Selecting the Best Opportunities in the Private Markets | AWM Insights #156
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Episode Summary
Tens of thousands of Private Equity and Venture Investments are made every year. How can you sort through these opportunities in thoughtful ways to isolate and get in front of the best of the best?
Private Markets are not as transparent as their public counterparts, which adds to the complexity of making investment decisions, but also creates opportunity. Building relationships with standout companies and operators gives insight into the most exciting prospects and can give investors the inside track to “win” deals.
From there, expert managers add value to their investment companies by helping with operations, expansions, and exit strategies. This is why who you invest with is just as important as what you invest in.
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Episode Highlights:
0:00 Intro
0:45 How do we source and filter through Private Market Opportunities?
2:56 What are our first steps to Evaluate an Opportunity
4:01 Sourcing, Selecting, Winning, Exiting
7:25 How the distribution of Venture returns impacts our investment framework
8:10 Differences in Perception in the Private Markets
9:40 Our Ultimate goal is to help you accomplish your priorities
11:30 Text us!
+ Read the Transcript
Brandon Averill (00:09): All right, Justin, while we're back and we're going to continue down the venture train here, top of the mind for us, as always, this time of year, we're getting our allocations put together and getting that private side of the portfolios allocated. And we left it off last episode talking a little bit about how we actually evaluate fund opportunities when we have some of these managers reach out with materials, which we still get blast cold emailed quite often. What's our process for actually going through that? There's other ways they come in too. We just had a client this week bring another opportunity to us that we had previously engaged with and gotten to know the team quite a bit.
(00:54): But I would love to just start with you, Justin. What are the different ways that we see inbound come in? And a little bit about just what is your processes, these types of things come in, what goes through your head? How do you determine this person's worth meeting with or that person this is clearly just not going to fit in our allocations? So I'll start there. I'd love to just hear more about your process.
Justin Dyer (01:17): Well, there's no shortage of deals to go through, I guess, to hit on that, which is a good thing. We welcome that. It's actually something we focus on trying to do a better job managing. And what I mean by that, we have an extensive network and those are trusted partners which share deals, share investment opportunities, share funds that may or may not be raising at a given point in time. That's great. That's all fine and dandy. But then there's, to your point, all sorts of cold inbound outreach as well. Typically, I give a little bit of a higher bar with those for probably, hopefully, obvious reasons, but that's a data point that we want to capture and make sure we are not missing out on something. Just because it comes in cold, doesn't mean it's a bad investment on the surface. There's probably a higher association there, but I don't want to completely write something off.
(02:11): So making sure we're capturing all that flow regardless of source, analyzing that at the end of the year is real big picture, high levels how we think about this. We want to do as thorough, as deep of a job, looking at the opportunity set that's available to us, using that information to figure out where we are missing out on something. Maybe it's a sector focus, maybe it's a stage focus, maybe there's a manager we've heard of, but we haven't got a direct introduction to. All of the above is really how we look at it. And so let's call it the deal flow term is something that is a very, very wide net that we throw out there that we use to harness all this information that's coming our way so we can, at the end of the day, make better and better investment decisions, learn over time, et cetera.
(03:00): When we do get a deck, usually, is how it comes or an introduction, looking at their website, just trying to get a quick assessment of who they are, what their backgrounds are, is this someone who is just... All of a sudden getting an itch they want to scratch and putting out a shingle and saying, "Hey, I want to be a venture capital manager or private equity manager," whatever the case may be, start a real estate fund. And typically, people who are doing that, you can get a sense right out the gate. And I would say that's probably a barrier to entry number one. And we'll talk probably a little bit about how to analyze that deeper, but I want to go through the broad process at the outset here. Once you get comfortable and say, "Okay, this is an interesting enough background, interesting enough manager or managers," you want to do your due diligence in three broad level categories.
(03:51): And this can be a applied to venture capital, private equity, real estate, sourcing your investment opportunities, selecting those. Just because you can source good deals doesn't mean you can pick good deals. And then you have to win those deals. So not just because you want to make an investment, you actually have to go to the founder and say, "Hey, let me invest in your company because X, Y, Z." And then eventually, you have to make a determination on when to get out of an investment. Sometimes that's answered for you through an IPO or an acquisition, but sometimes you have some control around that. And so those are four broad categories in which we are trying to assess a specific investment opportunity, whether it be a fund or direct investment, real estate, private equity, et cetera.
Brandon Averill (04:40): I think it's fascinating to hear that and hopefully, for clients listening, it's also putting some clarity around when we hear of clients or prospects or just people in the network that are interested in doing individual deals, to think like, "Okay, if we're putting these professional venture managers, private equity managers through this rigor of decision making and trying to assess how good they are, how confident are we in anybody really that's not living and breathing this entire environment to go out and make good decisions on a one-off basis?"
