David Conrod on Successor Funds and Growth Equity (Podcast)

about how that side of the investment world works. If you're at all interested in a variety of diversified and non correlated strategies, what it's like raising capital for both emerging and existing managers and playing in the world of credit lease back's, music industry, royalty funding, as well as traditional private equity, you're gonna find this to be absolutely fascinating. With no further ado, my conversation with Focused Point of

Capital Groups David Conrad. This is Mesters in Business with Very Results on Bloomberg Radio. My special guest this week is David Conrad. He is the co founder and CEO at Focused Point by the Capital Group and Lansing Investments. He played a key role in sourcing six separate Googgenheim sponsored UH strategies. Collectively those raised over six billion dollars of limited partner money He also helped to establish the Guggenheim Private Fund Group with more than seven billion dollars

in fund allocations. David Conrad, Welcome to Bloomberg Verry. Thank you glad to be here. So, so let's start in the middle. You've been working in the asset management industry for a long time, but let's start with your role at Guggenheim Partners. You were there when the firm was formed in two thousand. Tell us about your role in what you did for them. Sure, I left HSBC Group

at the end of and UH. Some friends of mine that I'd known a long time had came on came out of the fixed income side at a number of investment banks, generally UH, top I, I Rated Mortgage Research and more traders fixed income salesman and UH. To raise third party capital a broker dealers required. So I established the little fundraised up group at this small broker dealer and UH with the knowledge that we were going to try to create a financial brand out of a museum name.

And one of the founders of the broker dealer was very close to the Guggenheim family, the father and the

son that were owners of this brand. And we spent a little bit of time during two thousand and October two thousand, we merged the broker dealer with the Googgenheim brothers created Googenheim Partners, and then also in the same month closed on I believe it was twenty eight million and working capital, and then we and then we had a reverse merger also in the same month with a commercial paper conduit in Chicago by the name of Liberty Hampshire.

And the CEO and founder of Liberty Hampshire, Mark Walter, is still Googgenheim CEO today. That's quite interesting. How did being at Guggenheim when it was founded affect both your career and the way you think about private equity. I was exposed to private equity when I was at HSBC Group after business school and UH that's where I was

exposed to it in the early nineteen nineties. UH, when I HSBC was on an acquisition Binge in the late eighties early nineties and acquired some asset management businesses in the US, and when I graduated business school, UH joined join them and I was generally calling on institutions raising long only Southeast Asian equity mandates and at that time only the largest pageant funds and institutional investors would make an allocation to such a narrow strategy, and so it

got me. Uh, it allowed me to start a dialogue with some of the largest institutional institutional investors in the United States marketing those products. And through that I was introduced to an individual that owned twent of a management company and HSBC owned of where. He had two small, thirty five million dollar private equity funds focused on Southeast Asia and China. Performance looked pretty interesting and his goal in ninet I believe ninety three was to try to

raise some capital from the United States. And was that your entree into the private equity Yeah, that was my entree into and we went down to I think it was Mary Lynch to talk to their fund placement. My boss was the CEO. There were six of us in.

The CEO told the general partner, a guy named David Patterson, you know, take myself down there, and I saw the fees that were uh that Mary Lynch would earn on raising a private equity fund versus the fees you know, I was getting raising the long only and that was an easy decision. Uh. From my standpoint, this looks really interesting.

If I can raise you know, two or fifty million dollars at a two percent fee, that looks that looks pretty interesting, and you know, maybe I know some of the people that might take a look at this, and so that's how it started. And you raised a little more than two little bit. We so we we raised I think it was the largest Asian private equity fund ever. We closed it and I think December twenty second, nine four and we raised two hundred fifty and then we

raised the six fund in India. In the mid nineties, HSBC spotsored the team to invest in India and South Asia is probably one of the earlier ones then. Um I remember a drive with an advisory board meeting from Agra to Jaipur. I think it took eight hours. Would be the equivalent of driving from New York to Hartford eight to eight hours. So not exactly. India has changed quite a bit from their the mid nineties. And then

we raised a successor fund for Asia. After the taype Ot crisis in Indonesia, Rupaia went from I think two thousand to twenty thousand overnight, and then the U S firms came into Southeast Asia. You know, and saw that as a big opportunity. How did those funds do because when I think of Asia, I can't help but think of the peak in Japan in a D nine and that's subsequently done poorly. I guess when you're doing private equity, you don't care about those marta markets. You're working off

a working business. A lot of the funds that were fully invested by the time of the tay Bot crisis and the currency crisis in late ninety seven early nine JANU we're really hurt. You know. They were generally borrowing in U s dours and their revenues now were reduced by you know, ten ten times, and so it was. It was tough. So once we raised the successor fund, uh the America, all the US private equity firms started

to come into Asia forming groups. All all the big names started to hire teams to take advantage as they're trying to expand their footprint, and uh HSBC stayed in the I would say the lower mid market. Raised another fund in two thousand to two thousand three. Uh I was at Googleheim at that time and they became a client. So it worked out well that not only the group,

