Latest / Masters in Business / David Conrod on Successor Funds and Growth Equity (Podcast)

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David Conrod on Successor Funds and Growth Equity (Podcast) · Masters in Business

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Speaker 1: M This is Mesters in Business with Very Results on
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Speaker 1: Bluebird Radio. This week on the podcast, I have an
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Speaker 1: extra special guest, David Conrod. What a fascinating career in
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Speaker 1: the world of capital raising and private equity from Googgenheim
0:20
Speaker 1: Partners to Focus Point Capital. He really has seen just
0:24
Speaker 1: a little bit of everything and is very, very knowledgeable
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Speaker 1: about how that side of the investment world works. If
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Speaker 1: you're at all interested in a variety of diversified and
0:36
Speaker 1: non correlated strategies, what it's like raising capital for both
0:40
Speaker 1: emerging and existing managers and playing in the world of
0:45
Speaker 1: credit lease back's, music industry, royalty funding, as well as
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Speaker 1: traditional private equity, you're gonna find this to be absolutely fascinating.
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Speaker 1: With no further ado, my conversation with Focused Point of
1:00
Speaker 1: Capital Groups David Conrad. This is Mesters in Business with
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Speaker 1: Very Results on Bloomberg Radio. My special guest this week
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Speaker 1: is David Conrad. He is the co founder and CEO
1:16
Speaker 1: at Focused Point by the Capital Group and Lansing Investments.
1:20
Speaker 1: He played a key role in sourcing six separate Googgenheim
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Speaker 1: sponsored UH strategies. Collectively those raised over six billion dollars
1:30
Speaker 1: of limited partner money He also helped to establish the
1:33
Speaker 1: Guggenheim Private Fund Group with more than seven billion dollars
1:37
Speaker 1: in fund allocations. David Conrad, Welcome to Bloomberg Verry. Thank
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Speaker 1: you glad to be here. So, so let's start in
1:46
Speaker 1: the middle. You've been working in the asset management industry
1:49
Speaker 1: for a long time, but let's start with your role
1:51
Speaker 1: at Guggenheim Partners. You were there when the firm was
1:55
Speaker 1: formed in two thousand. Tell us about your role in
1:58
Speaker 1: what you did for them. Sure, I left HSBC Group
2:03
Speaker 1: at the end of and UH. Some friends of mine
2:08
Speaker 1: that I'd known a long time had came on came
2:11
Speaker 1: out of the fixed income side at a number of
2:14
Speaker 1: investment banks, generally UH, top I, I Rated Mortgage Research
2:19
Speaker 1: and more traders fixed income salesman and UH. To raise
2:25
Speaker 1: third party capital a broker dealers required. So I established
2:30
Speaker 1: the little fundraised up group at this small broker dealer
2:34
Speaker 1: and UH with the knowledge that we were going to
2:38
Speaker 1: try to create a financial brand out of a museum name.
2:42
Speaker 1: And one of the founders of the broker dealer was
2:46
Speaker 1: very close to the Guggenheim family, the father and the
2:49
Speaker 1: son that were owners of this brand. And we spent
2:55
Speaker 1: a little bit of time during two thousand and October
2:59
Speaker 1: two thousand, we merged the broker dealer with the Googgenheim
3:03
Speaker 1: brothers created Googenheim Partners, and then also in the same
3:07
Speaker 1: month closed on I believe it was twenty eight million
3:10
Speaker 1: and working capital, and then we and then we had
3:13
Speaker 1: a reverse merger also in the same month with a
3:16
Speaker 1: commercial paper conduit in Chicago by the name of Liberty Hampshire.
3:20
Speaker 1: And the CEO and founder of Liberty Hampshire, Mark Walter,
3:23
Speaker 1: is still Googgenheim CEO today. That's quite interesting. How did
3:28
Speaker 1: being at Guggenheim when it was founded affect both your
3:32
Speaker 1: career and the way you think about private equity. I
3:37
Speaker 1: was exposed to private equity when I was at HSBC
3:40
Speaker 1: Group after business school and UH that's where I was
3:44
Speaker 1: exposed to it in the early nineteen nineties. UH, when
3:48
Speaker 1: I HSBC was on an acquisition Binge in the late
3:52
Speaker 1: eighties early nineties and acquired some asset management businesses in
3:56
Speaker 1: the US, and when I graduated business school, UH joined
4:01
Speaker 1: join them and I was generally calling on institutions raising
4:06
Speaker 1: long only Southeast Asian equity mandates and at that time
4:11
Speaker 1: only the largest pageant funds and institutional investors would make
4:16
Speaker 1: an allocation to such a narrow strategy, and so it
4:20
Speaker 1: got me. Uh, it allowed me to start a dialogue
4:23
Speaker 1: with some of the largest institutional institutional investors in the
4:26
Speaker 1: United States marketing those products. And through that I was
4:31
Speaker 1: introduced to an individual that owned twent of a management
4:36
Speaker 1: company and HSBC owned of where. He had two small,
4:41
Speaker 1: thirty five million dollar private equity funds focused on Southeast
4:46
Speaker 1: Asia and China. Performance looked pretty interesting and his goal
4:51
Speaker 1: in ninet I believe ninety three was to try to
4:55
Speaker 1: raise some capital from the United States. And was that
4:59
Speaker 1: your entree into the private equity Yeah, that was my
5:02
Speaker 1: entree into and we went down to I think it
5:07
Speaker 1: was Mary Lynch to talk to their fund placement. My
5:11
Speaker 1: boss was the CEO. There were six of us in.
5:13
Speaker 1: The CEO told the general partner, a guy named David Patterson,
5:18
Speaker 1: you know, take myself down there, and I saw the
5:22
Speaker 1: fees that were uh that Mary Lynch would earn on
5:26
Speaker 1: raising a private equity fund versus the fees you know,
5:29
Speaker 1: I was getting raising the long only and that was
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Speaker 1: an easy decision. Uh. From my standpoint, this looks really interesting.
5:37
Speaker 1: If I can raise you know, two or fifty million
5:40
Speaker 1: dollars at a two percent fee, that looks that looks
5:43
Speaker 1: pretty interesting, and you know, maybe I know some of
5:46
Speaker 1: the people that might take a look at this, and
5:48
Speaker 1: so that's how it started. And you raised a little
5:51
Speaker 1: more than two little bit. We so we we raised
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Speaker 1: I think it was the largest Asian private equity fund ever.
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Speaker 1: We closed it and I think December twenty second, nine
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Speaker 1: four and we raised two hundred fifty and then we
6:06
Speaker 1: raised the six fund in India. In the mid nineties,
6:10
Speaker 1: HSBC spotsored the team to invest in India and South
6:14
Speaker 1: Asia is probably one of the earlier ones then. Um
6:17
Speaker 1: I remember a drive with an advisory board meeting from
6:21
Speaker 1: Agra to Jaipur. I think it took eight hours. Would
6:26
Speaker 1: be the equivalent of driving from New York to Hartford
6:29
Speaker 1: eight to eight hours. So not exactly. India has changed
6:33
Speaker 1: quite a bit from their the mid nineties. And then
6:35
Speaker 1: we raised a successor fund for Asia. After the taype
6:41
Speaker 1: Ot crisis in Indonesia, Rupaia went from I think two
6:44
Speaker 1: thousand to twenty thousand overnight, and then the U S
6:48
Speaker 1: firms came into Southeast Asia. You know, and saw that
6:51
Speaker 1: as a big opportunity. How did those funds do because
6:55
Speaker 1: when I think of Asia, I can't help but think
6:57
Speaker 1: of the peak in Japan in a D nine and
7:00
Speaker 1: that's subsequently done poorly. I guess when you're doing private equity,
7:04
Speaker 1: you don't care about those marta markets. You're working off
7:08
Speaker 1: a working business. A lot of the funds that were
7:11
Speaker 1: fully invested by the time of the tay Bot crisis
7:15
Speaker 1: and the currency crisis in late ninety seven early nine
7:18
Speaker 1: JANU we're really hurt. You know. They were generally borrowing
7:23
Speaker 1: in U s dours and their revenues now were reduced
7:27
Speaker 1: by you know, ten ten times, and so it was.
7:32
Speaker 1: It was tough. So once we raised the successor fund,
7:37
Speaker 1: uh the America, all the US private equity firms started
7:40
Speaker 1: to come into Asia forming groups. All all the big
7:42
Speaker 1: names started to hire teams to take advantage as they're
7:46
Speaker 1: trying to expand their footprint, and uh HSBC stayed in
7:51
Speaker 1: the I would say the lower mid market. Raised another
7:54
Speaker 1: fund in two thousand to two thousand three. Uh I
7:58
Speaker 1: was at Googleheim at that time and they became a client.
