This is Master's in Business with Barry Ridholds on Bloomberg Radio.
This week on the podcast, I have an extra special guest. Michael Carmon is co head of Private Markets at Wellington Management. Wellington's a fascinating company. They've been around literally nearly a century. At one point in time, Jack Bogel, founder of Vanguard, was chairman of their mutual funds. Just really a fascinating history from a private company to a public company back to a partnership. Really interesting, and Michael has had a bird's eye view of this for really the past twenty
five years. He is uniquely situated because he has run both public mutual funds as well as privates including late stage venture, private equity, credit down the list. He really sees all sides of the lfant and is capable of describing it in a way that I thought was both fascinating and informative. I found this to be an interesting discussion and I think you will also, with no further ado, my conversation with Wellington Management's Michael Carmon.
Thank you, Barry, thank you for having me.
So let's talk a little bit about Wellington, which has really a fascinating history, not only have they been around since I think nineteen twenty five, almost one hundred years old, and one point in time Jack Bogel was their chairman at least of the mutual fund division. Tell us a little bit about the firm's history and how it's evolved over the past one hundred years.
Sure, well, I haven't been there for most of the hundred years, so you're just so you're aware.
Okay, you look a little younger than that.
Thank you. I appreciate that.
And as you noted, the firm's almost one hundred years old. Started in nineteen twenty eight and twenty eight. One of the interesting aspects of the firm is that it was a public company at one point in the nineteen seventy The company went private in nineteen seventy nine and we became a partnership twenty nine original partners. We now have almost two hundred partners and we've gone through probably about
three generations of partnership change, which is very unusual. As you know, in the business, it usually is very difficult. But because the ownership was very dispersed among all of the partners, it made those transitions very easy. And so we've grown from a very small company with twenty nine partners back in nineteen seventy nine too, as you noted over a trillion dollars of assets and it become very diversified.
We were originally very equity heavy back in the day, and we made a lot of investments on the fixed income side, so fixed income is now a substantial percentage.
Of our assets.
We entered the liquid alts market with hedge funds back in nineteen ninety four, and we entered the private market in twenty fourteen with my product in late stage growth.
So you weren't there in twenty eight, you weren't there in seventy nine. When did you join?
Well, I joined in nineteen ninety nine in.
The middle of the tech bubble as a growth investor. Great time for the first nine months. Sure, it was April of ninety nine. I had an amazing ninety nine and early two thousand and I had left a hedge fund. So I was probably one of the few people to leave a hedge fund and go to a larger institution in the middle.
Of the tech bubble. But I wanted to be on a larger platform.
I love being with a lot of other investors and being very collaborative and collegial, and I felt that that's what embodied Wellington's culture, which was exactly what I got and what we continue to be today. And so I loved it from the first day I got there, and now I've been there for just under twenty five years.
So let's define some terms. Everybody knows what a hedge fund is, but let's talk about liquid alts. How do you define liquid alts?
Liquid alts I basically define as versions of hedge funds, basically, and you know, it's a synonym for hedge funds. And thinking about the alts market, right, there's liquid alts and then there's non liquid alts, which would be mostly on the private side. And so our initial thrust was what our first hedge fund was, a financial services hedge fund started by Nick Adams back in nineteen ninety four, which will, I guess be celebrating its thirtieth anniversary next year. And
now we have a number of different hedge funds. We have in the macro, we have multistrat we have point hedge funds in technology, in the healthcare field, and so we've built out over twenty billion dollar hedge fund liquid business and now we've added privates to that.
So I want to focus on the phrase liquid alts, which I don't think a lot of lay people understand. Typically, when you're invested in a hedge fund or private equity, you agree to be locked up for a certain period of time. There are occasional windows or gates that open and you could take some capital out. So when you commit to pe or venture, whatever that money is figure seven to ten years, you're not going to touch it.
When you say liquid as, what you're really saying is if you need this money back within X period of time, you could get some or all of it. What has distinguished liquid alts from these ill liquid locked up privates?
Sure, when I think of liquid als there's probably two parts of it. So one is, to your point, the money is not locked up for multiple years. Generally we have a one to maybe two year lockup where you
can you can't access that capital. But more importantly, when I fer liquid alts, it's generally the investments that they're making are in liquid liquid products, mostly public market products, and you can go long, you can go short, you can have leverage, you can have higher exposure levels, but the securities are in the liquid public markets versus private equity, which are in ill liquid private markets.
So it applies to both you the investor have a much shorter period of illiquidity and specifically the assets that the fund is investing.
In, correct, and definitely more emphasis on the types of investments the fund is made.
So you started out investing directly in the public market, small cap, mid cap, various styles. How did you find your way to that side of the street, the more private side of the street.
Yeah, it's it's a great question.
And so to your point, I was a public portfolio manager, started as a tech analyst and made my way to associate portfolio manager and then began managing public portfolios in nineteen ninety six prior to getting to Wellington.
Where were you managing those four in ninety six for a hedge fund?
So that was actually Montgomery Asset Management. I don't know if you remember the old Montgomery Securities, old school, correct. And I loved Montgomery and Robertson Stevens and all these boutique firms that are all gone. But they started an asset management division, and my family and I moved out to California and that was my first job in being a portfolio manager was running a small cap fund for them back in nineteen ninety six.
A little bit of a tech bias or it didn't matter you go it was.
It was diversified.
