We’re excited to continue to share learnings and perspectives from DMAC 2017 South Korea. The DarcMatter Alternatives Conference 2017 South Korea took place September 21-22 in Seoul’s financial district. DMAC 2017 focused on developing trends within the Alternative Investment industry, making the conference both thought provoking and educational as key speakers used their professional expertise to share insights on the future of the global alternatives market.
We’d love to share highlights from one of the panel sessions during DMAC 2017 that focused more on Infrastructure and Private Equity investments and how this plays a role in maximizing returns for LPs. This panel session was titled “Managing Risk & Maximizing Returns,” and was moderated by local CAIA board member and VP Practice Leader from Marsh, Brett Moffat. This session included the following participants and firms for a great discussion:
John Sharp, Partner, Hatcher+
Jakub Zalio, Country Manager, APS Holding
Mark Yusko, CEO & CIO, Morgan Creek Capital
This session provided a great forum for understanding the role infrastructure investments play for LPs and how this has shifted over time. We’ve shared some highlights below, and you can find more information on these firms/funds on www.DarcMatter.com
Where do you see the opportunities for NPLs (Nonperforming Loans) and what’s driving it?
“At the moment, NPLS are considered a safe investment. The reason it is safe is because we (APS Holding) have been doing this for over 8 years, and we have a proven track record of over 8 years and over 20% IRR, which is not bad for this type of investment. In 2008…there was quite a long time of downturn where NPLs were not being sold… so in regions like Europe, Cypress, and Greece, now is the time that those banks are ready to release, where these markets are over 50 Billion dollars outstanding each. They are great markets for NPLs.” – Jakub Zalio, APS Holding
“For us the real opportunity that we see in Venture is to reinvent the asset class. If you look at public equities and the adoption of tech in the last 20 years, and you compare VC, VC is a bit like walking into Charles Schwab in the late 80’s and buying some AT&T Stock. If you look at every aspect VC, it’s hard for LPs to diversify across several funds, it’s brutally hard to get in and out of these funds…it’s hard for the VC themselves to get in early enough to make a difference. So, the key thing that we see changing right now, is the ability to really get venture to scale. And what we mean by that, if we go back to the stock market analogy again. The stock market is all about getting capital in, massive diversification through the 90’s, massive adoption of technology in the 2000’s, that allowed huge amounts of automation, lots of data, lots of fact mining, lots of fantastic capabilities in terms of frequency and adaptation. If you look at VC it stood still…in every asset class the most important thing is data. And if you look at Venture, there is a complete absence of data at the early stages of these companies. And that doesn’t correlate to what we all want, which is fantastic returns. We are trying to get investors in at a much earlier stage, in places like China, Korea, Singapore, Australia…in emerging markets, where you can get in at an earlier underpriced accelerator round. In VC you can get fantastic returns, if you are only able to get access to these early deals. We think it’s an amazing opportunity and we are 1 of 3 firms in the world that does it.” – John Sharp, Hatcher+
From my experience Korean LPs are very risk averse…for VC they are going through a Fund of Funds, trying to get access to the big names, as we discussed, so how can we work with LP’s to look beyond brand names and FoF strategies and get where the real returns are?
“This biggest problem is this expectation that buying the past is going to get you equivalent returns. As an example, 20 years ago, we invested in a firm’s first fund…the fund was 3 Billion dollars, which used to be a pretty large fund in the technology buyout space…they were able to turn 3 Bn. into 10 Bn…. Second fund, they raised 4 Bn., and they turned 4 Bn. into 10 Bn. Then they raised their 3rd fund, they raised 10 Bn. and it was still 10 Bn. I went to the annual meeting and the room was packed… Fund 1 was great, fund 2 was great, fund 3 was not so great, and fund 4 is not going to be great either. And yet everybody is going to give them money, because they are a brand. And I just sat there in awe of this machinery that’s been created by the consulting community, intermediaries, and the companies themselves of convincing the LP community that that is safe. It’s not. If you think about it, the likelihood that you as an investor in the fund, will achieve your actual assumed rate from those managers, is significantly lower than these smaller managers; and Morgan creek, 70% of what we invest in over the 13 years we’ve been in business, are funds one, two, and three. The March of the Roman Numerals is your enemy. You do not want to be in the high roman numeral funds.” – Mark Yusko, Morgan Creek Capital
“We (APS Holding) are seeing really increased interest from LPs and we are on the smaller side of funds, because the fund we are raising is about 350-450 MM dollars. We are specifically seeking for the niche part where we are very specialized in (NPLs)…we are investing in a sector that we understand and that we have already done for 13 years, and we have data. We have this data from the markets and this works well to peak interest of the LPs to use this as a diversification for their portfolio; which also helps to manage the risk. If you go with the big partners you are buying the name and not their performance.” – Jakub Zalio, APS Holding
What kind of questions should LPs be asking and what kind of due diligence should they be doing to try to get into those newer or smaller funds?
