20VC Why Now is the Best Time to Invest in Emerging Managers, Biggest Mistake Emerging Managers Make When Fundraising & Investing Lessons from Investing $1.5BN Per Year and Being Early Investors in Thrive, a16z and Founders Fund with Peter Lacaillade



In this episode of "20 VC," host Harry Stebbings interviews Peter LaCalade, Managing Director at SCS Financial, who oversees their private investment program. LaCalade, an early investor in notable venture funds like Founders Fund and Andreessen Horowitz, emphasizes the importance of a diversified investment portfolio, strategic risk-taking, and backing next-gen emerging winners. He discusses the nuances of LP investment strategies, the significance of manager selection, and the importance of alignment and performance in long-term partnerships. LaCalade also touches on the challenges and opportunities in the current market, advocating for proactive liquidity management and the potential of secondary markets. The conversation delves into the dynamics of family offices, the structural issues within large pools of capital, and the personal approach to building lasting relationships with both GPs and LPs.

Summary Notes

Venture Capital Fund Performance Expectations

  • Venture capital funds are categorized based on performance expectations.
  • Funds can exceed, meet, or underperform expectations, with varying implications for investors.
  • A good time to start a program is when there is potential to manage excellent funds.
  • Building a diversified portfolio ("basket") can yield significant returns.
  • Seed funds have the potential to provide high multiples on investment.

Three to five exceed expectations. Three to five meet expectations. One to three underperform.

This quote outlines a general framework for categorizing venture capital funds based on their performance relative to expectations. It implies that a minority of funds will underperform, a majority will meet expectations, and a select few will exceed them.

The Role of Limited Partners (LPs) in Venture Capital

  • LPs invest in venture capital funds and are pivotal in the venture ecosystem.
  • Peter LaCalade is highlighted as a leading LP, managing director at SCS Financial.
  • LaCalade has a history of backing successful venture funds and is praised for his partnership with 20 VC.
  • The role of LPs is crucial for the funding and support of venture capital initiatives.

As a reminder, an LP is a limited partner. LPs invest in venture capital funds, and there's no better than our guest today, Peter LaCalade, managing director at SCS Financial.

Harry Stebbings provides a brief explanation of what an LP is and introduces Peter LaCalade, emphasizing his importance and success in the venture capital industry.

The Importance of Market Timing for LPs

  • Market timing can significantly impact the success of LP investments.
  • The aftermath of the global financial crisis in 2011 created opportunities for LPs to scale their programs.
  • A shift in power dynamics to the LP side can be advantageous when capital is scarce.
  • Investing in emerging funds can offer higher returns than established but less top-tier firms.

So it was great because Lehman happened 8 September 8. It was actually like the midpoint of my harbor vest career. But in 2011, people were still reeling from the global financial crisis.

Peter LaCalade reflects on the timing of his entry into the LP world, suggesting that the market conditions post-crisis were favorable for LPs looking to establish or grow their programs.

Risk Appetite in LP Investment Strategies

  • LPs must balance risk and reward in their investment strategies.
  • Institutional constraints and political considerations can limit the ability of some LPs to take risks.
  • LPs with performance-based incentives, like LaCalade, are more likely to seek high-performance investments.
  • Direct investments are a critical component of a diversified LP portfolio.
  • The structure of larger pools of capital can sometimes hinder the ability to invest in smaller, potentially higher-return funds.

Yeah, I think that when we can walk through the whole LP landscape, but I am incentivized around performance fees.

Peter LaCalade discusses how his incentive structure, which is tied to performance fees, influences his willingness to take calculated risks in his investment strategy.

Identifying Manager Quality in Venture Capital

  • Recognizing high-quality venture fund managers is a key skill for LPs.
  • Manager quality is often evident through their ambition, work ethic, and passion.
  • Successful LPs have a knack for quickly identifying managers who are "forces of nature."
  • Intuition, combined with experience, helps LPs discern the potential in fund managers and investment opportunities.

Who's a force of nature? Who is going to like. And you're one of those people who's going to run through walls.

Peter LaCalade shares his perspective on what makes a great venture fund manager, emphasizing the importance of drive and determination, which he refers to as being a "force of nature."## Trusted Relationships and Extracting Contrary Views

  • Building trust is essential to have candid conversations and extract honest feedback.
  • Teasing out negatives requires a delicate approach, asking about potential issues indirectly.
  • An example of an indirect question is inquiring about the skills a new hire would need to support a manager, revealing the manager's potential weaknesses.

"Well, you have to have a trusted relationship on the other side of the phone. And usually it's just me. I don't have my team on that call. And you just kind of ask. You love them, they're great. But what are some issues? You kind of tease out the negatives."