But as a growth manager mature, obviously you're going to have a reasonable wait to the tech sector. And I started as a tech analyst, but I became over the years, I became a much more diversified investor. That's probably the biggest reason I was able to navigate the other side of the tech bubble because I grew up in a period where I did invest in other sectors besides tech, and so that was very helpful when tech went out of favor for basically a decade.
So who were the investors when you started doing small cap and growth and are these the same sorts of investors now doing privates at Wellington?
So when my first fund that I ran when I was at Montgomery was a mutual fund, so it was all individual investors. And that was the period of time where you can be in some news publication and your fund would become hot and you would get hundreds of millions of dollars in assets in a short period of time.
And that's literally what happened to us.
But when you think about what I'm doing today and the types of investors I have today today, it's more of a combination of wealth management, so more in the family office, high net worth ultra high net worth, and then the other half of our business is large, large and medium sized institutions.
How do you transition from public investing public stocks, you know, mom and pop mutual fund investors, to family offices in private So I would imagine that's a series of pretty significant changes, both in what you're investing in and the process of finding things to put capital into.
Yeah.
Absolutely, And I think of it as I've had a second career right that I've made this transit difference.
It's like I was a lawyer, so this is my second career or third career if you include asset management. But I would think public and private are kind of shades of the same thing. You're saying a distinct difference from public mutual fund to private equity and late stage venture.
They are shades of the same thing. No doubt.
All of the skills that I garnered on the public side have been transferable to the private side, and in fact, in terms of what I do specifically in late stage growth.
My message has always.
Been that we've been able to bring our public market expertise to the private markets because the companies were investing in, as you're aware, used to go public at a much earlier stage.
When I was going back to that small cap fund.
Iran, I would sit across the table from companies that had two, three, four hundred million dollar market caps that were going public.
Right.
The best example I always love to give is that Amazon's last private round was at a sixty million dollar post money valuation.
That's unbelievable, correct.
And today, as you know, you have companies like Stripe doing fifty five billion dollar rounds right post money valuations
until the market has changed dramatically. And so to your question, the way I started getting into this market was effectively the FOMO of now seeing companies staying private life longer as a public market investor, and I was running mutual funds at Wellington as well as one of our hedge funds, and I had the latitude to invest a certain percentage of my assets in ill liquid investments and.
From Wellington, even though you're running mostly public equities.
Correct, under the forty Act, you could have up to and you wouldn't do this, but you could have up to fifteen percent in ill liquid securities. And for me, in my mutual funds, I was in like the mid to high single digits. But I started getting involved in buying a lot of these companies as I realized that companies were beginning to stay private longer.
And to clarify the way the SEC defined ill liquid securities in the forty Act for mutual funds, some of these might even have been public companies but trade by appointment, not a lot of float, not a lot of shares, or was it strictly non public private companies.
Well, you're getting above my pay grade in terms of being that specific. That's why you're the lawyer and I'm not.
But I mean, it just seems funny that the SEC would say up to fifteen percent. You just wonder what was the genesis of that. Was this just not widely traded stocks or was it really not public stocks.
I don't know specifically the answer to the whys of this, since it was done another thing that was done before my time nineteen forty.
But I was just a kid, so I don't remember. I wasn't paying attention. So then This raised a kind of interesting question. You're you're adding more private and a liquid stocks to your portfolio. At what point does Wellington sort of rub its chin and say, hey, this is an interesting space. We're really private, curious, we want to see if we can expand to this. What's that process like?
So the rubbing of the chin occurred in October of twenty twelve when I wrote a memo to my partner in crime, General O'Reilly, who's now my co head on privates, and I said, hey, I think this might be a really long term secular trend of companies staying private longer. And I do think it's challenging to buy ill liquids in publicly daily traded vehicles because of the ill liquidity aspect of it. We should consider doing a dedicated fund
to take advantage of this trend for our clients. And so that was about two years before our first close and so we had never as you noted, we've never done private. So we had to socialize if this was a business and a direction that we wanted to take. And I think that Wellington has always been very bottom up and very entrepreneurial. And so after explaining why, I
thought we could do super well in this category. We launched the product in twenty fourteen, and we were fortunate to have several of our clients who believed in us and believed in the team, and so we had our first clothes in two thousand November of twenty fourteen, and ultimately we raised a billion dollars for our first fund in the private space.
So from a billion dollars almost ten years years ago, what's Wellington's privates today? Some multiple that I would imagine correct.
So we're at about eight billion of commitments and money under management. We now have five products in the space. In fact, my original product invested in biotech. In twenty nineteen, we spun out Biotech into a separate, dedicated product for the biotech space, and now we've added products in investment grade private credit. We have a product in the sustainability climate area. We have a product called Wave which is
focused on diverse founders. And so now we've built out the space further and our hopes are to launch additional products in the space over the next several years and really build a very multi dimensional, multi asset platform that will address private equity, mostly inventure credit, as well as real estate.
So I've read a bunch of analysts research technical term, bunch of research I've I've frequently seen analyzes that show microcap and small cap run very parallel to venture capital in terms of performance and volatility and other descriptions. What have you found given your background running small cap at one point in time and now doing a little bit later, late stage venture capital. Are the parallels there at all? Or is that sort of academic research overstated? Now?
I think it's a very fair characterization of the way to think about this, because it's kind of the way that I thought about this. And in fact, what's interesting is that in my product, we have several clients that use us as a small cap growth alternative. And the reason being is that if you believe in my premise that companies are staying private longer, what's happening is many companies today are going public and skipping small cap.
