Speaker 1: This is Master's in Business with Barry Ridholds on Bloomberg Radio.
Speaker 2: This week on the podcast, I have an extra special guest.
Speaker 2: Michael Carmon is co head of Private Markets at Wellington Management.
Speaker 2: Wellington's a fascinating company. They've been around literally nearly a century.
Speaker 2: At one point in time, Jack Bogel, founder of Vanguard,
Speaker 2: was chairman of their mutual funds. Just really a fascinating
Speaker 2: history from a private company to a public company back
Speaker 2: to a partnership. Really interesting, and Michael has had a
Speaker 2: bird's eye view of this for really the past twenty
Speaker 2: five years. He is uniquely situated because he has run
Speaker 2: both public mutual funds as well as privates including late
Speaker 2: stage venture, private equity, credit down the list. He really
Speaker 2: sees all sides of the lfant and is capable of
Speaker 2: describing it in a way that I thought was both
Speaker 2: fascinating and informative. I found this to be an interesting
Speaker 2: discussion and I think you will also, with no further ado,
Speaker 2: my conversation with Wellington Management's Michael Carmon.
Speaker 3: Thank you, Barry, thank you for having me.
Speaker 2: So let's talk a little bit about Wellington, which has
Speaker 2: really a fascinating history, not only have they been around
Speaker 2: since I think nineteen twenty five, almost one hundred years old,
Speaker 2: and one point in time Jack Bogel was their chairman
Speaker 2: at least of the mutual fund division. Tell us a
Speaker 2: little bit about the firm's history and how it's evolved
Speaker 2: over the past one hundred years.
Speaker 1: Sure, well, I haven't been there for most of the
Speaker 1: hundred years, so you're just so you're aware.
Speaker 2: Okay, you look a little younger than that.
Speaker 3: Thank you. I appreciate that.
Speaker 1: And as you noted, the firm's almost one hundred years old.
Speaker 1: Started in nineteen twenty eight and twenty eight. One of
Speaker 1: the interesting aspects of the firm is that it was
Speaker 1: a public company at one point in the nineteen seventy
Speaker 1: The company went private in nineteen seventy nine and we
Speaker 1: became a partnership twenty nine original partners. We now have
Speaker 1: almost two hundred partners and we've gone through probably about
Speaker 1: three generations of partnership change, which is very unusual. As
Speaker 1: you know, in the business, it usually is very difficult.
Speaker 1: But because the ownership was very dispersed among all of
Speaker 1: the partners, it made those transitions very easy. And so
Speaker 1: we've grown from a very small company with twenty nine
Speaker 1: partners back in nineteen seventy nine too, as you noted
Speaker 1: over a trillion dollars of assets and it become very diversified.
Speaker 1: We were originally very equity heavy back in the day,
Speaker 1: and we made a lot of investments on the fixed
Speaker 1: income side, so fixed income is now a substantial percentage.
Speaker 3: Of our assets.
Speaker 1: We entered the liquid alts market with hedge funds back
Speaker 1: in nineteen ninety four, and we entered the private market
Speaker 1: in twenty fourteen with my product in late stage growth.
Speaker 2: So you weren't there in twenty eight, you weren't there
Speaker 2: in seventy nine. When did you join?
Speaker 3: Well, I joined in nineteen ninety nine in.
Speaker 1: The middle of the tech bubble as a growth investor.
Speaker 1: Great time for the first nine months. Sure, it was
Speaker 1: April of ninety nine. I had an amazing ninety nine
Speaker 1: and early two thousand and I had left a hedge fund.
Speaker 1: So I was probably one of the few people to
Speaker 1: leave a hedge fund and go to a larger institution
Speaker 1: in the middle.
Speaker 3: Of the tech bubble. But I wanted to be on
Speaker 3: a larger platform.
Speaker 1: I love being with a lot of other investors and
Speaker 1: being very collaborative and collegial, and I felt that that's
Speaker 1: what embodied Wellington's culture, which was exactly what I got
Speaker 1: and what we continue to be today. And so I
Speaker 1: loved it from the first day I got there, and
Speaker 1: now I've been there for just under twenty five years.
Speaker 2: So let's define some terms. Everybody knows what a hedge
Speaker 2: fund is, but let's talk about liquid alts. How do
Speaker 2: you define liquid alts?
Speaker 1: Liquid alts I basically define as versions of hedge funds, basically,
Speaker 1: and you know, it's a synonym for hedge funds. And
Speaker 1: thinking about the alts market, right, there's liquid alts and
Speaker 1: then there's non liquid alts, which would be mostly on
Speaker 1: the private side. And so our initial thrust was what
Speaker 1: our first hedge fund was, a financial services hedge fund
Speaker 1: started by Nick Adams back in nineteen ninety four, which will,
Speaker 1: I guess be celebrating its thirtieth anniversary next year. And
Speaker 1: now we have a number of different hedge funds. We
Speaker 1: have in the macro, we have multistrat we have point
Speaker 1: hedge funds in technology, in the healthcare field, and so
Speaker 1: we've built out over twenty billion dollar hedge fund liquid
Speaker 1: business and now we've added privates to that.
Speaker 2: So I want to focus on the phrase liquid alts,
Speaker 2: which I don't think a lot of lay people understand. Typically,
Speaker 2: when you're invested in a hedge fund or private equity,
Speaker 2: you agree to be locked up for a certain period
Speaker 2: of time. There are occasional windows or gates that open
Speaker 2: and you could take some capital out. So when you
Speaker 2: commit to pe or venture, whatever that money is figure
Speaker 2: seven to ten years, you're not going to touch it.
Speaker 2: When you say liquid as, what you're really saying is
Speaker 2: if you need this money back within X period of time,
Speaker 2: you could get some or all of it. What has
Speaker 2: distinguished liquid alts from these ill liquid locked up privates?
Speaker 1: Sure, when I think of liquid als there's probably two
Speaker 1: parts of it. So one is, to your point, the
Speaker 1: money is not locked up for multiple years. Generally we
Speaker 1: have a one to maybe two year lockup where you
Speaker 1: can you can't access that capital. But more importantly, when
Speaker 1: I fer liquid alts, it's generally the investments that they're
Speaker 1: making are in liquid liquid products, mostly public market products,
Speaker 1: and you can go long, you can go short, you
Speaker 1: can have leverage, you can have higher exposure levels, but
Speaker 1: the securities are in the liquid public markets versus private equity,
Speaker 1: which are in ill liquid private markets.
Speaker 2: So it applies to both you the investor have a
Speaker 2: much shorter period of illiquidity and specifically the assets that
Speaker 2: the fund is investing.
Speaker 1: In, correct, and definitely more emphasis on the types of
Speaker 1: investments the fund is made.
Speaker 2: So you started out investing directly in the public market,
Speaker 2: small cap, mid cap, various styles. How did you find
Speaker 2: your way to that side of the street, the more
Speaker 2: private side of the street.
Speaker 3: Yeah, it's it's a great question.
Speaker 1: And so to your point, I was a public portfolio manager,
Speaker 1: started as a tech analyst and made my way to
Speaker 1: associate portfolio manager and then began managing public portfolios in
Speaker 1: nineteen ninety six prior to getting to Wellington.
Speaker 2: Where were you managing those four in ninety six for
Speaker 2: a hedge fund?
Speaker 1: So that was actually Montgomery Asset Management. I don't know
Speaker 1: if you remember the old Montgomery Securities, old school, correct.
Speaker 1: And I loved Montgomery and Robertson Stevens and all these
Speaker 1: boutique firms that are all gone. But they started an
Speaker 1: asset management division, and my family and I moved out
Speaker 1: to California and that was my first job in being
Speaker 1: a portfolio manager was running a small cap fund for
Speaker 1: them back in nineteen ninety six.
Speaker 2: A little bit of a tech bias or it didn't
Speaker 2: matter you go it was.
Speaker 3: It was diversified.