8:01
Speaker 1: So it worked out well that not only the group,
8:04
Speaker 1: the group in Asia that we raised capital four. But
8:07
Speaker 1: HSBC had a group in Latin America and also a
8:11
Speaker 1: group in in Europe that spun out and as later
8:14
Speaker 1: rebranded themselves Montague. But we UH, we raised a little
8:19
Speaker 1: over two point two billion from Montague in early two thousand's.
8:24
Speaker 1: So you you start focus Point Private Capital in two
8:29
Speaker 1: How was this different from what you've done previously in
8:32
Speaker 1: your career? And what services does focus Points shall provide? Yeah,
8:36
Speaker 1: so we learned a lot at HSBC. We had it's
8:40
Speaker 1: a minority shareholder, is a A A is an assurance company,
8:43
Speaker 1: and that that seated a number of the funds that
8:46
Speaker 1: we raised at Guggenheim. So in addition to using the
8:50
Speaker 1: broker dealer at Googgenheim to raise third party capital UH,
8:54
Speaker 1: Googenheim was a principal and a number of different strategies
8:58
Speaker 1: H and we we would identify the management team, the
9:03
Speaker 1: insurance company, would would provide some seed capital to get
9:07
Speaker 1: some investments completed, and then we would go out to
9:09
Speaker 1: the market and raise the initial fund and UH and
9:13
Speaker 1: then we would generally raise a follow on fund two
9:16
Speaker 1: or fund three. UH and a number of credit related
9:20
Speaker 1: strategies as well as well as some equity UH. Following
9:24
Speaker 1: the financial crisis and oh eight UH Googenheim, I would say,
9:29
Speaker 1: less interested in in seeding new managers and more using
9:33
Speaker 1: the balance sheet that they were building to act more
9:37
Speaker 1: as a direct investor. UH. Middle of a lot of
9:42
Speaker 1: us on the capital raising private fund group inside Googenheim
9:47
Speaker 1: became independent. We're still still very close with a number
9:52
Speaker 1: of the people that were there when we we were there,
9:56
Speaker 1: and UH focus Point raises capital for price it funds
10:00
Speaker 1: and direct transactions. And I would say it's similar to
10:06
Speaker 1: what we're doing at Guggenheim and that we were all
10:09
Speaker 1: we're continually meeting with investors in general partners. One dynamic
10:15
Speaker 1: I'm noticing is increasingly the capital raising business we're acting
10:20
Speaker 1: like almost like a search firm, because we're continually meeting
10:23
Speaker 1: investment talent, whether it's talented UH investors inside a private
10:29
Speaker 1: equity firm other other independent sponsors that are more comfortable
10:36
Speaker 1: or confident in their ability to find profitable transactions. And
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Speaker 1: I've been unable to convince them to do a fund
10:43
Speaker 1: or talented limited partners that have been you know, investing
10:48
Speaker 1: in the asset class for a number of years. And
10:50
Speaker 1: UH we continue to see it evolved but you know,
10:53
Speaker 1: looking back, you know we've probably raised capital for over
10:57
Speaker 1: twenty first time funds and which requires a lot of work.
11:02
Speaker 1: But the reason you do it is for the successor funds.
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Speaker 1: So let's talk about that, because I tend to think
11:08
Speaker 1: in terms of venture capital doing a seed round and
11:12
Speaker 1: then a follow up a round, or a B around
11:14
Speaker 1: or C round. When you talk about successor funds, are
11:18
Speaker 1: you going back to the same funds you seated or
11:21
Speaker 1: is it different projects, different investments. I'll give you an
11:25
Speaker 1: example at at Guggenheim for example. So we following early
11:32
Speaker 1: two thousand's after after nine eleven, uh low air traffic
11:40
Speaker 1: was way off and UH A lot of the airlines
11:44
Speaker 1: went from a wide body to narrow body. You notice
11:47
Speaker 1: that when you fly across country now it's a single aisle,
11:50
Speaker 1: not at double aisle. And we were introduced to a
11:54
Speaker 1: group that spun out of British Aero Space and they
11:57
Speaker 1: had been buying commercial aircraft on their own account UH
12:01
Speaker 1: and engines that power them. And they were backed by
12:04
Speaker 1: big high net worth family on the West coast that
12:08
Speaker 1: would was the equity partner. It would be impossible to
12:12
Speaker 1: go to a bank to borrow money to buy a
12:13
Speaker 1: seven forty seven without you know, revealing who the sourcery
12:17
Speaker 1: or equity was. So they had to institutionalize their business,
12:21
Speaker 1: and so Guggenheim did that and by committing some initial capital,
12:26
Speaker 1: we went out and uh, the team went out and
12:29
Speaker 1: got some investments completed, and it was as the load
12:33
Speaker 1: factors were off. Uh, they were buying a lot of
12:36
Speaker 1: wide body seven four sevens and converting them into freighter
12:41
Speaker 1: to take advantage of the global supply chain moving from
12:43
Speaker 1: just to just in time delivery. So component parts and
12:46
Speaker 1: things like that coming out of Asia to the West wanted,
12:51
Speaker 1: you know, so there was a demand for seven forty seven.
12:54
Speaker 1: So we the team recognized that opportunity and did it.
13:00
Speaker 1: And UH, it's actually a big job to convert. You know,
13:04
Speaker 1: you have to cut a hole in this drill a
13:06
Speaker 1: big hole on the side of the aircraft. It's got
13:08
Speaker 1: to be structurally sound, strengthen the floor. But we were
13:13
Speaker 1: pretty successful with that raised. Uh got I think six
13:16
Speaker 1: investments completed, proved out the thesis, and we raised seven
13:21
Speaker 1: million for fund one and the successor fund. Get around
13:24
Speaker 1: answering your question is, UH, was seven thirty seven. We
13:29
Speaker 1: got up to seven forty one. We couldn't quite get
13:31
Speaker 1: to seven forty seven in capital, and so we backed
13:35
Speaker 1: it down to seven thirty seven and through story and
13:38
Speaker 1: uh but and now what did the fund investment? They
13:43
Speaker 1: did more. They they the market had changed, and so
13:45
Speaker 1: they started doing some new aircraft. Boeing came out with
13:49
Speaker 1: a new seven four seven dash eight and uh, so
13:53
Speaker 1: they put in an order for some new ones. Uh
13:57
Speaker 1: and uh the existing fund one, the tire portfolio was
14:01
Speaker 1: sold to a another private equity firm had a listed
14:06
Speaker 1: vehicle to do aircraft leasing and they they needed to grow,
14:11
Speaker 1: so they just bought the entire portfolio. So we had
14:14
Speaker 1: a we we generated a nice return in a very
14:17
Speaker 1: short period of time, proved that that had a nice
14:20
Speaker 1: track record, which enabled us to raise fund too. Let's
14:24
Speaker 1: talk a little bit about some of the asset managers
14:27
Speaker 1: you work with and help raise money through. What walk
14:30
Speaker 1: us through that process from due diligence to investing. What
14:35
Speaker 1: is that process like? It's it's a lot of detail,
14:39
Speaker 1: and it's a lot of work, but it's also uh,
14:42
Speaker 1: you know, having done it a lot, it's pattern recognition.
14:45
Speaker 1: And so we've met thousands and thousands of general partners
14:50
Speaker 1: looking to raise looking to raise capital, whether it's a
14:55
Speaker 1: new team that's spinning out from a larger invest a firm,
15:00
Speaker 1: or it may be a team that's proven themselves and
15:04
Speaker 1: they're looking to raise capital and they'd like to meet
15:07
Speaker 1: some new investors. On the due diligence side, there's a
15:09
Speaker 1: number of things to do. We we make a lot
15:11
Speaker 1: of reference calls, talk to the CEOs of the companies
15:15
Speaker 1: that they've backed to verify the track record that they're presenting.
15:19
Speaker 1: The reason we do that it's almost a triangle to
15:22
Speaker 1: see if they actually do have a story straight. Uh,
15:26
Speaker 1: these gps are all smart, clever guys, and they're gonna
15:29
Speaker 1: tell us about all the great deals that they've done
15:31
Speaker 1: and their track record and all that, and then verifying
15:35
Speaker 1: that by speaking to the CEOs to confirm that these
15:38
Speaker 1: are the guys that actually did the deals. And then
15:41
Speaker 1: we try to look at their files to the files
15:43
Speaker 1: track with what the CEO told us and what they
15:46
Speaker 1: told us, and if those three things match up, they
15:49
Speaker 1: probably do have a process and it's probably it's probably okay.