Right if you think.
About the airbnbs and Ubers and many many others, they're coming public not at three hundred million dollars, they're coming public at ten billion, twenty billion, thirty billion. And so their view is that, well, if we want to continue to have exposure to the next generation of great companies.
This is a product that.
Will enable us to have exposure to that set of companies, and so I think it is a fair characterization. In fact, when we look at performance, we use as our public market equivalent, we use the Russell two thousand growth index as our comparison of whether we're doing a good job or not doing a benchmark correct.
Correct.
So the obvious question is, at first, your thesis has proven to be true for a long time, what do we down to thirty five hundred companies in the Wilster five thousand, fewer companies going public? So you definitely got that right. I got to ask, why do you think that is? What is the underlying reason why companies are choosing to stay private for longer.
I think it's a really great question. And when we first started, we felt the thesis was that Sarbanes Oxley that was put in place in the early two thousands made it a little bit more onerous and made it more expensive for smaller cap companies to go public because they they raised the regulatory burden of doing that, And I think that was the genesis of this. But as I sat in the boardroom and we have a lot
of observation rights. Board observation rights in terms of what we do probably get them close to seventy five percent of the time. What I've discovered is that I think it actually makes sense because when you're private, you can think more strategically.
You're not trying to make the March quarter in the June quarter in the same time.
Longer term for sure.
Correct, you can think longer term, and when you're still at a phase where you have fifty seventy five hundred million dollars of revenues, you want to have a lot of latitude. You want to have the ability to say, you know what, we need to invest more money now. And as you know, you start making decisions like that in the public market, and you release your earnings results and say like, hey, our earnings next quarter are going to be half of what we thought they were going
to be. Your stock price generally doesn't go up, and then you go into the doghouse and you got to scratch your way out of it. Whereas when I'm in the board room, we probably spend ten percent of the time maybe talking about the quarter, and ninety percent of the time really thinking strategically about where we can take this business, how do we expand our product line? How
do we expand geographically? How do we expand distribution? And so I think that for me, my thinking has evolved in that I believe that it could make companies stronger for longer if they have more time to think strategically and then make that transition to having to balance the strategic with the tactical.
There's no doubt that the era when you were running a mutual fund the late nineties, there was a rush to bring a lot of premature companies public. So let's hold that aside. Clearly, just you know, issuing IPOs based on clicks and eyeballs wasn't gonna work. But that said, you bring up the regulatory burden of Sarbanes Oxley, but that alone wouldn't get it done if there wasn't just
tons and tons of capital around. Talk about what's available for early stage, seed, late stage companies that are looking to do around. There's no shortage of investors around, are there?
Yeah?
No, that's that's a fair point because everything I just said would mean nothing if there wasn't capital to deploy into these businesses. And over the last call it twenty plus years, which from early stage and seed to late stage, there has been more and more capital in the I think in the earlier stage it's much more dedicated funds. It's the traditional vcs that we all know that are in that market, and as you get to the later stage, it's it's a lot more eclectic. It's some dedicated funds
like ours. There are more multi stage funds where there were funds that were doing Series b's and c's and are now doing late stage, where generally our fund averaging a Series D. In terms of where we invest, there's crossover funds, there's hybrid funds. Even hedge funds and mutual funds have invested in this space. And so there are a lot of pockets. A lot of people like myself when I first started, are taking public mutual funds some of the bigger players out there, and they're also investing
in this space. And so there has been more capital available for these companies, which is what has enabled them to stay private longer.
Really interesting, so let's talk a little bit about the process of evaluating different types of privates. You kind of alluded that the skills you learned evaluating small cap growth companies is very applicable to late stage venture and other privates. Take us through that. What are the similarities?
Yes, absolutely, And because I would not be a good early stage investor, I don't have any skill sets in evaluating three people in a garage with an idea. But when we're looking at companies, and many of the companies in our portfolio they all have usually fifty million dollars plus in revenues. Many of them have one hundred two hundred plus in revenues, those skill sets are very applicable.
And because there's now product market fit, there's now streams a data about how their customers have responded to their product, how sticky are their customers, what the competitive landscape looks like. So all of the information that we were assessing on the public side is very applicable to the private side. And what I think distinguishes us at Wellington is that we're able to utilize our public market investors in the
due diligence process in helping us assess. We have fifty five global industry analysts that have been covering their industries for ten twenty thirty plus years, and whether it's logistics or aerospace or a software company, we have the information, and we have the skill sets to do that, and we have a lot of data to analyze, and we could predict the future. We know what the company is thinking about the future. Our numbers are generally going to
be lower because many of those numbers are aspirational. But assessing management teams so qualitative and quantitative, is very similar to what I've done on the public side for many, many years.
So the parallels. You have a management team that you can evaluate, you have a product that you can review, you have customers and revenue you can look at. All of this comes down to execution. Those are the similarities. What are the differences when you're looking at a company that hasn't yet gone public isn't quite that mature.
I think I wouldn't think of it as a difference, but I think it gets to your point. The part that we don't know is the future. It can this management team execute from here to the public markets. And we always believe that our value added in the space is that we can help them on that last mile from the private market to the public market.
So that you're touching on something to ask what are the milestones between a fifty million dollar company, meaning they're doing fifty million in revenues. They've been around a few years, but they want to bulk up, they want to become more substantial. Do we care about round numbers like one hundred million or five hundred million in sales or is we just want to see that steady growth over time and greater customer acquisition.
