But from a marketing perspective, if you wanna show more deals, do you wanna do more deals? Because then you can market that you're good at all these things and maybe get more market. Mhmm. And are you gonna start selling secondaries or investing in things that may not have a great return but give you, like, a two x DPI very quickly. And it's confusing because I don't think LPs are consistent. Right? They will want to see DPI.
Yeah. Welcome to The Investor, a podcast where I, Joel Palafinkel, your host, dives deep into the minds of the world's most influential institutional investors. In each episode, we sit down with an investor to hear about their journeys and how global markets are driving capital allocation. So join us on this journey as we explore these insights. We are live. And, what I love about StreamYard, I'm not I'm a spokesperson for StreamYard, but I've started using them recently.
And what I think is really cool is, just being able to push content to, like, multiple channels at one time, because I just, I'm lazy, and I'm a little tied up with a few things, I don't have time to do editing. So I just go live and hope for the best. And, Derek, thanks for, doing the same. But Derek Brooks, good buddy. You know, we've known each other for a while. I still have a really fond memory of you. You know, we met, like, near, like, a merry-go-round in Bryant Park.
It was, a random meetup, like, during the Yeah. During COVID. And we did, like, a circle, with, like, fund managers. Some I think there was a couple LPs, but it was, like, when I first started the fund accelerator. So just a really fond memory of, like, just meeting you in person at that time. And, and I think we just kinda connected through, through the through the fund ecosystem. So, and then we just got to grab dinner together last week at another like LPGP dinner.
It was really intimate, dinner, which was really cool celebrating women founders, and, excited to have you here. Really gracious for you to be generous with your time. And yeah, think it'll be a fun time to do some storytelling. So, you know, Derek Brooks again is at Flat World Partners. They do a lot of, direct investing and also some fund investing. So he's also been a mentor, you know, for some of the community building that I've been doing.
So excited to have you here, Derek, you know, why don't you kick this off with just a little bit about your story. I think what's going to be quite interesting is just taking everybody on this journey that you went across the planet. Right? You've traveled all over the world and you've done some really interesting, impactful work. And I think that comes full circle to, what you're building now.
So maybe just kick things off with that and then we'll just kind of have a fun conversation going through it. All right. Well, thanks, Joel. And as I kind of have always said, your career is only as good as your network. And I think you've done an amazing job of building a network of GPs and LPs here in New York City across the venture ecosystem, which is pretty developed, but we're not the Bay Area. And I think it's been a great asset to have you as a friend, but also as mentor and all this.
So I thank you very much for everything you've done and even our meeting in deep COVID when we've been able to create these communities that for a long time were going to really go silent. And what we do in the LP world is so much based on referrals and meeting and kind of there's a very big in person element. So thank you for all your work there.
Yeah, no, I mean, so I've had a pretty kind of non traditional career into the investment world and I think that might be more typical now in deep venture, but even in kind of an LP context that's not so traditional.
I mean, really started my career in peacekeeping operations in Bosnia And Herzegovina for a international organization where there was actually investment work as part of what that organization did to create inter ethnic businesses in Bosnia And Herzegovina, then to a career in journalism based out of Vienna covering Central Eastern Europe, both finance and business news.
But really kind of my real transition out of grad school was into private equity and to a firm in Dubai called the Abraaj Group, which I think is pretty infamous now within the private markets landscape, but for me was just a really transformative career experience, right. It was a private equity firm investing across Latin America, Asia, Africa exclusively, so $16,000,000,000 platform.
Transformative to me, you know transitioning from a career that was much more focused on public service into commercial private operations, but with the intentional idea of creating, I guess we would call it stakeholder value and kind of in those veins, right, it was not just about investing, but that was also about meeting government and policy officials across the countries that we were investing in, other parts of civil society, NGOs.
I think we call it blended finance now, but you can even think about it's not just building a fund to invest, but if you're going to be investing in health care in Sub Saharan Africa and Kenya specifically, why not engage the NGOs that are funding the clinics at the same time, government organizations that are funding certain small businesses and then have a private capital stack.
So it was a really transformative kind of way for me to transition my work, which is much more government, public service, journalism driven and thinking about how those skills and that kind of viewpoint could be important to building private markets.
And if you're thinking about if the goal is then to also create impact, there's no better way, right, to create impact than layering commercial seeking capital on top of really existing programs that are meant to target specific populations, whether it's cataract surgeries in second tier cities in Kenya or what the like, right? So that kind of balance. So it's something that I enjoyed really incredibly, like as an incredible experience. A barrage itself is a story in its collapse of itself.
But you know, I think my big takeaway from that time that it was possible to see commercial return, private fund investments at the same time as looking for that kind of stakeholder value. So it's also the consumer you're benefiting on top of the community and top of your shareholders and then of course your LPs at the same time. Can unpack the structure of an NGO? Because I feel like we don't really ever talk about that in a lot of these discussions.
So, like, who are the main stakeholders in an NGO? Obviously, the, you know, the beneficiaries, the community, right, that is getting those benefits. Obviously, it's a huge stakeholder, but who are the other, you know, main people? I'm I'm sure there's, like, budgetary decision makers and there's people coming up with, like, an initiative. So Yeah. I actually just for my personal education, I would love to know how those how those work.