15:53
Speaker 1: Then when you when you say GP, you're talking about
15:55
Speaker 1: the general partners who are running the fund correct as
15:58
Speaker 1: opposed to the LPs, the limited partners, the people putting
16:01
Speaker 1: the capital investing. That's that's exactly right. And so you know,
16:07
Speaker 1: I tell we one of the things we do is
16:09
Speaker 1: we tell the gps, the general partners that you know,
16:12
Speaker 1: they're in the automobile industry. They're selling cars. Every every
16:16
Speaker 1: GP that comes in to see us is a smart,
16:19
Speaker 1: very clever guy. And these LPs can buy any car
16:23
Speaker 1: they want, you know, and they're probably gonna do fine
16:26
Speaker 1: and uh and so so the question is why should
16:29
Speaker 1: they buy your car? Correct? Our job is to try
16:33
Speaker 1: to identify that investor that is looking for a differentiated
16:36
Speaker 1: strategy where it's additive to their portfolio to bring in
16:41
Speaker 1: another middle market buyout firm. Right now, everybody or a
16:46
Speaker 1: lot of growth equity and the software firms are doing
16:50
Speaker 1: very very well. Most funds are doing well over three x, right,
16:56
Speaker 1: and eyes glaze over almost with these limited partners. To
17:00
Speaker 1: try to convince a limited partner to do more work.
17:04
Speaker 1: And you know what, I need you to substitute your
17:07
Speaker 1: existing manager for this new group. Uh, and I want
17:10
Speaker 1: you to take six months of extra work on your
17:13
Speaker 1: end to get the same return. Is a ton That's
17:17
Speaker 1: a tough one, you know, I need to have a
17:19
Speaker 1: manager that's got a differentiated strategy that is additive to
17:23
Speaker 1: their portfolio, because that's what a lot of what a
17:26
Speaker 1: limited partner is thinking about. How can I improve diversify
17:30
Speaker 1: UH portfolio makes a lot of sense. So hypothetically, you
17:36
Speaker 1: run these managers through UM your process, you check off
17:40
Speaker 1: a lot of boxes. Once the LPs put capital to
17:44
Speaker 1: work with these gps, what are your responsibilities? Do they
17:47
Speaker 1: end at that point or is it an ongoing relationship.
17:51
Speaker 1: Generally it's you know, if they're handed off to the
17:55
Speaker 1: g P. You know, our job is to manage the
17:57
Speaker 1: process from the initial contact with the prospective investor. I
18:02
Speaker 1: think there there are suspect before their prospect and so
18:08
Speaker 1: we we go out to several thousand investors, probably initially
18:14
Speaker 1: to try to identify in some prospects, and then once
18:17
Speaker 1: we have an initial meeting or initial video call, we
18:21
Speaker 1: uh it's our job to help manage that process and
18:25
Speaker 1: move the investor through the different stages that they're gonna
18:28
Speaker 1: be thinking about, you know, towards making a positive decision,
18:33
Speaker 1: and that could be a second meeting to meet other
18:36
Speaker 1: members of the management team, getting access to a data
18:39
Speaker 1: room to look at due diligence files, look at the
18:42
Speaker 1: portfolio performance, make some reference calls. UH. Probably will do
18:48
Speaker 1: a visit on site to visit visit the offices. You know,
18:52
Speaker 1: that was an issue during when people weren't traveling. UH.
18:58
Speaker 1: You know, how does an institutional investor modify their investment
19:01
Speaker 1: policy procedures to make a commitment to a fund UH
19:05
Speaker 1: when they're unable to visit the office if that's part
19:08
Speaker 1: of their policy. So a lot of those policies were
19:10
Speaker 1: amended UH and or replaced with more reference calls and
19:16
Speaker 1: things like that. So that raises an obvious question. During
19:19
Speaker 1: the lockdown, were you doing everything by zoom? We were
19:24
Speaker 1: people going out and actually meeting the GPS and person
19:28
Speaker 1: of person. The GPS were, of course, you know, they
19:31
Speaker 1: have one one objective, which is to get funded, and
19:35
Speaker 1: so they will go ready, willing and able to go anywhere.
19:40
Speaker 1: But a lot of the limited partners, especially the institutions,
19:44
Speaker 1: were generally in the first six months of the pandemic,
19:49
Speaker 1: you know, not really willing to meet or they weren't.
19:53
Speaker 1: There's an age gap there, right. The GPS tend to
19:56
Speaker 1: be a little younger and hungry, and the LPs are
19:58
Speaker 1: a little older. And more seasoned. I'm I I'm their stereotype.
20:03
Speaker 1: That's not bad. I think you're you know that the
20:06
Speaker 1: younger guys, would you know? We had some meetings in
20:08
Speaker 1: uh it's a Miami. We had some family offices. We
20:13
Speaker 1: had meetings outside. UH. We did convert uh some in
20:19
Speaker 1: I think admittedly the year it was tough though April May.
20:23
Speaker 1: April May was you know, everybody was on adrenaline, not
20:27
Speaker 1: really knowing what was going to happen, but a lot
20:31
Speaker 1: of zoom. It was very exhausting. But you know, it's
20:36
Speaker 1: getting people are traveling again and taking meetings. So it's
20:41
Speaker 1: so this raises another interesting question. Were there any lasting
20:46
Speaker 1: changes to the industry or how you do business because
20:51
Speaker 1: of what we learned during the pandemic. So lots of
20:54
Speaker 1: people still working from home, lots of people are being
20:57
Speaker 1: more selective in their travel. Do I really have to
21:00
Speaker 1: go to l A or can I just make this
21:02
Speaker 1: a zoom call? How has this impacted your business? How
21:06
Speaker 1: has the pandemic impacted the way you operate today? I
21:09
Speaker 1: think it's making uh. I think it's making it a
21:12
Speaker 1: little bit more efficient now with annual meetings. UH, there's
21:16
Speaker 1: always going to be a remote option. And so these
21:19
Speaker 1: limited partners where before and you know, months of May,
21:23
Speaker 1: June and uh September, October, November, you know, most of
21:29
Speaker 1: the time of those let's say six months, they would
21:33
Speaker 1: be out of the office, Yeah, spending a day or
21:35
Speaker 1: two days traveling across country to attend an annual meeting.
21:39
Speaker 1: Now they can watch it on zoom for an hour
21:43
Speaker 1: and be much more efficient sitting at their desk. And
21:46
Speaker 1: I think that development, the fact that there is a
21:48
Speaker 1: remote option is allowed UH general partners and and for
21:52
Speaker 1: and capital raising firms like ourselves uh more more a
21:57
Speaker 1: better probability of getting too a prospective investor that's in
22:02
Speaker 1: the office where they're not wasting time traveling or wasting
22:05
Speaker 1: a half a week traveling to annual meetings. So it
22:08
Speaker 1: proved the efficiency. Does that give everybody a wider net
22:12
Speaker 1: they can cast your your geography isn't limited to your
22:16
Speaker 1: local city or even your local coast. You can pretty
22:19
Speaker 1: much go anywhere. I think that that has helped. But
22:21
Speaker 1: these limited partners are probably being bombarded by more and
22:25
Speaker 1: more emails incoming uh and so it's still more valuable
22:30
Speaker 1: to have the one on one in person. But when
22:34
Speaker 1: that is not available. We we definitely try for the
22:39
Speaker 1: video call. And UM, I'm curious as to these gps
22:43
Speaker 1: why come to a firm like yours as opposed to
22:46
Speaker 1: just hiring a team to raise the capitol themselves to
22:50
Speaker 1: hire a team, train a team. You know, it's it's
22:53
Speaker 1: a big expense and makes sense. It's you know, it's
22:57
Speaker 1: people and that's management cost and overhead and time and
23:01
Speaker 1: lack of expertise. Correct. Uh So so you mentioned people
23:05
Speaker 1: are looking for strategies that differentiate from everything else they have.
23:11
Speaker 1: What are some of the newer differentiated strategies or fund
23:15
Speaker 1: types uh that you're seeing more and more of that
23:18
Speaker 1: aren't as widely held as let's say, commercial real estate
23:22
Speaker 1: or structured notes or things like that. What's the new
23:25
Speaker 1: new thing these days? Right? I think one thing we've
23:28
Speaker 1: seen the last couple of years is music royalties. Almost
23:32
Speaker 1: every month there's a new group targeting that. And you
23:35
Speaker 1: know that emerged because these songwright these artists were unable
23:41
Speaker 1: to tour and so that was a big source of
23:44
Speaker 1: their income. Is to being able to tour, and now
23:47
Speaker 1: they're uh looking to sell some are all of their copyrights, uh,
23:53
Speaker 1: to cash out. That's really interesting. Because the old days,
23:57
Speaker 1: people would tour to promote an album and they made
23:59
Speaker 1: the money from sales. Now it's the opposite. They put
24:02
Speaker 1: out an album in order the tour. Once that shut down,
24:06
Speaker 1: they had some trouble. There's not a lot of money
24:08
Speaker 1: in streaming, is there? From most No streaming saved the
24:11
Speaker 1: music business, save the business. But how much of that
24:14
Speaker 1: falls to the artists? The artists? Uh, I think I
24:18
Speaker 1: don't know the exact number, but I think every time
24:20
Speaker 1: a song is downloaded on iTunes, a songwriter gets I
24:24
Speaker 1: think it's eleven or twelve cents um. And but Spotify
24:28
Speaker 1: with the streaming, you know, so the the younger artists
24:31
Speaker 1: are doing well because the people listening to Spotify or
24:35
Speaker 1: not my parents, right, Uh, And so the new classics
24:40
Speaker 1: are probably performing much better and uh than some of
24:46
Speaker 1: the Louis Armstrong is being downloaded or streamed. But I
24:50
Speaker 1: think we've seen music royalties. We're working with a group
24:54
Speaker 1: that not only does music, but they'll be coming out
24:57
Speaker 1: they do. They specialize in film and TV royalties. Uh.
