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Gaurav Kapadia

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77
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2022-03-22
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2022-03-22
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  1. “What we did to the family office and then let's add resources to it. So let's add these executive partners who can bring us diligence insight, authenticity, and operators mindset to evaluate public and private companies. That, I believe, still is we're one of the only or very few public-private focused funds that is able to do that in such an authentic way. Let's take our fantastic investment organization. Let's supplement it with resources. So we have a diligence team, which is basically ex-consultants help support the analyst team. We have a data analyst. And let's not get too big in AUM. So we have the ability, the resources of a $50 billion fund and deploy it to a much wider array of investment opportunities. That's how it came to be, which is the outside capital to me was, is it going to be accretive to reputation and returns? I was not going to do it for a source of.”

    2022-03-22 · Invest Like the Best · Gaurav Kapadia - Everything Compounds - [Invest Like the Best, EP. 269] · IDENTIFIED FROM THE TRANSCRIPT · source

  2. “The ethos of the compounding philosophy on returns, not have any pressure on the AUM side, and work with our partners to compound capital for the long run. And so that was the inflection point. Then we said we have this great team and really pour gasoline on the fire that we had ignited at XN as a family office. So that's how we created and that's how we expanded it. I will say If I was 80% sure it was the right decision when we raised the outside capital I'm like 110% convinced today because we have the greatest capital partners you could ask for and it has enabled us to think more creatively about the organization and investing than I think other organizations have the luxury to be able to do. So as large as investor with a fair amount of outside capital, relatively long lock, I'd say like, how could public and private investing change? What should we do? How should we tackle the problem?”

    2022-03-22 · Invest Like the Best · Gaurav Kapadia - Everything Compounds - [Invest Like the Best, EP. 269] · IDENTIFIED FROM THE TRANSCRIPT · source

  3. “I'm like as passionate as I've ever been. And I don't have to worry about a lot of the constraints that other people have in the sense that I could really work for the love of the game. And the second thing is I was like, man, we have something special here. Once you distill investing to the purity and you can make that machine run, everyone looks around and says, this is awesome. And so we set a very specific set of guidelines. Said, look, I will always be the largest investor in the fund. We're going to have mission-driven partners with us. Our goal is to compound capital for the long run. We have a very unusual structure, which has become less unusual over time, but where it's a commingled vehicle with a competition of capital across public and private, a mandatory private allocation, very long duration lockups. That structure allowed us to keep”

    2022-03-22 · Invest Like the Best · Gaurav Kapadia - Everything Compounds - [Invest Like the Best, EP. 269] · IDENTIFIED FROM THE TRANSCRIPT · source

  4. “To get back to the purity of investing, to generate high returns with outside capital. I thought that there would be too many constraints, even with the reputation and the relationships that I had to be able to do that effectively. So I set up my whole legal structure. You're sitting in the office. That was my family office. I'm going to go from 196 LPs to one LP. That's a pain in the ass, which is me. And then build the whole organization around that. And so like literally, I walked out the door at Sorobon. We renovated this office space and roughly half the colleagues on the investment team worked with me and the family office. It was not a family office where I played golf every day because I realized my passion was investing. I wanted to do it at a high level. I was 37 years old. Let's get after it. And then we did it for two years. And the couple of things are true. The joy and practice and love of investing came back.”

    2022-03-22 · Invest Like the Best · Gaurav Kapadia - Everything Compounds - [Invest Like the Best, EP. 269] · IDENTIFIED FROM THE TRANSCRIPT · source

  5. “So, I think that's worth maybe taking even a further step back, which is before I started X-Net as a family office, I wanted to, for me, get back to the joy and purity of investing. And as the same friend that you referenced earlier, Ferroz, Ferroz, I went out to dinner with him because he obviously, when he left Tiger, he started arena as a family office. And he said, you have to decide, Gorov, if you want to be in the AUM Hall of Fame or the IRR Hall of Fame. And I still tell everyone about that dinner. It was just before I was signed to leave. And it was in my head. And I was like, you know what? It's a good thing to look in the mirror and figure out what you want to be. The book that I want to write about our investment organization is we want to be in the IRR hall of fame. The name XN popped into my head. X to the NPA. That's what I want. That's what it means to me. So we set up XN as a family office because I actually did not think it would be.”