Then and it sounds like there's also some strategic investment goals as well for those NGOs. 100%. And I think the nonprofit world is generally evolving. Right. And you have a variety of what in The U. S. Would be nonprofit entities, right? You have foundations, right, main goal is to raise money, invest money for the benefit of grant making organizations. You have NGOs that maybe receive donations that are specifically looking to work on a specific problem, right?
And each of these organizations, right, have structural and legal and like other goals, as you said different stakeholders. So if you think about like you know a non profit that exists specifically you know work on let's say it's cataract surgery like raises money right? Well, you know, has a board, right? If maybe someone who intentionally put this together for personal reasons or, you know, into the space, raise money from grant making organizations government entities then do a specific task.
Their tasks only work in that way, right? Money that they take in needs to mostly go for the ultimate goal of the beneficiary of their charter. They can take a bunch of money also, right? It could be at ways to 25% for their administration costs. You know, that's a general structure now. So what happens, right, you have usually a board that is either, you know, comes from the main donors that sit on that board or really important other stakeholders that would somehow need to be involved.
And they have interest in guiding the organization, but it's usually pretty simple, right? The goal of the organization usually matches the goal of what the effort is. It becomes a little more complicated when the nonprofit or the NGO is starting to make investments, right? Because all of a sudden when you're making investments, have approve that you're achieving the philanthropic goals right of that NGO.
And then you have the issue of profits, what do you do with profits that you would exceed from a private market investment? So sometimes you see that coming into what we'd call concessionary, right. So that's where you see a lot of concessionary funds where they'll actually cap their upside as a non profit. So participate in the capital stack and actually juice the returns of the for profit investors, but maybe have a less more limiting loss. That's one place they play.
But then on the more foundation side which also can invest in two ways, right, from their grant making arm as something called a program related investment, or if they have endowment in their kind of more for profit investing arm can also make investments, right?
So sometimes you will see a situation where you have philanthropic foundation that has a tax exempt endowment that can invest in a GP, but also might have a foundation side that will also make investments in something called a program related investment that could have concessionary or kind of alternative capital structure.
So it's really kind of interesting how you can bring these in and right, it could be a grant, it could be a concessionary investment or even just a commercial investment on top of it and really seeing how you leverage that if you have a really mission driven fund or program is, you know, it can be a large opportunity to get new funds that are specific to impact off the ground. Can you clarify what a concessionary investment is, just for, I guess, my knowledge and the audience's knowledge?
Yeah. So, I mean right. Look. Most of the impact so the invest impact investing on the fund and LP level we do is non I do is non concessionary for the most part. Right? We're seeking risk adjusted returns. However, you could think of a organization or an endowment that might have the goal of health equity in California, right? And that is a philanthropic goal. So they may be making grants where they're just giving money, right, to companies or programs or non profits to make good on that goal.
Or perhaps one of the best ways they can think of creating impact in health equity in California could be to invest in a venture fund that is specializing in for profit equity. However, maybe that fund at this time, right, is in its early stages and you really can't underwrite its ability to make risk adjusted returns, It's gonna be it's a kind of a first time manager, right?
Maybe a first time manager in an unproven field in an area where what does it really mean to invest in healthcare businesses that main goal is health maximizing profit.
So, right, that you can underwrite as a program related investment, not expecting to make a 15, know, maybe you expect it's more going to be an 8% return for this first fund, and that would qualify under that grant making organization's nonprofit status, not as a for profit investment, but actually under their grant making arm if they're underwriting it as potentially not risk adjusted but meeting the mission. That could be one version of concessionary.
Another type of concessionary would be what I would say in the capital stack. So these putting these first loss capitals where you are de risking the investment for others to come in on a profit level. So there's multiple ways that can play out, but that would be an example.
And perhaps and ideally let's say this is a venture fund doing health equity in '24 and they prove their thesis in fact what they may not qualify to be a program related investment, right, because they can just attract commercial capital. Sure. No. That's really helpful. And, you know, another question I have is how do you measure that you're achieving those philanthropic goals? Like, what's the typical what are the typical KPIs? Is it, like, some type of, you know, number of jobs created?
Like, you know, because there's gotta be something tangible. So I'm assuming when they put together these initiatives, they have some type of, like, tracking mechanisms. And is it usually based on, a percentage increase or an actual tangible outcome or like like a like a Yeah. Like a measurable, you know, type of unit or something that helps them understand that? To my knowledge, there isn't a legal requirement on that reporting side in The United States.
Yeah. So in the European Union or in Europe in general, right, they now have this European taxonomy of impact funds, which on the environmental side, know, has a variety of articles that qualify you based on your tracking of KPIs, your auditing of KPIs. So that exists and it's something developed in Europe. In The US, we don't have this for impact, and to my knowledge, it doesn't affect philanthropy.
What does happen though is, right, you're qualifying the investment upfront as the investor that it's contributing investing into the themes that you're looking for, and usually you ensure that with a side letter. So even if the OPA or the PPM is specified enough that it's gonna be doing investing in the things that you're underwriting and also importantly, excluding the things that you can't invest in, right?