I think every company is unique and their journey is very unique. And what I have found is that there have been a number of situations where we invested and things went off the rail early on and the companies needed to pivot or they had big headwinds. I always loved to use the example of Coupong, which is in e commerce space in South Korea, whose growth rate what we owned it went from probably one hundred percent down to twenty percent and then re accelerated as they got
their logistics strategy in order. And then DraftKings, which is kind of the post to child that was at one point sued by practically every attorney general in the country whether daily fantasy sports was even legitimate, and then eventually became a big player in sports betting and I gaming, and so those went totally.
Off the rails that we had marked them down.
Probably close to fifty percent at one point and then ended up being Two of our best outcomes is that every company just has a different journey and the goal is is to be patient.
In many case, you.
Were an early investor in DraftKings also, is that right? And then what was the resolution? So we know what happened with them? They blew up when the Supreme Court overturned the rule that only allowed gambling in certain states, and now they're one of the handful of giant players there. What was the Korean company?
So the Korean South Korean company is called Kupong, which is basically simply the Amazon of South Korea. And so they went through and I remember going through this with Bomb who is the CEO. Is that they were going through a very similar thing that Amazon went through early
in their existence. Is they were going from multiple day delivery down to two day delivery, to one day delivery to literally our delivery and doing all the logistics behind that required a lot of infrastructure, and at one point they had to really slow down growth to make sure they got that right. And once they got it right,
they were able to reaccelerate. And they had a moment where they were getting very close to running out of capital, but they were able to put around together and then they ended up having a really good outcome in the public markets, and they went public.
They did.
They're public, yeah, public on NASDAK and so they've now been public. I think they went public in twenty one, so they've been public two plus years now, and so they had a really good outcome. But those were two that were not you know, is to your point going up until the right like it was, there was a lot of sideways there and a lot of nail biting,
and then they ended up having good outcomes. But then there's others that, to your point, will just continue to pound out forty fifty sixty percent growth and go from
unprofitable to eventually profitable. And then our job is just really to help them think through what do you know to do between now and when you go public to make sure that you remain a very attractive company in the public markets, right, because there's always this risk which I worry a lot about, is that companies stay private longer.
But sometimes they can stay private too long, right, correct, because you need you still need to have a really good story for the public markets, because the public markets want to see a long term trend that they can buy into.
And if they.
Believe that you've already seen your best days, your best days are now behind you, that's not going to be a really interesting public investment. And so we really need to think through what's the right timing, what are the right dynamics, and what do you need to do today to set yourself up for a really strong public showing.
So how do these areas work together or are they three distinct fields of investment?
So some of it works together and there's some synergies and some ability for us to really invest across the platform from early stags to lay stage. On the bench side investment great private credit is a totally new area for us. But I think the commonality of everything that we're doing is through the lens of where can Wellington
have an edge? What have we done historically on the public side that would make sense to poort over to the private side and leverage and scale that right, So you think about credit, we have a multiple one hundred billion, hundreds of billion dollars of revenue of asset business and credit and so we have a lot of expertise, We have a lot of experts, whether it's portfolio managers, analysts, macro economists, and so there's a lot of things that we can do in that space that we think we
can deliver very strong results. And similarly, as we think about real estate, which we're not in yet but something
we're thinking about. We have a public reteam on the equity side, we have a public presence on the credit and fixed income side, and so we think that's an area that we can extend our expertise to also, and so we think about it through through that lens in terms of where we where we believe the platform can enable us to be super strong and what we've been very i think very successful at doing is attracting investors who buy into that.
So is some of the thinking around that these are essentially uncorrelated in terms of their returns or does eventually all things go to one and the lack of correlation goes away.
I think it always depends. I think you know, when you look at what we're doing on the late stage space, that's probably the most correlated to the public markets. We're definitely taking the direction that we're going from and how our performance is somewhat from what's going on on the public side. Obviously, with our early stage fund, that's many years away from a liquidity event, so that's probably the least correlated. So I think it's going to depend on
the asset class. I think all things. I don't think all things go to one. But there's going to be some correlation with what's going on in the public markets and happening economically. That's going to have an impact on the performance of the businesses that we're investing in on the private side similar to businesses that we invest in on the public site.
That's really interesting. So let's talk a little bit about the IPO market. Seems like it's been mostly frozen this year twenty twenty three. Why do you think that is?
So the IPO market always takes its queue from the public markets, and as you know, last year twenty two we had a bear market. It was pretty harsh bear market, and particularly in growth.
It was a modest bear market in the S and P five hundred off about nineteen percent, but the Nasdaq, the tech heavy NASDAK I think, was down thirty two or thirty four percent. That's a big losing a third of your value, that's a big whack.
Yes, that was a little bit more nuclear winter, and if you look at the innards of that, there were a lot of companies down sixty, seventy and eighty percent. And so when that happens, portfolio managers having been one shut down. The last thing you want to do when you have fifty fires in your portfolio is to look at a new idea. Right, You're still trying to figure out what you need to keep, what you need to jettison. And so that is why the IPO market shuts down in a bear market.
Now, now today, what do we have the SMP we're recording this in the beginning of the fourth quarter. The SMP is up about twelve percent for the year, above average historically, and yet the IPO market still seems to be a little chilly. Is it just recovering from last year? Or why we still floundering along?