    2022-03-22 · Invest Like the Best · Gaurav Kapadia - Everything Compounds - [Invest Like the Best, EP. 269] · IDENTIFIED FROM THE TRANSCRIPT · source

  6. “I think there's a couple of aspects to it. Number one, fewer talented people are going straight into investing. And I think it's because there's a plethora of other great options that have been created that are also high paying and really intellectually interesting. You can work at a startup. You could actually just work at one of the large internet companies and get paid very well and have a great quality of life and do interesting stuff, which is actually different from like 10 or 15 years ago. I would say then within that public market organizations, I feel like their start.”

    2022-03-22 · Invest Like the Best · Gaurav Kapadia - Everything Compounds - [Invest Like the Best, EP. 269] · IDENTIFIED FROM THE TRANSCRIPT · source

  7. “100% not even close, in my opinion. Or I think rigor has shifted. I think the rigor that you see on a short-term basis is like very high because as so much of capital is moved into organizations that are compensated on shorter term cycles as well as shorter term results. The amount of rigor, whether it's data science, analytical capability on that is like super high. The time horizon has shrunk a fair amount. Medium and long-term rigor has declined a ton and short-term rigor has gone up a lot almost like what I increased the opportunity for XN.”

    2022-03-22 · Invest Like the Best · Gaurav Kapadia - Everything Compounds - [Invest Like the Best, EP. 269] · IDENTIFIED FROM THE TRANSCRIPT · source

  8. “As the rigor has waned and the analytical capabilities of waned, as there's been so many companies that are there to evaluate, simple winds the day for multiples, but whether it's people have forgotten to do NOLs or the refinancings or so there's like financial complexity business model transition complexity, end market incremental marginy complexity that we see pretty often.”

    2022-03-22 · Invest Like the Best · Gaurav Kapadia - Everything Compounds - [Invest Like the Best, EP. 269] · IDENTIFIED FROM THE TRANSCRIPT · source

  9. “I mean, I think there's a couple of different sources of complexity. One is oftentimes companies that change points. So whether it is new business model transitions or M&A divestitures in the end market, those create a lot of friction that the management teams often feel like they understand, but the investors don't. I'll give you like an incredibly simple example. We have a portfolio company that announced that their margins are going to be lower on percent terms. And the whole market is freaking out about it. And really, when you double click into it, it's that they're adding incremental revenue that they never would have gotten. So it's dollar additive and percent margin dilutive. There's no reason to freak out. That's like a source of complexity that even something as simple as that that the market flips out around. Now, I do feel like over time, particularly in the public markets, to some extent the private markets.”

    2022-03-22 · Invest Like the Best · Gaurav Kapadia - Everything Compounds - [Invest Like the Best, EP. 269] · IDENTIFIED FROM THE TRANSCRIPT · source

  10. “The last decade, people weren't doing the profit contribution of what TV was to the P&L of a cable company. And so we kind of armed them with that, which is why don't you just tell people it's like a lot of revenue and not a lot of profit, and then people won't stress out about it. Those aspects we tend to find ourselves because we have this rigor mindset. And I do believe to generate extraordinary investment returns, you have to go towards complexity. But then to realize those extraordinary investment returns, you have to de complexify. You have to simplify them in a way that you understand what the key value drivers are. And then you can hand that back to the company so they can do the same thing for their other shareholders.”

    2022-03-22 · Invest Like the Best · Gaurav Kapadia - Everything Compounds - [Invest Like the Best, EP. 269] · IDENTIFIED FROM THE TRANSCRIPT · source

  11. “It really varies by type of company, probably the modal outcome though, is we like, you know, the analogy of if you had two runners to coach, one who looks perfect and runs a five minute mile, the other one who looks clumsy and runs a five minute mile, who do you want to pick? The second one? I say this with respect to all our portfolio companies on the public side in particular, but we often pick the second one. And so a lot of it is the companies themselves are so in the weeds and investor attention is so diffuse these days that it's like you have an exciting and important thing to communicate. First of all, are we understanding it correctly? Secondly, if we are, you should shout it from the rooftop. That's the modal thing. There's a lot around controversies too, which we try to do outside and work to help companies understand on their own, which is there could be a concern around competitive thread. I mean, cable is a great example, right? Because back in the early part,”

    2022-03-22 · Invest Like the Best · Gaurav Kapadia - Everything Compounds - [Invest Like the Best, EP. 269] · IDENTIFIED FROM THE TRANSCRIPT · source

  12. “Known for 20 years, worked with five or ten, and seeing them grow and be huge and impactful leaders and partners is great. My favorite thing these days is when I talk to a CEO and they're like, hey, Gore, great to see you. I'm good. I'll talk to one of your colleagues. That's like a great way for me to measure.”