Because there are also limits, usually you will also have a side letter for that, for this LP, for a foundation that's specific to those goals. Now, of course you do want measurement. So from our case, when we are even on the commercial side investing in funds, we are asking and usually requiring our fund managers to provide that yearly GP report where they are specifying the KPIs they're looking for from people, companies tracking it, and then usually also tracking the negative externalities.
So it's not just that you are creating jobs, but you're also doing no harm in the process, which is like an interesting issue with greenwashing across both social and environmental investments, but we are usually looking for some sort of framework across both on both sides.
And I think right, there are some that have been developed really well, we really like impact measurement project for measurement In terms of framework of how you build your investment fund, we like the operating principles of impact management, which was spun out of the IFC, which was the International Financial Development Corporation of the World Bank that really have these processes of saying what you're gonna you know, having strategic
alignment, deciding what your KPIs are, you guys need those KPIs, and then go and auditing those results. Yeah. Know that's really helpful, and we're gonna dive a little deeper on that in a second. But I one question I have, you know, maybe just taking a step back holistically. There's something that I'm thinking about putting together for, emerging LPs and really it's thinking about the portfolio construction.
Whether you're a single family office or you're a new mint newly minted fund to fund, know, you're emerging LP, you know, what are some frameworks that you've learned in terms of constructing kind of a strategy as a dual purpose fund, right?
You're doing some directs and then you're doing, fund to funds and you don't necessarily have to talk in specifics, but just in general, what are some best practices as you're kind of like thinking about a strategy that does directs and, and fund investments. And, if you were to kind of construct your own fund to fund in another life, like, how would you do it?
Like, for me, like, I would probably do, like, maybe and and I'm kind of doing this now, but I'll probably do, like, maybe 10% fund investments, just me personally, just to get access to deals, and kinda to learn about, a new sector that maybe I just don't have expertise in. And I think that could be pretty interesting for some, family offices. But any advice in terms of like if someone were to start their own kind of fund that does both? Yeah. How would they kind of think about that?
And and, know, I you know, I know you guys also look at private equity. So, you know, have you looked in the lens of, like, a broader lens of just, a multi asset strategy? Like, should we do some public? Should we do some private? Should we do some buyout? You know, how would you recommend to do that? Sorry to throw this curveball at you. No. No. I think that's right. And I've actually thought a lot about this.
We do have an impact funded funds that we've gone through many iterations to have a think about And I think our, you know, because we're focused on impact, and I would say the majority of the impact commercial return seeking impact opportunity happens in venture, right? Yeah. Right now in the market, it should be happening in private equity and even more so in private credit, right?
I mean private credit should be the largest asset class, right, I think that exists, but in the impact specifically, right, commercial returns seeking impact in both environmental and social. So we see the majority of those things in venture, and I think the rule is, if you look at different parallels, want like exposure to about 100 portfolio companies, I think in a venture strategy. So if that's divided amongst like four venture funds at least, this is one vintage, right?
So that would be over, let's say over a three year period, at least, right? That would be at least four to get 100, you want at least four venture funds, right? So 100 portfolio funds. We kind of looked at more just because of the nature of where impact is happening, about 50% of investments being in venture by dollar amount, and then kind of dividing the rest into infrastructure and private equity in Impact.
So I think that's essentially, I think we ended up doing about 50% venture, 25% infrastructure and 25% private equity was our kind of balance. And for us, right, we're gonna have some kind of stable basis return generating in private equity, lower risk, looking more at like 15% IRR, something similar, a little lower in infrastructure, but also on that line. And then about the rest in, I think in venture, which is about that 50%, which is a real big upside return driver.
Think so in a general portfolio construction model, that is not how a typical, like that's not how a pension fund divides it. But when we were building our impact fund of funds, that was what the real ask was, right?
To get access to DEEP and that's where you get access and that just really hasn't been an interesting, I think alpha in the private equity, yeah, just because there's not that many new private equity funds, it's much harder to build a private equity fund, an incredible private equity fund. So that's how we obviously did it. And the way we also thought about too, right, if we're already in impact, you gotta divide the risk.
We decided that our fund of fund vehicle was going to be also focused on three areas, education, healthcare and environment. And we also try to divide those themes among kind of those three asset classes as well. I think it's hopefully gonna work out, right? And to our not surprise, the venture portfolio is the one that has the most availability.
We have one, I think we'd ended up doing five, We have two clear winners, two that are, you know, that to be seen, one loser already and that, you know, that's to be expected, right, as you expect in the fund to have a distribution of deals. The way we also thought about it is direct deals are actually part of the venture allocation, it's part of that get us get at least 100 companies, So if it's not, know and also the top up places where I think we only went into one ed tech fund, right?
So we kind of balanced that out with a little bit more direct ed tech deals maybe on the later stage there. The actual interesting thing about our fund is that the, you know, the direct deals that have ended up are not necessarily co investments from the managers. Interesting. Yeah. So, so that's kind of an interesting thing to think through. So 50% is VC, and then, you know, so how do you get it? Are you so how do you get the direct exposure? Are you carving out, like, with the fund?