So we're thwing. I think we're in the thawing thwing, okay orring moment. Right, we're starting to get there. And if you look historically, and we've looked at data from the last forty years, generally the IPO market when it shuts down, it shuts down for about a year. Occasionally it will shut down for two years plus, and as you're noting, we're kind of in the second year of this, and as you also noted, the markets are starting to recover.
And as the markets recover, public investors start to get a little bit more comfortable looking at new ideas.
And we've had a few IPOs trickle out this year, right, anything catch your eye?
You know, I don't look at the public markets quite as closely, but had you had a cadre of companies come public several weeks ago with Clavio, which is in a very interesting space in kind of the ad tech area, and Instacart, which obviously was a down round but still has an eight nine billion dollar market cap, and of course arm which was a much larger play and a
spin out being respun out from Intel. And so to me, they've traded fine, which is like a nice little indication that the health of the IPO market is beginning to improve. And of course I don't have a crystal ball, so I don't know if the markets are up or down, but let's assume that they're stable over the next couple of quarters or several quarters. I think that there's a reasonable backlog of companies that will start seeing being surfaced
and starting to come to the IPO markets. We know we have companies in our portfolio that are beginning that prep So I think my guess right now is that twenty twenty four begins to normalize and we'll we'll see improvements in the IPO market after two years of really very very low volume.
So a decade ago, you identify private companies are going to stay private for longer, which means there's going to be a delay going public, and then a decade goes by and more or less proves your thesis correct. Over that ensuing decade, How has the IPO market changed? What's different about a company going public in twenty twenty four than you when you were first making these observations in twenty fourteen.
So I think generally what we're seeing as companies are going public later. So instead of being like four or five six years into their existence, it's more like eight, nine, ten years into their existence. And so by definition, these companies tend to be more mature and tend to be
larger than they were a decade ago. And particularly when I started in the business and was managing money back in the nineteen nineties, and so these companies hopefully should have more sustainable performance and be a little bit less violatile. Albeit in twenty one we had a rush for a lot of companies to come public and that class has not performed well, which is probably a good cautionary tale that you should be more mature when you hit the public markets.
So in the nineties, when you were running public funds, that IPO process was very much a dog and pony show. You would have the investment bank and the founders and a whole bunch of folks do these giant road shows and they would go from New York to Boston, they'd go out to San Francisco. They would go all around the country showing off the company before the big wedding. How is it today, Do we still go through that same process or have capital markets evolved for taking companies public today?
Well, the biggest difference is it's now zoom, zoom and zoom.
Right. It's just a lot of zoom meetings, so they're running all over the world anymore, which is probably really good for more efficient, for sure, massively more efficient. We do have a couple of different directions we can take. Although the majority of the companies are still doing a direct IPO. Right, you have direct listings that got a lot of play a few years ago. Obviously we saw a lot from the spack market a couple of years ago. I think that trend is in the rear view mirror.
I always felt SPACs makes sense in very specific cases. But if you're a really solid company, you can go public through an IPO, you don't need to do a spack. So I don't see SPACs coming back. So a lot has not really changed in that regard, other than the fact that that companies now can do a lot more meetings in a lot more locations, in the comfort of their offices or their home.
So let's talk a little bit about how you guys work with later stage companies. How do you think about these firms versus either in early stage company where you really don't have a sense of product and client base, and companies that have gone public where they're fairly mature and it's pretty clear, hey, we have a sense of what the next five years might look like. These sort of straddle that gray zone in between.
Correct, and the value that we add is very different than an early stage company. Right, when you're an early stage investor, you're going to help them hire their first chief marketing officer, their first head of R and D, and many other, many other positions, and you're going to work with that founding team on their product market fit. By the time we get involved, the company has been built, they've had they've achieved escape velocity, and it's really about
how well they can scale. And that's where we come in, is really being able to help them. As I noted
earlier on that last mile. So for instance, we have an ESG team, and so we have a team led by Hillary Flynn that steps in and works with the company on what they're going to need to do from today to the time they go public to be at a level that's going to make them attractive to the most investors on the public side, since, as we know the public side, many investors care about issues around ESG, particularly around corporate governance, so what the composition of the
board of directors should look like, and and many other
issues around that. We're going to help them really think about strategically and tactically the things that they're doing today that are going to have ramifications when they are a public company, whether they're introducing products that have lower gross margins, so optically, gross margins are going to start going down and that could have an impact on their multiples relative to things that they can do that can be gross margining enhanceome and what can they do to sustain their
level of growth for the longest period of time. And as we talked about also IPO timing. Sometimes we've suggested that companies delay their IPO because we think that they don't have the visibility to go public today. Others we've suggested that they should go public sooner be to what we talked about about not getting past their expiration date of having an attractiveness to public investors.
So private equity firms tend to come in and take over running these companies. They manage them, not what you guys do. The description of how you approach late stage companies almost sounds like finishing school. You put the final touches and get them ready to send them out into the world. Is that to glib or is that a fair way to describe them?
No?
I like that description.
I think that's what we're doing is really helping them with finishing school. And importantly we want them to be attractive to the public side of Wellington. Subsequent to their IPO. There's no guarantee. We always tell our companies, we don't
tell our public side what to do. But we've had a lot of success and in fact, when you look at the numbers over the first year of those companies have gone public, we have bought massively more on the public side than we originally bought out of our private portfolios. And so that to me suggests that our finishing school is working very effectively and creating companies that are attractive to not just the public side broadly, but to many of the investors on Wellington's public.
So I'm thinking about the tax consequences of what you just said. Can you own a company while they're still private and then shift that over to the public funds or does it have to go to the process of the IPO and then you're buying shares in the secondary market.
