March 18, 2025 • 22 mins
In this episode of How I Invest, I dive deep into a conversation with Charlotte Zhang of Inatai Foundation. Charlotte shares her approach to managing a $2.4 billion private investment program, the importance of market inefficiencies, and how she strategically builds GP relationships. We explore how Inatai identifies top managers, why LPs are increasingly interested in fundless sponsors, and what makes a great investment philosophy. Whether you're an LP, VC, or just curious about institutional investing, this episode is packed with insights on capital allocation, conviction-based investing, and long-term partnership building.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:00):
Is the financial mandate for the InnetaiFoundation?
What are you trying to achieve through yourportfolio?
We are simply trying to generate the mostattractive risk adjusted returns, and that is
the reason why we actually have so fewconstraints.
We invest globally.
We don't have any asset allocation target andtruly it is about trying to capture those
things that I had chatted about beforeinnovation and market inefficiencies as we
(00:24):
believe that that tends to generate alpha overthe long run.
When you joined Inatay Foundation, you'retasked with building a $2,400,000,000 privates
program.
How did you go about doing this?
We don't have an asset allocation target, and Itried to begin by aligning with the team on
(00:44):
what do we actually fundamentally want to haveexposure to.
For us, that answer was we want exceptionalreturns that are generated from global
innovation as well as market inefficiencies.
This naturally pointed us in the direction ofyou're probably gonna invest more in venture
and buyout, although we do have some selectreal assets exposure as well, and then also
having a bias for specialists.
(01:07):
We then went on to leverage our networks, and Ideveloped a forward calendar of essentially
wish list GPs that we'd like to do furtherdiligence with.
I also created a commitment budget tocoordinate all of our sizing and pacing
decisions.
Very curious.
You said you went about building a wish list ofGPs that you'd like to access.
How did you go about building that wish list?
(01:28):
We started off by focusing on thematic areasthat we felt tied to that innovation or market
inefficiency With innovation, we felt thatthere was a lot of density of talent in China
as well as an incredibly large marketopportunity.
Another example would be, you know, for marketinefficiencies, we all know that lower mid
(01:48):
market businesses tend to have a lot moresuboptimized, functions, and there would be,
opportunities to create value add byprofessionalizing these businesses and then
became another subset of GPs that we added tothe wish list target.
And let's say now you've double clicked.
Do you wanna do lower middle market PE?
(02:09):
How do you go about executing that strategy?
They're the four p's.
People, philosophy, process, and performance.
It starts with having a stable, veryexperienced team of high caliber people with
the right background of skills, expertise, andrelationships to really execute on their
strategy.
You also want a culture that values dissentingopinions as opposed to group think and then
(02:34):
embraces humility, especially in admitting toand learning from mistakes.
The investment philosophy should be focused.
It should demonstrate some sort of nuanced ordifferentiated understanding of the market
dynamics that actually create the opportunitiesthey're trying to pursue and then the
characteristics that qualify for a down thefairway deal.
And then when you think about, right, how doyou execute on the philosophy, there then needs
(02:57):
to be a consistently applied investmentprocess.
This spans from, you know, how do they source,what do they dig into during diligence, how are
the decisions made, how do they approach valueadd initiatives, and then their discipline in
doing buy, hold, sell analyses to determinewhen is actually the appropriate time to exit
an investment.
And finally, performance is the output ofcogency amongst the first three factors.
(03:21):
The track record should outperform relevantbenchmarks across market cycles and then
demonstrate both resilience as well as abilityto adapt and react to changing environments.
Performance, of course, shouldn't be driven bya couple of deals to the point where it's
really hard to differentiate whether it wasmanager skill or luck.
You sometimes take years to invest into amanager, and you're meeting with a manager
(03:44):
multiple times, and you're tracking them.
What exactly are you trying to ascertain fromspending years on investment decision?
You have to spend sufficient time seeing wherethe rubber actually meets the road.
In other words, it's developing context on theexceptionality of the people and then
monitoring the consistency of their,executional progress relative to what they
(04:08):
articulated is their investment philosophy andprocess.
It takes time for me to landscape comparablestrategies.
It takes time to really embed myself in anecosystem enough that people actually feel
comfortable and compelled to share what reallygoes on versus just the polite responses.
So you're trying to see whether theirphilosophy translates into their behavior?
(04:29):
Yes.
And what about during market downturns?
What would you like to see managers do whenthere's turbulence in the market?