Let's say, you know, I'm not sure what the number is, but let's say there's just to keep an example ready. Let's say there's like a $2,000,000 investment into a fund fund one in like education. So like, does all of that 2,000,000 go into the fund or like is like a third of that or like a eighth of that, like, carved out for direct investments? Like, I guess that entire Well, I mean yeah.
So, like, let's say, like and and so let's say we were doing I mean, we did do about, like, 2,000,000 to 3,000,000 1,000,000 to 3,000,000 per manager on the venture on the venture side. Yep. And that was managers, but there was actually a separate pool of allocation Mhmm. About another million reserved for direct invest you know? Got it. So that's separate. Like, if you just kinda meet other interesting funds through the community, you can just kinda directly do deals.
But then you also have the the opportunities to co invest maybe with some with some. Exactly. So you got the flexibility. Got it. We that flexibility. We didn't do so you know most of our direct investments we've done outside. We've done some in the fund a lot of them we've done outside.
So then there's also been opportunities that didn't manifest, but we also write that potential co investments offered to the funded funds could be done outside as well, and then deals that we're working on outside could also be invested in the funded funds. Maybe the funded fund comes in and does like, you know, two fifty check and we get a two fifty check from our other pool of capital to make that investment in either an SPV or direct structure.
But I think for us because we're doing both and most of our direct investment isn't coming from managers, they're not coming from managers we're investing in, they're coming from managers more as peers than as LPs. Absolutely. Yeah. And I think it's really interesting because I'm also seeing a change, right? Like if you are a direct investor, you don't think private equity is still charging fees for investment, right?
Woodcars fees on co investment, but essentially that really shouldn't be happening in venture anymore, right? You know, could be a juice to get someone in the fund and be like, hey, you're going get privileged access, we're going to make sure we'll help you get into these deals alongside of us. But in the end, it's you know, venture funds can't really gatekeep too much in deals. Maybe you know, especially now. Maybe 2021 was a little different. Yeah. No. That's helpful.
And then unpacking infrastructure, what are can you just kind of, unpack that a little bit in terms of, like, the infrastructure type of investments that you're interested in? Yeah. So we've looked at infrastructure, you know, so I you know, we think thematically. So, like, let's say we're looking at health care. Right? You have, like, well, let's say biotech is one level and then you have like the delivery of healthcare, let's focus more on that.
So you have venture style healthcare, IT, then you would have, right, a private equity style like buying businesses, whether it's hospital systems, whether it's roll up of clinics, this is something we're doing at a barrage, right? Oh nice. Private equity. And then you have infrastructure, right? Like owning hospitals and building hospitals, right? So right, that line of healthcare you can think of, right, those are all very different chains of value stack.
And that happens also in education, right? Like owning university real estate, you have ed tech buyout and then you have venture style ed tech. You go down. In climate, right, then you have the same, right? So climate then you can think of, right, okay, well where else in the capital sector? So you have energy. Energy is one. I think another emerging asset class that I think I find really interesting is kind of alternative and kind of owning of assets that isn't venture private equity.
If you think about in climate, so much of what you're building is in the real world and is hardware. Venture dollars probably shouldn't be going to owning bioreactors that will be phased out because you're going get bigger bioreactors as you move up the scale.
So it's kind of an amazing asset of owning like the bioeconomy, that's something people are really interested in thinking about as well as these kind of alternate capital, you know, this alternate capital stack that exists outside the risk of investing in some novel technology. I mean, novel technologies that need to use you know, pretty cost heavy hardware. Yeah. That's that's also how we're thinking about kind of what we call infrastructure kind of hardware investments as well.
Yeah. Know. That's that's helpful context. Yeah. Because I've talked to a couple other allocators that are doing infrastructure in, like, buildings and roadways. So I could see that also potentially being something interesting, you know, overseas, like in Africa, you know, kind of building better, infrastructure and systems to kind of, you know, provide more betterment for the communities and the people to kind of transport, you know, supplies and like, you know, handle logistics better.
And then, you know, I'm I'm definitely with you on the the bioreactors, especially in the food tech space.
You know, if you're, you know, if you're growing, you know, sustainable meats or lab grown meats, you know, you need a bioreactor, and a lot of those will eventually become obsolete to having, like, upgrades and that, you know, you gotta do something with those old bioreactors, which you could probably still make really good use of in, like, another developing country that could, leverage that for probably, like, cancer treatment.
And then also, like, they use those same bioreactors for, for growing food. And I mean, the other thing, right, is as a company scales up, so the bioreactor you need to pilot, your project is very different than the one you'll need to basically sell at cost in fermentation or Right? So it's more that you don't need that bioreactor, but a new kind of cell culture company could use it as well, but you don't need it anymore to test.
And I think also, right, then as the cost of development comes it's not right? It's you know, you're not gonna see it's gonna be like in food tech in general, you're not gonna see big mega companies developing. It's gonna be small c it's almost gonna be like CPG. Right? Where we're moving a new novel. Let's test out. We'll make kangaroo meat. Right? That's, you know, very different. And so I totally agree with you.