    2022-03-22 · Invest Like the Best · Gaurav Kapadia - Everything Compounds - [Invest Like the Best, EP. 269] · IDENTIFIED FROM THE TRANSCRIPT · source

  13. “I was lucky to be able to do that too. So there's no hierarchy of seniority. I would walk in, be prepped, and hopefully be able to lead the meeting to ask important questions, develop a really good relationship. And it's actually interesting. So these three executive partners that I mentioned and a bunch of the executives have relationships with, I met Carl when I was 24. I met Jan when I was 23 and I met Rob when I was 28. That relationship still carries through. One of the most gratifying things for me is that it's not just me anymore. If you look across the whole organization, look outside this conference room, everyone here brings that kindness and rigor, the insight, the management interactions that I really want to pride our organization around. They do it independently. One of the really fun things I've been able to observe because I have some of my colleagues here that I've”

    2022-03-22 · Invest Like the Best · Gaurav Kapadia - Everything Compounds - [Invest Like the Best, EP. 269] · IDENTIFIED FROM THE TRANSCRIPT · source

  14. “Almost always we have a significant prep document that we often share with the companies. So they know from the outset that we have the long-term interest of the company at heart and that we're putting in the elbow grease to make sure that we understand what they're trying to accomplish. That alone has been a huge differentiator. Can you imagine 99% of investor interactions are like, why didn't you do this for me lately? Hopefully the ones with us are we see a lot of potential. We think the world's not understanding it. Help us understand it better. Can we help you understand how to communicate it better? What are we missing? How can we help? Do you need a customer introduction? That just changes the tenor of the conversation. That started for me really early because I had this luxury of starting, I think as a consultant. I work for people my whole career who became successful very early in their own careers.”

    2022-03-22 · Invest Like the Best · Gaurav Kapadia - Everything Compounds - [Invest Like the Best, EP. 269] · IDENTIFIED FROM THE TRANSCRIPT · source

  15. “Interestingly, the 28 versus today I don't think is that different. I was very lucky in that I had a huge accelerator and a huge mentor very early in my career. So instead of going to investment banking or private equity out of college, I went to a consulting firm, went to the Boston Consulting Group. And that was a really interesting experience because when you're 22, you have to interact with senior management teams like immediately. And so that's a real trial by fire. One of the things that I decided and I observed is very few investors, public or private, viewed themselves as partners or advocates for the management team or companies. If you go to many meetings, they automatically start adversarial. They go, how much share are you going to buy back? Why do you miss your margins? We never start by it. We lead with insight. We lead with work. We never go to a management meeting without tons of prep.”

    2022-03-22 · Invest Like the Best · Gaurav Kapadia - Everything Compounds - [Invest Like the Best, EP. 269] · IDENTIFIED FROM THE TRANSCRIPT · source

  16. “Lost a little bit in COVID. Also, a lot of other things, which is we create a culture where you're not afraid to make a mistake. What that does is allows you to open the aperture as to what you look for. Because if you're so constantly afraid of being scolded if you commit a footfall, you can't allow yourself the intellectual freedom to look beyond the day-to-day, if that makes sense.”

    2022-03-22 · Invest Like the Best · Gaurav Kapadia - Everything Compounds - [Invest Like the Best, EP. 269] · IDENTIFIED FROM THE TRANSCRIPT · source

  17. “I believe investing is an apprenticeship model. I have the greatest luxury I started as a professional investor when I was 23, and I had great friends, colleagues, and mentors literally around me. We're sitting here in my office. If you look at the office we have here, you'll notice that we're open architecture. I sit with all of my colleagues. My hope, and we did this at Sorbonne, and obviously I benefited from a TBG axon, is that you show by doing and not just by saying. And that's like a huge tenet of what we do here. Like, I don't say one thing and then make everybody else do something else. The best way to do it is to show it. And we show it every day. I come here to the office every day, stand in my standing desk with my colleagues around me. I'm in all the management team meetings. I'm on the road all the time meeting companies, which I think is a really important piece of what we do with it, which has kind of gotten.”