“I would not further complicate it. If you have no experience, then you probably will not be successful. As an LP, I would still ask what was the past experience and past performance. I would base it mainly on the team, not the fund the performance, but on the people managing the fund. Do these people have a track record and if they have had success in their career, looking at the types of investments that have made, that would one the main factors that would make me decide to go for that fund.” – Jakub Zalio, APS Holding
“I think people are very important and I completely agree…We have all seen people invest into firms that look great on the outside, but they are not really in the flow of the deals and are not getting the good quality deals that are necessary. One of the things that we are really focused on is the outstanding nature of accelerators around the world as dealflow. For us when we look at Venture, we just did a study of 100 VC firms in Singapore, and we found out that 20% of these guys had no external bridge to entrepreneurs, whatsoever. And they include most of the largest funds…they had no email on their sites, no form, no way for the entrepreneur to contact them…Looking at the deal funnel and validating that company’s ability to source and research, and understand the deals coming in, is probably the most important factor, at least in our asset class.” – John Sharp, Hatcher+
We are much more inundated with information and data these days. How do you cut through this and what specific data are you looking at and how do you apply this to returns?
“…When we are working with accelerators, the biggest problem we see that accelerators are not addressing right now is performance data. We developed a score, the DART Score. The Diligence, Accuracy, Responsiveness, and Transparency, and every month we ask the entrepreneurs to update this score. After the 6-month cohort, these guys go to a demo day, and investors get a chart in front of them to see just how D A R T and transparent these entrepreneurs have been. This has never happened before…What used to happen, and we call this “charming founder syndrome,” they stand up and make their pitch and wave their hands around, and maybe people will be convinced. We think this is a flawed strategy and data is really helpful, even at the super early stage, to figure out who has a real business…” – John Sharp, Hatcher+
Is there a difference in trying to incorporate these different cultures and businesses into your LP base and how has that changed business for you?
“I live in Singapore and consider myself Asian at this point, I’ve been here 20+ years. If someone writes a book on culture, it’s pretty much out of date…you just never know what to expect when meeting people anymore…When you are meeting people below the age of 35, you could be meeting them anywhere in the world and they are pretty much the same. For the older folks, and I count myself as one, we adapt as much as we can, but I think there is less cultural specificity then their used to be, and it’s a lot easier of a world to navigate.” – John Sharp, Hatcher+
“I think what it’s lead to is institutionalization, and I think of it more as a homogenization, and I actually don’t think it’s a good thing. It’s a bureaucratization of a process. So, what’s happened is, as the pools of capital have gotten bigger, they have gotten more bureaucratic and they’ve gotten less risk tolerant and more risk averse…compensation systems are wrong, they don’t reward employees, make a mistake get fired…some are starting to fix that. What we see, in the old days of alternative investing…if you had a good idea, the owners of the capital were wealthy families, innovative institutions, and there were a lot of great ideas and buy in… Now…It’s “what’s the sharpe ratio, what’s the risk adjusted return,” and I think what’s happening is that the returns of all investors as a group, are falling. The average pension fund in the US has gone from fully funded to massively underfunded. Pension fund returns around the world are not good. Because I believe in this homogenization and dumbing down of ideas because of too much risk aversion, which comes from bureaucracy.” – Mark Yusko, Morgan Creek Capital
Photo (Left to Right): Moderator: Brett Moffat, VP Practice Leader from Marsh; Panelists: John Sharp, Partner, Hatcher+, Jakub Zalio, Country Manager, APS Holding, Mark Yusko, CEO & CIO, Morgan Creek Capital
For More DMAC 2017 Content Highlights, visit this post: DMAC 2017 Panel: Alpha Through Industry Transformation
For DMAC 2017 Photo Highlights, visit here: DarcMatter Alternatives Conference 2017: Photo Highlights