25:00
Speaker 1: And that prior TV. Now you have a lot of
25:03
Speaker 1: series that are picked up over and over, uh the
25:08
Speaker 1: Netflix or HBO and gets picked up those you know,
25:12
Speaker 1: those royalties behave in a similar fashion to a film
25:16
Speaker 1: library with the TV series and uh so that that's
25:21
Speaker 1: self liquidating uh mezzanine debt and so there's no capital
25:26
Speaker 1: markets event required for an exit, and uh it's generating
25:30
Speaker 1: a nice load of mid teens net returned to investors
25:33
Speaker 1: in a zero interest rate environment. And so so let's
25:36
Speaker 1: talk about that a little bit because that's kind of fascinating.
25:39
Speaker 1: I know Dylan recently sold this catalog Taylor swift Um
25:44
Speaker 1: allowed streaming, which we had previously Pink Floyd. What does
25:49
Speaker 1: this look like when an artist said says, here's a
25:52
Speaker 1: dozen albums I've created over thirty years. I want to
25:56
Speaker 1: monetize this. Tell us about that. I think I saw
25:59
Speaker 1: a song it's as steady state after a I believe
26:02
Speaker 1: it's about six years. You know a good example, we
26:06
Speaker 1: worked with a music royalty group. We've raised three funds
26:09
Speaker 1: for them since so we've been at it for a while.
26:13
Speaker 1: But uh and I think it was that during the
26:16
Speaker 1: Olympics in the in London and two thousand and twelve,
26:22
Speaker 1: uh call me maybe was on the radio every five minutes.
26:26
Speaker 1: Now you never hear it, and uh so it took
26:28
Speaker 1: about a song hits its steady state after about six years,
26:32
Speaker 1: and they they can monitor, you know, they collect those
26:36
Speaker 1: revenues globally now, so whether it's played on on the radio,
26:41
Speaker 1: whether it's played in a bar, at a skating rink,
26:44
Speaker 1: on you know, it's a set list at a concert
26:46
Speaker 1: by a musician. Those UH artists received those royalties every quarter.
26:52
Speaker 1: And UH, it's you're basically just doing a cash flow
26:55
Speaker 1: analysis to see how it's gonna play out. But you
26:58
Speaker 1: probably would be interested in It's a little risky prior
27:03
Speaker 1: to six years because you don't know where it's going
27:06
Speaker 1: to so in other way, that song is going to
27:08
Speaker 1: hit its steady states, so to so after six years,
27:11
Speaker 1: it's almost like the coupon on a bond, the yield
27:14
Speaker 1: of a bond. You have an idea, Hey, at this
27:16
Speaker 1: point it should yield X going forward. And not all
27:19
Speaker 1: songs are created equal, not all artists are something I'm
27:22
Speaker 1: gonna do two X or three X, but you don't
27:25
Speaker 1: know that until six years in correct, something like, Yeah,
27:29
Speaker 1: so you've done three funds that we did. We've done
27:31
Speaker 1: three music funds with a group, UH, and we've done
27:35
Speaker 1: two funds with another group that focuses on film and
27:39
Speaker 1: TV royalties. But they're the most recent fund. Uh, there
27:44
Speaker 1: wasn't a lot of new films being produced in one.
27:50
Speaker 1: They dip their toe into music and uh so a
27:53
Speaker 1: little more diversified. I think there'll be some good interest
27:57
Speaker 1: in that next year when they come out with their
28:00
Speaker 1: success or fund. How how large can this space to get?
28:04
Speaker 1: There's only so many songs that that get produced each year.
28:08
Speaker 1: It's only like ten million songs, but not all of
28:10
Speaker 1: them make money. Um, how much room is there in
28:14
Speaker 1: this little niche as a potential investment sector music? It's
28:19
Speaker 1: I don't know how big it will ultimately get to,
28:22
Speaker 1: but there's certainly long ways to go. And I think
28:26
Speaker 1: the film and TV. The TV is really taking off
28:29
Speaker 1: when you see the number of series created and the
28:32
Speaker 1: and they're they're picked up from multiple seasons. So uh
28:37
Speaker 1: and film is you know similar, Yeah, and you know
28:42
Speaker 1: what's it's release theatrically, you know, in the in the
28:45
Speaker 1: in the theaters in the US, then it goes to Europe,
28:47
Speaker 1: then it goes to pay per view on demand, you know,
28:50
Speaker 1: and you're still seeing The Godfather every every Christmas time,
28:54
Speaker 1: you know, it's on four different channels, a classic Christmas movie. Yeah,
28:59
Speaker 1: quite fascinated. Another interesting strategy that we've been we've done
29:05
Speaker 1: three funds with a group focused on the sale, lease back,
29:09
Speaker 1: and that of real estate, of commercial real estate. So
29:13
Speaker 1: I'm a I'm an old world company. I own all
29:15
Speaker 1: my real estate, all my buildings, and I'm tired of
29:18
Speaker 1: depreciating them over time. I sell the building to you
29:22
Speaker 1: and then do a fifty year lease. Not not quite
29:25
Speaker 1: fifty years, but yeah, that's exactly it. So you have
29:28
Speaker 1: the headquarters of a big pharmaceutical company and uh, they
29:34
Speaker 1: they're looking to raise some cash. Maybe not a pharmaceutical company,
29:37
Speaker 1: but some other business. Uh, it's a great non bank
29:41
Speaker 1: source of financing. You can sell the asset and simultaneously
29:44
Speaker 1: release it back for fifteen to twenty five years. You're
29:48
Speaker 1: protected against inflation. The manager manager is because the rent
29:52
Speaker 1: increases are built in contractually and you own the asset,
29:56
Speaker 1: so you're actually in a better position than the bond
29:58
Speaker 1: holders that own the same credit. And uh, we've done
30:03
Speaker 1: three funds with this group. I think say at least
30:07
Speaker 1: back the investment banks haven't been promoting it because they
30:10
Speaker 1: probably this is just me a theory of mind. But
30:13
Speaker 1: the investment banks would rather convince the CFO of these
30:16
Speaker 1: corporates that do a bond offering or an equity offering
30:19
Speaker 1: because the fees are higher than suggesting. You know what
30:23
Speaker 1: if I look at your balance sheet, you know property,
30:25
Speaker 1: plant and equipment is your largest line item. Why do
30:28
Speaker 1: you why are you in the real estate business? Why
30:30
Speaker 1: do you sell that, release it back and reinvest back
30:34
Speaker 1: into the business. Another advantage for the company is to
30:38
Speaker 1: do it is by entering into a long term lease,
30:41
Speaker 1: they're going to get a below market rate, right, and
30:44
Speaker 1: the manager gets to buy the asset at a below
30:47
Speaker 1: market price. And uh so we've worked with a group.