What's a good way to handle a market downturn,and what's a bad way to handle it?
Oftentimes, market downturns, are a test ofyour conviction.
If you have truly studied and developed anuanced understanding of this market, you
should have the conviction to deploy and toactually capture some of those dislocated entry
(04:54):
evaluations.
But at the same time with your existingportfolio assets, there are likely to be some
more challenges on the operating side.
And so hopefully you have the team andcapabilities in house to be able to quickly
identify what are the drivers of what'scurrently going wrong and then right size kind
(05:15):
of for those companies to get on the the righttrajectory.
And and observing managers during downturns, Ithink learning agility has a high correlation
with success.
I want to see if they voluntarily share theirmistakes and what are the reflections and what
could have been done better, as well as howquickly they tend to implement feedback.
(05:37):
I also am very interested in observing teamdynamics in purposely different circumstances
and settings.
Getting to meet people across different rolesand seniorities also gives you a sense of if
there is this strong cohesive culture.
You're tracking managers over several years andyou're getting these data points.
What is the mismatch between what people saythey're gonna do and then they actually do
(06:01):
through their behavior?
If you were to invest with a manager that saysthey take a truly long term oriented approach,
but then when you observe the average time theytake to bring an asset to market is, like, two
years or so, that clearly shows to you that,you know, perhaps their definition of long term
is just a bit different from yours.
(06:23):
We try and look for folks who stay verydisciplined and do not operate on any sort of
access of FOMO.
So the idea being they know what type of dealis exactly for them.
It usually falls within a certain check sizerange as well.
And over the course of their fund, you don'tsee them kind of creeping into increasingly
(06:44):
larger check size deals, or even sometimes,pursuing those that might seem off thesis,
whether it be geographically or sector wise.
Those are kind of the more obvious ones thatyou can observe.
When we were last chatting, you mentioned thatif a GP has nuanced understanding of a
strategy, he or she won't need to sell you, heor she will simply need to explain the
(07:05):
strategy.
What did you mean by that?
When you're learning about a particular topic,your understanding kinda goes from simple to
complex back down to simple.
So that first simple is because you really justdon't know very much.
And then when it gets to the complexity, it'sbecause you're actually cobbling together kind
of all these, like, disparate facts andfigures.
And how you ultimately end back at that lastsimple starting point is by organizing
(07:29):
everything that you know and just sealing itdown into a coherent framework.
The idea being if a GP has spent sufficienttime and effort truly studying their market,
they're able to design their strategy with theintent to capture a very specific
underappreciated opportunity.
Then in talking to you, all they have to do isreally tell you what that target opportunity is
(07:52):
for them, why is it attractive, and then whythey're best positioned to invest in it.
It it's simple.
There's no selling.
It's just explaining.
I have found that strategies that are notpurpose built based on some nuanced insight,
that that's where you really require someselling.
When we were last chatting, you mentioned thatmany LPs are looking for fundless sponsors
(08:13):
today.
Why are LPs interested in the space?
Institutional LPs.
We tend to love lower middle market buyoutbecause it has this potential to generate,
right, attractive returns by capitalizing onmarket inefficiency.
What you're dealing with essentially is youhave less sophisticated sellers and
intermediaries that equates to cheaper entryvaluations, and then there's usually a lot of
(08:34):
low hanging fruit in terms of value creationopportunities to professionalize these
suboptimized businesses.
Unfortunately, what happens is the mostsuccessful lower middle market buyout firms,
they quickly raise the increasingly largerfunds, and then they abdicate the inefficient
market that actually generated their success.
For us to find these groups early, ideallybacking them from the beginning in fund one, it
(08:57):
requires spending time with them even earlierin their life cycle of development to to build
that conviction.
That's the reason why LPs are now flocking tofocusing on fund less sponsors.
It essentially just represents this earlierphase of private equity investors who are just
raising capital for opportunities in the lowermarket, mid market on a deal by deal basis.
And, you know, given how difficult thefundraising environment for emerging managers
(09:21):
is today, I would say it is an opportune timeto access the highest caliber of talent that's
probably being forced to operate in thisformat.
By investing in fundless sponsor deals, are youlooking to generate alpha through those
specific deals, or is it a way to get arelationship with the fundless sponsors ahead
of a fund?
Specifically chose to, invest in fundlesssponsors for both its ability to generate alpha
(09:46):
as well as this sort of, strategic systematicapproach to then creating almost like a funnel
for, for backing fund ones.