Yeah. I haven't had kangaroo meat, but I'm open open to try anything at least once. Just put a little bit of hot sauce on it, and I'll be fine. So, you know, I I think what could be really interesting too to hear is, you know, what what you classify as a winner. So, maybe going down in terms of the, the metrics that you look for, right? The TPPI, the DPI.
So that would be really helpful, I think, the emerging manager community in terms of like when you're looking at the performance reporting of funds, what what are some benchmarks that fund managers should think about? Right. Because they're they probably want to set up some benchmarks for their fund one, you know, and obviously there's industry benchmarks, but we'd love to hear your perspective on like what a good fund is in terms of KPIs and maybe like what metrics you look at, too.
Yeah, no, I mean, so I mean, we spend a lot of time looking at metrics and right metrics are very hard, right? Because in one way you got to really understand are they saying what you think it says or is that metric actually relevant?
I think something that if you're kind of in a if you're now on fund three, I like to look at a lot at performance concentration, so looking at the dispersion of performance amongst deals, I like looking at loss ratio, I think that's actually a really important thing if you have a track record, even it's from a syndicate or something before, really just to show how much capital has actually been lost because when we look at IRRs, right, I mean in law of
dispersion, maybe you're gonna have one or two drivers, but you could be more de risked if you have a pretty low loss ratio. That's actually a story to tell as well if you're thinking about risk adjusted returns. So I like to look at loss ratio. I'm a bigger fan TVPI than I am for IRR. There's a whole post I think by Jamie Rhodes on that. So I mean it seems like you and I just like to really nerd out on this stuff.
I mean I like I have a modeling background, so like I could go like literally like I'm typing in all these different portfolio construction constructs that you're like telling me and I'm like, wow, I'm like totally nerding out. But yeah, so TVPI so for the audience, right? Like there's definitely different ways of evaluating those metrics, right? So tell us why you like TVPI over IRR and there's a common thread around that that I've been hearing too.
Yeah, well, look, you know, for me, because there are so many ways that a venture fund can get started or exist, an IRR could be manipulated unintentionally in so many ways with like having, being able to debt finance your first capital calls, right?
That just drastically changes your IRR numbers or, right, if you had a lot of investments kind of early on versus late, right, that time value plays in or if you had like multiple closes, you only raised a little at the beginning, but then drew down fees on the top. It just doesn't really I just IRR just I end up spending have to spend so much time.
I end up spending just looking at the cash flows that it just is not as important to me as just saying, like, looking at just how much capital you could return. DPI is the most important metric, right, in the end. The early fund manager is not going to have that. I'm gonna have an idea. Of DPI. I prefer looking at, you know, more multiple type numbers. The other thing, and I think this comes back to my background having been at a collapsed private equity fund, I really care about operations.
And that's why I also, I think I'm looking at things like gross net drag, if you are looking at IRR, I really like to see that number. It's just how wisely are you spending money of LPs? And it just doesn't it's not just right. It depends on when you're drawing down fees. That's when IRR does get useful is if you spent like five years, had a five year investment period and you spent four years collecting fees before making investments, all like that. I mean, that's really bad management.
So I think that's an interesting thing to show if you are going to show IRR and if you can show that you're pretty responsible, that it's not very costly for you to do your deals. Right. I think people forget that I think LPs do forget that when you get marketed these gross IRRs as well, it's not with fees and it doesn't come with all the deal costs. So if you're spending a bunch of money on legal fees to close the deal that comes out, right?
That is not reflected in the investment value much of the time. It should be, but it's not. So I think that's something to show. It also differentiates me. That's what there's a story you can tell around that. Yeah. I mean, very similar to, like, evaluating founders. Right? I mean, just looking at the financial their their financial reporting in terms of income statement. Right? So like, they how much are they spending? Or, you know, it's really great.
These emerging managers, you know, they've some of them are past founders, they run, you know, everything is on Zoom, like they're bootstrapping everything. Nobody nobody has just done like a three year lease on an office. Yeah. So and I've seen that a few times, you know, like there's smaller funds that are kind of taking on more infrastructural, you know, liabilities when they could probably do something a little more lean.
And obviously me, I've always kind of been, thinking like a founder too, but I think that's really interesting too. Mean, kind of looking at, their spending habits. 100%. And I think another thing to add, right, I was actually thinking about this is at what moment as an LP are you at risk of losing all your investment?
And to be honest, you're always in any venture fund or any private market fund, all investments can go to zero, but the biggest risk is the manager collapsing and no longer existing, right? That the biggest downside risk, right? If the manager collapses, the manager commits fraud, that is where you're apt to not being able to collect on assets. Mean, we saw this also with Asure shutting down with SPVs, people that, right, are gonna lose everything just because SPV. Yeah. You're in my support.
We we I created like a support group around that. Yeah. You were so much. There's so much. Think so many issues. And I think that so how do you what what do you guys do to kind of like diligence that headline risk? You know, because a lot of times things look really great, as you first meet them and everything looks super legit. It's not just exactly. It's not just the investment strategy. It's you're building a business and you said this as well. That's why I care about gross net drag.