(05:14): And so I just think it's interesting. This is why we implement the way we do. This is why we choose managers to approach the situation and don't just take the random deals that are being plucked off. It's about volume, it's about understanding trends, it's about seeing what's going on in the markets. And if you're just rifle shooting on one specific opportunity, you're more than likely setting yourself up for a risk reward. That just doesn't make any sense. And you may get lucky that that may hit, but you think about the magnitude and the impact of that decision. If you get it wrong, it can be pretty significant. And so being able to assess the professionalism, how do these people actually invest money just ends up putting all of our clients in a much, much better situation overall.
(06:03): And I think the other thing that I find interesting a lot of times is we'll get comments like, "Hey, this other person that I'm getting this flow from seems like they're really good at picking investments, et cetera." And I always ask the question, I like to ask the question, "Oh really? Compared to what? What makes you think that? What return expectation did they have and where did it actually line up?" and that usually stops people in their tracks because it's natural, it's human. You get really excited. We talked about this previously, but there's an excitement to investing in the private investment world because you are putting a bet in innovation and growth and all the good things that we have to offer in this world. But if you don't have frameworks to say, "Hey, I actually want X and Y return within certain period of time." I mean, you can come up with a hodgepodge of stuff that doesn't make any sense, right?
Justin Dyer (06:56): Oh, no doubt. And I think even just grabbing what you're saying there too, and going back to this idea, I think, in this series, we've talked about the power law. I'm not going to go geek out on statistics, but really all that's saying is the range of outcomes in venture capital, private equity, et cetera, are wildly dispersed. You have incredible outliers and just absolute duds. Companies that go to zero, happens all the time. Depending on where you're investing earlier stage on the venture side, later stage in private equity, you start to narrow that down, but you're also bringing down your expected return as well. And what I'm getting at here is in order to have confidence in that expected outcome, you need a wide range, a number of shots on goal. You need that systematic process. You need that decision making framework to make sure you're increasing your confidence that you're going to see those actual expectations and you're not just getting lucky on a single rifle shot.
Brandon Averill (08:03): Yeah, no, I think it's fascinating. I mean, these recent meetings are flooding to my head, but we actually met with somebody that works at a private equity firm, fairly new to the business, but actually has been investing their wealth for quite some time via this firm and super excited, laid out probably 15 to 20 deals that he's been a part of and never lost money. "The firm's never lost money, X, Y, and Z. We've gotten low double-digit return. This has been fantastic." And he's just elated. And then you go to a professional that has pretty much the same portfolio invested with the same company, same deals, all this kind of stuff, and he's sitting going, "Yeah, it is what it is. But they've basically produced the S&P 500. It's kind of been disappointing." But you take the two perspectives, one that a person that lives in this world and analyzes these deals and really understands the trade-offs. And then you have somebody else that, not to their fault, they're learning and getting their feet under them.
(09:02): But looking at the situation completely different probably because he hasn't developed yet that criteria for figuring out like, "What do I actually want, or more importantly, what do I actually deserve from this part of my portfolio if I'm going to lock up my money?" So I think it's pretty interesting is you guys that are listening, start to think about how we approach your private allocations, or you think about other opportunities or hear of other opportunities to start to put the frameworks around these and really understand why your financial structure is built in the way that it is.
Justin Dyer (09:35): Yeah, totally. And you hit the term trade-off, and I think that's it. That's a really good place to sit on for a second. When we're constructing your custom portfolio, we are constantly doing that. We're looking at the opportunity cost, the trade-off, you can use all these different words, to you missing or accomplishing, hitting your priorities and making sure you can actually do what's important to you in life. And private investments are a component of that, especially when you've established or accumulated substantial wealth. But there's trade-offs to that, right? Both from a risk and return standpoint, but a liquidity standpoint, which we've talked about. And all of these need to go into this bag of analysis to adequately construct a portfolio that gives us the highest probability or highest likelihood to meet your priorities.
Brandon Averill (10:26): All right. So as we wrap up here, we did get a little philosophical on everybody in this episode, but we wanted to give you a framework just how we think about when deals come in, how we start to evaluate them. And hopefully, the key takeaway here is that we're looking more systematically at the approach to make sure that as we enter in this position, how does it affect the overall return expectations? How does it affect when we think money may or may not actually return back to you as the investor? And it's really systematically approached rather than this kind of buckshot-looking, just kind of hits something lightning in a bottle. Everything ties back to your individual priorities and really trying to accomplish that. So we hope you enjoyed this episode. We'd love to hear your questions. And until next time, own your wealth, make an impact, and always be a pro.