the group in Asia that we raised capital four. But HSBC had a group in Latin America and also a group in in Europe that spun out and as later rebranded themselves Montague. But we UH, we raised a little over two point two billion from Montague in early two thousand's. So you you start focus Point Private Capital in two How was this different from what you've done previously in your career? And what services does focus Points shall provide? Yeah,

so we learned a lot at HSBC. We had it's a minority shareholder, is a A A is an assurance company, and that that seated a number of the funds that

we raised at Guggenheim. So in addition to using the broker dealer at Googgenheim to raise third party capital UH, Googenheim was a principal and a number of different strategies H and we we would identify the management team, the insurance company, would would provide some seed capital to get some investments completed, and then we would go out to the market and raise the initial fund and UH and then we would generally raise a follow on fund two or fund three. UH and a number of credit related

strategies as well as well as some equity UH. Following the financial crisis and oh eight UH Googenheim, I would say, less interested in in seeding new managers and more using the balance sheet that they were building to act more as a direct investor. UH. Middle of a lot of us on the capital raising private fund group inside Googenheim

became independent. We're still still very close with a number of the people that were there when we we were there, and UH focus Point raises capital for price it funds and direct transactions. And I would say it's similar to what we're doing at Guggenheim and that we were all

we're continually meeting with investors in general partners. One dynamic I'm noticing is increasingly the capital raising business we're acting like almost like a search firm, because we're continually meeting investment talent, whether it's talented UH investors inside a private equity firm other other independent sponsors that are more comfortable

or confident in their ability to find profitable transactions. And I've been unable to convince them to do a fund or talented limited partners that have been you know, investing in the asset class for a number of years. And UH we continue to see it evolved but you know, looking back, you know we've probably raised capital for over twenty first time funds and which requires a lot of work. But the reason you do it is for the successor funds.

So let's talk about that, because I tend to think in terms of venture capital doing a seed round and then a follow up a round, or a B around or C round. When you talk about successor funds, are you going back to the same funds you seated or is it different projects, different investments. I'll give you an example at at Guggenheim for example. So we following early two thousand's after after nine eleven, uh low air traffic was way off and UH A lot of the airlines

went from a wide body to narrow body. You notice that when you fly across country now it's a single aisle, not at double aisle. And we were introduced to a group that spun out of British Aero Space and they had been buying commercial aircraft on their own account UH and engines that power them. And they were backed by big high net worth family on the West coast that

would was the equity partner. It would be impossible to go to a bank to borrow money to buy a seven forty seven without you know, revealing who the sourcery or equity was. So they had to institutionalize their business, and so Guggenheim did that and by committing some initial capital, we went out and uh, the team went out and got some investments completed, and it was as the load

factors were off. Uh, they were buying a lot of wide body seven four sevens and converting them into freighter to take advantage of the global supply chain moving from just to just in time delivery. So component parts and things like that coming out of Asia to the West wanted, you know, so there was a demand for seven forty seven. So we the team recognized that opportunity and did it. And UH, it's actually a big job to convert. You know, you have to cut a hole in this drill a

big hole on the side of the aircraft. It's got to be structurally sound, strengthen the floor. But we were pretty successful with that raised. Uh got I think six investments completed, proved out the thesis, and we raised seven million for fund one and the successor fund. Get around answering your question is, UH, was seven thirty seven. We got up to seven forty one. We couldn't quite get to seven forty seven in capital, and so we backed it down to seven thirty seven and through story and

uh but and now what did the fund investment? They did more. They they the market had changed, and so they started doing some new aircraft. Boeing came out with a new seven four seven dash eight and uh, so they put in an order for some new ones. Uh and uh the existing fund one, the tire portfolio was sold to a another private equity firm had a listed vehicle to do aircraft leasing and they they needed to grow,

so they just bought the entire portfolio. So we had a we we generated a nice return in a very short period of time, proved that that had a nice track record, which enabled us to raise fund too. Let's talk a little bit about some of the asset managers you work with and help raise money through. What walk us through that process from due diligence to investing. What

is that process like? It's it's a lot of detail, and it's a lot of work, but it's also uh, you know, having done it a lot, it's pattern recognition. And so we've met thousands and thousands of general partners looking to raise looking to raise capital, whether it's a new team that's spinning out from a larger invest a firm, or it may be a team that's proven themselves and they're looking to raise capital and they'd like to meet some new investors. On the due diligence side, there's a

number of things to do. We we make a lot of reference calls, talk to the CEOs of the companies that they've backed to verify the track record that they're presenting. The reason we do that it's almost a triangle to see if they actually do have a story straight. Uh, these gps are all smart, clever guys, and they're gonna tell us about all the great deals that they've done and their track record and all that, and then verifying that by speaking to the CEOs to confirm that these

are the guys that actually did the deals. And then we try to look at their files to the files track with what the CEO told us and what they told us, and if those three things match up, they probably do have a process and it's probably it's probably okay. Then when you when you say GP, you're talking about the general partners who are running the fund correct as opposed to the LPs, the limited partners, the people putting

the capital investing. That's that's exactly right. And so you know, I tell we one of the things we do is we tell the gps, the general partners that you know, they're in the automobile industry. They're selling cars. Every every GP that comes in to see us is a smart, very clever guy. And these LPs can buy any car they want, you know, and they're probably gonna do fine and uh and so so the question is why should

they buy your car? Correct? Our job is to try to identify that investor that is looking for a differentiated strategy where it's additive to their portfolio to bring in another middle market buyout firm. Right now, everybody or a lot of growth equity and the software firms are doing very very well. Most funds are doing well over three x, right, and eyes glaze over almost with these limited partners. To try to convince a limited partner to do more work.