It's actually the gross net drag doesn't even matter, but you know what you're doing to the fund, the P and L of the fund. Usually, I ask for budgets for a lot of times like how are you going to spend this? How are you going to fund this? How are you going to fund the team? How are going to fund yourself? We look for things like what type of insurance are you taking out?
I mean, if you're going to take board seats in companies, right, usually the company is going to pay that insurance, what other kind of risk mitigating? If you're large enough, are you going to put in a CFO operations function? If you're not, who is responsible for that on the team? Right, even things like employment, employment law is really, really difficult, right? Yeah. Who's going to do that?
And maybe it's ADP, maybe it's your service provider, but you have to think about your building a business and how is there going to be that business going to have longevity? And maybe if you're only going to do a fund one, but what is in place to make sure that fund continues doesn't become orphan, you aren't locked out, or the manager doesn't come up with all these liabilities where in a potential collapse LPs won't get back their capital.
And I'm speaking to this as someone who went through this with the collapse of a billion dollar platform, right? You can't take for granted that operations compliance is smooth. You really got to look to see how are things actually operating, making sure that the budget makes sense, that funds are not going to operate underwater.
But yeah, those are all things that we look for and I would say the more you spend on institutional investors, the more they look for as well as opposed to family offices. Yeah. And then when you mentioned, you know, the three year period in a vintage, are you expecting that three year vintage to deliver some type of proceeds to recycle back into the fund? Is that kind of why you mentioned the three year vintage?
Maybe there's, like, some secondary opportunities or some liquidity events where they can kind of, like, return some of that capital back? No. I meant that sometimes in the four year the four year investment period, we've had cases where for three years the investor didn't make any investments and drew down. Oh, wow. You You can do it. It's completely okay. But right. It drives but also right.
I mean, I think So what do they do for those first three to four years if they're not making any If they're looking for deals, but they could still be drawing down, you know, capital for operations. Maybe they think the deal environment isn't good or, they lose out on a lot of deals. This is something we've seen. We have one manager that did that. I think they're going to be okay.
They're probably not going to get a re up or maybe they will, but I mean, they basically have very little time to deploy 75% of the capital. And there's all sorts of funny things that funds can do like make a lot of small, what you can do is instead of deploying it all at once, a lot of small checks with the promise of and then just switch your strategy to have more re ups down the line.
I've seen it before where instead of making new investments in private equity, when you've gone past your investment period, you basically fund acquisitions as a way to invest in other companies.
I mean there's legitimate knowledge of things to do, But on your other question of what LPs can show, it's actually a really tricky question because I always wonder, is there a competitive decision making between making investments and making decisions that's good for your marketing, for your fund two versus what is actually good for the fund you're currently investing.
Because I can imagine a scenario where the best decision for the LPs in fund one are for investments to hold on to make more concentrated larger percentage, 10% ownerships. But from a marketing perspective, if you want to show more deals, do you want to do more deals because then you can market that you're good at all these things and maybe get more market.
And are you going to start selling secondaries or investing in things that may not have a great return but give you like a 2x DPI very quickly? And it's confusing because I don't think LPs are consistent, right? They will want to see DPI. Yeah. But if that DPI was for the purpose of showing DPI, maybe it's savvy on the manager, but it is a weird tension. But maybe the advice is for managers to do that, right?
To demonstrate your ability to sell secondaries or to get in deals and you don't have a quick flip from a marketing perspective. So I struggle with that too because sometimes I have to think in my own bias, like, I want to see these things, Yeah. Do those indicators actually say what we think they're saying? Yeah. And I think also as long as the communication is there. Right?
So if there's, like you know, if it's expected to not deploy any capital for three years and that's already been communicated because there's a unique strategy, and maybe it's a unique sector that they're trying to invest in, or it's like the period, right? I mean, we're if we're heading into a recession, and it's better to wait a little bit because you could bet better price points for like a certain type of deal, like maybe infrastructure.
There's a certain time period as long as that's communicated. Because, you know, there's going to be an annual, you know, meeting where some of those updates are going to be provided. Right. And it's like, hey, you're you're on your second meeting and it's like year two and it's like, hey, we still haven't deployed, but we are we are leveraging a lot of the management fees. I think as long as that's communicated, right, whatever the strategy is.
And it's and I think also just having a clear mapping of that, like there was one fund manager from a few cohorts ago. Still remember this. You know, they they justified a 3% management fee, but they backed that into the budget. So, you know, kind of looking at the budget, seeing how that flows in. And then they did taper it off so that you did kind of get made whole towards the end where it's still kind of, you know, turned into 2% every year.
As long as you kind of communicate and present that thoughtfully, I think that is like the biggest issue. I think that the biggest concern would you also kind of like having the experience that you did, getting surprised or seeing a collapse or seeing something that throws you off, that's definitely where all the red flags definitely start popping off. So Yeah. I mean, look, managers, fund managers expect pretty frequent communication from their portfolio companies.
I believe, you know, LPs could expect the same from their fund managers and see the value in that. Right? So Yeah. Well, you know, I know we got, like, ten minutes. I wanna talk about some of the fun stuff, some of the magical stuff with picking managers because I always believe, like, when you when you invest in somebody, whether it's a fund or a deal, you know, there is that kind of alpha, or that, that x factor essentially. Right?
