The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch
00:06:34 · Harry Stebbings, Scott Wilson
[00:06:34] S1: Were you worried about doing too much too soon? That is a very large shift. [00:06:38] S0: Yeah. I mean, it was a mix. There was this kinda obvious tension that performance hadn't been great for for quite some time, and the the board, you know, wanted to see results quickly. And and they had kinda given me and the team three years to really make performance show some real pro performance improvements. And to do that, you know, we had to really restructure the portfolio relatively quickly, you know, and changing around an endowment portfolio is more like turning around an aircraft carrier than a speedboat. So we knew that was gonna take a decent amount of time. And then the private side... Luckily, private side was in better shape, I think, than the public side of the portfolio. But we, we had 36, 37 hedge funds in the portfolio and then we got rid of them all. So we certainly weren't popular in certain parts of Manhattan. Ultimately, we we turned over more than 75% of the portfolio through secondary sales on the private side. [00:07:30] S1: That is a fire sale. That would constitute... Yeah. I'll I'll tell you that. And you just [00:07:34] S0: over eighteen months. [00:07:36] S1: Oh, fine. And just don't go to Manhattan for a while. He won't be the most popular dude on Wall Street. Okay. And the endowment then is $8,000,000,000? [00:07:44] S0: Yeah. It was just under 8,000,000,000 when I started. [00:07:46] S1: Okay. And it... Today is how much? [00:07:48] S0: The total managed pool is probably just under $20,000,000,000 today.
00:07:48 · Scott Wilson, Harry Stebbings
[00:07:48] S0: The total managed pool is probably just under $20,000,000,000 today. [00:07:52] S1: I hope you have a 20% take rate personally. No. [00:07:57] S0: Unfortunately, that's not the way it works. [00:07:59] S1: Unfortunately, not. That would be a $2,400,000,000 take. So, well done. So you have that restructuring of the portfolio, and you then have the freedom to bluntly reallocate and start a little bit more afresh. How did you approach it then going, okay. This is how much I want publics, privates. What did the portfolio construction look like when you had that flexibility? [00:08:20] S0: I mean, I always say we're pretty much indifferent between publics and privates. And I would tell my board, like, you know, the only difference between those two asset classes is how often they're mark to market. So if you have, a ten, twenty year time frame, do you... Should you really care that something is marked every day or something is marked once a quarter? Within that, we have obvious liquidity constraints. So our big broad target, I would say, is half publics, half privates. We're definitely out over our skis and privates, but that's reversing quickly. [00:08:48] S1: With the greatest of respect, I get you on the mark to markets, but the biggest difference is, as you said, liquidity. No. I mean, the extended period that funds are now in terms of being twelve to fifteen year funds and the time it takes to get cash back, the fundamental difference is available liquid. No?
00:08:48 · Harry Stebbings, Scott Wilson
[00:08:48] S1: With the greatest of respect, I get you on the mark to markets, but the biggest difference is, as you said, liquidity. No. I mean, the extended period that funds are now in terms of being twelve to fifteen year funds and the time it takes to get cash back, the fundamental difference is available liquid. No? [00:09:04] S0: Yeah. I mean, we obviously have liquidity constraints, and that drives that ratio between public and privates. But it's not like if Stripe goes public tomorrow, it should be in a different asset class. [00:09:14] S1: In terms of the capital requirements, you have net outflows a year of, like, 5%? [00:09:19] S0: Roughly 5%. It's it's smoothed out over kind of rolling five year average. [00:09:23] S1: If you didn't have the required net outflows, would you do anything differently in terms of capital allocation? [00:09:30] S0: Oh, for sure. We would probably have, 70, 80% targeted privates. [00:09:34] S1: Wow. Can you walk me through that thinking and just say, I... I'm the board. Rationalize that for me, Scott.
00:09:34 · Harry Stebbings, Scott Wilson
[00:09:34] S1: Wow. Can you walk me through that thinking and just say, I... I'm the board. Rationalize that for me, Scott. [00:09:39] S0: Yeah. I mean, well, payout is a function of your liquid assets. Right? Because you can't always convert your private portfolio into the payout is not guaranteed, right? In theory, like, you know, some percentage of your private portfolio should become liquid every year, but you can never count on it when you actually need it. So if you have a 5% of payout on, and half your portfolio is liquid, that's 10% of your liquid portfolio that you're paying out every year. And if you're paying out zero, well, you really don't have that constraint. And if you look at the relative performance, you know, over the last decade, we've probably compounded our privates by in the low to mid twenties and we've compounded, you know, our public equities at 10%. [00:10:18] S1: Did you always have this belief in privates being the value driver of a portfolio? [00:10:23] S0: No. I I... But I do think, like, the markets are less efficient. [00:10:26] S1: What do you mean by that? [00:10:28] S0: I mean, like, you can get access to investments that are less picked over. Like, there's always natural buyers and sellers, and I think it's much harder to create alpha in public markets than it is private markets. And I think this is, you know, well documented over the course of time.
00:10:28 · Scott Wilson, Harry Stebbings
[00:10:28] S0: I mean, like, you can get access to investments that are less picked over. Like, there's always natural buyers and sellers, and I think it's much harder to create alpha in public markets than it is private markets. And I think this is, you know, well documented over the course of time. [00:10:43] S1: So if we take the 70 to 80% that could be in privates, how do we think about structuring the private space today? Obviously, privates is a very large allocation in itself. You've got directs. You've got funds. You've got credit. You've got debt. How do you think about how private should be structured for you? [00:11:00] S0: The way we do it... So roughly half of our private portfolio is in, maybe more than half right now, is in kinda co investments and direct investments. So we manage it the same way we manage the public portfolio. So we, you know, find good partners. And to the extent we can, when they find something that's really interesting, we try and co invest or add capital directly to that single name. [00:11:23] S1: Do you have a separate direct team? [00:11:25] S0: No. No. Everybody on my team is a generalist. [00:11:27] S1: What would you advise another CI? I I... You know, obviously, I'm I'm a manager. I have many LPs, and they all say to me, you know, oh, we'd really like to do more directs, but we don't feel like we're equipped to do so. We don't have the time to really do the work. What would you say to them, and how would you advise a CIO who doesn't really do directs today but maybe should and could?
00:11:27 · Harry Stebbings, Scott Wilson
[00:11:27] S1: What would you advise another CI? I I... You know, obviously, I'm I'm a manager. I have many LPs, and they all say to me, you know, oh, we'd really like to do more directs, but we don't feel like we're equipped to do so. We don't have the time to really do the work. What would you say to them, and how would you advise a CIO who doesn't really do directs today but maybe should and could? [00:11:46] S0: Yeah. You kinda have to build that muscle. You have to have that internal skill set on the team. So if you look at how my team allocates their time, and we still meet with a lot of external partners, but but upwards of, you know, 80, 90% of our time is just out meeting individual companies. And and that's very different than probably how most of your LPs spend their time. [00:12:06] S1: Very different. Most of them spend 70 to 90% of their time with managers, and then 10% of their time with directs, I'd say. [00:12:13] S0: But if you look at our performance over the last decade, if we didn't have any direct or co investments, we would have been right at the average of our peer group, you know, as it is, I think we're we're at the top, if not the very top of our peer group over the last decade. [00:12:26] S1: So were you just better company pickers then? Because what you just told me is that actually you'd be average if it were just funds only. And if that were the case, you must just be better company pickers than everyone else.