We can't.
It has to be it always has to be arms length, and so we cannot take what we've done on the private side, and that's in dedicated funds and transfer that to any of the other portfolios at Wellington. So everybody needs to make an independent decision, and we can't use our fund as a reservoir for the funds on the public.
I was just thinking of the tax consequences of having to sell the privately held shares out into the market and then someone else in the same under the same roof goes out and buys those publicly shares. Seems like there's a tax arbitrage to be had, But that might be a litle little too cute by half.
No, but you talking about a product that I think is very interesting in terms of the hybrid space where you have public private products, and so it's something that
we have actually in our fintech product. We have a public private product that can do just that, and we're thinking about additional ways that we can take advantage of our public and private market expertise to create products for our clients that can do exactly what you're saying is we can invest prior to the IPO and then we can hold for the long term subsequent to the IPO.
Really interesting. So let's talk a little bit about valuation. What metrics are you looking at when you're thinking about elite stage venture investment.
It depends on the company and every company. We're going to use different metrics in healthcare versus tech, versus consumer and fintech. Many of our companies are still burning cash when we get involved, and so a lot of times we're going to be thinking about normalized margins, and those normalized margins are going to dictate how we think about that price to revenue multiple that we're willing to put
on that company at the time we invest. And a company ultimately is going to have ten percent margins, then that's going to be much lower relative to a company that can have thirty forty percent margins. And what I've done is really ported what I used to do on the public side to the private side. In terms of thinking about ranges, I always like to think about what's
my downside risk and what's my upside potential. And we want to skew our investments to those that we believe we have a lot more upside relative to our downside.
So whenever I see forget, even seed like Series A companies, it feels like everybody's just making up numbers. Hey, there is no product, there are no customers. How to even come up with a multiple? This has to be very, very different than either seed or a stage venture investments.
Absolutely, because as we've noted, we have companies with one hundred two hundred, three hundred million dollars revenues.
So these are real companies, real products, real customers, real businesses are.
Real businesses, and so we can really look at this in terms of having a little bit more confidence. I always like to say that these are not riskless, but they've been de risked, right. You know it's a company. What we don't know is we'll it's scale from one hundred million to five hundred to a billion, or is it going to be one hundred and make its way to two to three hundred.
So these aren't binary outcomes. Either they work or they don't. It's hey, is this going to continue along or as it is? Or can we get them to the next level?
Correct?
And when you look at our portfolio over the last ten years and all the outcomes we've had, we've gotten back our money or made money on about eighty percent of the deals that we've done, So it's a higher hit rate. I always think of it this as a little bit more of a fat pitch portfolio, is that we stay away from binary events. We're looking for the events that the outcomes could be less good or they can be really good.
You're not looking for the moonshots. You're not looking for one hundred to one and the other ninety five percent of the portfolios go to zero.
No, we we underwrite to a two to three x return on our investment. And when you look at the performance of our funds that are more mature Fund one and fun two, we're right in that camp about net two x or so. But we're doing it over a shorter period of time in terms of how long it takes we have we have a shallower J curve because we're returning capital more quickly and so and that's so
that's how we're thinking about this category. Is that to your point, the range of outcomes are a little narrower. We're never going to have one hundred x, but it's going to be very rare when we get when we get back zero.
Right. So what leads you to a yes, is it is it a certain comfort level that with understanding the business. Is it the management team? Because you know, in my office we've joked if it's not an obvious yes, it's a no. I don't know if you think of it in the same way when you're looking at late stage.
I think it's more in that camp that it's got to be a more obvious, yes, but it's a lot. It's I always think about investing as matching the qualitative and the quantitative. Right is that I've always said to analysts when I was on the public side that we could always make the numbers work, but we have to have a management team that could execute. And so we spend a lot of time with our management teams. In fact, on average, we know our management teams for over a
year before we invest with them. We want to understand how did they execute from the first time we met them to now. Did they say they were going to do X and they did X? Or above X or was it point five x? Right? So we want to see what their credibility is. We want to understand how they've built their team around them. Are they the type of management teams that want to hire people that are smarter than them or people that just want to say yes to them? And so we need to understand those dynamics.
And so management is very, very important. I've always said in my career that I'd rather have an A management team running a C business than a C management team running an A business, because that team will figure out how to mess it up and always want the former, and so that is a really really important part of it.
Then once we distinguish that we believe we have a good management team, then we have the ability to dig into the numbers and see if the numbers match what we're hearing from the team, because typically we don't have numbers early on, we're just building a relationship, and so now we're going to see if the numbers are matching the hype and the conversations that we've had with the teams. And it's amazing to me how many times that is
not the case. But in the times that it is the case, then those are the deals that we're going to want to lean into and really determine if we believe this is a sustainable business. How big is the TAM the total available market or are they creating a new market. How fast are they growing today relative to other companies that were of similar scale, How sticky are their clients, what is their long term value to customer
acquisition costs? All of those dynamics to figure out if this company can be a lot larger in the future than it is today. Because generally we're looking for an IPO of two to four years after we invest, and importantly, we have to look at it through the lens of can this eventually be a public company? Does this make sense that that public market investors will be enamored and excited about seeing this company in the public market someday in the future.
So do you work with other co investors? Do you work with other firms or are these just one off investments just with Wellington?