Speaker 1: But as a growth manager mature, obviously you're going to
Speaker 1: have a reasonable wait to the tech sector. And I
Speaker 1: started as a tech analyst, but I became over the years,
Speaker 1: I became a much more diversified investor. That's probably the
Speaker 1: biggest reason I was able to navigate the other side
Speaker 1: of the tech bubble because I grew up in a
Speaker 1: period where I did invest in other sectors besides tech,
Speaker 1: and so that was very helpful when tech went out
Speaker 1: of favor for basically a decade.
Speaker 2: So who were the investors when you started doing small
Speaker 2: cap and growth and are these the same sorts of
Speaker 2: investors now doing privates at Wellington?
Speaker 1: So when my first fund that I ran when I
Speaker 1: was at Montgomery was a mutual fund, so it was
Speaker 1: all individual investors. And that was the period of time
Speaker 1: where you can be in some news publication and your
Speaker 1: fund would become hot and you would get hundreds of
Speaker 1: millions of dollars in assets in a short period of time.
Speaker 3: And that's literally what happened to us.
Speaker 1: But when you think about what I'm doing today and
Speaker 1: the types of investors I have today today, it's more
Speaker 1: of a combination of wealth management, so more in the
Speaker 1: family office, high net worth ultra high net worth, and
Speaker 1: then the other half of our business is large, large
Speaker 1: and medium sized institutions.
Speaker 2: How do you transition from public investing public stocks, you know,
Speaker 2: mom and pop mutual fund investors, to family offices in
Speaker 2: private So I would imagine that's a series of pretty
Speaker 2: significant changes, both in what you're investing in and the
Speaker 2: process of finding things to put capital into.
Speaker 3: Yeah.
Speaker 1: Absolutely, And I think of it as I've had a
Speaker 1: second career right that I've made this transit difference.
Speaker 2: It's like I was a lawyer, so this is my
Speaker 2: second career or third career if you include asset management.
Speaker 2: But I would think public and private are kind of
Speaker 2: shades of the same thing. You're saying a distinct difference
Speaker 2: from public mutual fund to private equity and late stage venture.
Speaker 3: They are shades of the same thing. No doubt.
Speaker 1: All of the skills that I garnered on the public
Speaker 1: side have been transferable to the private side, and in fact,
Speaker 1: in terms of what I do specifically in late stage growth.
Speaker 3: My message has always.
Speaker 1: Been that we've been able to bring our public market
Speaker 1: expertise to the private markets because the companies were investing in,
Speaker 1: as you're aware, used to go public at a much
Speaker 1: earlier stage.
Speaker 3: When I was going back to that small cap fund.
Speaker 1: Iran, I would sit across the table from companies that
Speaker 1: had two, three, four hundred million dollar market caps that
Speaker 1: were going public.
Speaker 2: Right.
Speaker 1: The best example I always love to give is that
Speaker 1: Amazon's last private round was at a sixty million dollar
Speaker 1: post money valuation.
Speaker 2: That's unbelievable, correct.
Speaker 1: And today, as you know, you have companies like Stripe
Speaker 1: doing fifty five billion dollar rounds right post money valuations
Speaker 1: until the market has changed dramatically. And so to your question,
Speaker 1: the way I started getting into this market was effectively
Speaker 1: the FOMO of now seeing companies staying private life longer
Speaker 1: as a public market investor, and I was running mutual
Speaker 1: funds at Wellington as well as one of our hedge funds,
Speaker 1: and I had the latitude to invest a certain percentage
Speaker 1: of my assets in ill liquid investments and.
Speaker 2: From Wellington, even though you're running mostly public equities.
Speaker 1: Correct, under the forty Act, you could have up to
Speaker 1: and you wouldn't do this, but you could have up
Speaker 1: to fifteen percent in ill liquid securities. And for me,
Speaker 1: in my mutual funds, I was in like the mid
Speaker 1: to high single digits. But I started getting involved in
Speaker 1: buying a lot of these companies as I realized that
Speaker 1: companies were beginning to stay private longer.
Speaker 2: And to clarify the way the SEC defined ill liquid
Speaker 2: securities in the forty Act for mutual funds, some of
Speaker 2: these might even have been public companies but trade by appointment,
Speaker 2: not a lot of float, not a lot of shares,
Speaker 2: or was it strictly non public private companies.
Speaker 1: Well, you're getting above my pay grade in terms of
Speaker 1: being that specific. That's why you're the lawyer and I'm not.
Speaker 2: But I mean, it just seems funny that the SEC
Speaker 2: would say up to fifteen percent. You just wonder what
Speaker 2: was the genesis of that. Was this just not widely
Speaker 2: traded stocks or was it really not public stocks.
Speaker 1: I don't know specifically the answer to the whys of this,
Speaker 1: since it was done another thing that was done before
Speaker 1: my time nineteen forty.
Speaker 2: But I was just a kid, so I don't remember.
Speaker 2: I wasn't paying attention. So then This raised a kind
Speaker 2: of interesting question. You're you're adding more private and a
Speaker 2: liquid stocks to your portfolio. At what point does Wellington
Speaker 2: sort of rub its chin and say, hey, this is
Speaker 2: an interesting space. We're really private, curious, we want to
Speaker 2: see if we can expand to this. What's that process like?
Speaker 1: So the rubbing of the chin occurred in October of
Speaker 1: twenty twelve when I wrote a memo to my partner
Speaker 1: in crime, General O'Reilly, who's now my co head on privates,
Speaker 1: and I said, hey, I think this might be a
Speaker 1: really long term secular trend of companies staying private longer.
Speaker 1: And I do think it's challenging to buy ill liquids
Speaker 1: in publicly daily traded vehicles because of the ill liquidity
Speaker 1: aspect of it. We should consider doing a dedicated fund
Speaker 1: to take advantage of this trend for our clients. And
Speaker 1: so that was about two years before our first close
Speaker 1: and so we had never as you noted, we've never
Speaker 1: done private. So we had to socialize if this was
Speaker 1: a business and a direction that we wanted to take.
Speaker 1: And I think that Wellington has always been very bottom
Speaker 1: up and very entrepreneurial. And so after explaining why, I
Speaker 1: thought we could do super well in this category. We
Speaker 1: launched the product in twenty fourteen, and we were fortunate
Speaker 1: to have several of our clients who believed in us
Speaker 1: and believed in the team, and so we had our
Speaker 1: first clothes in two thousand November of twenty fourteen, and
Speaker 1: ultimately we raised a billion dollars for our first fund
Speaker 1: in the private space.
Speaker 2: So from a billion dollars almost ten years years ago,
Speaker 2: what's Wellington's privates today? Some multiple that I would imagine correct.
Speaker 1: So we're at about eight billion of commitments and money
Speaker 1: under management. We now have five products in the space.
Speaker 1: In fact, my original product invested in biotech. In twenty nineteen,
Speaker 1: we spun out Biotech into a separate, dedicated product for
Speaker 1: the biotech space, and now we've added products in investment
Speaker 1: grade private credit. We have a product in the sustainability
Speaker 1: climate area. We have a product called Wave which is
Speaker 1: focused on diverse founders. And so now we've built out
Speaker 1: the space further and our hopes are to launch additional
Speaker 1: products in the space over the next several years and
Speaker 1: really build a very multi dimensional, multi asset platform that
Speaker 1: will address private equity, mostly inventure credit, as well as
Speaker 1: real estate.
Speaker 2: So I've read a bunch of analysts research technical term,
Speaker 2: bunch of research I've I've frequently seen analyzes that show
Speaker 2: microcap and small cap run very parallel to venture capital
Speaker 2: in terms of performance and volatility and other descriptions. What
Speaker 2: have you found given your background running small cap at
Speaker 2: one point in time and now doing a little bit later,
Speaker 2: late stage venture capital. Are the parallels there at all?
Speaker 2: Or is that sort of academic research overstated? Now?
Speaker 1: I think it's a very fair characterization of the way
Speaker 1: to think about this, because it's kind of the way
Speaker 1: that I thought about this. And in fact, what's interesting
Speaker 1: is that in my product, we have several clients that
Speaker 1: use us as a small cap growth alternative. And the
Speaker 1: reason being is that if you believe in my premise
Speaker 1: that companies are staying private longer, what's happening is many
Speaker 1: companies today are going public and skipping small cap.