The quote emphasizes the importance of one-on-one, trust-based interactions to uncover honest opinions and potential concerns about a person's performance or character.

Intuition in Assessing Managers

  • The speaker has not experienced bad intuition when backing managers.
  • Past positive references and proactive outreach by prominent individuals can be misleading.
  • A manager's behavior and professional conduct can signal underlying issues within their firm.
  • It is crucial to focus on on-list references, as they can provide critical insights that off-list references might miss.

"Has your intuition ever been wrong on a person in terms of a manager that you've bat? And if so, what did that teach you?"

This quote leads to a discussion about relying on intuition and references when evaluating a manager's potential, highlighting the importance of being thorough and attentive to red flags.

The Role of Off-List References

  • Off-list references can be controversial and should be taken with a grain of salt.
  • Negative feedback is common for many successful managers, but it must be weighed carefully.
  • Understanding the context and motivations behind negative comments is crucial.

"Do you worry about the off list reference? And what I mean by that is there are many great managers that bluntly will have very negative things said about them. Many."

This quote introduces the topic of off-list references and the complexity of evaluating feedback that falls outside of official sources or recommended contacts.

Diversification in Fund Investments

  • The speaker advocates for a barbell approach to investment, balancing between large groups and niche, targeted funds.
  • Diversification is important, and a mix of manager count and company count can yield strong returns.
  • The performance of fund investments can be predicted over time, with some exceeding, meeting, or underperforming expectations.

"On the fund side, how do you think about the right level of diversification? Because you see a lot with very large portfolios, 30, 40 funds, and then you see some who take the completely alternative approach and are very concentrated. How do you think about the right level of diversification on the fund basis?"

The question prompts a discussion on investment strategies, particularly the balance between diversification and concentration in fund portfolios and the impact on potential returns.

Deployment Timelines and Vintage Performance

  • Accelerated deployment timelines have become apparent in retrospect.
  • Transparency about deployment intentions allows for better sizing of commitments.
  • The speaker predicts that 2020 and 2021 will not be the best vintages due to high entry prices and compressed deployment timelines.
  • Partnering with the best people is essential, even if returns may be lower than expected due to market conditions.

"How do you feel about the compression and deployment timelines? We saw people move from three years to twelve."

This quote introduces the topic of deployment timelines in fund management and the impact of rapid deployment on investment performance and strategy.

Marking Down Investments and Incentives

  • Some funds have proactively marked down their companies, while others have not, leading to a wide dispersion in valuations.
  • Fund of funds and other investors may have conflicting interests regarding the marking of investments.
  • The speaker values transparency with managers and intellectual honesty when evaluating funds.

"Are you seeing managers remark? Their books you mentioned there totally."

The question opens a conversation on the practice of marking down investments and the various incentives that influence this decision by fund managers.

Starting an Investment Program and Accessing Top Firms

  • The current market provides opportunities to start an investment program and gain access to high-quality managers.
  • A barbell approach is recommended, including both established brands and up-and-coming firms.
  • The speaker discusses the challenge of gaining access to top-tier funds and the importance of early engagement and building relationships.

"You say you can do it. Where would you start? Because you have the big established brands, you have the up and comers, and you have the competitors."

This quote questions the feasibility of starting an investment program and accessing established, highly sought-after funds, leading to a discussion on strategies for entering the investment space.

Support and Exit Strategies for Fund Investments

  • The speaker is often one of the first to invest in and also to exit a fund.
  • Reasons for exiting a fund include excessive fund size growth, team composition changes, and strategic shifts.
  • Force ranking and intellectual honesty are essential in decision-making, as is maintaining trust and transparency with fund managers.

"How do you think about how long to have unwavering support for often lps decided as having three fund commitments?"

This question addresses the duration of commitment to fund investments and the factors that influence the decision to continue or withdraw support.

Direct Investing and Co-Investment Strategies

  • Direct investing is important for fee savings and deeper portfolio knowledge.
  • It is essential to understand management teams, diversify, and size positions appropriately.
  • Co-investments can provide insights into how managers underwrite deals and facilitate deeper relationships with analysts and the team.

"You mentioned the direct investing, there being such an important part. Why do you think it is such an important part?"