And you know what, I need you to substitute your existing manager for this new group. Uh, and I want you to take six months of extra work on your end to get the same return. Is a ton That's a tough one, you know, I need to have a manager that's got a differentiated strategy that is additive to their portfolio, because that's what a lot of what a limited partner is thinking about. How can I improve diversify

UH portfolio makes a lot of sense. So hypothetically, you run these managers through UM your process, you check off a lot of boxes. Once the LPs put capital to work with these gps, what are your responsibilities? Do they end at that point or is it an ongoing relationship. Generally it's you know, if they're handed off to the g P. You know, our job is to manage the

process from the initial contact with the prospective investor. I think there there are suspect before their prospect and so we we go out to several thousand investors, probably initially to try to identify in some prospects, and then once we have an initial meeting or initial video call, we uh it's our job to help manage that process and move the investor through the different stages that they're gonna be thinking about, you know, towards making a positive decision,

and that could be a second meeting to meet other members of the management team, getting access to a data room to look at due diligence files, look at the portfolio performance, make some reference calls. UH. Probably will do a visit on site to visit visit the offices. You know,

that was an issue during when people weren't traveling. UH. You know, how does an institutional investor modify their investment policy procedures to make a commitment to a fund UH when they're unable to visit the office if that's part of their policy. So a lot of those policies were amended UH and or replaced with more reference calls and things like that. So that raises an obvious question. During

the lockdown, were you doing everything by zoom? We were people going out and actually meeting the GPS and person of person. The GPS were, of course, you know, they have one one objective, which is to get funded, and so they will go ready, willing and able to go anywhere. But a lot of the limited partners, especially the institutions, were generally in the first six months of the pandemic, you know, not really willing to meet or they weren't.

There's an age gap there, right. The GPS tend to be a little younger and hungry, and the LPs are a little older. And more seasoned. I'm I I'm their stereotype. That's not bad. I think you're you know that the younger guys, would you know? We had some meetings in uh it's a Miami. We had some family offices. We had meetings outside. UH. We did convert uh some in I think admittedly the year it was tough though April May.

April May was you know, everybody was on adrenaline, not really knowing what was going to happen, but a lot of zoom. It was very exhausting. But you know, it's getting people are traveling again and taking meetings. So it's so this raises another interesting question. Were there any lasting changes to the industry or how you do business because of what we learned during the pandemic. So lots of people still working from home, lots of people are being

more selective in their travel. Do I really have to go to l A or can I just make this a zoom call? How has this impacted your business? How has the pandemic impacted the way you operate today? I think it's making uh. I think it's making it a little bit more efficient now with annual meetings. UH, there's

always going to be a remote option. And so these limited partners where before and you know, months of May, June and uh September, October, November, you know, most of the time of those let's say six months, they would be out of the office, Yeah, spending a day or two days traveling across country to attend an annual meeting. Now they can watch it on zoom for an hour

and be much more efficient sitting at their desk. And I think that development, the fact that there is a remote option is allowed UH general partners and and for and capital raising firms like ourselves uh more more a better probability of getting too a prospective investor that's in the office where they're not wasting time traveling or wasting a half a week traveling to annual meetings. So it

proved the efficiency. Does that give everybody a wider net they can cast your your geography isn't limited to your local city or even your local coast. You can pretty much go anywhere. I think that that has helped. But these limited partners are probably being bombarded by more and more emails incoming uh and so it's still more valuable to have the one on one in person. But when that is not available. We we definitely try for the

video call. And UM, I'm curious as to these gps why come to a firm like yours as opposed to just hiring a team to raise the capitol themselves to hire a team, train a team. You know, it's it's a big expense and makes sense. It's you know, it's people and that's management cost and overhead and time and lack of expertise. Correct. Uh So so you mentioned people are looking for strategies that differentiate from everything else they have.

What are some of the newer differentiated strategies or fund types uh that you're seeing more and more of that aren't as widely held as let's say, commercial real estate or structured notes or things like that. What's the new new thing these days? Right? I think one thing we've seen the last couple of years is music royalties. Almost every month there's a new group targeting that. And you know that emerged because these songwright these artists were unable to tour and so that was a big source of

their income. Is to being able to tour, and now they're uh looking to sell some are all of their copyrights, uh, to cash out. That's really interesting. Because the old days, people would tour to promote an album and they made the money from sales. Now it's the opposite. They put out an album in order the tour. Once that shut down, they had some trouble. There's not a lot of money in streaming, is there? From most No streaming saved the music business, save the business. But how much of that

falls to the artists? The artists? Uh, I think I don't know the exact number, but I think every time a song is downloaded on iTunes, a songwriter gets I think it's eleven or twelve cents um. And but Spotify with the streaming, you know, so the the younger artists are doing well because the people listening to Spotify or not my parents, right, Uh, And so the new classics are probably performing much better and uh than some of the Louis Armstrong is being downloaded or streamed. But I

think we've seen music royalties. We're working with a group that not only does music, but they'll be coming out they do. They specialize in film and TV royalties. Uh.

