allocators who need to invest in those funds for them to grow, how do you think about those issues and in the way that you want these firms to attract capital that still may have, for example, that adversarial GPLP relationship?”
2021-10-18 · Capital Allocators · Erik Serrano Berntsen – Backing Alternative Founders at Stable Asset Management (Capital Allocators, EP.218) · IDENTIFIED FROM THE TRANSCRIPT · source
“Seen that movie. And secondly, we want to make sure that we can grow with you. So we want to deploy more capital with you. We want to have aligned fee structures. We want capacity reservations. We want to take advantage of unique opportunities along the way together. So all those avenues we build in from day one into our investments. And that's great for the founder too. They get to have a supportive partner that enables them to take advantage. And it really changes the conversation. In an LPGP relationship, oftentimes it's a bit adversarial. It feels like a zero-sum game that the allocator wants to reduce fees. The founder wants to increase fees. But when you're actually in the same boat, that adversarial zero-sum game disappears. And now you're really both benefiting from building something together. And not only does it make for more fun and healthier relationship, but it makes for much more profitable relationships too.”
2021-10-18 · Capital Allocators · Erik Serrano Berntsen – Backing Alternative Founders at Stable Asset Management (Capital Allocators, EP.218) · IDENTIFIED FROM THE TRANSCRIPT · source
“That you end up with delivering great results by investing in emerging managers. And then finally, the alignment piece. This is all about structuring. So for us, alignment is about fairer upside sharing and relationship optionality. So what does that mean? We want to build alignment that will withstand the test of time. And so because these investment firms are very profitable businesses to own, and the more you invest in them, the more valuable they become, we think it's fair that if we invest with you and help you build your business, we want to be partners in your business. So this way, as the business grows, not only are we making a return on our investment capital, but we're also making a return from the success of your business. And this mitigates the misalignment around over time a huge part of the upside from these businesses coming from management fee versus performance fees, which tends to occur over time.”
2021-10-18 · Capital Allocators · Erik Serrano Berntsen – Backing Alternative Founders at Stable Asset Management (Capital Allocators, EP.218) · IDENTIFIED FROM THE TRANSCRIPT · source
“Can bring. But if you set expectations properly and communicate very proactively from the beginning, then I think you can sort of nip that in the bud. And when those failures inevitably happen, that's within expectations. And the third way to mitigate that allocator risk, career risk, is to build portfolios. So when these investment firms fail, they don't actually fail much. There's many ways to protect downside across asset classes. And when failures occur, it tends to be pedestrian, uninspiring performance, or it's related to the team gelling or it's really not very often that you'll have significant capital loss. But when these investment firms are successful, they're very profitable. And so the win-loss ratio is very asymmetric. When these businesses are successful, as long as you build a portfolio of them, then you can have that positive expectation. And that's the way.”
2021-10-18 · Capital Allocators · Erik Serrano Berntsen – Backing Alternative Founders at Stable Asset Management (Capital Allocators, EP.218) · IDENTIFIED FROM THE TRANSCRIPT · source
“At strategy level? Is this a strategy that has a sustainable edge? Does it have a role to play in investor portfolios? And then we think about it at peer group level, which is what are the alternatives to this new business? Are there incumbents? Is it oligopolistic? Are incumbents also raising capital? Are they closed? Are they raising a fund? This vintage, or is it between vintages? And all of that consideration is more around the potential to actually attract follow-on investors after we've invested our own capital. That's the diligent side of things. When it comes to how to manage the allocator risk, there's three ways to do that. One is alignment, which I'll get to in a second. The second is to communicate the right expectations. Because emerging managers have a higher failure rate, what happens is that the leadership of the allocating community is fearful of the career risk that sort of those failures.”
2021-10-18 · Capital Allocators · Erik Serrano Berntsen – Backing Alternative Founders at Stable Asset Management (Capital Allocators, EP.218) · IDENTIFIED FROM THE TRANSCRIPT · source
“Edges coming with you, or the percentage that isn't can be replicated within a reasonable period of time at a reasonable cost, then we can proceed. On the operational side, that's really more just about cost and complexity. It's more about making sure this is a business that we feel we have expertise in supporting and that we feel is a business that can start at a relatively small scale compared to perhaps its previous incarnation. And then the third, commercial, this is probably the leg that's most unique to backing founders and building investment firms versus being a passive limited partner. And on the commercial side, we're really trying to assess, does this founding team have the potential to have a business built around them? So we think about it at the person level. Is this a person who can build trust with investors? Can they attract and retain talent? Can they explain what they do? And then we think about”
2021-10-18 · Capital Allocators · Erik Serrano Berntsen – Backing Alternative Founders at Stable Asset Management (Capital Allocators, EP.218) · IDENTIFIED FROM THE TRANSCRIPT · source