TIFF actually has a really great set of datathat shows, you know, if you look at call it
like the top quartile cutoff for fundlesssponsor deal performance versus those of, lower
middle market buyout.
(10:06):
It does in fact, outperform across vintages.
That being said, the dispersion of returnsamongst fundless sponsors is far higher than
that of lower mid market funds, and that isdefinitely a risk that you need to take into
mind when when choosing to approach this assetclass.
Thank you for listening.
To join our community and to make sure you donot miss any future episodes, please click the
(10:29):
follow button above to subscribe.
What's the largest fundless sponsored deal thatyou've seen come across your desk?
Our allocations to these deals are prettyreasonably sized, you know, just a couple of
million dollars.
But that being said, there are now folks whoare, call it, spinning out from kind of larger,
more established name brand firms who want tojust operate kind of single assets at any given
(10:54):
time, and those can easily have equity checksizes in the hundreds and millions of dollars.
I was
hoping you would say Elon Musk's ninety sevenbillion dollar offer for OpenAI.
Yes.
I suppose it would be.
Although, I think he's got, like, three or fourfunds that would be on the hook.
Tell me about your team at Inatay.
There are seven folks, five on the investmentside and two on the operation side.
(11:16):
On the investment side, we are all generalists,although people naturally gravitate towards
different areas depending on their interestsand passions as well as background background
of experiences and expertise.
And in recruiting, I do think we probably didourselves a favor by being deliberate in
selecting for, people with these common valuesof humility, intellectual curiosity, and grit,
(11:38):
but diverse backgrounds and complementary skillsets.
So, you know, some are stronger in riskmanagement, others, private markets
underwriting, and we even have someone who diddirects.
This really creates a team with pretty wellrounded capabilities.
There's pros and cons to having generalistsversus specialists as an LP.
Talk to me about the strengths and weaknessesof a generalist team.
(12:00):
The advantage of being a generalist team isflexibility to evaluate opportunities across
asset classes, geographies, sectors.
You really can then pursue, right, the bestrisk adjusted returns rather than being
pigeonholed to any particular opportunity set.
I think it also creates a rich learningenvironment for team members since your day to
day really can vary dramatically.
(12:22):
Probably the most important aspect is increating robust investment discussions and more
folks around the table trying to questionassumptions since they're not siloed and
therefore actually are more equipped withcontext and knowledge and experience to
contribute meaningfully in reviving at highquality decisions.
(12:43):
The disadvantage of a generalist team is, youknow, the risk of being a mile wide and an inch
deep on any particular area.
And there can certainly be bandwidthconstraints in trying to prosecute on too many
things, because you can actually do all of thethings.
How we try and manage that internally is youstart each year with planning out your
commitment budget, and you also set a forwardcalendar of what your strategic priorities are
(13:08):
and then research topics for folks to dedicatethree to six months sprints.
And then you assign leads, right, foraccountability to deliver some pretty distinct
results.
What is the financial mandate for the InatayFoundation?
What are you trying to achieve through yourportfolio?
We are simply trying to generate the mostattractive risk adjusted returns, and that is
the reason why we actually have so fewconstraints.
(13:30):
We invest globally.
We don't have any asset allocation targets.
And, truly, it is about trying to capture thosethings that I had chatted about before,
innovation and market inefficiencies as webelieve that that tends to generate alpha over
the long run.
You have a flexible mandate.
How do you manage the infinite opportunities?
(13:51):
So we're about 80% committed now.
And so, you know, really reaching that steadystate where when we choose to add an additional
manager idea, it'll probably be at the cost ofneeding to exit another partnership.
A one in one out.
But really what we tend to lean on is that ideaof trying to invest, with high conviction.
(14:12):
We try once we have, elected to partner with aGP, we really try and lean on them as the
dedicated specialists that spend so much timebreathing all of the, market context and being
able to identify kind of the relativeattractiveness of opportunity sets as compared
to historic.
How do you think about diversification?
(14:33):
Diversification is important in the sense of ifthere are different drivers of fundamental
value in your portfolio, it equips yourportfolio to hopefully weather market cycles in
different areas.
But I do think that sometimes diversification,if done for the sake of diversification, just
(14:54):
creates a portfolio where any one investment issized in a way that, like, even if it's
successful, won't really be able to drive yourreturns.
That's really what we're trying to wardagainst.