    2022-03-22 · Invest Like the Best · Gaurav Kapadia - Everything Compounds - [Invest Like the Best, EP. 269] · IDENTIFIED FROM THE TRANSCRIPT · source

  18. “To make the transition between license to subscription, they forgot that they basically have a lock on all architects domestically, maybe globally, that the bill of materials is very small as it relates to the total custom of an architecture job, and that we had the ability to tie in things that we were seeing both on the software side, but also given how much work we do on the industrials and construction side, data points there. And so it's one of those things. I actually prepared a slide presentation for the board when they were under attack by activists. Here's what we view your competitive position as. We believe this is going to be obvious in retrospect that you have a great position. And I remember we actually put out a free cash flow per share target for them. That was an interesting one because we were so convicted at the time. It felt very scary because there was a ton of volatility, a ton of disbelief. But in the fullness of time, it came out.”

    2022-03-22 · Invest Like the Best · Gaurav Kapadia - Everything Compounds - [Invest Like the Best, EP. 269] · IDENTIFIED FROM THE TRANSCRIPT · source

  19. “Charter consolidated the cable industry. Comcast has done a fantastic job. Turns out the very low profit margins they made on TV, even though as high revenue was a sideshow. Another example is when we were making software investments that are transitioning from a license to subscription, it was actually very controversial at the time. People were like, how are they going to cross the chasm? What about the cash flow degradation that happens? And now it's like, well, you have a vertical software monopoly. Like, oh, yeah, SaaS transition. I know how to do that. But at the time, it was hard to see. Even the way we built XSEN as an organization, I am actually really lucky three of the former executives and CEOs that we actually invested with behind these obvious introspect ideas actually work with us now as executive partners. And so I remember Autodesk was Carl Bass is one of our executive partners. People were so concerned that they wouldn't be able to.”

    2022-03-22 · Invest Like the Best · Gaurav Kapadia - Everything Compounds - [Invest Like the Best, EP. 269] · IDENTIFIED FROM THE TRANSCRIPT · source

  20. “TV or moved to Netflix or whatever it is. And we just kind of said wait, hold on a second. They're the cheapest way to get broadband internet to your home. If you believe any of these things and there's no regulatory pressure, the usage of broadband is going to go straight up. And your pricing power, because you basically have localized monopolies, which I know you're not allowed to say if you're a cable executive, but I can as cable investor, is that you do have pricing power, mixed power, customer relationship. And then like here we sit. And it's fully obvious in retrospect.”

    2022-03-22 · Invest Like the Best · Gaurav Kapadia - Everything Compounds - [Invest Like the Best, EP. 269] · IDENTIFIED FROM THE TRANSCRIPT · source

  21. “Organizationally, we have this ability to tie disparate pieces of information, block out the noise, and tie them together. And the way I've tried to define what that means for us as an investment organization or a firm is to try to find things that are obvious in retrospect. If there's two main characteristics that we, I think, have, it's that we like asymmetry. We think people have totally lost a thread for many years in a bull market is easy to do on what the downside versus upside skew looks like, what the probability adjusted outcomes are. But that it's so easy to be stuck in the trenches that you don't take a step back and say, like, hey, what's going to be obvious in retrospect? And there's so many great examples. Which now I'll say will sound obvious in retrospect. But in 2011 and 12, 13, or 14, when we made this huge investment in the cable industry, the whole debate was what's going to happen if people stop watching.”

    2022-03-22 · Invest Like the Best · Gaurav Kapadia - Everything Compounds - [Invest Like the Best, EP. 269] · IDENTIFIED FROM THE TRANSCRIPT · source

  22. “Think that's right. And you always see that when people get more senior over time, they have this tendency to ask the one question that the analyst or colleague is just not prepared for. Our president, David Bronson, I started working for him when I was 22 at BCG. He used to do that all the time to me. And now I see myself doing it to people and closing that gap is almost part of the rigor example, which is everyone who starts as an analyst or a different colleague can get the baseline answer. It has to be. But to get the insight, which is really what delivers differentiated investment returns is much harder and it's usually their blind spot. Now, if you ask the question enough time, they become anticipatory of the broader view. So I think that's a great way to put it.”