30:52
Speaker 1: It's been a little difficult raising capital for it because
30:56
Speaker 1: it's a hybrid. It's not quite credit because it's real
30:59
Speaker 1: estate act and the credit guys don't understand corporate real estate,
31:04
Speaker 1: and the real estate guys don't understand credit. And the
31:06
Speaker 1: real estate guys think the market's gonna take is going
31:09
Speaker 1: to continue to go up, and they're not looking at
31:11
Speaker 1: the the importance of the credit. But that's the opportunity
31:16
Speaker 1: when when nobody really understood when the players in the space,
31:20
Speaker 1: it's it's adjacent not dead center. What they do, so
31:23
Speaker 1: they don't really get it. Yeah, And so our job
31:27
Speaker 1: is as a capital raiser for that is to identify
31:30
Speaker 1: the prospective investor that might be a little more thoughtful
31:36
Speaker 1: is looking for a product like this which is generating
31:39
Speaker 1: you know, ten eleven percent cash on cash without a
31:44
Speaker 1: lot of volatility and fairly safely. And during the pandemic,
31:47
Speaker 1: they they actually this group collects their rent quarterly in
31:51
Speaker 1: advance versus monthly, and so they never had an issue
31:55
Speaker 1: all during the pandemic. So let's talk a little bit
31:59
Speaker 1: about focus po lane. Um, what's its specialty? Where do
32:03
Speaker 1: you really put your focus into focus point? Sure, we
32:07
Speaker 1: we raise capital for private funds and direct transactions. The
32:11
Speaker 1: typical fund strategies we are focused on are, I would
32:18
Speaker 1: private equity managers in the mid cap space from two
32:22
Speaker 1: fifty million to say two hundred billion, in in fun
32:26
Speaker 1: size growth equity managers, minority or managers focused on control, uh,
32:34
Speaker 1: some software, but all throughout the tech sector tech enabled services, software,
32:40
Speaker 1: some hardware. Uh. And we've lately done a little bit
32:45
Speaker 1: in the venture capital world, and we do a lot
32:48
Speaker 1: in credit and income related strategies. And who hasn't done
32:52
Speaker 1: a little something on the venture capital world these days,
32:54
Speaker 1: it seems like there's just a ton of cash flowing
32:58
Speaker 1: into that. But you mentioned equity growth are those private
33:03
Speaker 1: Are you talking about hedge funds that are in the
33:05
Speaker 1: These are UH private equity firms that are not seeking
33:11
Speaker 1: control of the businesses. So they're generally it's generally backing
33:15
Speaker 1: a management team bootstrapped and they're the first institutional money
33:20
Speaker 1: going into the business. Companies are growing, you know, thirty
33:25
Speaker 1: to fifty annually and they need some equity capital to
33:29
Speaker 1: get to the next level. These growth equity managers provide
33:33
Speaker 1: that with their guidance, get them to a hundred or
33:36
Speaker 1: two hundred million in revenue for exact saying, and then
33:39
Speaker 1: they show up on the radar screen of the larger
33:42
Speaker 1: UH private equity firms that are looking to add on
33:46
Speaker 1: you know, looking for a portfolio company to add onto
33:49
Speaker 1: an existing platform. And so it's almost a food chain
33:53
Speaker 1: that makes we're starting to see developed which wasn't as
33:57
Speaker 1: apparent three to five years ago, but with the what's
34:01
Speaker 1: happening in the world of tech, it's it's it's increasing
34:05
Speaker 1: rapidly quite quite interesting. Let's talk about land sea investment.
34:10
Speaker 1: It almost sounds like lands and Sea, but it's lands
34:13
Speaker 1: and the letteracy. First, what does that name mean, and
34:16
Speaker 1: then we'll talk about what it does. I've got a
34:19
Speaker 1: son named Lucas, I've got a son named Alex, I've
34:21
Speaker 1: got a wife named Nina. My name is David and
34:24
Speaker 1: my last name is Conrad. So there it is, and
34:27
Speaker 1: uh that that's the entity that owns the Focus Point
34:30
Speaker 1: Private Capital Group. And we i'd say since twenty we've
34:36
Speaker 1: been through the capital raising business. We meet some We
34:42
Speaker 1: started meeting some talented independent sponsors that were confident in
34:46
Speaker 1: their ability to get a transaction done where they I
34:50
Speaker 1: was unable to convince them to do a fund and
34:52
Speaker 1: so we would raise equity for them, and we started
34:55
Speaker 1: to participate in the promote structure with them. So land
34:59
Speaker 1: C owned a portfolio of ownership interests in some direct
35:04
Speaker 1: transactions and on occasion we participate in the promote structure
35:09
Speaker 1: with some first time funds as part of our compensation.
35:13
Speaker 1: So when you say you participate, you get a slice
35:16
Speaker 1: of the GP. Is that of the of the GP economics? Correct? Oh,
35:20
Speaker 1: not the control, just the economics, just the cash flow
35:23
Speaker 1: from that the part of the percent of their carried
35:26
Speaker 1: interests for raising the equity and in some cases we
35:29
Speaker 1: have invested in their GP one dint. One thing we
35:34
Speaker 1: noticed is with independent sponsors when they do have a
35:37
Speaker 1: direct transaction, the lenders want to see a fund that
35:41
Speaker 1: the GP commit is generally two percent minimum. The lenders
35:46
Speaker 1: on a direct transaction for a sponsor who does not
35:49
Speaker 1: have a FUN are asking for ten to for a
35:53
Speaker 1: GP commit and they don't always have that lying around
35:57
Speaker 1: money and so being able to help them solve the
36:01
Speaker 1: GP capital problem helps improve our economic sharing makes for example,
36:07
Speaker 1: and that and that sounds like those are potentially lucrative
36:11
Speaker 1: investments over time. That's that's our that's our that's the
36:15
Speaker 1: object of the exercise, I guess right well as opposed
36:18
Speaker 1: to saying I want to put money into this fund
36:20
Speaker 1: that's gonna yield it or ten percent when you're putting
36:23
Speaker 1: money into a direct investment, my assumption is those are
36:29
Speaker 1: ordinarily attractive opportunities. Yeah, they're the investors are looking for
36:33
Speaker 1: a higher return. Uh. And we've we've done some things
36:38
Speaker 1: in the real, real stimulated in the hospitality sector, focusing
36:42
Speaker 1: on the extended stay in the select service market with
36:46
Speaker 1: the former former principal on at a large investment bank.
36:51
Speaker 1: He had a twenty billion dollar portfolio he oversaw one point.
36:54
Speaker 1: He's been operating at it as an independent sponsor for
36:57
Speaker 1: ten years and we've done completed now six transactions with him,
37:03
Speaker 1: and we have I guess ownership in you know, north
37:07
Speaker 1: to sixty uh of those types of hotels. UH. We
37:11
Speaker 1: recently identified a New York Stock Exchange listed insurance company
37:17
Speaker 1: to invest in eight uh large shipping container vessels. That
37:23
Speaker 1: hundred and seventy million is now worth north of half
37:26
Speaker 1: a billion in only nine months, as the container market
37:30
Speaker 1: is red hot right now. And this insurance company was
37:35
Speaker 1: pretty savvy and recognizing that end of last year. And
37:39
Speaker 1: these are all end of life ships, so they go
37:41
Speaker 1: to scrap at the end of the charters that they're
37:43
Speaker 1: currently on, so there's no exposure or risk of rechartering
37:47
Speaker 1: them at the end of these and UH. The investor
37:51
Speaker 1: at that insurance company clever guy uh actually ex colleague
37:56
Speaker 1: at Google. Heim really really interesting. So I mentioned lands
38:02
Speaker 1: coincidental it's really an anagram for you and your wife
38:05
Speaker 1: and your kids. But let's talk a little bit about
38:08
Speaker 1: triple netleases in real estate. UM, explain what that is
38:12
Speaker 1: and what's the investment opportunity there. Yeah. UH. If you
38:17
Speaker 1: look at UH most spalace sheets of most corporates, property,
38:22
Speaker 1: plant and equipment is the largest line item, and we
38:26
Speaker 1: there's an opportunity there too. It's another non bank source
38:30
Speaker 1: of financing. So corporate could looking to raise capital, could
38:36
Speaker 1: unlock some of that really get out of the real
38:39
Speaker 1: estate business, sell, sell the asset, simultaneously release it back
38:44
Speaker 1: for a long period of time fifteen to twenty five years,
38:48
Speaker 1: and UH have the use of those proceeds to reinvest
38:52
Speaker 1: in their business. I think it's hasn't been very popular.
38:57
Speaker 1: It hasn't been promoted a lot by the investment banking
38:59
Speaker 1: commune because I think that the cynical side of me
39:03
Speaker 1: says they're making more more money on a bond offering
39:07
Speaker 1: or issuing some more equity than UH suggesting a sale
39:12
Speaker 1: lease back for an asset. We came in contact, I
39:16
Speaker 1: guess over ten years ago with a very talented team
39:21
Speaker 1: from a guy who came out of a listed company
39:26
Speaker 1: called w P Cary. He built their international business. UH
39:31
Speaker 1: sold his share he had a shareholding in that business,
39:34
Speaker 1: sold it back to w P. Kerry informed his new
39:37
Speaker 1: firm ten years ago we've raised three sets of funds
39:41
Speaker 1: for them, both in North America and Europe, and I
39:44
Speaker 1: believe that firm probably is pushing seven or eight billion
39:48
Speaker 1: in a U M huh uh, it's a great Yeah.