We're, like, there's just something outside of the quantitative, you know, metrics that everybody has and some of those metrics are table stakes, right? Like there is a benchmark for IRR, there is a, you know, standard, you know, expectation that you're looking for for TVPI. So all the metrics that we talked about, you know, there's common common benchmarks that you guys are looking at.
But, you know, to finally make that investment, you know, there's usually something else, you know, something that's like a little magical. So my question to you is like, what what in what have you seen in some of the managers or investments that you've made that kind of made you really excited about, you know, those people that you wanted to back? Yeah. And I I I think you're completely right. I've in fund investing for better or for worse and especially in venture, it is a people business.
Right? You're you're investing in your belief in that manager to deliver returns for you. You can't hold anybody actually to the marketing they give you or to the data. All you can you can do is, you know, use that to as ways to believe in people, and there's ultimate alternate ways. I mean, before I get into maybe some, like, anecdotes, I'll have to think about that. But Mhmm. I think that's why for me, when I'm doing diligence on the on a manager, we do a lot of reference checks.
Yeah. We spend a lot of time, know, probably more time talking to portfolio companies, talking to former employers, talking to other LPs, just getting a three sixty color of who this person is, what they're like, what they're like to work with. And I think that to me, that is really the main driver of what makes us use an investment in the end. That's kind of we actually upfront that. We now, before we do any kind of really, really deep diligence, we start actually off of those questions.
Yeah. But I mean, I think for me, like I think I have a bias to managers that show that they can build great relationships and demonstrate kind of ease of efficiency of being with people, whether it is LPs or it is portfolio companies. That's how deals get done. That is how you build trust. And I think what is interesting is I'm not necessarily for on-site due diligence, but I do think physically meeting people in person really gives you that color and kind of alternative ways to meet people.
I think I like meeting managers at dinners. I like, you know, I mean, it sounds obnoxious, ski trips is also a really great intimate way to meet people. And I mean, obviously you wanna remove bias, but you can it's really the color of the personalities. And I'm trying to think of managers that we've back that we've really had that magic, and now I can't think of specific stories. But in the end, it's really the quality of the team. It also means a different how big team is.
We invested in a couple billion dollar, like multi platform funds. In the end, I think those are operationalized. This really matters even more on the smaller level, the firm level. But I, know, I think, you know, one of the best things that managers can do, right, everybody is content marketing. Right? Anything that we do.
Hosting hosting events that you're not fundraising for, like bringing experts together, kind of demonstrating demonstrating your network when you're not fundraising is, I think, the best way to win over an LP that might be on the fence. Yeah. No. I totally agree. That's definitely a piece of advice that I always give everybody. You know, even if you're not fundraising, that's a that is the best time because there's not really much pressure on yourself.
You're not really selling and you're really focusing on the friendship. You know, one of my buddies who's also a mentor, who's a large institutional allocator, you know, his words were, hey, we like to marry our GPs because a lot of times too, I mean, if you really like that person, you know, it's really someone that you wanna back for decades. And it is a lot of work.
I mean, sometimes, you know, the feedback I've gotten different pieces of feedback on re ups, and I know we talked about this in, like, our, LP accelerator, but, you know, there's sometimes it's more work and more risk to re up a manager if Mhmm. If, you know, compared to, like, just kinda re upping and and backing the same manager that, you know, has a proven strategy is not gonna collapse.
And it's a repeatable repeatable model that, you know, will probably mature and improve in the next vintage. But it's just already they've already built a franchise in a platform. That's why fund twos are the most I think the most difficult ones, right? You can believe in the magic of fund one and you want to take that risk and it's you know you're allocating that, but by fund two you know a fund two is still an emerging manager, Right?
It's not until those early funds are proven that does that re up become automatic because, I mean, what Union Square Ventures just returned its first fund. Like, I mean, these long time horizons and there's not a lot of proof in two years that you can give. So I think you're right. It becomes easier and we definitely, on our client advisory side, we see basically our clients just now are almost no longer putting in new managers. They've now established their client manager.
That chip has sailed maybe, but, you know, those fun twos are not are not are actually not guaranteed, but maybe the threes and fours are. Yeah. Yeah. And I totally agree with you. I think the education piece is is definitely like an underserved tool. You know? I think if you can educate if you can bring other LPs or even your existing LPs and provide some education, know, that's going to attract other LPs because there are all these other LPs.
Now they're starting to kind of build their own platform and community because they want to attract the best funds. And they probably also want to build a community of other like minded LPs to, to share knowledge and and hopefully share deals, you know, because a lot of times, those are those are close to the chest. Those allocations, get oversubscribed really fast, especially the good ones. So That's a huge that's a huge value to LPs is introducing your LPs to each other. And it's a risk.
Right? Because, you know, if you're you know, as a manager, I mean, you know, I once again, going to Stories of the Broad, we would would manage our l p you know, how our LPs would interact with each other, Like in some ways like not allow it as much as possible and that should have been a red flag. I think having LPs like all be part of a club that's supporting you. I mean it's the same thing like investors on a cap table.