Speaker 3: Right if you think.
Speaker 1: About the airbnbs and Ubers and many many others, they're
Speaker 1: coming public not at three hundred million dollars, they're coming
Speaker 1: public at ten billion, twenty billion, thirty billion. And so
Speaker 1: their view is that, well, if we want to continue
Speaker 1: to have exposure to the next generation of great companies.
Speaker 3: This is a product that.
Speaker 1: Will enable us to have exposure to that set of companies,
Speaker 1: and so I think it is a fair characterization. In fact,
Speaker 1: when we look at performance, we use as our public
Speaker 1: market equivalent, we use the Russell two thousand growth index
Speaker 1: as our comparison of whether we're doing a good job
Speaker 1: or not doing a benchmark correct.
Speaker 3: Correct.
Speaker 2: So the obvious question is, at first, your thesis has
Speaker 2: proven to be true for a long time, what do
Speaker 2: we down to thirty five hundred companies in the Wilster
Speaker 2: five thousand, fewer companies going public? So you definitely got
Speaker 2: that right. I got to ask, why do you think
Speaker 2: that is? What is the underlying reason why companies are
Speaker 2: choosing to stay private for longer.
Speaker 1: I think it's a really great question. And when we
Speaker 1: first started, we felt the thesis was that Sarbanes Oxley
Speaker 1: that was put in place in the early two thousands
Speaker 1: made it a little bit more onerous and made it
Speaker 1: more expensive for smaller cap companies to go public because
Speaker 1: they they raised the regulatory burden of doing that, And
Speaker 1: I think that was the genesis of this. But as
Speaker 1: I sat in the boardroom and we have a lot
Speaker 1: of observation rights. Board observation rights in terms of what
Speaker 1: we do probably get them close to seventy five percent
Speaker 1: of the time. What I've discovered is that I think
Speaker 1: it actually makes sense because when you're private, you can
Speaker 1: think more strategically.
Speaker 3: You're not trying to make the March quarter in the
Speaker 3: June quarter in the same time.
Speaker 2: Longer term for sure.
Speaker 1: Correct, you can think longer term, and when you're still
Speaker 1: at a phase where you have fifty seventy five hundred
Speaker 1: million dollars of revenues, you want to have a lot
Speaker 1: of latitude. You want to have the ability to say,
Speaker 1: you know what, we need to invest more money now.
Speaker 1: And as you know, you start making decisions like that
Speaker 1: in the public market, and you release your earnings results
Speaker 1: and say like, hey, our earnings next quarter are going
Speaker 1: to be half of what we thought they were going
Speaker 1: to be. Your stock price generally doesn't go up, and
Speaker 1: then you go into the doghouse and you got to
Speaker 1: scratch your way out of it. Whereas when I'm in
Speaker 1: the board room, we probably spend ten percent of the
Speaker 1: time maybe talking about the quarter, and ninety percent of
Speaker 1: the time really thinking strategically about where we can take
Speaker 1: this business, how do we expand our product line? How
Speaker 1: do we expand geographically? How do we expand distribution? And
Speaker 1: so I think that for me, my thinking has evolved
Speaker 1: in that I believe that it could make companies stronger
Speaker 1: for longer if they have more time to think strategically
Speaker 1: and then make that transition to having to balance the
Speaker 1: strategic with the tactical.
Speaker 2: There's no doubt that the era when you were running
Speaker 2: a mutual fund the late nineties, there was a rush
Speaker 2: to bring a lot of premature companies public. So let's
Speaker 2: hold that aside. Clearly, just you know, issuing IPOs based
Speaker 2: on clicks and eyeballs wasn't gonna work. But that said,
Speaker 2: you bring up the regulatory burden of Sarbanes Oxley, but
Speaker 2: that alone wouldn't get it done if there wasn't just
Speaker 2: tons and tons of capital around. Talk about what's available
Speaker 2: for early stage, seed, late stage companies that are looking
Speaker 2: to do around. There's no shortage of investors around, are there?
Speaker 3: Yeah?
Speaker 1: No, that's that's a fair point because everything I just
Speaker 1: said would mean nothing if there wasn't capital to deploy
Speaker 1: into these businesses. And over the last call it twenty
Speaker 1: plus years, which from early stage and seed to late stage,
Speaker 1: there has been more and more capital in the I
Speaker 1: think in the earlier stage it's much more dedicated funds.
Speaker 1: It's the traditional vcs that we all know that are
Speaker 1: in that market, and as you get to the later stage,
Speaker 1: it's it's a lot more eclectic. It's some dedicated funds
Speaker 1: like ours. There are more multi stage funds where there
Speaker 1: were funds that were doing Series b's and c's and
Speaker 1: are now doing late stage, where generally our fund averaging
Speaker 1: a Series D. In terms of where we invest, there's
Speaker 1: crossover funds, there's hybrid funds. Even hedge funds and mutual
Speaker 1: funds have invested in this space. And so there are
Speaker 1: a lot of pockets. A lot of people like myself
Speaker 1: when I first started, are taking public mutual funds some
Speaker 1: of the bigger players out there, and they're also investing
Speaker 1: in this space. And so there has been more capital
Speaker 1: available for these companies, which is what has enabled them
Speaker 1: to stay private longer.
Speaker 2: Really interesting, so let's talk a little bit about the
Speaker 2: process of evaluating different types of privates. You kind of
Speaker 2: alluded that the skills you learned evaluating small cap growth
Speaker 2: companies is very applicable to late stage venture and other privates.
Speaker 2: Take us through that. What are the similarities?
Speaker 1: Yes, absolutely, And because I would not be a good
Speaker 1: early stage investor, I don't have any skill sets in
Speaker 1: evaluating three people in a garage with an idea. But
Speaker 1: when we're looking at companies, and many of the companies
Speaker 1: in our portfolio they all have usually fifty million dollars
Speaker 1: plus in revenues. Many of them have one hundred two
Speaker 1: hundred plus in revenues, those skill sets are very applicable.
Speaker 1: And because there's now product market fit, there's now streams
Speaker 1: a data about how their customers have responded to their product,
Speaker 1: how sticky are their customers, what the competitive landscape looks like.
Speaker 1: So all of the information that we were assessing on
Speaker 1: the public side is very applicable to the private side.
Speaker 1: And what I think distinguishes us at Wellington is that
Speaker 1: we're able to utilize our public market investors in the
Speaker 1: due diligence process in helping us assess. We have fifty
Speaker 1: five global industry analysts that have been covering their industries
Speaker 1: for ten twenty thirty plus years, and whether it's logistics
Speaker 1: or aerospace or a software company, we have the information,
Speaker 1: and we have the skill sets to do that, and
Speaker 1: we have a lot of data to analyze, and we
Speaker 1: could predict the future. We know what the company is
Speaker 1: thinking about the future. Our numbers are generally going to
Speaker 1: be lower because many of those numbers are aspirational. But
Speaker 1: assessing management teams so qualitative and quantitative, is very similar
Speaker 1: to what I've done on the public side for many,
Speaker 1: many years.
Speaker 2: So the parallels. You have a management team that you
Speaker 2: can evaluate, you have a product that you can review,
Speaker 2: you have customers and revenue you can look at. All
Speaker 2: of this comes down to execution. Those are the similarities.
Speaker 2: What are the differences when you're looking at a company
Speaker 2: that hasn't yet gone public isn't quite that mature.
Speaker 1: I think I wouldn't think of it as a difference,
Speaker 1: but I think it gets to your point. The part
Speaker 1: that we don't know is the future. It can this
Speaker 1: management team execute from here to the public markets. And
Speaker 1: we always believe that our value added in the space
Speaker 1: is that we can help them on that last mile
Speaker 1: from the private market to the public market.
Speaker 2: So that you're touching on something to ask what are
Speaker 2: the milestones between a fifty million dollar company, meaning they're
Speaker 2: doing fifty million in revenues. They've been around a few years,
Speaker 2: but they want to bulk up, they want to become
Speaker 2: more substantial. Do we care about round numbers like one
Speaker 2: hundred million or five hundred million in sales or is
Speaker 2: we just want to see that steady growth over time
Speaker 2: and greater customer acquisition.