And that prior TV. Now you have a lot of series that are picked up over and over, uh the Netflix or HBO and gets picked up those you know, those royalties behave in a similar fashion to a film library with the TV series and uh so that that's self liquidating uh mezzanine debt and so there's no capital markets event required for an exit, and uh it's generating a nice load of mid teens net returned to investors

in a zero interest rate environment. And so so let's talk about that a little bit because that's kind of fascinating. I know Dylan recently sold this catalog Taylor swift Um allowed streaming, which we had previously Pink Floyd. What does this look like when an artist said says, here's a dozen albums I've created over thirty years. I want to monetize this. Tell us about that. I think I saw a song it's as steady state after a I believe it's about six years. You know a good example, we

worked with a music royalty group. We've raised three funds for them since so we've been at it for a while. But uh and I think it was that during the Olympics in the in London and two thousand and twelve, uh call me maybe was on the radio every five minutes.

Now you never hear it, and uh so it took about a song hits its steady state after about six years, and they they can monitor, you know, they collect those revenues globally now, so whether it's played on on the radio, whether it's played in a bar, at a skating rink, on you know, it's a set list at a concert by a musician. Those UH artists received those royalties every quarter. And UH, it's you're basically just doing a cash flow

analysis to see how it's gonna play out. But you probably would be interested in It's a little risky prior to six years because you don't know where it's going to so in other way, that song is going to hit its steady states, so to so after six years, it's almost like the coupon on a bond, the yield of a bond. You have an idea, Hey, at this

point it should yield X going forward. And not all songs are created equal, not all artists are something I'm gonna do two X or three X, but you don't know that until six years in correct, something like, Yeah, so you've done three funds that we did. We've done three music funds with a group, UH, and we've done two funds with another group that focuses on film and TV royalties. But they're the most recent fund. Uh, there wasn't a lot of new films being produced in one.

They dip their toe into music and uh so a little more diversified. I think there'll be some good interest in that next year when they come out with their success or fund. How how large can this space to get? There's only so many songs that that get produced each year. It's only like ten million songs, but not all of them make money. Um, how much room is there in this little niche as a potential investment sector music? It's I don't know how big it will ultimately get to,

but there's certainly long ways to go. And I think the film and TV. The TV is really taking off when you see the number of series created and the and they're they're picked up from multiple seasons. So uh and film is you know similar, Yeah, and you know what's it's release theatrically, you know, in the in the in the theaters in the US, then it goes to Europe, then it goes to pay per view on demand, you know, and you're still seeing The Godfather every every Christmas time,

you know, it's on four different channels, a classic Christmas movie. Yeah, quite fascinated. Another interesting strategy that we've been we've done three funds with a group focused on the sale, lease back, and that of real estate, of commercial real estate. So I'm a I'm an old world company. I own all my real estate, all my buildings, and I'm tired of depreciating them over time. I sell the building to you and then do a fifty year lease. Not not quite

fifty years, but yeah, that's exactly it. So you have the headquarters of a big pharmaceutical company and uh, they they're looking to raise some cash. Maybe not a pharmaceutical company, but some other business. Uh, it's a great non bank source of financing. You can sell the asset and simultaneously release it back for fifteen to twenty five years. You're

protected against inflation. The manager manager is because the rent increases are built in contractually and you own the asset, so you're actually in a better position than the bond holders that own the same credit. And uh, we've done three funds with this group. I think say at least back the investment banks haven't been promoting it because they

probably this is just me a theory of mind. But the investment banks would rather convince the CFO of these corporates that do a bond offering or an equity offering because the fees are higher than suggesting. You know what if I look at your balance sheet, you know property, plant and equipment is your largest line item. Why do you why are you in the real estate business? Why do you sell that, release it back and reinvest back

into the business. Another advantage for the company is to do it is by entering into a long term lease, they're going to get a below market rate, right, and the manager gets to buy the asset at a below market price. And uh so we've worked with a group. It's been a little difficult raising capital for it because it's a hybrid. It's not quite credit because it's real estate act and the credit guys don't understand corporate real estate,

and the real estate guys don't understand credit. And the real estate guys think the market's gonna take is going to continue to go up, and they're not looking at the the importance of the credit. But that's the opportunity when when nobody really understood when the players in the space, it's it's adjacent not dead center. What they do, so

they don't really get it. Yeah, And so our job is as a capital raiser for that is to identify the prospective investor that might be a little more thoughtful is looking for a product like this which is generating you know, ten eleven percent cash on cash without a lot of volatility and fairly safely. And during the pandemic, they they actually this group collects their rent quarterly in advance versus monthly, and so they never had an issue all during the pandemic. So let's talk a little bit

