Invest Like the Best with Patrick O'Shaughnessy
· Martín Escobari, Patrick O'Shaughnessy
I think it has to do with the internally consistent vision, mission, and plan that Chuck had for GA. [00:00:00] S0: That's not a normal origin story for a firm like this. Usually, it's really just purely commercial enterprise, some young investors set off and build a firm. This was different. What else about that founding DNA makes the setup of the firm unique? How does his original vision and setup allow you to act differently than others do today? [00:00:00] S1: There's this phrase written into our founding documents, which is, "We're good partners to each other, to our founders, and to our clients." The partnership ethos is fundamental, and when you look at 45 years of references of 500 people with 500 companies, thousands of people we've partnered with, and you say, "What do you think of GA?" "They're good partners, they're good guys, they're good people. They do what they say they're going to do, they put the company's interests first." Sometimes we're accused of being dolphins in a sea of sharks, and I'd love to be a dolphin. Who wants to be a shark? Dolphins have much better life. I think that's a big part of the firm's DNA, so I'll give you an example. I ran our General Atlantic's Latin America program for the first seven, eight years of my career at General Atlantic, and in all the due diligence sessions, they asked, "How did you do it? How did you make money in the one neighborhood that no one makes money?" I say, "The reason we do well in Latin America is we don't have a Latin America fund, because if we had a Latin America fund-"
· Martín Escobari, Patrick O'Shaughnessy
[00:00:00] S1: There's this phrase written into our founding documents, which is, "We're good partners to each other, to our founders, and to our clients." The partnership ethos is fundamental, and when you look at 45 years of references of 500 people with 500 companies, thousands of people we've partnered with, and you say, "What do you think of GA?" "They're good partners, they're good guys, they're good people. They do what they say they're going to do, they put the company's interests first." Sometimes we're accused of being dolphins in a sea of sharks, and I'd love to be a dolphin. Who wants to be a shark? Dolphins have much better life. I think that's a big part of the firm's DNA, so I'll give you an example. I ran our General Atlantic's Latin America program for the first seven, eight years of my career at General Atlantic, and in all the due diligence sessions, they asked, "How did you do it? How did you make money in the one neighborhood that no one makes money?" I say, "The reason we do well in Latin America is we don't have a Latin America fund, because if we had a Latin America fund-" [00:00:00] S0: "We're going to put money into Latin America."
· Martín Escobari
[00:00:00] S1: "We're going to buy at the top, but sell at the bottom. You know what? If you want to make money, you do the opposite. You buy at the bottom, you sell at the top, right?" They're like, "Interesting. Why don't other people do it?" It turns out it's really hard to do, to have a team in Latin America or in China or in India or in Southeast Asia compete for attention and money throughout one global IC is so hard to do, unless your culture is about partnership. The culture demands good partnership and the culture expels behavior that's not consistent with being a good partner. We're structured in a way that, first, we are the largest investor in our own product, by design. Right now, the employees of General Atlantic have 8% of the funds we administer. It's over $5 billion of our own capital. This does not feel like managing other people's money, this feels, my day-to-day, "I'm managing my family wealth, first and foremost, and I'm doing it with care and with intention and purpose." The way we fundraise is different also. One of the problems with the industry is the five-year fundraising cycle. To be able to raise your next fund, you have to deploy at a certain speed and you need to return capital a certain cadence. Otherwise, you don't get to do the next fund. If there's a winter of risk, like we've had for the last three years, you're out of dry powder exactly at the time that things are on sale. The traditional fundraising five-year cycle creates lots of distortions and pain for our industry. We have a hybrid evergreen fundraising cycle. Meaning, yes, every two to three years, we have a normal fund. If you want a normal fund, come to GA every two or three years. Perfect. But if you're a large institution and are willing to do a standard managed account, you can come at anytime, and the two structures invest at the same portfolio from here forward. There's never conflict of buying the legacy, but the advantage of that is there's no fundraising cliffs. We're always fundraising, it's always steady. There's no big jumps, there's no pressure to liquidate something, to meet some artificial target.