So I'd say that almost every deal we do has a variety of investors in the cap table. We're not exclusive. Very rarely have we been. I don't know if we've ever been the only investor in the cap table in our round. One is we'd love to see insider involvement. We want to see insiders taking a pro rauter or a super pro rauter of the round because that there's a lot of information in that If all the insiders aren't playing, or an insider is selling, then we generally don't want to.
Be a part of that different vibe there.
Correct, And then generally there'll be other investors that invest alongside us, But importantly we're not generally working a alongside them because these are competitive deals and we want to get the maximum allocation that we need for our clients, and so we don't want to draw other people in during that process. We might help on the backside if we're leading the deal and there's other investors looking at it.
But job one is making is figuring out for ourselves independently if we think this would be a good idea and making sure if we want, say our average check size now and our funds is about seventy five to one hundred million, let's make sure that we can get
that check. And we have co investors that we work with that are clients of ours that we want to be able to offer them the opportunity to invest also, and so we kind of stay very stealth when we're in the due diligence process, and then generally we'll see other investors come in to fill out a round. Probably our average rounds are somewhere between two hundred to three hundred million dollars total rounds, and we're doing just under half of that.
So where does your deal flow come from? It sounds like very competitive space. How do you find your way to some of these some of these late stage venture investments?
Yeah, which is the most important part of what we do because the old adage is you don't see it, you can't do it, and so in on our team on my product, which is called Hadley Harbor, we have eleven investors on our team and they are out there every day sourcing. I always think of it as kind
of forty forty twenty. Forty percent of the skill is onsourcing, forty percent is due diligence, and twenty percent is the ongoing support of the companies, but probably close to seventy five percent of the time is really going out and
looking for deals. Our biggest source of deals are from our network of early stage investors that we have cultivated over the last decade, hundreds of investors who have invested in early stage companies that can help us get warm introductions to these companies, and by the time we get into our round, it's very common that we know the majority of the board that's in that company, which generally consists of early stage investors that are very important proponents
of having us being in bold with the company, that people believe that we can add value and that we're going to be additive to that company over the time that we invest, because we bring a much different angle given that we have the public market expertise relative to earlier stage investors, and I have had a lot of IPO outcomes and so we understand what it's going to take. But a lot of our sourcing comes from early stage seed, Series A and even Series B investors who are are part of our network.
Let me throw a curveball at you. You previously served as the first male advisory board member of the Wellington's Women's Network. Do I have that right?
You do have that right.
I love the research, So tell us a little bit about why you were the first male member of the Wellington's Women's Network.
Well, thank you for pointing that out, and it's something I'm actually very proud of because this was probably back in two thousand and seven, in two thousand and eight, and I believe that was our first internal business network, and a couple of the heads of that network came to me and asked if I was served, and I was.
I was very honored, and I think it was a testament to my advocacy for women in the firm, and and so they felt that I could be a really strong advocate for them as we were trying to elevate and get more women as a part on the investment side and the business side and really level the playing field over the longer term, and so I was I was super happy to do it, and so I served on that, I think for about six or so years.
And then interestingly today, as I mentioned earlier, General O'Reilly who's my co head, obviously a woman, but our whole our management team on the private side, consists of me and all women. I'm the only guy on our private on our private team management team, which is which is just great that that we've come to a point where where we can really have that much talent on our team that could help us build the business.
And if I recall correctly, you're EO correct, Gene Heinz right, aren't a lot of women in the world running a trillion dollar company.
She's one of them, correct, And Geane and I have grown up in the firm. Jen's story. She always talks about that she started as an assistant out of Wellesley and worked a way up to being a global industry analyst and then managing partner, and then in twenty one she took over a CEO of the firm. And so to your point, she is she is still in the minority, but an increasing percentage of the minority, and so it's getting everything is getting better over the longer term.
Really interesting. All right, I know I only have you for a limited amount of time, so let's jump to our favorite questions that we ask all of our guests, starting with what's keeping you entertained these days? What are you streaming, watching or listening to?
Sure, so right now I'm streaming The Crown, so I know I'm a little behind the eight ball at hour, though it's I love it because there's so much about the UK that I don't know, particularly kind of pre Charles and Diana. And so I'm now on season four. So the first three seasons were really early in Queen Elizabeth Rayn and there was just a lot of information and just super well done. The acting is is great. And then the one that I just finished that by the way, I.
Think there's one more season coming of the ground.
Great because I'm I'm slowly catching up.
I got you know, it's my it's my treadmill entertainment, so I'm slowly catching up. And then the one that I watched recently that I absolutely loved was The Bear so good, and season two, which I just finished recently my wife and I finished was phenomenal and episode six might be one of the best.
Was that Copenhagen or was that the Forks No.
Episode six was well when Jamie Lee Curtis and Bob Odenkirk and it was the I.
Think, oh the family Chrissmily Christ that was painful, that was difficult to watch. That was real time family meltdown. Yes, I mean my wife walked out in the middle of that and said, let me know when it's over. She could not sit through that.
But I think I think it was some of the best acting. Jamie Lee Curtis was just unbelievable, and the acting and the whole situation. I mean, I'm sure many many families can relate to the dysfunction and just incredibly well.
Done, really really interesting stuff. So let's talk about mentors who helped shape your career.