The question explores the significance of direct investing within an investment program, leading to insights on the strategic and relational benefits of co-investments.## Diligence Processes

  • Diligence processes vary widely, with some taking extensive time and others blindly following managers.
  • It's critical for Limited Partners (LPs) to understand their role distinct from General Partners (GPs) and to invest with high-conviction managers in their expertise areas.
  • Co-investments should have a high hit rate and align with specific return targets, typically aiming for a minimum of 2.5 to 3.5x net return.
  • LPs can leverage their network for due diligence, but must maintain discretion to avoid jeopardizing deals.
  • Investment committees rarely reject funds or co-investments, with a general hit rate on co-investments around 35%.
  • Quick decision-making is vital for co-investments, with the ability to execute deals in a week or less.

"You have to know, you're an LP, you're not a GP. So we only do co-investments with our highest convection managers in their areas of expertise, deep areas of expertise where they're fully aligned."

This quote emphasizes the importance of LPs recognizing their role and the necessity of partnering with GPs who have deep expertise and alignment for successful co-investments.

"I'm not there to re underrate everything. The deal has to make sense for our returns. That typically is at least two and a half to three and a half x base case net return with a right tail where I hope I can make five x plus my goal is generally not to lose money."

The speaker outlines the expected return parameters for co-investments, indicating a focus on deals that offer significant upside while aiming to avoid losses.

Scale for Co-Investments

  • A significant scale of assets under management is necessary for an effective direct co-investment program.
  • The speaker suggests that a minimum of hundreds of millions of dollars per year should be allocated to maintain a diversified co-investment portfolio.
  • Scale allows for more diversified risk and better execution of a co-investment strategy.

"Well, I feel really strongly about the need for scale. When I joined scs, we had $7 billion under management. That's around the low end that you need when you back into what that equates to from a private equity allocation."

The speaker stresses the importance of scale in managing a co-investment program, suggesting that a significant amount of assets under management is necessary for success.

Alignment of Incentives

  • The wealth management industry is fragmented and often driven by conflicts of interest.
  • Large investment banks typically offer large cap funds that are difficult to distribute, whereas highly sought-after funds do not need such platforms.
  • Venture funds appearing on a bank's platform can be a red flag, indicating potential issues with the fund.
  • LPs should be discerning and recognize that following bank-recommended investments without due diligence can lead to poor performance.

"It's amazing to me, the wealth management industry, that it continues to be so fragmented, so underserved."

The speaker expresses surprise at the persistent fragmentation and service gaps within the wealth management industry, suggesting opportunities for improvement.

"If you see a venture fund on a bank, holy shit, that is not a good sign."

This blunt statement indicates that seeing a venture fund on a bank's platform could be indicative of the fund's inability to attract investors on its own merits, which is concerning.

Secondary Market Opportunities

  • There is an emerging market for liquidity solutions in the LP ecosystem, such as Pine Grove, which deals with LP liquidity.
  • Secondary market players are generally more comfortable with buyouts than with venture due to the difficulty of underwriting.
  • There is a market gap for secondary players who can handle venture at scale, presenting a significant opportunity.
  • The secondary market can provide win-win situations for both sellers seeking liquidity and buyers looking for investment opportunities.

"No, the secondary, like, so it's been announced square heritage and Brookfield created a company called Pine Grove that's going to be dealing with kind of like liquidity in the LP ecosystem."

The speaker introduces Pine Grove, a company created to address liquidity needs within the LP ecosystem, highlighting the importance of such solutions.

"Most of the secondary people are not really comfortable in venture. They like buyouts. It's hard to underwrite."

This quote explains the preference of secondary market players for buyouts over venture investments, due to the challenges associated with underwriting venture deals.

Liquidity Management and Planning

  • Effective liquidity management is essential, as evidenced by personal experiences of missed opportunities to sell at high valuations.
  • The best managers are those who can actively manage liquidity, recognizing when to buy or sell based on market conditions.
  • Secondary sales can be strategic, especially when divesting from tail-end positions or managers with whom one is no longer partnering.
  • Looking ahead, there is potential for increased liquidity tools and options, which could benefit the private equity market as a whole.

"Where I think I can be better is actively managing liquidity."

The speaker reflects on the need for improved liquidity management, indicating that being proactive in this area is crucial for investment success.

"The more kind of tools in the toolkit that institutionalize and give different offramps for liquidity, I think is amazing."

The speaker advocates for a variety of liquidity options, suggesting that having multiple strategies for exiting investments can be highly beneficial.

Understanding Different Types of LPs

  • It's important for managers to understand the composition and dynamics of LPs, such as endowments and family offices.
  • Endowments are often stable sources of capital but can experience team changes that affect their investment strategies.
  • Managers should seek a diverse set of LPs to avoid concentration risk and potential herd mentality that could lead to simultaneous withdrawals.
  • LPs should be evaluated on their independent mindset and the potential for strategic collaboration.