about focus po lane. Um, what's its specialty? Where do you really put your focus into focus point? Sure, we we raise capital for private funds and direct transactions. The typical fund strategies we are focused on are, I would private equity managers in the mid cap space from two fifty million to say two hundred billion, in in fun size growth equity managers, minority or managers focused on control, uh, some software, but all throughout the tech sector tech enabled services, software,

some hardware. Uh. And we've lately done a little bit in the venture capital world, and we do a lot in credit and income related strategies. And who hasn't done a little something on the venture capital world these days, it seems like there's just a ton of cash flowing into that. But you mentioned equity growth are those private Are you talking about hedge funds that are in the These are UH private equity firms that are not seeking

control of the businesses. So they're generally it's generally backing a management team bootstrapped and they're the first institutional money going into the business. Companies are growing, you know, thirty to fifty annually and they need some equity capital to

get to the next level. These growth equity managers provide that with their guidance, get them to a hundred or two hundred million in revenue for exact saying, and then they show up on the radar screen of the larger UH private equity firms that are looking to add on you know, looking for a portfolio company to add onto

an existing platform. And so it's almost a food chain that makes we're starting to see developed which wasn't as apparent three to five years ago, but with the what's happening in the world of tech, it's it's it's increasing rapidly quite quite interesting. Let's talk about land sea investment. It almost sounds like lands and Sea, but it's lands and the letteracy. First, what does that name mean, and then we'll talk about what it does. I've got a son named Lucas, I've got a son named Alex, I've

got a wife named Nina. My name is David and my last name is Conrad. So there it is, and uh that that's the entity that owns the Focus Point Private Capital Group. And we i'd say since twenty we've been through the capital raising business. We meet some We started meeting some talented independent sponsors that were confident in their ability to get a transaction done where they I was unable to convince them to do a fund and so we would raise equity for them, and we started

to participate in the promote structure with them. So land C owned a portfolio of ownership interests in some direct transactions and on occasion we participate in the promote structure with some first time funds as part of our compensation. So when you say you participate, you get a slice

of the GP. Is that of the of the GP economics? Correct? Oh, not the control, just the economics, just the cash flow from that the part of the percent of their carried interests for raising the equity and in some cases we have invested in their GP one dint. One thing we noticed is with independent sponsors when they do have a direct transaction, the lenders want to see a fund that

the GP commit is generally two percent minimum. The lenders on a direct transaction for a sponsor who does not have a FUN are asking for ten to for a GP commit and they don't always have that lying around money and so being able to help them solve the GP capital problem helps improve our economic sharing makes for example, and that and that sounds like those are potentially lucrative

investments over time. That's that's our that's our that's the object of the exercise, I guess right well as opposed to saying I want to put money into this fund that's gonna yield it or ten percent when you're putting money into a direct investment, my assumption is those are ordinarily attractive opportunities. Yeah, they're the investors are looking for

a higher return. Uh. And we've we've done some things in the real, real stimulated in the hospitality sector, focusing on the extended stay in the select service market with the former former principal on at a large investment bank. He had a twenty billion dollar portfolio he oversaw one point. He's been operating at it as an independent sponsor for ten years and we've done completed now six transactions with him, and we have I guess ownership in you know, north

to sixty uh of those types of hotels. UH. We recently identified a New York Stock Exchange listed insurance company to invest in eight uh large shipping container vessels. That hundred and seventy million is now worth north of half a billion in only nine months, as the container market is red hot right now. And this insurance company was

pretty savvy and recognizing that end of last year. And these are all end of life ships, so they go to scrap at the end of the charters that they're currently on, so there's no exposure or risk of rechartering them at the end of these and UH. The investor at that insurance company clever guy uh actually ex colleague at Google. Heim really really interesting. So I mentioned lands coincidental it's really an anagram for you and your wife and your kids. But let's talk a little bit about

triple netleases in real estate. UM, explain what that is and what's the investment opportunity there. Yeah. UH. If you look at UH most spalace sheets of most corporates, property, plant and equipment is the largest line item, and we there's an opportunity there too. It's another non bank source

of financing. So corporate could looking to raise capital, could unlock some of that really get out of the real estate business, sell, sell the asset, simultaneously release it back for a long period of time fifteen to twenty five years, and UH have the use of those proceeds to reinvest in their business. I think it's hasn't been very popular.

It hasn't been promoted a lot by the investment banking commune because I think that the cynical side of me says they're making more more money on a bond offering or issuing some more equity than UH suggesting a sale lease back for an asset. We came in contact, I guess over ten years ago with a very talented team from a guy who came out of a listed company

called w P Cary. He built their international business. UH sold his share he had a shareholding in that business, sold it back to w P. Kerry informed his new firm ten years ago we've raised three sets of funds for them, both in North America and Europe, and I believe that firm probably is pushing seven or eight billion in a U M huh uh, it's a great Yeah. It's another non bank source of financing and a low interest rate environment. Really interesting. And I'm curious about something

in the pub look markets. E s G has been become really such a buzzword environmental, social and governance. You do you see anything like that on the private side or is it much more blocking and tackling less marketing and you know, value based investing. It's it's I would say most institutional investors definitely have an allocation to e s G and it's it's really increasing significantly on the private and the private side, and that's a big part