Sure, so there's so many. I'm always afraid that I'm going to forget people. But two of the people at Wellington who I co managed money with when I first got there and with just phenomenal investors. One was Bob Brands, who was we always referred to as the godfather of growth. He was only one of the first true growth investors
at Wellington. Just a phenomenal investor in keeping it super simple, having just a great feel for the markets, but just being able to meet with a management team and evaluate them and making decisions based on those evaluations. And then the other one was Saul Panel who ran the run the Hertford Capital Appreciation Fund from inception to I think about twenty fifteen. Had just phenomenal performance. But he was like an old school go any way where a capital
appreciation manager. There were times where he could be positioned incredibly aggressively in growth companies, and then there were times that he could be very value oriented. And so I don't think anybody I worked with did as good a job as navigating the tech bubble back in two thousand as he did and having great performance in nineteen ninety nine and then also having amazing performance in two thousand
and He's just an amazing, amazing investor. So I say those would be two that were very important in my career.
Let's talk about books. What are some of your favorites and what are you reading right now?
Sure, so, a couple of books that I've really enjoyed over the last few years one was The Silent Patient by Alex Michael Ladies that just was kind of like a psycho thriller story and just had one of the most amazing twists towards the end that I.
This is fiction, so that's a fiction book.
And then the other one that I read, which is an older book, I think it was written twenty twenty five years ago, was A Human Stain by Philip Roth that was just also incredibly well written. A matter of fact, they just I was a part of something that everybody had to record. Bring a book, You had to literally bring a book, right And that was the book that
I brought. And then the one I'm reading right now that I'm on my kindle supposedly seventy percent of the way through is a book called The Color of Water
by James McBride, which was recommended to me. My favorite book recommended, which is My Friend Susie, and it's a biography slash autobiography, and it's written by a black man who was brought up by his white mother who grew up as an Orthodox Jew, okay, and so he learns later in life that he didn't know that he was actually Jewish, and his mother would never tell him anything, and he finally got his mother to tell him his story.
And so the story is like one chapter of his life, him telling his life, and then another chapter of his mom talking about her life, juxtaposition between their two lives. And so it's an incredibly fascinating book. And so that's what I'm reading right now.
Our final two questions, what advice would you give a recent college grad interested in a career in either finance, mutual funds, private placements, late stage venture. What sort of advice would.
You give them? Yeah, well, part of the answer is what you just said. There's so much more variety of what.
You can do in the investment world than say, when I got out of school close to forty years ago, which was you know, it was kind of one game.
It was really public markets.
But now with private credit and private equity and ETFs as well as the public markets, it's just a variety of things that you can do. And so the advice I would get somebody coming out of school is figure out where your passion is, figure out what your investment style and what works for you. Do you want to be at a hedge fund and really be in the day by day and have to make basically a lot of decisions in short amount of time, or do you
want to have a much longer timeframe. Are you more in the growth mindset versus the value mindset?
So you need to think.
About all this and head towards the direction that really fits your personality. Like for me, I know, I always tell the story that my moment was when I saw Rod Canyon of Compact unveil the first true laptop back in nineteen I think eighty eight or eighty nine.
I was getting tingles.
When you say laptop. I remember those because they were like these big giant suitcases. The monitor were like the lid of a suitcase with a handle sticking out, and they weighed like one hundred pounds.
Luggable, they call them luggable.
Luggable.
You knew it was going to be the creation of a market, right because this is a totally new market, and you think about you know, fast forward to today. I think most people have laptops versus versus desktop. Like at Wellington, we all have laptops now, we just plug it in when we go. We don't have any desktops in the entire almost the entire organization, and so it's it was the beginning of a major, major trend, right, just like the iPhone.
When the iPhone was introduced.
Think about like nobody had a computer in their pocket. You had these blackberries or you had these these flip phones, but you didn't have you didn't have the Internet in your hand, and at that moment in time, So seeing those develop and understanding that sometimes these trends are overestimated in the short term and underestimated in the long term,
and really trying to find those inflection points. That's what I always loved about investing, is being ahead of the crowd and trying to figure out where the puck is going to go before massively before it gets there.
And our final question, what do you know about the world of investing today? You wish you knew thirty or so years ago when you were first getting started.
So I think I was thinking about it from the context of like over the last kind of two decades, and I think I wish I knew interest rates were going to stay low for as long as they did.
Because just forty years wasn't that big a deal.
Exactly if you knew that, right, if you knew it was just going to be down into the right from nineteen eighty two to twenty twenty one, you would have been massively more aggressive in terms of your investments. I mean I was. I've been an aggressive investor. I've been a growth investor. That's not been bad. It wasn't because I knew interest rates were going to go down. But think about all the trends around buyout and everything in the investment universe that's benefited from that that it would
have been great to know. Now, I think that that lesson was obviously two generations, but I don't think that that's going to help you over the next couple of decades because I think interest rates going to zero is probably a thing of the past.
Huh, very very very interesting, Michael, Thank you for being so generous with your time. We have been speaking with Michael Carmen, co head of Private Markets at Wellington Management. If you enjoy this conversation, well be sure and check out any of our previous five hundred discussions we've had over the past nine years. You can find those at Apple Podcasts, Spotify, YouTube, wherever you find your favorite podcasts. Sign up for my daily reading list at ridults dot com.
Follow me on Twitter once again at Ridults. Hello, all of the Bloomberg Fine family of podcasts on Twitter or x AT podcast. I would be remiss if I did not thank the crack team that helps put these conversations together each week. Rich Subnati is our audio engineer. Attika of Albron is our project manager. Anna Luke is my producer. Sean Russo is my researcher. I'm Barry Rittolts. You've been listening to Masters in Business on Bloomberg Radio.