39:52
Speaker 1: It's another non bank source of financing and a low
39:55
Speaker 1: interest rate environment. Really interesting. And I'm curious about something
39:59
Speaker 1: in the pub look markets. E s G has been
40:02
Speaker 1: become really such a buzzword environmental, social and governance. You
40:08
Speaker 1: do you see anything like that on the private side
40:10
Speaker 1: or is it much more blocking and tackling less marketing
40:14
Speaker 1: and you know, value based investing. It's it's I would
40:21
Speaker 1: say most institutional investors definitely have an allocation to e
40:25
Speaker 1: s G and it's it's really increasing significantly on the
40:32
Speaker 1: private and the private side, and that's a big part
40:34
Speaker 1: of their due diligence to go through. Uh. You know,
40:39
Speaker 1: there's E s G consultants now that e s G
40:43
Speaker 1: standards definitely in Europe. Uh, it is probably further ahead
40:46
Speaker 1: than the US, but it is most of the managers
40:51
Speaker 1: have to be aware of that. But I think it's
40:53
Speaker 1: going to make their portfolio companies ultimately better because it's
40:57
Speaker 1: all focused on innovation, and you know, innovation is technology
41:03
Speaker 1: and these companies will just will be better and it's
41:05
Speaker 1: going to bring about better international standards that these companies
41:11
Speaker 1: have to operate under and say with these gps. UH
41:14
Speaker 1: quite quite fascinating. So let's talk about the state of
41:18
Speaker 1: private equity here in New York. It seems to be
41:21
Speaker 1: hot as a pistol um. What do you see going
41:24
Speaker 1: on in the industry and how has it changed over
41:27
Speaker 1: the past couple of years. I think if I looked
41:30
Speaker 1: at our roster of general partners that we were working
41:35
Speaker 1: with back to say, probably we probably only had one
41:42
Speaker 1: that had a tech technology element to it. Now everybody does,
41:47
Speaker 1: even even a distress for control manager that we're about
41:51
Speaker 1: to go to market with UH with a with an assignment,
41:57
Speaker 1: and this is an individual that led the Creditor Group
41:59
Speaker 1: to gain control of Circus sole A last year. UH.
42:04
Speaker 1: Every every strategy has to embrace technology to improve their
42:09
Speaker 1: businesses and take advantage of the innovation and the and
42:13
Speaker 1: the competition is becoming increasingly fierce. So these are tech
42:19
Speaker 1: components to non technology companies. Were not necessarily talking about
42:24
Speaker 1: investing in semiconductors or software. These are more traditional businesses,
42:29
Speaker 1: but technology is a key part of them. Yeah, and
42:31
Speaker 1: I'd say absolutely software to make them more efficient. Uh
42:36
Speaker 1: you know if if previously you may have had a
42:38
Speaker 1: financial services investor that was providing balance sheet capital. Now
42:43
Speaker 1: they're focused on payments and yeah, correct. But you're seeing
42:51
Speaker 1: that in specialty industrial managers, health healthcare managers, you know obviously,
42:57
Speaker 1: and venture capital it's obvious. But any type of strategy
43:02
Speaker 1: there's a technology element that they need to be thinking
43:06
Speaker 1: about it because the competitive intensity with their competitors is
43:12
Speaker 1: only going to increase. Really really interesting. Um So I
43:17
Speaker 1: don't know if that's an opportunity or a strategy. I
43:20
Speaker 1: don't know how to think about that. What else are
43:22
Speaker 1: you seeing that's different than five years ago? Besides the
43:26
Speaker 1: impact of technology, I think the in the slow interest
43:30
Speaker 1: rate environment, people are looking for yield an income and uh,
43:36
Speaker 1: how do they have a they have a benchmark, and
43:39
Speaker 1: when zero, when bonds are returning zero, you know they
43:43
Speaker 1: need to look at other income related or alternatives. You know,
43:48
Speaker 1: we've talked about sale least back, We've talked about music royalties,
43:51
Speaker 1: talked about film and TV royalties, asset back, asset base lending.
43:56
Speaker 1: In addition to just cash flow lending and leverage loans.
44:00
Speaker 1: People are starting to see um uh, litigation finance strategies.
44:06
Speaker 1: You've seen some of those. Last week I ran into
44:11
Speaker 1: two new income strategies I had never thought of. I
44:14
Speaker 1: don't know if they're scalable or we would do it,
44:16
Speaker 1: but one is liquor license lending in California. Apparently in
44:22
Speaker 1: the state of California, there are no new liquor licenses.
44:25
Speaker 1: You have to buy an existing one of the purchase
44:29
Speaker 1: price has to go in escrow. Why the due diligence
44:32
Speaker 1: is completed on the new buyer. And that's a ten
44:35
Speaker 1: percent business. It's small. We've seen uh, tax lean finance,
44:42
Speaker 1: you know in different states, people buying the tax lin
44:46
Speaker 1: and uh. You know, people are a lot of creative
44:52
Speaker 1: people out there trying to come up with strategies that
44:56
Speaker 1: will generate you know, an attractive you know, financial return.
45:00
Speaker 1: So we try to work our way through that. But
45:03
Speaker 1: you know, it's got to be scalable and the management
45:06
Speaker 1: team has to be credible. Uh. And where there's a
45:09
Speaker 1: process in place where it's systematic and repeatable. It might
45:14
Speaker 1: be a little early in the growth cycle of this.
45:17
Speaker 1: But are you hearing anything from clients about things like cryptocurrencies,
45:22
Speaker 1: blockchain and f T s that that's the flavor of
45:25
Speaker 1: the month. What what are you seeing on the private
45:27
Speaker 1: equity side there? If anything? Yeah, absolutely, people are looking
45:30
Speaker 1: at that and allocating resource to it. And when you
45:33
Speaker 1: see the consultants also spending time and uh staffing up
45:38
Speaker 1: to do some research. Uh yeah, it's probably here to
45:42
Speaker 1: say some of the large some of the larger endowments
45:45
Speaker 1: have already made some allocations in the crypto and the
45:49
Speaker 1: digital currency world. So it's it's it's happening really really interesting.
45:55
Speaker 1: So previously we talked about zoom calls and the efficiencies
45:58
Speaker 1: that took place during a pandemic lockdown when there was
46:02
Speaker 1: less travel. When COVID first was beginning, it looked like
46:06
Speaker 1: a distressed assets cycle was going to begin. But it
46:10
Speaker 1: seems to be the distressed assets cycle that never happened.
46:14
Speaker 1: How are you looking at those sort of opportunities? In
46:19
Speaker 1: the first and second quarters of we were thinking the
46:22
Speaker 1: same thing we are. Uh. We we saw an individual
46:28
Speaker 1: that we know well who led the creditor group in
46:31
Speaker 1: March April of to uh get control of Circus. Right
46:36
Speaker 1: if you think about that business, their sales stopped overnight
46:40
Speaker 1: globally done and uh, he there was at one point
46:44
Speaker 1: two billion of dead on that business, and this guy
46:47
Speaker 1: created the company for and it actually relaunched it just
46:52
Speaker 1: prior to Thanksgiving all over the world. And uh but
46:57
Speaker 1: we we thought the same thing he's launched is fund.
47:00
Speaker 1: He's got four positions completed, you know, since I'd say
47:05
Speaker 1: two Q then he's probably up one point six. If
47:08
Speaker 1: you think about Distress, you've got a management team that's
47:10
Speaker 1: on a treadmill, and then the private equity sponsor every
47:14
Speaker 1: quarter is telling them make the interest payment. And every
47:17
Speaker 1: quarter the tilts going up and the speed is going
47:20
Speaker 1: up on that treadmill, and these Distress investors are just
47:23
Speaker 1: waiting for that amorization schedule to kick in, and at
47:27
Speaker 1: some point that's gonna happen and they're gonna lose the company.
47:30
Speaker 1: And uh so, I think there's a number of positions
47:33
Speaker 1: being built on these potential targets, but we haven't seen
47:40
Speaker 1: the carnage that everybody anticipated a year and a half ago.
47:43
Speaker 1: It's really really interesting. We haven't really talked about deal flow.
47:47
Speaker 1: You've been doing this long enough that you know so
47:49
Speaker 1: many people in the space, but what is it like?
47:53
Speaker 1: How how do you find either the gps you want
47:56
Speaker 1: to invest in, or the specific deals that you want
48:00
Speaker 1: to directly invest in. Yeah, the the uh we have
48:04
Speaker 1: been doing I have been doing it a long time,
48:06
Speaker 1: and some of my colleagues at Focus Point, we're also
48:10
Speaker 1: at Guggenheim. From the beginning or early on, we we
48:15
Speaker 1: all have a pretty good network of people. We Our
48:19
Speaker 1: sourcing comes from some of the experienced investors that we've
48:22
Speaker 1: known a long time that maybe at some large endowments
48:26
Speaker 1: or foundations that I have a good relationship with a group,
48:30
Speaker 1: and maybe some of that team is spinning out to
48:33
Speaker 1: start something new. Um, some of our deal flow comes
48:37
Speaker 1: that way direct approach, where we go out introduce ourselves
48:41
Speaker 1: and a general partner may have been working with another
48:46
Speaker 1: capital raised partner for a number of years and might
48:50
Speaker 1: be thinking about, you know, maybe I should try somebody
48:53
Speaker 1: new and met a new getting introduced to some new
48:56
Speaker 1: investors that I may not have met that are not
48:59
Speaker 1: in the net work of the existing capital raiser that
49:03
Speaker 1: I've been working with. So some of that, and uh
49:07
Speaker 1: a lot we get emails all day long of new
49:10
Speaker 1: groups looking to raise capital. So it's I think it's
49:13
Speaker 1: a combination of all of it. Some incoming some proactive definitely,
49:18
Speaker 1: we're always speaking to limited partners. What groups do you like?