And so, right, when I said concentratedportfolio construction, our portfolio is meant
to have around 35 GP relationships across theboard, at steady state.
(15:18):
And we're tracking there.
We intend to stay there.
It does mean you have to make some pretty toughdecisions in terms of keeping the bar really
high and also being willing to say, you know,if we do believe in adding an incremental
manager, you know, where in the portfolio do webelieve less has that same opportunity to
generate meaningful alpha.
(15:39):
If you're not willing to kind of make thesetrade offs and it's always consistently adding,
in in some ways, you're also not forcingyourself to make those comparative decisions as
to, what would be a better use of capital.
I had an interesting conversation with MelWilliams of Truebridge, and he was talking
about this forced ranking, how sometimes themain competitor to a fund is not actually a new
(16:00):
fund.
It's more of a great fund.
They might have a founders fund gives them moreallocation to that.
So that was, like, a really disciplined way tolook at it.
We used to do that exercise, while I was atMedley Partners, and I thought it really
enforced a lot of discipline and alsotransparency because the way that different
people kind of perceive certain GPs may changeover time, and it's just good to be able to
(16:23):
naturally surface that and and sync thosediscussions.
Sometimes brand could be a lagging indicator ofreturns.
In other words, sometimes returns depreciatequicker than the brand.
Mhmm.
Always.
And you mentioned Medley Medley Partners.
You're also at Iconic.
You're obviously at InaTie.
You've sourced GPs in many different contexts.
(16:45):
What has been the number one way to source thebest GP ideas or relationships?
There's something to this, like, top downapproach.
So if you really commit yourself to, you know,let's say, for Latin America, I committed
myself to kind of reading about each of thecomposing countries.
What were the key industries, who were the keyplayers, spending time chatting with LPs who
(17:09):
had been committed to the region for a longtime.
If you do all of that work upfront, you'reequipped with hopefully enough context and
knowledge to then be able to engage in a moremeaningful conversation the first time that you
meet a GP.
And that in and of itself, I think, is whatkind of builds a foundation for what can feel
(17:30):
like more of a reciprocal relationship oflearning.
The most talented GPs are incredibly ambitiousand smart, and they're always looking for ways
to get better.
And I think by trying to learn more so that youcan share more, that's been something that has,
I think, enhanced my ability to to source somepretty interesting GPs.
(17:51):
Are there any others of LP value add?
A lot of the times, it's just about being,like, a authentic, congenial human.
At the end of the day, money is green, and itcan come from anywhere.
But who are you actually working with on a dayto day basis?
It impacts your mood and kind of the, I think,like, the joy that you get from doing the same
(18:11):
job.
That to me is also very important, having thatpersonal touch of really getting to know people
as people.
Listen to podcast with Sahil Bloom, and he wastalking about his energy calendar, which is
going over your calendar and seeing which whichwhich, which meetings gave you energy, which
depleted you.
I think it's a really valuable exercise.
Absolutely.
LPs tend to we we always ask the GP, you know,okay.
(18:34):
So how are you being value add to the founders?
But if you think about that sort ofrelationship dynamic, the way that the GP tries
and provides value to their founders ormanagement teams should actually be also
mirrored in the way that we try and hopefullyprovide some sort of value to our GPs.
But perhaps the expectation historically hasjust been, you know, by simply providing the
(18:57):
capital, that is my value.
I I really do think that we can do a little bitbetter than that.
What are the best ways that LPs can provideincremental value to GPs?
It it parallels a lot of the same things thatthey're able to do.
GPs, you know, they try and hire and retainexceptional talent.
And that endeavor, you can send them relevantreferrals from kind of your expanded network.
(19:23):
And, of course, you'd be more equipped to dothis.
You did the landscaping exercise, kind of knowwhere some of, like, the exceptional investors
are, and also have a dialogue with them so youknow if there are certain people looking for
opportunities.
In terms of fundraising, a lot of GPs do wantto be very thoughtful and who they welcome into
the partnership fold and, and being able tokind of matchmake as to which LP institutions
(19:48):
might have similar investment philosophies andalignment.
You can make kind of more curated introductionsthat might shorten their fundraising exercises.
I think this is the also part of the beauty ofbeing a generalist.
For example, you know, we when we are thinkingabout our biotech exposure in the portfolio, we
(20:09):
have evaluated strategies that span kind of theprivate markets as well as the public markets.