"It's all about the endowment is probably like the team, right? You got to understand what's going on."

This quote highlights the importance of understanding the team behind an endowment, as their stability and approach can significantly impact investment strategies.

"So maybe you need to be thoughtful and like, oh, they all do a lot of the same things together."

The speaker advises managers to consider the collective behavior of LPs, as similar actions by a group can lead to amplified effects on investment decisions.## Fundraising Dynamics in Venture Capital

  • Venture capital fundraising involves careful consideration of the number of limited partners (LPs) and the diversity within them.
  • Ideal LP sizing ranges between 5% to 20% of the fund, with a tail of strategic small checks.
  • Long-term partnerships are important, as funds last longer than the average marriage and are difficult to exit.
  • Establishing a stable or growing base of capital is crucial, avoiding excessive bureaucracy for swift decision-making.
  • LP relationships should be with partners who are supportive without being intrusive, allowing fund managers to focus on entrepreneurs.

"I think you don't want to have too many LPs, but you also want to have diversity. So I think probably max out, ideally at least at scale. At call it like 20% would be a lot."

This quote highlights the balance needed between the number of LPs and the diversity within them, suggesting an upper limit of 20% for any single LP's contribution to the fund.

"These are long term things, right. So it's like funds last longer than the average marriage, for sure."

The quote emphasizes the long-term nature of venture funds and the commitment required when entering into an LP relationship.

"You want to have a very stable base of capital, arguably growing. Maybe not just stable, but growing base of capital and a place that's not too bureaucratic, where you can get answers quickly."

This underscores the importance of a stable capital base and an efficient, non-bureaucratic environment for fund operations.

Structural Challenges in the LP World

  • The LP industry is often hindered by bureaucratic structures and low pay, leading to less competition and innovation.
  • Fund of funds are transactional and focus on short-term gains, which can be at odds with long-term investment strategies.
  • Personal tragedies or changes in circumstances can drastically affect single family offices, demonstrating the need for diversified LP bases.

"A lot of the big pools of capital have very bureaucratic structures and low pay."

The quote points out the structural issues within large capital pools that lead to inefficiencies and low competitiveness in the LP industry.

"Our wealthiest family... The reason I was hired at SES, because they had the mandate that was like 200 and 250,000,000. I built the whole thing."

This quote illustrates the impact of individual LPs on a fund's strategy and the potential vulnerability to changes in their circumstances.

The Economics of Single Family Offices

  • Single family offices are often inefficient for managing wealth below a certain threshold, such as $1 billion.
  • Multifamily offices offer scale, institutional knowledge, lower fees, and better investment access.
  • A $100 million portfolio should cautiously allocate to private investments over time, not all at once.

"It's definitely not a billion dollars. You have to be maybe worth 10 billion, at least five."

This quote suggests that the benefits of a single family office are not realized unless the family's net worth is significant, recommending a threshold of $5 to $10 billion.

"If you have 50 million... You should build that portfolio over time."

The speaker provides a practical approach for wealth allocation, advising against immediate and total investment in private equity for smaller portfolios.

Best Practices for Emerging Managers

  • Emerging managers should not meet with an excessive number of LPs or hastily accept the first capital offers.
  • Building a portfolio should involve targeted meetings, aiming for a high yield of commitments.
  • Referrals through trusted sources are more valuable than cold outreach.
  • Choosing between boutique fundraisers and large placement agents, boutique options are preferred for their thoughtfulness.

"I'm a big proponent of doing targeted, not meeting like 120 LPs and taking the first dollars."

This quote advises emerging managers to have a focused and selective approach to fundraising rather than casting a wide net.

"You have to show some sort of figure out a way to hit me up."

The quote emphasizes the need for emerging managers to find creative and personal ways to connect with potential LPs, rather than relying on cold outreach.

Long-Term Perspective and Personal Growth

  • Venture capital investing requires a long-term outlook, with a focus on building relationships and selecting partners with care.
  • Personal growth involves learning to appreciate different viewpoints and optimizing for long-term partnerships, not just talent.
  • Balancing family and work life is crucial, with delegation and team support being key to managing a large portfolio of relationships.

"But one of my reference calls will be to the fund of funds that did 60 calls."

This quote demonstrates the speaker's strategy of leveraging the extensive due diligence conducted by others to inform his own investment decisions.

"I think I can continue to do this for a long time and do so in a way that, lifestyle wise, I can take more time and enjoy travel."

The speaker reflects on his future in the venture capital industry, expressing a desire to maintain a balance between work and personal life while continuing his career long-term.

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