· Martín Escobari, Patrick O'Shaughnessy
That makes our lives so much easier, and then the third component that I think is distinctive, which I hated initially, because we have a communist system of compensation, which is you all get a percent of the total performance, not your individual performance. Are you kidding me? [00:00:00] S0: I'm a spear fisherman. [00:00:00] S1: I'm a spear fisherman, I got some big fish left in me. This communism didn't work in the Soviet Union, why is that going to... Then I saw how it changed everything, in that the level of collaboration is fantastic, and the way you prevent the Soviet Union from happening is, if you're not pulling your weight, you're not on the boat. It's a meritocracy in that, to be in this community where we all win together and lose together, we all have to be effective and bringing as much into the partnership that we're taking away from it. That's what keeps the health and meritocracy of the system, but there isn't a hyper-incentive to be hyper-productive, because if I'm hyper-productive, I'll make more wins and I get... No, it's much more about winning as a team, as opposed to winning as an individual. [00:00:00] S0: That dual structure, which is unusual, not common, what are the negatives or trade-offs associated with that? [00:00:00] S1: There's two very serious trade-offs. First of all, it takes forever to explain. [00:00:00] S0: We'll do it at scale right here, they'll never have to do it again.
· Patrick O'Shaughnessy, Martín Escobari
[00:00:00] S0: We'll do it at scale right here, they'll never have to do it again. [00:00:00] S1: They're like, "Why do you have two series? Which one is better? Which one is worse? I can get it, why this is good for you, but how is it good for me?" The onboarding experience is a painful experience. The other downside is fundraising is a perpetual activity. Whereas, for a lot of my competitors, every five years, it's a six-month sprint that all they do is fundraise and then they can not fundraise for another four and a half years. [00:00:00] S0: Yeah. [00:00:00] S1: It's like binge dieting. You only do it once every six years, and for us, it's a no-brainer. That's a structure that leads to more- [00:00:00] S0: Productive deployment or cap. My friend, John Kim, who is a very well-known fundraiser at General Catalyst, has this simple equation, which is that persuasion equals desire minus fear. What have you learned about fundraising, given that you've had to do it as a firm on a constant basis? [00:00:00] S1: I think most humans go from FOMO to fear, and one of the traps of our industry is you can only fundraise when things are very expensive, because that's when everyone's on FOMO. [00:00:00] S0: Have you been able to invert that fear-to-FOMO problem, so that you can... If you have been able to raise some money in the harder times, what is the key to doing that well?
· Martín Escobari
[00:00:00] S1: There's always someone in the world that has excess capital, even in a time of fear, and you go there. You'd be surprised, I do this in Brazil. One other of our tricks, our strategies to navigate global complexity is, in every geography we're in, we have the best families, the most entrepreneurial families become investors, and we cultivate them not necessarily for their money, but for their insights around the country and around the entrepreneurs with which we partner. It takes a really long time, and a lot of those families are typically entrepreneurial and they're like, "No, no. I don't invest in funds, I invest directly, because I created a business, and I'm so good and I'm good at getting the big fish." I ask them one very simple question. I say, "Hey, what percent of your net worth you have in Brazil?" They're like, "Liquid net worth?" "No, no, no, no. Total net worth," and they're like, "The number's typically between 90 and 95%." I said, "That's very interesting," and I said, "Close your eyes. Imagine you're not Brazilian, you're a citizen of the world. What percent of your wealth would you put in Brazil"? They're like, "3%." "Well, yeah. How about I help you get a little closer to three than the 95 you're in?" I find that argument to be generally effective, because it's genuinely in their best interest. I think people have a natural tendency to over-invest in that in which they understand, and of course, those families understand what it is to invest in Brazil. But in doing that, they're massively un-diversified, and the world has become really, really risky. There's only one free lunch in finance. Do you remember that-