Speaker 1: I think every company is unique and their journey is
Speaker 1: very unique. And what I have found is that there
Speaker 1: have been a number of situations where we invested and
Speaker 1: things went off the rail early on and the companies
Speaker 1: needed to pivot or they had big headwinds. I always
Speaker 1: loved to use the example of Coupong, which is in
Speaker 1: e commerce space in South Korea, whose growth rate what
Speaker 1: we owned it went from probably one hundred percent down
Speaker 1: to twenty percent and then re accelerated as they got
Speaker 1: their logistics strategy in order. And then DraftKings, which is
Speaker 1: kind of the post to child that was at one
Speaker 1: point sued by practically every attorney general in the country
Speaker 1: whether daily fantasy sports was even legitimate, and then eventually
Speaker 1: became a big player in sports betting and I gaming,
Speaker 1: and so those went totally.
Speaker 3: Off the rails that we had marked them down.
Speaker 1: Probably close to fifty percent at one point and then
Speaker 1: ended up being Two of our best outcomes is that
Speaker 1: every company just has a different journey and the goal
Speaker 1: is is to be patient.
Speaker 3: In many case, you.
Speaker 2: Were an early investor in DraftKings also, is that right?
Speaker 2: And then what was the resolution? So we know what
Speaker 2: happened with them? They blew up when the Supreme Court
Speaker 2: overturned the rule that only allowed gambling in certain states,
Speaker 2: and now they're one of the handful of giant players there.
Speaker 2: What was the Korean company?
Speaker 1: So the Korean South Korean company is called Kupong, which
Speaker 1: is basically simply the Amazon of South Korea. And so
Speaker 1: they went through and I remember going through this with
Speaker 1: Bomb who is the CEO. Is that they were going
Speaker 1: through a very similar thing that Amazon went through early
Speaker 1: in their existence. Is they were going from multiple day
Speaker 1: delivery down to two day delivery, to one day delivery
Speaker 1: to literally our delivery and doing all the logistics behind
Speaker 1: that required a lot of infrastructure, and at one point
Speaker 1: they had to really slow down growth to make sure
Speaker 1: they got that right. And once they got it right,
Speaker 1: they were able to reaccelerate. And they had a moment
Speaker 1: where they were getting very close to running out of capital,
Speaker 1: but they were able to put around together and then
Speaker 1: they ended up having a really good outcome in the
Speaker 1: public markets, and they went public.
Speaker 3: They did.
Speaker 1: They're public, yeah, public on NASDAK and so they've now
Speaker 1: been public. I think they went public in twenty one,
Speaker 1: so they've been public two plus years now, and so
Speaker 1: they had a really good outcome. But those were two
Speaker 1: that were not you know, is to your point going
Speaker 1: up until the right like it was, there was a
Speaker 1: lot of sideways there and a lot of nail biting,
Speaker 1: and then they ended up having good outcomes. But then
Speaker 1: there's others that, to your point, will just continue to
Speaker 1: pound out forty fifty sixty percent growth and go from
Speaker 1: unprofitable to eventually profitable. And then our job is just
Speaker 1: really to help them think through what do you know
Speaker 1: to do between now and when you go public to
Speaker 1: make sure that you remain a very attractive company in
Speaker 1: the public markets, right, because there's always this risk which
Speaker 1: I worry a lot about, is that companies stay private longer.
Speaker 1: But sometimes they can stay private too long, right, correct,
Speaker 1: because you need you still need to have a really
Speaker 1: good story for the public markets, because the public markets
Speaker 1: want to see a long term trend that they can
Speaker 1: buy into.
Speaker 3: And if they.
Speaker 1: Believe that you've already seen your best days, your best
Speaker 1: days are now behind you, that's not going to be
Speaker 1: a really interesting public investment. And so we really need
Speaker 1: to think through what's the right timing, what are the
Speaker 1: right dynamics, and what do you need to do today
Speaker 1: to set yourself up for a really strong public showing.
Speaker 2: So how do these areas work together or are they
Speaker 2: three distinct fields of investment?
Speaker 1: So some of it works together and there's some synergies
Speaker 1: and some ability for us to really invest across the
Speaker 1: platform from early stags to lay stage. On the bench
Speaker 1: side investment great private credit is a totally new area
Speaker 1: for us. But I think the commonality of everything that
Speaker 1: we're doing is through the lens of where can Wellington
Speaker 1: have an edge? What have we done historically on the
Speaker 1: public side that would make sense to poort over to
Speaker 1: the private side and leverage and scale that right, So
Speaker 1: you think about credit, we have a multiple one hundred billion,
Speaker 1: hundreds of billion dollars of revenue of asset business and
Speaker 1: credit and so we have a lot of expertise, We
Speaker 1: have a lot of experts, whether it's portfolio managers, analysts,
Speaker 1: macro economists, and so there's a lot of things that
Speaker 1: we can do in that space that we think we
Speaker 1: can deliver very strong results. And similarly, as we think
Speaker 1: about real estate, which we're not in yet but something
Speaker 1: we're thinking about. We have a public reteam on the
Speaker 1: equity side, we have a public presence on the credit
Speaker 1: and fixed income side, and so we think that's an
Speaker 1: area that we can extend our expertise to also, and
Speaker 1: so we think about it through through that lens in
Speaker 1: terms of where we where we believe the platform can
Speaker 1: enable us to be super strong and what we've been
Speaker 1: very i think very successful at doing is attracting investors
Speaker 1: who buy into that.
Speaker 2: So is some of the thinking around that these are
Speaker 2: essentially uncorrelated in terms of their returns or does eventually
Speaker 2: all things go to one and the lack of correlation
Speaker 2: goes away.
Speaker 1: I think it always depends. I think you know, when
Speaker 1: you look at what we're doing on the late stage space,
Speaker 1: that's probably the most correlated to the public markets. We're
Speaker 1: definitely taking the direction that we're going from and how
Speaker 1: our performance is somewhat from what's going on on the
Speaker 1: public side. Obviously, with our early stage fund, that's many
Speaker 1: years away from a liquidity event, so that's probably the
Speaker 1: least correlated. So I think it's going to depend on
Speaker 1: the asset class. I think all things. I don't think
Speaker 1: all things go to one. But there's going to be
Speaker 1: some correlation with what's going on in the public markets
Speaker 1: and happening economically. That's going to have an impact on
Speaker 1: the performance of the businesses that we're investing in on
Speaker 1: the private side similar to businesses that we invest in
Speaker 1: on the public site.
Speaker 2: That's really interesting. So let's talk a little bit about
Speaker 2: the IPO market. Seems like it's been mostly frozen this
Speaker 2: year twenty twenty three. Why do you think that is?
Speaker 1: So the IPO market always takes its queue from the
Speaker 1: public markets, and as you know, last year twenty two
Speaker 1: we had a bear market. It was pretty harsh bear market,
Speaker 1: and particularly in growth.
Speaker 2: It was a modest bear market in the S and
Speaker 2: P five hundred off about nineteen percent, but the Nasdaq,
Speaker 2: the tech heavy NASDAK I think, was down thirty two
Speaker 2: or thirty four percent. That's a big losing a third
Speaker 2: of your value, that's a big whack.
Speaker 1: Yes, that was a little bit more nuclear winter, and
Speaker 1: if you look at the innards of that, there were
Speaker 1: a lot of companies down sixty, seventy and eighty percent.
Speaker 1: And so when that happens, portfolio managers having been one
Speaker 1: shut down. The last thing you want to do when
Speaker 1: you have fifty fires in your portfolio is to look
Speaker 1: at a new idea. Right, You're still trying to figure
Speaker 1: out what you need to keep, what you need to jettison.
Speaker 1: And so that is why the IPO market shuts down
Speaker 1: in a bear market.
Speaker 2: Now, now today, what do we have the SMP we're
Speaker 2: recording this in the beginning of the fourth quarter. The
Speaker 2: SMP is up about twelve percent for the year, above
Speaker 2: average historically, and yet the IPO market still seems to
Speaker 2: be a little chilly. Is it just recovering from last year?