    2022-03-22 · Invest Like the Best · Gaurav Kapadia - Everything Compounds - [Invest Like the Best, EP. 269] · IDENTIFIED FROM THE TRANSCRIPT · source

  23. “Going to a trade show. It could be looking at the end product. It could be just a different, more qualitative form of rigor. It doesn't need to be quantitative necessarily, but it has to inform the mosaic to make you a great investor or a great colleague.”

    2022-03-22 · Invest Like the Best · Gaurav Kapadia - Everything Compounds - [Invest Like the Best, EP. 269] · IDENTIFIED FROM THE TRANSCRIPT · source

  24. “But in the end, it ends up almost unfailingly, I get a call a few years later saying, like, you are totally right. That was the kind thing to do. And by the way, thank you for following up with me along the way to make sure I landed in the right place and mentor me, give me a reference, whatever that is. That's a good example of things that are over the long-term kind but feel cruel in the moment. Just being honest and transparent as a measure of kindness. Rigor, I think people get rigor wrong in investing a lot, especially people who come through a specific analytical background. And it's not that you have to get your estimates or model perfect. That's actually almost like the table stakes. Like, of course, everyone we hire interview can do.”

    2022-03-22 · Invest Like the Best · Gaurav Kapadia - Everything Compounds - [Invest Like the Best, EP. 269] · IDENTIFIED FROM THE TRANSCRIPT · source

  25. “First thing is people can sometimes confuse what rigor is and what kindness is. Kindness doesn't mean just being unflailingly polite or it can conflate the issue or being non-confrontational. One of the kindest things people do, they tell you the truth. Getting people in that mindset, sometimes in the most difficult situation, the most complicated interaction, the kindest thing to do is to say, as an example, tell someone that it's unlikely they're going to be promoted here or make a career here for the long run. It hurts. I've had to do that many times. I'm crying, they're crying.”

    2022-03-22 · Invest Like the Best · Gaurav Kapadia - Everything Compounds - [Invest Like the Best, EP. 269] · IDENTIFIED FROM THE TRANSCRIPT · source

  26. “What you said, a lot of the most rigorous investment organizations have a reputation for being assholes, for being unkind. And the kindest investment organizations or organizations in general have a tendency to get soft. But I don't think there's a dichotomy there. I think if you keep a cultural backbone, you could be both. And if you're both, you're so differentiated that it creates a foundation for ongoing success. If you talk to anyone, investments we've made, people we interact with, We are a pretty intense organization. We have a lot of rigor, but you will always find that we treat people well, that we act like good partners. By the way, sometimes acting kind is telling the truth. It's not just appeasement. And over the long term, people realize that that is kindness as well. Honesty, compassion, really putting yourself in other people's shoes and really thinking of yourself as a partner.”

    2022-03-22 · Invest Like the Best · Gaurav Kapadia - Everything Compounds - [Invest Like the Best, EP. 269] · IDENTIFIED FROM THE TRANSCRIPT · source

  27. “You're right. We strive to be in the upper right quadrant of kindness and rigor. I'll just take a step back, which is like you, I'm a student of so many investment organizations. And one of the things that I found in the best places that the stand the test of time is that they know what their culture is and it's all self-reinforcing. It kind of even goes back to our name, which is XN, which is if you see our logo X to the nth power, which is everything compounds. That goes with culture too, but you also have to have a rubric to communicate what that culture means and a touchstone for people. At our first off-site after we decided to raise outside capital, we said, like, how do we define who we are? How do we explain to internally and externally who we want to be? And there's so many micro examples. There's, I think we want to be the most ethical. We want to be the best partners. We want to be the most analytical. But how do you communicate that succinctly? And one of the things I found is exactly...”

    2022-03-22 · Invest Like the Best · Gaurav Kapadia - Everything Compounds - [Invest Like the Best, EP. 269] · IDENTIFIED FROM THE TRANSCRIPT · source