49:22
Speaker 1: Have you seen any strategies in this area? You know,
49:25
Speaker 1: if I look at the market, there's three components to it.
49:28
Speaker 1: I call it the trilogy. You've got the limited partners,
49:32
Speaker 1: who are the investors. You've got the general partners, and
49:36
Speaker 1: you have the intermediaries, which are the consultants and the
49:40
Speaker 1: gatekeepers that work with a lot of the limited partners.
49:43
Speaker 1: And we're constantly hitting the limited partners, and they're they're
49:48
Speaker 1: meeting the salesforce, they're seeing us at conferences, they're getting newsletters,
49:52
Speaker 1: they're reading about you in the press, uh and coll calls,
49:57
Speaker 1: whatever it may be. They're constantly get ing introduced to
50:01
Speaker 1: products that we have. The same with the intermediaries and
50:06
Speaker 1: and also with the general partners. We're trying to get them,
50:09
Speaker 1: but the intermediaries are going to influence the limited partners.
50:14
Speaker 1: The limited partners may tell the gatekeeper the consultant, this
50:17
Speaker 1: looks kind of interesting, I'd like you to do some
50:19
Speaker 1: work on it. So those three things are constantly moving
50:22
Speaker 1: and we it's we try, we say, we try to
50:25
Speaker 1: do it with rhythm and repetition. Each one of these
50:29
Speaker 1: market participants and how we spend our time. So we're
50:33
Speaker 1: used to the two and twenty fees with either vcs
50:37
Speaker 1: or hedge funds of private equity, You guys are in
50:40
Speaker 1: a somewhat different niche. What does the fee structures look
50:44
Speaker 1: like relative to to regular alternative investment. Yeah, that's that's
50:48
Speaker 1: about right. So the rack rate UH for raising up
50:52
Speaker 1: the capital for an established group is probably two percent
50:56
Speaker 1: on committed capital, and then you're protected on the success
51:00
Speaker 1: a fund with say half fee on the UH of
51:05
Speaker 1: the fee that they paid last time up to their level,
51:08
Speaker 1: and then maybe something a little more on the incremental generally,
51:12
Speaker 1: and an investors is underwriting to do two funds with
51:16
Speaker 1: a general partner, and then they'll re underwrite them seriously.
51:20
Speaker 1: On fund three. There just won't be a lot enough
51:23
Speaker 1: to come through by the time they're back in the market,
51:26
Speaker 1: especially today when they're back every eighteen months. On the
51:30
Speaker 1: credit side, the fees are a little less because they're
51:33
Speaker 1: charging a little less because the returns are Yeah, and
51:37
Speaker 1: so you know, i'd say rule of thumb if it
51:40
Speaker 1: it's UH. If a credit strategy is returning say a
51:45
Speaker 1: net net return of between eight and ten percent. The
51:49
Speaker 1: managers probably can't charge more than one percent on invested
51:53
Speaker 1: capital versus committed capital, and maybe it's a ten or
51:58
Speaker 1: fifteen percent carried interests versus twenty. If the return is
52:02
Speaker 1: say ten to twelve percent net, the credit manager might
52:06
Speaker 1: be able to get one and a half percent, one
52:09
Speaker 1: to one and a half on and invested you know,
52:12
Speaker 1: maybe a fifteen percent carry and then north to twelve.
52:16
Speaker 1: They're working their way closer to two and twenty. Is
52:19
Speaker 1: there the same sort of fee pressure on the private
52:22
Speaker 1: side that we see in the public side? You know,
52:24
Speaker 1: you have Vanguard driving and others driving Grace to the bottom,
52:29
Speaker 1: which which is great when you have scale, but everybody
52:31
Speaker 1: else it definitely pressures them and they don't have the
52:35
Speaker 1: same sort of economies of scale that Black Rock or
52:39
Speaker 1: or Vanguard have. What are you seeing on the private
52:42
Speaker 1: side with that? Definitely? Definitely that on the fund of
52:45
Speaker 1: funds managers, right, the fund of funds generally, you know,
52:50
Speaker 1: ten fifteen years ago could get away maybe with charging
52:53
Speaker 1: one percent. Yeah, and now now on on a they're
52:59
Speaker 1: all move being into trying to make money with co investments, right,
53:04
Speaker 1: and so that's where they're going to make their that's
53:06
Speaker 1: their bread and butter, and they're almost giving away the
53:08
Speaker 1: primary investment. Uh. The fees that they charge on that
53:13
Speaker 1: another interesting development, right, I think we'll see a lot
53:18
Speaker 1: of fee fee pressure. Are the private equity secondary managers? Uh,
53:23
Speaker 1: they've raised incredible amounts of money, tens of billions of
53:27
Speaker 1: dollars UH from large, large LPs. UH. They're paying a
53:34
Speaker 1: slight premium versus you know, following the financial crisis, they
53:38
Speaker 1: were paying they were buying a lot of these limited
53:41
Speaker 1: partners were out of balance when when they rebalanced their
53:44
Speaker 1: portfolio when the stock market declined, they were way over
53:48
Speaker 1: their targeted allocation to private equity. So they had to sell.
53:52
Speaker 1: And these secondary managers did very well. They were buying
53:56
Speaker 1: buying those positions at a steep discounts. Now, they continued
54:00
Speaker 1: to raise money, but they're they're probably paying a slight premium. Uh.
54:06
Speaker 1: And I think investing in a secondary manager UH when
54:10
Speaker 1: there's a lot of liquidity doesn't make a lot of
54:12
Speaker 1: sense to me. You know, I think investing in a
54:15
Speaker 1: secondary manager when there isn't liquidity, they're going to be
54:18
Speaker 1: buying in at steep discounts. And and and another dynamic
54:23
Speaker 1: is you're seeing these continuation funds being UH formed, where
54:29
Speaker 1: general partners now are basically creating their own secondary funds themselves.
54:34
Speaker 1: So a GP will have their best asset their taxpayers,
54:38
Speaker 1: and they'd rather just continue to compound and so that
54:42
Speaker 1: without having to pull it out and without having to
54:44
Speaker 1: sell it. Correct, and so they'll take their best asset,
54:48
Speaker 1: put it into a continuation vehicle UH redeem out the
54:54
Speaker 1: LPs that want their capital back, bringing a new new
54:58
Speaker 1: capital provider. They keep going. And so I think we'll
55:05
Speaker 1: see what We'll see how that shakes out with with
55:07
Speaker 1: some of these secondary managers that have raised a lot
55:09
Speaker 1: of capital. So that raises a really interesting question. We
55:14
Speaker 1: seem to hear every couple of years a lot of
55:17
Speaker 1: chatter about doing away with the carried interest loophole. What
55:21
Speaker 1: do you think happens with that and how significant is it?
55:26
Speaker 1: I I think it's gonna stay stay where it is,
55:31
Speaker 1: and it is significant though, but that's what motivates these
55:36
Speaker 1: you know, very talented investors and UH, especially on those
55:41
Speaker 1: secondary funds where you don't have to UM redeem and
55:46
Speaker 1: cash out. You can keep it running, yeah and correct.
55:50
Speaker 1: Really interesting, So so we we you mentioned liquidity UM
55:56
Speaker 1: when I look at the venture side, there's just so
55:59
Speaker 1: much capital own and we've certainly seen a similar growth
56:04
Speaker 1: spurt in the private equity side. Uh. What does that
56:08
Speaker 1: do when you see all this cash and capital coming
56:11
Speaker 1: into the space. In the old days to three four
56:14
Speaker 1: billion dollars, Wall Street was happy to participate in that space.