Speaker 2: Or why we still floundering along?
Speaker 1: So we're thwing. I think we're in the thawing thwing,
Speaker 1: okay orring moment. Right, we're starting to get there. And
Speaker 1: if you look historically, and we've looked at data from
Speaker 1: the last forty years, generally the IPO market when it
Speaker 1: shuts down, it shuts down for about a year. Occasionally
Speaker 1: it will shut down for two years plus, and as
Speaker 1: you're noting, we're kind of in the second year of this,
Speaker 1: and as you also noted, the markets are starting to recover.
Speaker 1: And as the markets recover, public investors start to get
Speaker 1: a little bit more comfortable looking at new ideas.
Speaker 2: And we've had a few IPOs trickle out this year, right,
Speaker 2: anything catch your eye?
Speaker 1: You know, I don't look at the public markets quite
Speaker 1: as closely, but had you had a cadre of companies
Speaker 1: come public several weeks ago with Clavio, which is in
Speaker 1: a very interesting space in kind of the ad tech area,
Speaker 1: and Instacart, which obviously was a down round but still
Speaker 1: has an eight nine billion dollar market cap, and of
Speaker 1: course arm which was a much larger play and a
Speaker 1: spin out being respun out from Intel. And so to me,
Speaker 1: they've traded fine, which is like a nice little indication
Speaker 1: that the health of the IPO market is beginning to improve.
Speaker 1: And of course I don't have a crystal ball, so
Speaker 1: I don't know if the markets are up or down,
Speaker 1: but let's assume that they're stable over the next couple
Speaker 1: of quarters or several quarters. I think that there's a
Speaker 1: reasonable backlog of companies that will start seeing being surfaced
Speaker 1: and starting to come to the IPO markets. We know
Speaker 1: we have companies in our portfolio that are beginning that
Speaker 1: prep So I think my guess right now is that
Speaker 1: twenty twenty four begins to normalize and we'll we'll see
Speaker 1: improvements in the IPO market after two years of really
Speaker 1: very very low volume.
Speaker 2: So a decade ago, you identify private companies are going
Speaker 2: to stay private for longer, which means there's going to
Speaker 2: be a delay going public, and then a decade goes
Speaker 2: by and more or less proves your thesis correct. Over
Speaker 2: that ensuing decade, How has the IPO market changed? What's
Speaker 2: different about a company going public in twenty twenty four
Speaker 2: than you when you were first making these observations in
Speaker 2: twenty fourteen.
Speaker 1: So I think generally what we're seeing as companies are
Speaker 1: going public later. So instead of being like four or
Speaker 1: five six years into their existence, it's more like eight, nine,
Speaker 1: ten years into their existence. And so by definition, these
Speaker 1: companies tend to be more mature and tend to be
Speaker 1: larger than they were a decade ago. And particularly when
Speaker 1: I started in the business and was managing money back
Speaker 1: in the nineteen nineties, and so these companies hopefully should
Speaker 1: have more sustainable performance and be a little bit less violatile.
Speaker 1: Albeit in twenty one we had a rush for a
Speaker 1: lot of companies to come public and that class has
Speaker 1: not performed well, which is probably a good cautionary tale
Speaker 1: that you should be more mature when you hit the
Speaker 1: public markets.
Speaker 2: So in the nineties, when you were running public funds,
Speaker 2: that IPO process was very much a dog and pony show.
Speaker 2: You would have the investment bank and the founders and
Speaker 2: a whole bunch of folks do these giant road shows
Speaker 2: and they would go from New York to Boston, they'd
Speaker 2: go out to San Francisco. They would go all around
Speaker 2: the country showing off the company before the big wedding.
Speaker 2: How is it today, Do we still go through that
Speaker 2: same process or have capital markets evolved for taking companies
Speaker 2: public today?
Speaker 3: Well, the biggest difference is it's now zoom, zoom and zoom.
Speaker 1: Right. It's just a lot of zoom meetings, so they're
Speaker 1: running all over the world anymore, which is probably really
Speaker 1: good for more efficient, for sure, massively more efficient. We
Speaker 1: do have a couple of different directions we can take.
Speaker 1: Although the majority of the companies are still doing a
Speaker 1: direct IPO. Right, you have direct listings that got a
Speaker 1: lot of play a few years ago. Obviously we saw
Speaker 1: a lot from the spack market a couple of years ago.
Speaker 1: I think that trend is in the rear view mirror.
Speaker 1: I always felt SPACs makes sense in very specific cases.
Speaker 1: But if you're a really solid company, you can go
Speaker 1: public through an IPO, you don't need to do a spack.
Speaker 1: So I don't see SPACs coming back. So a lot
Speaker 1: has not really changed in that regard, other than the
Speaker 1: fact that that companies now can do a lot more
Speaker 1: meetings in a lot more locations, in the comfort of
Speaker 1: their offices or their home.
Speaker 2: So let's talk a little bit about how you guys
Speaker 2: work with later stage companies. How do you think about
Speaker 2: these firms versus either in early stage company where you
Speaker 2: really don't have a sense of product and client base,
Speaker 2: and companies that have gone public where they're fairly mature
Speaker 2: and it's pretty clear, hey, we have a sense of
Speaker 2: what the next five years might look like. These sort
Speaker 2: of straddle that gray zone in between.
Speaker 1: Correct, and the value that we add is very different
Speaker 1: than an early stage company. Right, when you're an early
Speaker 1: stage investor, you're going to help them hire their first
Speaker 1: chief marketing officer, their first head of R and D,
Speaker 1: and many other, many other positions, and you're going to
Speaker 1: work with that founding team on their product market fit.
Speaker 1: By the time we get involved, the company has been built,
Speaker 1: they've had they've achieved escape velocity, and it's really about
Speaker 1: how well they can scale. And that's where we come in,
Speaker 1: is really being able to help them. As I noted
Speaker 1: earlier on that last mile. So for instance, we have
Speaker 1: an ESG team, and so we have a team led
Speaker 1: by Hillary Flynn that steps in and works with the
Speaker 1: company on what they're going to need to do from
Speaker 1: today to the time they go public to be at
Speaker 1: a level that's going to make them attractive to the
Speaker 1: most investors on the public side, since, as we know
Speaker 1: the public side, many investors care about issues around ESG,
Speaker 1: particularly around corporate governance, so what the composition of the
Speaker 1: board of directors should look like, and and many other
Speaker 1: issues around that. We're going to help them really think
Speaker 1: about strategically and tactically the things that they're doing today
Speaker 1: that are going to have ramifications when they are a
Speaker 1: public company, whether they're introducing products that have lower gross margins,
Speaker 1: so optically, gross margins are going to start going down
Speaker 1: and that could have an impact on their multiples relative
Speaker 1: to things that they can do that can be gross
Speaker 1: margining enhanceome and what can they do to sustain their
Speaker 1: level of growth for the longest period of time. And
Speaker 1: as we talked about also IPO timing. Sometimes we've suggested
Speaker 1: that companies delay their IPO because we think that they
Speaker 1: don't have the visibility to go public today. Others we've
Speaker 1: suggested that they should go public sooner be to what
Speaker 1: we talked about about not getting past their expiration date
Speaker 1: of having an attractiveness to public investors.
Speaker 2: So private equity firms tend to come in and take
Speaker 2: over running these companies. They manage them, not what you
Speaker 2: guys do. The description of how you approach late stage
Speaker 2: companies almost sounds like finishing school. You put the final
Speaker 2: touches and get them ready to send them out into
Speaker 2: the world. Is that to glib or is that a
Speaker 2: fair way to describe them?
Speaker 1: No?
Speaker 3: I like that description.
Speaker 1: I think that's what we're doing is really helping them
Speaker 1: with finishing school. And importantly we want them to be
Speaker 1: attractive to the public side of Wellington. Subsequent to their IPO.
Speaker 1: There's no guarantee. We always tell our companies, we don't
Speaker 1: tell our public side what to do. But we've had
Speaker 1: a lot of success and in fact, when you look
Speaker 1: at the numbers over the first year of those companies
Speaker 1: have gone public, we have bought massively more on the
Speaker 1: public side than we originally bought out of our private portfolios.