of their due diligence to go through. Uh. You know, there's E s G consultants now that e s G standards definitely in Europe. Uh, it is probably further ahead than the US, but it is most of the managers

have to be aware of that. But I think it's going to make their portfolio companies ultimately better because it's all focused on innovation, and you know, innovation is technology and these companies will just will be better and it's going to bring about better international standards that these companies have to operate under and say with these gps. UH quite quite fascinating. So let's talk about the state of private equity here in New York. It seems to be

hot as a pistol um. What do you see going on in the industry and how has it changed over the past couple of years. I think if I looked at our roster of general partners that we were working with back to say, probably we probably only had one that had a tech technology element to it. Now everybody does, even even a distress for control manager that we're about to go to market with UH with a with an assignment, and this is an individual that led the Creditor Group

to gain control of Circus sole A last year. UH. Every every strategy has to embrace technology to improve their businesses and take advantage of the innovation and the and the competition is becoming increasingly fierce. So these are tech components to non technology companies. Were not necessarily talking about investing in semiconductors or software. These are more traditional businesses, but technology is a key part of them. Yeah, and

I'd say absolutely software to make them more efficient. Uh you know if if previously you may have had a financial services investor that was providing balance sheet capital. Now they're focused on payments and yeah, correct. But you're seeing that in specialty industrial managers, health healthcare managers, you know obviously,

and venture capital it's obvious. But any type of strategy there's a technology element that they need to be thinking about it because the competitive intensity with their competitors is only going to increase. Really really interesting. Um So I don't know if that's an opportunity or a strategy. I don't know how to think about that. What else are

you seeing that's different than five years ago? Besides the impact of technology, I think the in the slow interest rate environment, people are looking for yield an income and uh, how do they have a they have a benchmark, and when zero, when bonds are returning zero, you know they need to look at other income related or alternatives. You know, we've talked about sale least back, We've talked about music royalties, talked about film and TV royalties, asset back, asset base lending.

In addition to just cash flow lending and leverage loans. People are starting to see um uh, litigation finance strategies. You've seen some of those. Last week I ran into two new income strategies I had never thought of. I don't know if they're scalable or we would do it, but one is liquor license lending in California. Apparently in the state of California, there are no new liquor licenses. You have to buy an existing one of the purchase price has to go in escrow. Why the due diligence

is completed on the new buyer. And that's a ten percent business. It's small. We've seen uh, tax lean finance, you know in different states, people buying the tax lin and uh. You know, people are a lot of creative people out there trying to come up with strategies that will generate you know, an attractive you know, financial return. So we try to work our way through that. But you know, it's got to be scalable and the management team has to be credible. Uh. And where there's a

process in place where it's systematic and repeatable. It might be a little early in the growth cycle of this. But are you hearing anything from clients about things like cryptocurrencies, blockchain and f T s that that's the flavor of the month. What what are you seeing on the private equity side there? If anything? Yeah, absolutely, people are looking at that and allocating resource to it. And when you see the consultants also spending time and uh staffing up

to do some research. Uh yeah, it's probably here to say some of the large some of the larger endowments have already made some allocations in the crypto and the digital currency world. So it's it's it's happening really really interesting. So previously we talked about zoom calls and the efficiencies that took place during a pandemic lockdown when there was less travel. When COVID first was beginning, it looked like

a distressed assets cycle was going to begin. But it seems to be the distressed assets cycle that never happened. How are you looking at those sort of opportunities? In the first and second quarters of we were thinking the same thing we are. Uh. We we saw an individual that we know well who led the creditor group in

March April of to uh get control of Circus. Right if you think about that business, their sales stopped overnight globally done and uh, he there was at one point two billion of dead on that business, and this guy created the company for and it actually relaunched it just prior to Thanksgiving all over the world. And uh but we we thought the same thing he's launched is fund. He's got four positions completed, you know, since I'd say

two Q then he's probably up one point six. If you think about Distress, you've got a management team that's on a treadmill, and then the private equity sponsor every quarter is telling them make the interest payment. And every quarter the tilts going up and the speed is going up on that treadmill, and these Distress investors are just waiting for that amorization schedule to kick in, and at some point that's gonna happen and they're gonna lose the company.

And uh so, I think there's a number of positions being built on these potential targets, but we haven't seen the carnage that everybody anticipated a year and a half ago. It's really really interesting. We haven't really talked about deal flow. You've been doing this long enough that you know so many people in the space, but what is it like? How how do you find either the gps you want to invest in, or the specific deals that you want

to directly invest in. Yeah, the the uh we have been doing I have been doing it a long time, and some of my colleagues at Focus Point, we're also at Guggenheim. From the beginning or early on, we we all have a pretty good network of people. We Our sourcing comes from some of the experienced investors that we've known a long time that maybe at some large endowments or foundations that I have a good relationship with a group, and maybe some of that team is spinning out to

start something new. Um, some of our deal flow comes that way direct approach, where we go out introduce ourselves and a general partner may have been working with another capital raised partner for a number of years and might be thinking about, you know, maybe I should try somebody new and met a new getting introduced to some new investors that I may not have met that are not in the net work of the existing capital raiser that