56:19
Speaker 1: Now it seems they're going further and further up the
56:24
Speaker 1: skit size, going further and further up the deal size scale,
56:29
Speaker 1: and what we used to think of as middle market
56:32
Speaker 1: continues to expand. What's the result of all this capital
56:36
Speaker 1: rushing into the space? I think in the mid market,
56:41
Speaker 1: in the mid in the let's call it the lower
56:44
Speaker 1: mid market to two fifty to a billion is probably
56:49
Speaker 1: uh to fifty is the lower end you know, mid
56:52
Speaker 1: cap would be I'd say between five hundred and a
56:55
Speaker 1: billion and a half or five d and a billion
56:58
Speaker 1: fund size. Uh, there's more exit opportunities when you're have
57:03
Speaker 1: a company at that level than you have a five
57:06
Speaker 1: billion dollar company, right, and so there's there's more there's
57:10
Speaker 1: more options in terms of exit. You could potentially I
57:15
Speaker 1: p O it, it might might fit for us back,
57:19
Speaker 1: or there's a lot of larger private equity firms that
57:23
Speaker 1: have raised, you know, significant amounts of capital, and they
57:26
Speaker 1: have platforms and they're looking to grow, and I think
57:30
Speaker 1: they're maybe some of them overpay for some of those assets.
57:35
Speaker 1: And uh, is that valuation issue ongoing? Is all that
57:40
Speaker 1: cash leading people to pay inflated values even on the
57:43
Speaker 1: private equity side. I think I think they're some of
57:46
Speaker 1: the larger firms are feeling the weight of the money
57:49
Speaker 1: and they have to get the money invested, and so
57:52
Speaker 1: they can't overpaying a bit. Yeah, they might. Uh. You know.
57:57
Speaker 1: One anecdote for you is, I know a tech investor,
58:01
Speaker 1: you know, probably sub one billion, a large, you know,
58:05
Speaker 1: ten plus billion dollar firm was buying one of their
58:08
Speaker 1: portfolio companies. Uh. Smaller firm was going to roll their equity,
58:14
Speaker 1: uh roll thirty or their equity, you know into the
58:19
Speaker 1: new new company. The larger firm kath And said, you
58:22
Speaker 1: know what if we pay you a little extra, can
58:24
Speaker 1: we just take all of it? He said, sold to you?
58:29
Speaker 1: Sold to you? One of my favorite lines of all time. Yeah,
58:32
Speaker 1: so I think you're seeing some of that. Um, that's
58:36
Speaker 1: really that's really interesting. All right, So let's jump to
58:40
Speaker 1: our favorite questions that we ask all of our guests,
58:44
Speaker 1: starting with what are you streaming these days? Give us
58:47
Speaker 1: your favorite Netflix or Amazon Prime. What's keeping you entertained?
58:52
Speaker 1: My wife watches more than I, more of those than
58:55
Speaker 1: I do. But one that I definitely liked was Serpent
59:01
Speaker 1: The Serpent. The Serpent that was I think. It was
59:04
Speaker 1: a BBC series about a French serial killer in the
59:09
Speaker 1: seventies in Southeast Asia and uh interesting, it's uh amazing
59:16
Speaker 1: and they finally they finally caught him. Well spoiler alert. Yeah,
59:20
Speaker 1: but it's a that one I liked. You know, I've
59:25
Speaker 1: seen a few few series like that, but that one,
59:30
Speaker 1: that one stood out stood out. Who are your early
59:33
Speaker 1: mentors who helped to shape your career. Yeah, I would
59:37
Speaker 1: say it would be H David Patterson, who ran HSBC's
59:42
Speaker 1: private equity business in China and Southeast Asia. He was
59:47
Speaker 1: based in Hong Kong, and that's who introduced me to
59:52
Speaker 1: private equity in nineteen two when he showed up in
59:56
Speaker 1: our offices in New York with to thirty five million
59:59
Speaker 1: dollar funds study invested in Southeast Asia and looking to
1:00:04
Speaker 1: raise h a fund in the US with some of
1:00:08
Speaker 1: US investors. Tell us about some of your favorite books.
1:00:12
Speaker 1: What are you reading right now? What am I reading
1:00:14
Speaker 1: right now? I just a cheap peak. Gave me red notice.
1:00:21
Speaker 1: I came out of a couple of years ago Bill
1:00:23
Speaker 1: Browder's book where he had I think he was the
1:00:27
Speaker 1: largest foreign investor in Russia at one Yeah, and uh,
1:00:34
Speaker 1: it's an amazing story. Once uh, once Vladimir Putin, you know,
1:00:40
Speaker 1: seemed to cut his deal with the y'alligarchs and uh,
1:00:45
Speaker 1: a strong willed guy. It's an amazing story. I think
1:00:48
Speaker 1: it would be a great movie. Uh. And I just
1:00:52
Speaker 1: recently read Elon Must. I read a couple of the
1:00:56
Speaker 1: rocket billionaires, you know about the and then Elon. That
1:01:00
Speaker 1: led me to recently read Elon Must's biography. Uh and uh,
1:01:07
Speaker 1: you know, incredible, incredible what he's doing, you know, simultaneously
1:01:11
Speaker 1: trying to disrupt the three most complex industries in the
1:01:14
Speaker 1: world Aerospace, financial services with PayPal, you know when he
1:01:19
Speaker 1: got involved there, and uh and automotive with Tesla simultaneously.
1:01:25
Speaker 1: So you know, he he left South Africa, I think,
1:01:30
Speaker 1: you know, at eighteen, I think a distant relative of his,
1:01:34
Speaker 1: of his mom, you know, had had some there were
1:01:37
Speaker 1: some relatives in Canada, and he went for it. A history. Yeah, yeah.
1:01:44
Speaker 1: Say at least what sort of advice would you give
1:01:46
Speaker 1: to a recent college grad who was interested in a
1:01:49
Speaker 1: career in in private equity or capital raising. I would say, Uh,
1:01:56
Speaker 1: I definitely get an internship where you can. We've we've
1:02:00
Speaker 1: to try to take in two or three interns every
1:02:02
Speaker 1: year and that certainly helps them when they graduate. Getting
1:02:07
Speaker 1: getting a position at an investment firm. UH doesn't need
1:02:12
Speaker 1: necessarily need to be a capital raising firm. I also
1:02:16
Speaker 1: think getting experience and credit. I would recommend that to
1:02:20
Speaker 1: anybody coming right out. I think that is a good
1:02:24
Speaker 1: foundation that you that UH can be very valuable. Interesting
1:02:31
Speaker 1: And our final question, what do you know about the
1:02:34
Speaker 1: world of private equity and capital raising and credit today
1:02:38
Speaker 1: that you wish you knew thirty years ago or so
1:02:40
Speaker 1: when you were first starting out? I would say patients
1:02:44
Speaker 1: and perseverance UH to use come up with a couple
1:02:48
Speaker 1: of words that raising raising capital Uh, you can you
1:02:55
Speaker 1: can never stop. You just have to keep moving forward.
1:02:58
Speaker 1: Just like I I ski race. I still do the Masters,
1:03:03
Speaker 1: and one of the coaches always tells me at the
1:03:06
Speaker 1: beginning of the gates, you know, for a practice run
1:03:08
Speaker 1: keep moving forward. And I think just raising cat things.
1:03:13
Speaker 1: Things are gonna always happen. There'll be a key man event,
1:03:16
Speaker 1: somebody will leave, UH, portfolio company will blow up, you know,
1:03:23
Speaker 1: could be some others. You know, the Asian crisis, a
1:03:27
Speaker 1: pandemic can hit. But you can never stop. You just
1:03:30
Speaker 1: have to keep moving forward. And I would say, you've
1:03:33
Speaker 1: got to be patient and you just continually have to persevere.
1:03:37
Speaker 1: Really really good advice. Um, how your knees. Gotta ask
1:03:41
Speaker 1: if your ski racing still these are good? I UH.
1:03:45
Speaker 1: I had my reconstructive surgery from a soccer from a
1:03:48
Speaker 1: soccer uh incident in nineteen ninety and they've it's still there.
1:03:54
Speaker 1: It's still good. So far, so good. Thank you David
1:03:58
Speaker 1: for being so generous with your time. I'm we have
1:04:00
Speaker 1: been speaking with David Conrad. He is the co founder
1:04:03
Speaker 1: and CEO at Focused Point Private Capital Group. If you
1:04:07
Speaker 1: enjoy this conversation, We'll be sure and check out any
1:04:10
Speaker 1: of the previous four hundred such discussions we've had over
1:04:13
Speaker 1: the past seven years. You can find those at iTunes, Spotify,
1:04:18
Speaker 1: wherever you get your favorite podcasts. We love your comments,
1:04:22
Speaker 1: feedback and suggestions right to us at m IB podcast
1:04:26
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1:04:30
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1:04:34
Speaker 1: Halts dot com. Follow me on Twitter at rid Halts.
1:04:38
Speaker 1: I would be remiss if I did not thank the
1:04:39
Speaker 1: crack team that helps put these conversations together each week.
1:04:44
Speaker 1: Mohammed Rumaui is my audio engineer. Alatico val Bron is
1:04:48
Speaker 1: our project manager. Paris Wald is my producer. Michael Batnick
1:04:52
Speaker 1: is my head of research. I'm Barry Hults. You've been
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Speaker 1: listening to Masters in Business on Bloomberg Radio Zero