Speaker 1: And so that to me suggests that our finishing school
Speaker 1: is working very effectively and creating companies that are attractive
Speaker 1: to not just the public side broadly, but to many
Speaker 1: of the investors on Wellington's public.
Speaker 2: So I'm thinking about the tax consequences of what you
Speaker 2: just said. Can you own a company while they're still
Speaker 2: private and then shift that over to the public funds
Speaker 2: or does it have to go to the process of
Speaker 2: the IPO and then you're buying shares in the secondary market.
Speaker 3: We can't.
Speaker 1: It has to be it always has to be arms length,
Speaker 1: and so we cannot take what we've done on the
Speaker 1: private side, and that's in dedicated funds and transfer that
Speaker 1: to any of the other portfolios at Wellington. So everybody
Speaker 1: needs to make an independent decision, and we can't use
Speaker 1: our fund as a reservoir for the funds on the public.
Speaker 2: I was just thinking of the tax consequences of having
Speaker 2: to sell the privately held shares out into the market
Speaker 2: and then someone else in the same under the same
Speaker 2: roof goes out and buys those publicly shares. Seems like
Speaker 2: there's a tax arbitrage to be had, But that might
Speaker 2: be a litle little too cute by half.
Speaker 1: No, but you talking about a product that I think
Speaker 1: is very interesting in terms of the hybrid space where
Speaker 1: you have public private products, and so it's something that
Speaker 1: we have actually in our fintech product. We have a
Speaker 1: public private product that can do just that, and we're
Speaker 1: thinking about additional ways that we can take advantage of
Speaker 1: our public and private market expertise to create products for
Speaker 1: our clients that can do exactly what you're saying is
Speaker 1: we can invest prior to the IPO and then we
Speaker 1: can hold for the long term subsequent to the IPO.
Speaker 2: Really interesting. So let's talk a little bit about valuation.
Speaker 2: What metrics are you looking at when you're thinking about
Speaker 2: elite stage venture investment.
Speaker 1: It depends on the company and every company. We're going
Speaker 1: to use different metrics in healthcare versus tech, versus consumer
Speaker 1: and fintech. Many of our companies are still burning cash
Speaker 1: when we get involved, and so a lot of times
Speaker 1: we're going to be thinking about normalized margins, and those
Speaker 1: normalized margins are going to dictate how we think about
Speaker 1: that price to revenue multiple that we're willing to put
Speaker 1: on that company at the time we invest. And a
Speaker 1: company ultimately is going to have ten percent margins, then
Speaker 1: that's going to be much lower relative to a company
Speaker 1: that can have thirty forty percent margins. And what I've
Speaker 1: done is really ported what I used to do on
Speaker 1: the public side to the private side. In terms of
Speaker 1: thinking about ranges, I always like to think about what's
Speaker 1: my downside risk and what's my upside potential. And we
Speaker 1: want to skew our investments to those that we believe
Speaker 1: we have a lot more upside relative to our downside.
Speaker 2: So whenever I see forget, even seed like Series A companies,
Speaker 2: it feels like everybody's just making up numbers. Hey, there
Speaker 2: is no product, there are no customers. How to even
Speaker 2: come up with a multiple? This has to be very,
Speaker 2: very different than either seed or a stage venture investments.
Speaker 1: Absolutely, because as we've noted, we have companies with one
Speaker 1: hundred two hundred, three hundred million dollars revenues.
Speaker 2: So these are real companies, real products, real customers, real
Speaker 2: businesses are.
Speaker 1: Real businesses, and so we can really look at this
Speaker 1: in terms of having a little bit more confidence. I
Speaker 1: always like to say that these are not riskless, but
Speaker 1: they've been de risked, right. You know it's a company.
Speaker 1: What we don't know is we'll it's scale from one
Speaker 1: hundred million to five hundred to a billion, or is
Speaker 1: it going to be one hundred and make its way
Speaker 1: to two to three hundred.
Speaker 2: So these aren't binary outcomes. Either they work or they don't.
Speaker 2: It's hey, is this going to continue along or as
Speaker 2: it is? Or can we get them to the next level?
Speaker 3: Correct?
Speaker 1: And when you look at our portfolio over the last
Speaker 1: ten years and all the outcomes we've had, we've gotten
Speaker 1: back our money or made money on about eighty percent
Speaker 1: of the deals that we've done, So it's a higher
Speaker 1: hit rate. I always think of it this as a
Speaker 1: little bit more of a fat pitch portfolio, is that
Speaker 1: we stay away from binary events. We're looking for the
Speaker 1: events that the outcomes could be less good or they
Speaker 1: can be really good.
Speaker 2: You're not looking for the moonshots. You're not looking for
Speaker 2: one hundred to one and the other ninety five percent
Speaker 2: of the portfolios go to zero.
Speaker 1: No, we we underwrite to a two to three x
Speaker 1: return on our investment. And when you look at the
Speaker 1: performance of our funds that are more mature Fund one
Speaker 1: and fun two, we're right in that camp about net
Speaker 1: two x or so. But we're doing it over a
Speaker 1: shorter period of time in terms of how long it
Speaker 1: takes we have we have a shallower J curve because
Speaker 1: we're returning capital more quickly and so and that's so
Speaker 1: that's how we're thinking about this category. Is that to
Speaker 1: your point, the range of outcomes are a little narrower.
Speaker 1: We're never going to have one hundred x, but it's
Speaker 1: going to be very rare when we get when we
Speaker 1: get back zero.
Speaker 2: Right. So what leads you to a yes, is it
Speaker 2: is it a certain comfort level that with understanding the business.
Speaker 2: Is it the management team? Because you know, in my
Speaker 2: office we've joked if it's not an obvious yes, it's
Speaker 2: a no. I don't know if you think of it
Speaker 2: in the same way when you're looking at late stage.
Speaker 1: I think it's more in that camp that it's got
Speaker 1: to be a more obvious, yes, but it's a lot.
Speaker 1: It's I always think about investing as matching the qualitative
Speaker 1: and the quantitative. Right is that I've always said to
Speaker 1: analysts when I was on the public side that we
Speaker 1: could always make the numbers work, but we have to
Speaker 1: have a management team that could execute. And so we
Speaker 1: spend a lot of time with our management teams. In fact,
Speaker 1: on average, we know our management teams for over a
Speaker 1: year before we invest with them. We want to understand
Speaker 1: how did they execute from the first time we met
Speaker 1: them to now. Did they say they were going to
Speaker 1: do X and they did X? Or above X or
Speaker 1: was it point five x? Right? So we want to
Speaker 1: see what their credibility is. We want to understand how
Speaker 1: they've built their team around them. Are they the type
Speaker 1: of management teams that want to hire people that are
Speaker 1: smarter than them or people that just want to say
Speaker 1: yes to them? And so we need to understand those dynamics.
Speaker 1: And so management is very, very important. I've always said
Speaker 1: in my career that I'd rather have an A management
Speaker 1: team running a C business than a C management team
Speaker 1: running an A business, because that team will figure out
Speaker 1: how to mess it up and always want the former,
Speaker 1: and so that is a really really important part of it.
Speaker 1: Then once we distinguish that we believe we have a
Speaker 1: good management team, then we have the ability to dig
Speaker 1: into the numbers and see if the numbers match what
Speaker 1: we're hearing from the team, because typically we don't have
Speaker 1: numbers early on, we're just building a relationship, and so
Speaker 1: now we're going to see if the numbers are matching
Speaker 1: the hype and the conversations that we've had with the teams.
Speaker 1: And it's amazing to me how many times that is
Speaker 1: not the case. But in the times that it is
Speaker 1: the case, then those are the deals that we're going
Speaker 1: to want to lean into and really determine if we
Speaker 1: believe this is a sustainable business. How big is the
Speaker 1: TAM the total available market or are they creating a
Speaker 1: new market. How fast are they growing today relative to
Speaker 1: other companies that were of similar scale, How sticky are
Speaker 1: their clients, what is their long term value to customer
Speaker 1: acquisition costs? All of those dynamics to figure out if
Speaker 1: this company can be a lot larger in the future
Speaker 1: than it is today. Because generally we're looking for an
Speaker 1: IPO of two to four years after we invest, and importantly,
Speaker 1: we have to look at it through the lens of
Speaker 1: can this eventually be a public company? Does this make
Speaker 1: sense that that public market investors will be enamored and
Speaker 1: excited about seeing this company in the public market someday
Speaker 1: in the future.
