Alt Goes Mainstream: The Latest on Alternative Investments, WealthTech, & Private Markets
00:10:04 · Michael Sidgmore
[00:10:04] S1: Something that's really interesting that you're getting at, and where my mind goes when you're talking about that, is that what you're talking about might be a back office function, but it actually connects to the front office. The investment team has to be able to understand waterfall scenarios and modeling pre investment. Yeah. But then obviously, it matters post investment. It matters with investor communications, touches the IR team. All of this kind of flows together and is interconnected. What do you make of that, and how how do you think about, yes, you might be a back office innovation, and the teams that are using this are the finance, the operation teams, but when should people be leveraging technology? Should it come before they do? Deals, obviously, private equity firms are growing concerns. They're already using solutions, they now have to fit something in. But how do you think about this interplay between maybe a back office solution, how it impacts the front office or investor relations?
00:10:54 · Venkat Subramaniam
[00:10:54] S2: So when we were working on this problem, we kind of did a pain statement. So it's a really messy chart with lots of yellow sticky papers connecting everything. And when you really drill into it, you realize if you take cap table as an example, you realize that people are actually asking for cap table data without actually saying what they want as a cap table. And it's across the piece, front office, back office. And I'll give you a few examples. So let's say you have a portfolio company and they are one of the subsidiary entities opening a bank comes over, and the banks want to do a KYC analysis. They may say we want a structure chart. We wanna see everything all the way up to the fund. That is a cap table deliverable. You can't do a structure chart and show ownerships without cap table. That's a very indirect way of asking for cap table information. The same applies to deal teams. They may be thinking, I want to value this instrument or this return or your valuation teams every quarter. They might be thinking, I want to value the equity position that a fund holds across all the investments. What they're effectively asking for is cap table data because you can't do that without accurate cap tables. Exits, your tax advisers come in. They want to look at the entire exit process and the diligence risks. They may be asking for lots of information that is indirectly connected to the cap table. So it goes across all areas, front office, back office, middle. And this problem is occurring all the time on a daily basis, quarterly basis, yearly basis. And... But then teams are working in silos, so they don't realize it's all connected to that source data. We didn't realize it, to be honest, until it was a long time in. Then, you know, penny drop moment, and then you go, well, this is it. You connect all the dots, and I think everything is connected, including investor reporting, ultimately your relationships with the LPs. But the problems are myriad and vast. We're focused on one right now.
00:12:43 · Michael Sidgmore
[00:12:43] S1: Unpack why you're focused on that specific problem. Is it because the cap table data, that underlying asset level data is the core and kernel of everything, where everything else kind of revolves around that?
00:12:57 · Venkat Subramaniam
[00:12:57] S2: We like to call it the messy middle. There's a lot of tech in private markets, as you know, investor relationships, fund accounting, portfolio monitoring, and lots of new tech coming, which is very exciting. But there is this messy middle between the fund and the portfolio companies. There's complexity in this dataset because these things are highly structured. There is lots of moving parts during the whole period, and there's volume because a fund will have many investments, each of which will have its own unique. What we thought was identify a pain point, but a pain point that is recurring. I don't think just having a pain will validate the need for a product. Because if you're trying to solve for exit efficiencies, that maybe happens once every four or five years. And proactive funds are very good at throwing people at... And lots of resource at it. But if you have a pain that is more recurring, let's say annual audits, that's once every year. But even better, quarterly evaluations and reporting, that's once every quarter. Now the funny thing is it's all connected. So if you have a recurring pain like quarterly evaluations and you build a cap table solution that's solving it, your annual audits are going to become very easy. And if your annual audits are clean and easy, your exits are going to become clean and easy. So we kind of zeroed in on cap tables, but specifically from the standpoint of quarterly reporting function. But the way we do it is we have that big vision in play. So you do it properly, then your annual audits become easier. Your exits become easier, and then it all rolls in and connects the dots.
00:14:31 · Michael Sidgmore, Venkat Subramaniam
[00:14:31] S1: So cap tables are something that many people will be familiar with in private markets in the venture context. Carta has built a large cap table management business focused on venture funds and venture backed companies. Why has it been harder to do that for private equity? [00:14:47] S2: Carta have done an amazing job in in building what they did in in venture. And the reason why there wasn't anything available to private equity is because of the complexity. I think the value proposition is exactly the same. What Carta are trying to solve is what we are doing for PE. But the complexity in private equity is that, for example, the capital was never at one level. You you have multiple levels of legal entity chains. They are never in one jurisdiction, multiple jurisdictions. They're never in one currency. So if you take Europe as an example, a PE fund might hold investment in UK, across Europe, in Switzerland. There's vast amounts of currencies in there. And then the instruments that are used in private equity context are very different. There's a combination of debt and equity. So the complexity level in PE requires a completely different product. But if you think about the value proposition that Carta are trying to solve, that's exactly what we are doing, but different solution. [00:15:43] S1: The value proposition may be similar or the same, but the way in which you build the platform, is that very different? It is. Because what you end
00:15:43 · Michael Sidgmore, Venkat Subramaniam
[00:15:43] S1: The value proposition may be similar or the same, but the way in which you build the platform, is that very different? It is. Because what you end [00:15:52] S2: up having to do when you're solving for PE capital is you... You're combining a lot of different things, because you can't do p capital without some form of legal entity relationship and legal entity management thing. So you're connecting that bit, and you can't do p capital without things like structure charts, debt instruments, waterfall valuations matter a lot. I think in venture, venture funds don't seem to be doing quarterly valuations in the same sophisticated way as PE does. In PE, it matters a lot more because you're a majority owner or a significant majority owner, and you have lots of different types of instruments. So the product requires a lot more than just a simple cap table solution. So we have ended up having to kind of connect dots across lots of different things. [00:16:36] S1: Another really important point that you bring up is making sure you're connecting dots across a lot of different things, and also organizations. So I imagine there's also more stakeholders that have to be connected in the process. It's external stakeholders, tax, audit, valuation, in addition to everyone internally. How does a platform get built to work with this cadre of service providers who have to be involved in these processes