Invest Like the Best with Patrick O'Shaughnessy
· 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-
· Patrick O'Shaughnessy, Martín Escobari
[00:00:00] S0: Yeah, diversification. [00:00:00] S1: Diversification is the only free lunch. Thinking strategically about how to diversify, with whom to diversify is hard, but super valuable if you want that free lunch. [00:00:00] S0: Speaking of diversification, maybe the most interesting dimension of that today is geographic. We were talking before we hit record about the incredibly wide gulf between the pristine US equity assets and, basically, everywhere else in the world. There was a time when you saw this chart between the S&P 500 and the ACWI world, ex-US, or something, and it was back and forth and back and forth, and then the line has just gone like this for 20 years, where the US has just so completely dominated everybody else in enterprise value creation, or some measure like that. How do you interpret that shift? Is it secular? Is it going to be cyclical and go back towards the international markets? How do you think about that crazy bifurcation?
· Martín Escobari
[00:00:00] S1: The premium for US exceptionalism has never been higher. US public equities are trading at 26 times earnings for a 4% forecasted growth, which is at the 97th percentile of the last 25 years. The US dollar, despite a 10% depreciation this year, is pretty much two standard deviations away from the neutral state, so the US has never been this expensive. I love the US, it's still the number-one economy, I still have half my assets in the US, but not 90% of my assets in the US. Not only is it very expensive, total debt to GDP is 125% of GDP. That is the highest of the OECD. It's higher than it was after World War II, when America levered to defeat the Axis of evil. Current plans in place, within five years, we're going to be at 145% of GDP, which is higher than Greece and Italy, and the US has not had a recession since 2009. Are you sure you want to have 95% of your assets in the United States of America? I don't. If you look at the rest of the world, you can buy Europe at 14 times earnings, you can buy Brazil at nine times earnings, you can buy Mexico at 10 times earnings. We're finding 40, 50% growers at 12 times EBITDA, 14 times EBITDA, many of them serving dollarized clients, so the case for global diversification, the price for global earnings... The case has never been stronger, the price has never been lower on a relative basis, so I do think that, in the next 10 years, those who achieve some level of a diversification will be rewarded, because I do think there's a little bit of froth in the US market and the opposite in a lot of the emerging markets.