I've been working with. So some of that, and uh a lot we get emails all day long of new groups looking to raise capital. So it's I think it's a combination of all of it. Some incoming some proactive definitely, we're always speaking to limited partners. What groups do you like? Have you seen any strategies in this area? You know, if I look at the market, there's three components to it. I call it the trilogy. You've got the limited partners,

who are the investors. You've got the general partners, and you have the intermediaries, which are the consultants and the gatekeepers that work with a lot of the limited partners. And we're constantly hitting the limited partners, and they're they're meeting the salesforce, they're seeing us at conferences, they're getting newsletters, they're reading about you in the press, uh and coll calls, whatever it may be. They're constantly get ing introduced to

products that we have. The same with the intermediaries and and also with the general partners. We're trying to get them, but the intermediaries are going to influence the limited partners. The limited partners may tell the gatekeeper the consultant, this looks kind of interesting, I'd like you to do some work on it. So those three things are constantly moving and we it's we try, we say, we try to do it with rhythm and repetition. Each one of these

market participants and how we spend our time. So we're used to the two and twenty fees with either vcs or hedge funds of private equity, You guys are in a somewhat different niche. What does the fee structures look like relative to to regular alternative investment. Yeah, that's that's

about right. So the rack rate UH for raising up the capital for an established group is probably two percent on committed capital, and then you're protected on the success a fund with say half fee on the UH of the fee that they paid last time up to their level, and then maybe something a little more on the incremental generally, and an investors is underwriting to do two funds with a general partner, and then they'll re underwrite them seriously.

On fund three. There just won't be a lot enough to come through by the time they're back in the market, especially today when they're back every eighteen months. On the credit side, the fees are a little less because they're charging a little less because the returns are Yeah, and so you know, i'd say rule of thumb if it it's UH. If a credit strategy is returning say a

net net return of between eight and ten percent. The managers probably can't charge more than one percent on invested capital versus committed capital, and maybe it's a ten or fifteen percent carried interests versus twenty. If the return is say ten to twelve percent net, the credit manager might be able to get one and a half percent, one to one and a half on and invested you know, maybe a fifteen percent carry and then north to twelve.

They're working their way closer to two and twenty. Is there the same sort of fee pressure on the private side that we see in the public side? You know, you have Vanguard driving and others driving Grace to the bottom, which which is great when you have scale, but everybody else it definitely pressures them and they don't have the same sort of economies of scale that Black Rock or or Vanguard have. What are you seeing on the private

side with that? Definitely? Definitely that on the fund of funds managers, right, the fund of funds generally, you know, ten fifteen years ago could get away maybe with charging one percent. Yeah, and now now on on a they're all move being into trying to make money with co investments, right, and so that's where they're going to make their that's their bread and butter, and they're almost giving away the

primary investment. Uh. The fees that they charge on that another interesting development, right, I think we'll see a lot of fee fee pressure. Are the private equity secondary managers? Uh, they've raised incredible amounts of money, tens of billions of

dollars UH from large, large LPs. UH. They're paying a slight premium versus you know, following the financial crisis, they were paying they were buying a lot of these limited partners were out of balance when when they rebalanced their portfolio when the stock market declined, they were way over their targeted allocation to private equity. So they had to sell. And these secondary managers did very well. They were buying buying those positions at a steep discounts. Now, they continued

to raise money, but they're they're probably paying a slight premium. Uh. And I think investing in a secondary manager UH when there's a lot of liquidity doesn't make a lot of sense to me. You know, I think investing in a secondary manager when there isn't liquidity, they're going to be buying in at steep discounts. And and and another dynamic is you're seeing these continuation funds being UH formed, where general partners now are basically creating their own secondary funds themselves.

So a GP will have their best asset their taxpayers, and they'd rather just continue to compound and so that without having to pull it out and without having to sell it. Correct, and so they'll take their best asset, put it into a continuation vehicle UH redeem out the LPs that want their capital back, bringing a new new capital provider. They keep going. And so I think we'll see what We'll see how that shakes out with with some of these secondary managers that have raised a lot

of capital. So that raises a really interesting question. We seem to hear every couple of years a lot of chatter about doing away with the carried interest loophole. What do you think happens with that and how significant is it? I I think it's gonna stay stay where it is, and it is significant though, but that's what motivates these you know, very talented investors and UH, especially on those secondary funds where you don't have to UM redeem and

cash out. You can keep it running, yeah and correct. Really interesting, So so we we you mentioned liquidity UM when I look at the venture side, there's just so much capital own and we've certainly seen a similar growth spurt in the private equity side. Uh. What does that do when you see all this cash and capital coming into the space. In the old days to three four billion dollars, Wall Street was happy to participate in that space.