Speaker 2: So do you work with other co investors? Do you
Speaker 2: work with other firms or are these just one off
Speaker 2: investments just with Wellington?
Speaker 1: So I'd say that almost every deal we do has
Speaker 1: a variety of investors in the cap table. We're not exclusive.
Speaker 1: Very rarely have we been. I don't know if we've
Speaker 1: ever been the only investor in the cap table in
Speaker 1: our round. One is we'd love to see insider involvement.
Speaker 1: We want to see insiders taking a pro rauter or
Speaker 1: a super pro rauter of the round because that there's
Speaker 1: a lot of information in that If all the insiders
Speaker 1: aren't playing, or an insider is selling, then we generally
Speaker 1: don't want to.
Speaker 2: Be a part of that different vibe there.
Speaker 1: Correct, And then generally there'll be other investors that invest
Speaker 1: alongside us, But importantly we're not generally working a alongside
Speaker 1: them because these are competitive deals and we want to
Speaker 1: get the maximum allocation that we need for our clients,
Speaker 1: and so we don't want to draw other people in
Speaker 1: during that process. We might help on the backside if
Speaker 1: we're leading the deal and there's other investors looking at it.
Speaker 1: But job one is making is figuring out for ourselves
Speaker 1: independently if we think this would be a good idea
Speaker 1: and making sure if we want, say our average check
Speaker 1: size now and our funds is about seventy five to
Speaker 1: one hundred million, let's make sure that we can get
Speaker 1: that check. And we have co investors that we work
Speaker 1: with that are clients of ours that we want to
Speaker 1: be able to offer them the opportunity to invest also,
Speaker 1: and so we kind of stay very stealth when we're
Speaker 1: in the due diligence process, and then generally we'll see
Speaker 1: other investors come in to fill out a round. Probably
Speaker 1: our average rounds are somewhere between two hundred to three
Speaker 1: hundred million dollars total rounds, and we're doing just under
Speaker 1: half of that.
Speaker 2: So where does your deal flow come from? It sounds
Speaker 2: like very competitive space. How do you find your way
Speaker 2: to some of these some of these late stage venture investments?
Speaker 1: Yeah, which is the most important part of what we
Speaker 1: do because the old adage is you don't see it,
Speaker 1: you can't do it, and so in on our team
Speaker 1: on my product, which is called Hadley Harbor, we have
Speaker 1: eleven investors on our team and they are out there
Speaker 1: every day sourcing. I always think of it as kind
Speaker 1: of forty forty twenty. Forty percent of the skill is onsourcing,
Speaker 1: forty percent is due diligence, and twenty percent is the
Speaker 1: ongoing support of the companies, but probably close to seventy
Speaker 1: five percent of the time is really going out and
Speaker 1: looking for deals. Our biggest source of deals are from
Speaker 1: our network of early stage investors that we have cultivated
Speaker 1: over the last decade, hundreds of investors who have invested
Speaker 1: in early stage companies that can help us get warm
Speaker 1: introductions to these companies, and by the time we get
Speaker 1: into our round, it's very common that we know the
Speaker 1: majority of the board that's in that company, which generally
Speaker 1: consists of early stage investors that are very important proponents
Speaker 1: of having us being in bold with the company, that
Speaker 1: people believe that we can add value and that we're
Speaker 1: going to be additive to that company over the time
Speaker 1: that we invest, because we bring a much different angle
Speaker 1: given that we have the public market expertise relative to
Speaker 1: earlier stage investors, and I have had a lot of
Speaker 1: IPO outcomes and so we understand what it's going to take.
Speaker 1: But a lot of our sourcing comes from early stage seed,
Speaker 1: Series A and even Series B investors who are are
Speaker 1: part of our network.
Speaker 2: Let me throw a curveball at you. You previously served
Speaker 2: as the first male advisory board member of the Wellington's
Speaker 2: Women's Network. Do I have that right?
Speaker 3: You do have that right.
Speaker 2: I love the research, So tell us a little bit
Speaker 2: about why you were the first male member of the
Speaker 2: Wellington's Women's Network.
Speaker 1: Well, thank you for pointing that out, and it's something
Speaker 1: I'm actually very proud of because this was probably back
Speaker 1: in two thousand and seven, in two thousand and eight,
Speaker 1: and I believe that was our first internal business network,
Speaker 1: and a couple of the heads of that network came
Speaker 1: to me and asked if I was served, and I was.
Speaker 1: I was very honored, and I think it was a
Speaker 1: testament to my advocacy for women in the firm, and
Speaker 1: and so they felt that I could be a really
Speaker 1: strong advocate for them as we were trying to elevate
Speaker 1: and get more women as a part on the investment
Speaker 1: side and the business side and really level the playing
Speaker 1: field over the longer term, and so I was I
Speaker 1: was super happy to do it, and so I served
Speaker 1: on that, I think for about six or so years.
Speaker 1: And then interestingly today, as I mentioned earlier, General O'Reilly
Speaker 1: who's my co head, obviously a woman, but our whole
Speaker 1: our management team on the private side, consists of me
Speaker 1: and all women. I'm the only guy on our private
Speaker 1: on our private team management team, which is which is
Speaker 1: just great that that we've come to a point where
Speaker 1: where we can really have that much talent on our
Speaker 1: team that could help us build the business.
Speaker 2: And if I recall correctly, you're EO correct, Gene Heinz right,
Speaker 2: aren't a lot of women in the world running a
Speaker 2: trillion dollar company.
Speaker 1: She's one of them, correct, And Geane and I have
Speaker 1: grown up in the firm. Jen's story. She always talks
Speaker 1: about that she started as an assistant out of Wellesley
Speaker 1: and worked a way up to being a global industry
Speaker 1: analyst and then managing partner, and then in twenty one
Speaker 1: she took over a CEO of the firm. And so
Speaker 1: to your point, she is she is still in the minority,
Speaker 1: but an increasing percentage of the minority, and so it's
Speaker 1: getting everything is getting better over the longer term.
Speaker 2: Really interesting. All right, I know I only have you
Speaker 2: for a limited amount of time, so let's jump to
Speaker 2: our favorite questions that we ask all of our guests,
Speaker 2: starting with what's keeping you entertained these days? What are
Speaker 2: you streaming, watching or listening to?
Speaker 1: Sure, so right now I'm streaming The Crown, so I
Speaker 1: know I'm a little behind the eight ball at hour,
Speaker 1: though it's I love it because there's so much about
Speaker 1: the UK that I don't know, particularly kind of pre
Speaker 1: Charles and Diana. And so I'm now on season four.
Speaker 1: So the first three seasons were really early in Queen
Speaker 1: Elizabeth Rayn and there was just a lot of information
Speaker 1: and just super well done. The acting is is great.
Speaker 1: And then the one that I just finished that by
Speaker 1: the way, I.
Speaker 2: Think there's one more season coming of the ground.
Speaker 3: Great because I'm I'm slowly catching up.
Speaker 1: I got you know, it's my it's my treadmill entertainment,
Speaker 1: so I'm slowly catching up. And then the one that
Speaker 1: I watched recently that I absolutely loved was The Bear
Speaker 1: so good, and season two, which I just finished recently
Speaker 1: my wife and I finished was phenomenal and episode six
Speaker 1: might be one of the best.
Speaker 2: Was that Copenhagen or was that the Forks No.
Speaker 1: Episode six was well when Jamie Lee Curtis and Bob
Speaker 1: Odenkirk and it was the I.
Speaker 2: Think, oh the family Chrissmily Christ that was painful, that
Speaker 2: was difficult to watch. That was real time family meltdown. Yes,
Speaker 2: I mean my wife walked out in the middle of
Speaker 2: that and said, let me know when it's over. She
Speaker 2: could not sit through that.
