A Few Thoughts From Austin Post Q1

Austin is a popular place for fund managers and investors to visit in the winter, so my being here provides me with easy access to many voices and opinions in our industry. In the past few weeks, I’ve visited with allocator friends, managers and peers from all over at SXSW, Lw3 Alts, and in many coffee catch ups.

I’ve also seen a lot of broad-based energy and excitement among investment professionals for the current opportunities across private markets, especially as we shift from the trough of pessimism to cautious optimism. Idea sharing around how to pursue the opportunities set in private credit, venture capital, private equity, and real estate has been the subject of many recent conversations.

Naturally I’m excited to feel a bit of a changing tide following the challenging markets the last couple of years have presented. However, after the recent flurry of activity, I’m also thinking a lot about what drives decision making in our industry.

What’s at Play Behind the Scenes?

What behind-the-scenes factors influence investors besides IRR? Job security for one thing. I recently heard a CIO of a large endowment say that he always considers career risk before presenting an opportunity to his board. I was caught off guard when I initially heard this but have since realized this mentality is actually the norm.

Given the governance structure in which he operates, it makes sense for the CIO, though I question if this framing makes sense for the endowment constituents he represents.

In a similar vein, it’s understandable that many investment advisors are inclined to recommend investments that are perceived as lower risk instead of searching for alternatives that may require more client education. I believe this dynamic is one reason why interval fund products have exploded in popularity among RIAs. The perception of liquidity can help get clients over the hump, thereby satisfying an unmet target in a client’s allocation model. And it’s no secret that herd mentality and social validation can be powerful forces in investment decision making. ?

Big Opportunities are Often Ignored

So, what does this all mean? It means there’s a significant portion of capital controlled by intermediaries or career allocators who have little incentive to explore the edges of private markets. They effectively ignore what we see as arguably the most interesting opportunity set. It’s also a reminder that just because [insert well known endowment/billionaire/investor here] invested in a deal, it doesn’t mean that I, or you, should consider doing the same without first understanding their motivations. Our industry is heavily impacted by dynamics that we rarely mention or acknowledge, dynamics that create opportunities for those who are willing to do the work.

Case in point: A team at Mantra Investment Partners recently analyzed the historical internal rate of return and multiple on invested capital across more than 5,000 deals, 500 funds, and 242 private equity firms. The results?

“. . . Private equity strategies that have less than $350 million in assets, and that focus on investing in esoteric industries or businesses, meaningfully outperformed bigger funds.”

See the Institutional Investor article here.

- Alec Garza

The Information herein does not constitute a solicitation to invest in any security or Epic Fund. All Investments involves risk including risk of loss of some or all of an original investment. ?This should not be considered investment, legal, tax, or any other type of advice. Investors should consult their investment professionals before making any type of investment.