There's a fund, a healthcare fund that we invested in for one client that I, after going to the annual meeting, meeting all the other LPs, seeing the fluency of the GP and bringing in, they even did a room where they brought in all the potential clients, which were health systems to the floor and brought every one of their portfolio company to meet them.
I mean just seeing true value creation work, seeing the group of LPs, seeing the collaboration the LPs could get together, was like, oh man, I want to be a part of this club as well. Institutional investors may be a little less so, but you know family offices, foundations, other specialty investors can find other value out of being part of your platform. And another tip, I just posted something today.
I mean, I you know, there was a fund manager that's that's doing, a little, like, LP jazz thing. You know? So I think I think also what's what's what I've learned because I'm pretty new to, like, building community, you know, it's only been a couple of years. But if you can if you can have an event that is so irresistible, like it's just a cool event that like typically you'd never see, right?
Because the typical events, you know, we're both in New York, you know, they're usually at like a coworking space or or like a law firm. If you kind of come up with something cool that is so irresistible, like people will move their schedule to go to it, that's definitely been a hack. Then I think another thing is like, love doing, community events, but it's more powerful if somebody else is already doing something, and then you can kinda, like, invite other people.
You can still kinda get credit for, like, bringing those people there. So that's also a great way to kinda, build LP community if you can just invite other LPs to other LP events because then you get to know them, you build a little bit of street cred for like, you know, connecting them to that community. And, you never know, maybe that turns into like a casual coffee or something in the next couple of weeks. So I've personally done that. Like, I mean, that's how we went to dinner last week.
Somebody was doing something. I'm like, look, I would love to do it. I don't have time, but somebody else is already doing something. So, hey, here's a cool place to meet maybe some new friends, you know, so it's been exactly the leveraging other platforms and communities really helps.
And I also think, you know, I loved about that event and, you know, a lot of events that you and I have attended, but across the city is when you start connecting to other people that you start seeing at very similar events. I think someone said like a measurement of happiness is how many times you run into someone you know unexpectedly.
It really creates more events that you create like this and collaborations, the more chance for people to make that second or third time in person meeting, which is, I think, really kind of what what builds actually relationship. So Yeah. And I know we're on time, but one final point I wanna touch is, like, you know, the content and community.
You know, we've seen a lot of people on, Twitter, you know, you know, creating really amazing communities and engagement, and that provides a lot of education. I mean, the LPs are there. They may not be as vocal, and they may be hidden kind of, like, observing because they want a little be a little behind the scenes, but they're watching all those tweets and kind of, you know, consuming some of that content. But I think an untapped market still is, you know, the short form video content.
So some of these VCs are now starting to step up. I'm slowly playing with it as well, like using TikTok and short form. And, you know, what's really interesting is if you're seen everywhere, right? Like you go on Instagram, you see the same short form, you know, two pieces of two pieces of wisdom about like, you know, portfolio construction. You see it everywhere.
Think that's so I think some of the VCs that are starting to do that, twenty minute VC and, you know, I think, know, shout outs to Ripple Ventures. They're also building a really cool franchise. You know, they're also doing a lot of content. So I think video could definitely give you an edge because it's it's it's hard to do and you need to sit down and you also need to be comfortable on camera.
So those people that are comfortable doing that, I think could really have an edge kind of creating that that form of content because I think really it's it's edutainment, right? If you can educate people and also kind of entertain them a little bit in a fun way, I've seen that kind of really build a huge community. No, 100%.
I think actually I recently at a VC event, I met Rashad from Redpoint, I think, and I didn't know about his TikToks before, but, you know, I did get to take a look at it and they're hilarious and quite funny, but it's also just amazing the engagement just into VC that that even brings on these different platforms. So it's not just for your portfolio companies and brands, but it's also finding talent or finding other partnerships a 100% if it creates inbound. I don't know.
I don't know how else you do it nowadays. So Yeah. One thing I learned too, this is crazy. I started looking at the stats. So I did a few short term form videos. I have an older iPhone. I'm due for an upgrade, but the quality wasn't that great. And I've actually hired a videographer to do some content. I was kind of experimenting, and the the quality really matters. Like, I because on Twitter, you can see, like, the viewership, and it was significantly greater with, a higher quality video.
I I thought in the beginning, as long as you're authentic, like, it doesn't really matter if it's, a bad camera, but it really, really matters. Like, people will actually pay more attention because maybe they just think it's much more a higher level of professionalism if it's, like, a high end video. So that that was just Yeah. And be honest, I also think some of the algorithms that pump out information also are looking at Probably. As well.
Yeah. Cool. Well, I know we're out of time, but, Derek, this is amazing. I I felt like I could still nerd out for another hour. There was just so much value, in these insights and, you know, hope we get to run into each other again in dinner. You know, we probably go to a lot of the same events. Yeah. If you're around on Monday, I'll I'll ping you about that too. But, hope to catch up soon, man. Thanks for thanks for being generous with your time.
Yeah. Thanks for having me and, looking forward to seeing you hopefully Monday then. Yeah. Absolutely, man. Take care. Take care. Bye.