Speaker 1: But I think I think it was some of the
Speaker 1: best acting. Jamie Lee Curtis was just unbelievable, and the
Speaker 1: acting and the whole situation. I mean, I'm sure many
Speaker 1: many families can relate to the dysfunction and just incredibly well.
Speaker 2: Done, really really interesting stuff. So let's talk about mentors
Speaker 2: who helped shape your career.
Speaker 1: Sure, so there's so many. I'm always afraid that I'm
Speaker 1: going to forget people. But two of the people at
Speaker 1: Wellington who I co managed money with when I first
Speaker 1: got there and with just phenomenal investors. One was Bob Brands,
Speaker 1: who was we always referred to as the godfather of growth.
Speaker 1: He was only one of the first true growth investors
Speaker 1: at Wellington. Just a phenomenal investor in keeping it super simple,
Speaker 1: having just a great feel for the markets, but just
Speaker 1: being able to meet with a management team and evaluate
Speaker 1: them and making decisions based on those evaluations. And then
Speaker 1: the other one was Saul Panel who ran the run
Speaker 1: the Hertford Capital Appreciation Fund from inception to I think
Speaker 1: about twenty fifteen. Had just phenomenal performance. But he was
Speaker 1: like an old school go any way where a capital
Speaker 1: appreciation manager. There were times where he could be positioned
Speaker 1: incredibly aggressively in growth companies, and then there were times
Speaker 1: that he could be very value oriented. And so I
Speaker 1: don't think anybody I worked with did as good a
Speaker 1: job as navigating the tech bubble back in two thousand
Speaker 1: as he did and having great performance in nineteen ninety
Speaker 1: nine and then also having amazing performance in two thousand
Speaker 1: and He's just an amazing, amazing investor. So I say
Speaker 1: those would be two that were very important in my career.
Speaker 2: Let's talk about books. What are some of your favorites
Speaker 2: and what are you reading right now?
Speaker 1: Sure, so, a couple of books that I've really enjoyed
Speaker 1: over the last few years one was The Silent Patient
Speaker 1: by Alex Michael Ladies that just was kind of like
Speaker 1: a psycho thriller story and just had one of the
Speaker 1: most amazing twists towards the end that I.
Speaker 3: This is fiction, so that's a fiction book.
Speaker 1: And then the other one that I read, which is
Speaker 1: an older book, I think it was written twenty twenty
Speaker 1: five years ago, was A Human Stain by Philip Roth
Speaker 1: that was just also incredibly well written. A matter of fact,
Speaker 1: they just I was a part of something that everybody
Speaker 1: had to record. Bring a book, You had to literally
Speaker 1: bring a book, right And that was the book that
Speaker 1: I brought. And then the one I'm reading right now
Speaker 1: that I'm on my kindle supposedly seventy percent of the
Speaker 1: way through is a book called The Color of Water
Speaker 1: by James McBride, which was recommended to me. My favorite
Speaker 1: book recommended, which is My Friend Susie, and it's a
Speaker 1: biography slash autobiography, and it's written by a black man
Speaker 1: who was brought up by his white mother who grew
Speaker 1: up as an Orthodox Jew, okay, and so he learns
Speaker 1: later in life that he didn't know that he was
Speaker 1: actually Jewish, and his mother would never tell him anything,
Speaker 1: and he finally got his mother to tell him his story.
Speaker 1: And so the story is like one chapter of his life,
Speaker 1: him telling his life, and then another chapter of his
Speaker 1: mom talking about her life, juxtaposition between their two lives.
Speaker 1: And so it's an incredibly fascinating book. And so that's
Speaker 1: what I'm reading right now.
Speaker 2: Our final two questions, what advice would you give a
Speaker 2: recent college grad interested in a career in either finance,
Speaker 2: mutual funds, private placements, late stage venture. What sort of
Speaker 2: advice would.
Speaker 3: You give them? Yeah, well, part of the answer is
Speaker 3: what you just said. There's so much more variety of what.
Speaker 1: You can do in the investment world than say, when
Speaker 1: I got out of school close to forty years ago,
Speaker 1: which was you know, it was kind of one game.
Speaker 3: It was really public markets.
Speaker 1: But now with private credit and private equity and ETFs
Speaker 1: as well as the public markets, it's just a variety
Speaker 1: of things that you can do. And so the advice
Speaker 1: I would get somebody coming out of school is figure
Speaker 1: out where your passion is, figure out what your investment
Speaker 1: style and what works for you. Do you want to
Speaker 1: be at a hedge fund and really be in the
Speaker 1: day by day and have to make basically a lot
Speaker 1: of decisions in short amount of time, or do you
Speaker 1: want to have a much longer timeframe. Are you more
Speaker 1: in the growth mindset versus the value mindset?
Speaker 3: So you need to think.
Speaker 1: About all this and head towards the direction that really
Speaker 1: fits your personality. Like for me, I know, I always
Speaker 1: tell the story that my moment was when I saw
Speaker 1: Rod Canyon of Compact unveil the first true laptop back
Speaker 1: in nineteen I think eighty eight or eighty nine.
Speaker 3: I was getting tingles.
Speaker 2: When you say laptop. I remember those because they were
Speaker 2: like these big giant suitcases. The monitor were like the
Speaker 2: lid of a suitcase with a handle sticking out, and
Speaker 2: they weighed like one hundred pounds.
Speaker 3: Luggable, they call them luggable.
Speaker 2: Luggable.
Speaker 1: You knew it was going to be the creation of
Speaker 1: a market, right because this is a totally new market,
Speaker 1: and you think about you know, fast forward to today.
Speaker 1: I think most people have laptops versus versus desktop. Like
Speaker 1: at Wellington, we all have laptops now, we just plug
Speaker 1: it in when we go. We don't have any desktops
Speaker 1: in the entire almost the entire organization, and so it's
Speaker 1: it was the beginning of a major, major trend, right,
Speaker 1: just like the iPhone.
Speaker 3: When the iPhone was introduced.
Speaker 1: Think about like nobody had a computer in their pocket.
Speaker 1: You had these blackberries or you had these these flip phones,
Speaker 1: but you didn't have you didn't have the Internet in
Speaker 1: your hand, and at that moment in time, So seeing
Speaker 1: those develop and understanding that sometimes these trends are overestimated
Speaker 1: in the short term and underestimated in the long term,
Speaker 1: and really trying to find those inflection points. That's what
Speaker 1: I always loved about investing, is being ahead of the
Speaker 1: crowd and trying to figure out where the puck is
Speaker 1: going to go before massively before it gets there.
Speaker 2: And our final question, what do you know about the
Speaker 2: world of investing today? You wish you knew thirty or
Speaker 2: so years ago when you were first getting started.
Speaker 1: So I think I was thinking about it from the
Speaker 1: context of like over the last kind of two decades,
Speaker 1: and I think I wish I knew interest rates were
Speaker 1: going to stay low for as long as they did.
Speaker 2: Because just forty years wasn't that big a deal.
Speaker 1: Exactly if you knew that, right, if you knew it
Speaker 1: was just going to be down into the right from
Speaker 1: nineteen eighty two to twenty twenty one, you would have
Speaker 1: been massively more aggressive in terms of your investments. I
Speaker 1: mean I was. I've been an aggressive investor. I've been
Speaker 1: a growth investor. That's not been bad. It wasn't because
Speaker 1: I knew interest rates were going to go down. But
Speaker 1: think about all the trends around buyout and everything in
Speaker 1: the investment universe that's benefited from that that it would
Speaker 1: have been great to know. Now, I think that that
Speaker 1: lesson was obviously two generations, but I don't think that
Speaker 1: that's going to help you over the next couple of
Speaker 1: decades because I think interest rates going to zero is
Speaker 1: probably a thing of the past.
Speaker 2: Huh, very very very interesting, Michael, Thank you for being
Speaker 2: so generous with your time. We have been speaking with
Speaker 2: Michael Carmen, co head of Private Markets at Wellington Management.
Speaker 2: If you enjoy this conversation, well be sure and check
Speaker 2: out any of our previous five hundred discussions we've had
Speaker 2: over the past nine years. You can find those at
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