Now it seems they're going further and further up the skit size, going further and further up the deal size scale, and what we used to think of as middle market continues to expand. What's the result of all this capital rushing into the space? I think in the mid market, in the mid in the let's call it the lower mid market to two fifty to a billion is probably uh to fifty is the lower end you know, mid cap would be I'd say between five hundred and a billion and a half or five d and a billion

fund size. Uh, there's more exit opportunities when you're have a company at that level than you have a five billion dollar company, right, and so there's there's more there's

more options in terms of exit. You could potentially I p O it, it might might fit for us back, or there's a lot of larger private equity firms that have raised, you know, significant amounts of capital, and they have platforms and they're looking to grow, and I think they're maybe some of them overpay for some of those assets. And uh, is that valuation issue ongoing? Is all that cash leading people to pay inflated values even on the

private equity side. I think I think they're some of the larger firms are feeling the weight of the money and they have to get the money invested, and so they can't overpaying a bit. Yeah, they might. Uh. You know. One anecdote for you is, I know a tech investor, you know, probably sub one billion, a large, you know, ten plus billion dollar firm was buying one of their portfolio companies. Uh. Smaller firm was going to roll their equity, uh roll thirty or their equity, you know into the

new new company. The larger firm kath And said, you know what if we pay you a little extra, can we just take all of it? He said, sold to you? Sold to you? One of my favorite lines of all time. Yeah, so I think you're seeing some of that. Um, that's really that's really interesting. All right, So let's jump to our favorite questions that we ask all of our guests, starting with what are you streaming these days? Give us your favorite Netflix or Amazon Prime. What's keeping you entertained?

My wife watches more than I, more of those than I do. But one that I definitely liked was Serpent The Serpent. The Serpent that was I think. It was a BBC series about a French serial killer in the seventies in Southeast Asia and uh interesting, it's uh amazing and they finally they finally caught him. Well spoiler alert. Yeah, but it's a that one I liked. You know, I've seen a few few series like that, but that one, that one stood out stood out. Who are your early

mentors who helped to shape your career. Yeah, I would say it would be H David Patterson, who ran HSBC's private equity business in China and Southeast Asia. He was based in Hong Kong, and that's who introduced me to private equity in nineteen two when he showed up in our offices in New York with to thirty five million dollar funds study invested in Southeast Asia and looking to raise h a fund in the US with some of US investors. Tell us about some of your favorite books.

What are you reading right now? What am I reading right now? I just a cheap peak. Gave me red notice. I came out of a couple of years ago Bill Browder's book where he had I think he was the largest foreign investor in Russia at one Yeah, and uh, it's an amazing story. Once uh, once Vladimir Putin, you know, seemed to cut his deal with the y'alligarchs and uh, a strong willed guy. It's an amazing story. I think it would be a great movie. Uh. And I just

recently read Elon Must. I read a couple of the rocket billionaires, you know about the and then Elon. That led me to recently read Elon Must's biography. Uh and uh, you know, incredible, incredible what he's doing, you know, simultaneously trying to disrupt the three most complex industries in the world Aerospace, financial services with PayPal, you know when he got involved there, and uh and automotive with Tesla simultaneously.

So you know, he he left South Africa, I think, you know, at eighteen, I think a distant relative of his, of his mom, you know, had had some there were some relatives in Canada, and he went for it. A history. Yeah, yeah. Say at least what sort of advice would you give to a recent college grad who was interested in a career in in private equity or capital raising. I would say, Uh, I definitely get an internship where you can. We've we've to try to take in two or three interns every

year and that certainly helps them when they graduate. Getting getting a position at an investment firm. UH doesn't need necessarily need to be a capital raising firm. I also think getting experience and credit. I would recommend that to anybody coming right out. I think that is a good

foundation that you that UH can be very valuable. Interesting And our final question, what do you know about the world of private equity and capital raising and credit today that you wish you knew thirty years ago or so when you were first starting out? I would say patients and perseverance UH to use come up with a couple of words that raising raising capital Uh, you can you can never stop. You just have to keep moving forward.

Just like I I ski race. I still do the Masters, and one of the coaches always tells me at the beginning of the gates, you know, for a practice run keep moving forward. And I think just raising cat things. Things are gonna always happen. There'll be a key man event, somebody will leave, UH, portfolio company will blow up, you know, could be some others. You know, the Asian crisis, a pandemic can hit. But you can never stop. You just

have to keep moving forward. And I would say, you've got to be patient and you just continually have to persevere. Really really good advice. Um, how your knees. Gotta ask if your ski racing still these are good? I UH. I had my reconstructive surgery from a soccer from a soccer uh incident in nineteen ninety and they've it's still there. It's still good. So far, so good. Thank you David for being so generous with your time. I'm we have been speaking with David Conrad. He is the co founder

and CEO at Focused Point Private Capital Group. If you enjoy this conversation, We'll be sure and check out any of the previous four hundred such discussions we've had over the past seven years. You can find those at iTunes, Spotify, wherever you get your favorite podcasts. We love your comments, feedback and suggestions right to us at m IB podcast at Bloomberg dot net. You can sign up from my daily reading list of favorite articles each day at d Halts dot com. Follow me on Twitter at rid Halts.

I would be remiss if I did not thank the crack team that helps put these conversations together each week. Mohammed Rumaui is my audio engineer. Alatico val Bron is our project manager. Paris Wald is my producer. Michael Batnick is my head of research. I'm Barry Hults. You've been listening to Masters in Business on Bloomberg Radio Zero