And if you are structured in a particular way,you might not know what your counterparts in
the public markets or the private markets aredoing.
Being able to kind of collect that, overarchingmarket view and then relay it back to them can
(20:29):
actually maybe provide them with someincremental context that would help them, when
they're dealing with these, folks as, you know,fellow, fellow stakeholders or even in better
understanding why the market might behave incertain ways.
I've also heard on the value add is being goodthought partner, giving good feedback, getting
the right amount of feedback and encouragement,and also being either quick to act on a new
(20:54):
fund or maybe coming with ideas.
I'd like to invest in this kind of fund.
I'd anchor GP and you say, I wanna back you ina crypto strategy and you're that first check,
that's a huge value add for for managers.
It really scales.
I've heard managers with tens of billions ofdollars that would love that those kind of LP
relationships.
(21:15):
Absolutely.
Yes.
The the thought partner piece, I guess, perhapsthe same way that, you know, founders, like,
saying, my best VCs are simply the ones that Ican call up and ask any question to.
Perhaps that's that's what we should alsoaspire to on the LP side.
It's VCs to start ups, LPs to VCs, goes all theway down.
What would you like our audience to know aboutyou, about Inatay, or anything else you'd like
(21:39):
to share?
We are based in Seattle, Washington, but we aretrying to find a more more racially just
socially equitable Washington state and beyond.
What was, a bit unique in terms of ourstrategic development is in 2022, we actually
launched an investment management company, andthen last year became SEC registered.
Now we are an outsourced chief investmentoffice, and particularly, we want to serve
(22:04):
other charitable entities seeking to fundsimilar initiatives on the grant making side
and to thoughtfully select our partners.
It's such a value when an OCIO is also has adiscretionary bucket, and they're in the
business of investing, not just advisingpeople.
And, hopefully, you you like the access thatyou're able to gain in in signing up to be a
(22:26):
part of, a much larger pool.
Well, Charlotte, I appreciate you jumping onthe podcast.
Look forward to seeing you down in SanFrancisco or New York City very soon.
That would be lovely.
I'm looking forward to that as well.
Thank you, Charlotte.
Thanks for listening to my conversation withCharlotte.
If you enjoyed the episode, please share itwith a friend.
This helps us grow and also provides the bestfeedback when we review the episode's
(22:49):
analytics.
Thank you for your support.
Is the financial mandate for the InnetaiFoundation?
What are you trying to achieve through yourportfolio?
We are simply trying to generate the mostattractive risk adjusted returns, and that is
the reason why we actually have so fewconstraints.
We invest globally.
We don't have any asset allocation target andtruly it is about trying to capture those
things that I had chatted about beforeinnovation and market inefficiencies as we
(00:24):
believe that that tends to generate alpha overthe long run.
When you joined Inatay Foundation, you'retasked with building a $2,400,000,000 privates
program.
How did you go about doing this?
We don't have an asset allocation target, and Itried to begin by aligning with the team on
(00:44):
what do we actually fundamentally want to haveexposure to.
For us, that answer was we want exceptionalreturns that are generated from global
innovation as well as market inefficiencies.
This naturally pointed us in the direction ofyou're probably gonna invest more in venture
and buyout, although we do have some selectreal assets exposure as well, and then also
having a bias for specialists.
(01:07):
We then went on to leverage our networks, and Ideveloped a forward calendar of essentially
wish list GPs that we'd like to do furtherdiligence with.
I also created a commitment budget tocoordinate all of our sizing and pacing
decisions.
Very curious.
You said you went about building a wish list ofGPs that you'd like to access.
How did you go about building that wish list?
(01:28):
We started off by focusing on thematic areasthat we felt tied to that innovation or market
inefficiency With innovation, we felt thatthere was a lot of density of talent in China
as well as an incredibly large marketopportunity.
Another example would be, you know, for marketinefficiencies, we all know that lower mid
(01:48):
market businesses tend to have a lot moresuboptimized, functions, and there would be,
opportunities to create value add byprofessionalizing these businesses and then
became another subset of GPs that we added tothe wish list target.
And let's say now you've double clicked.
Do you wanna do lower middle market PE?
(02:09):
How do you go about executing that strategy?
They're the four p's.
People, philosophy, process, and performance.
It starts with having a stable, veryexperienced team of high caliber people with
the right background of skills, expertise, andrelationships to really execute on their
strategy.
You also want a culture that values dissentingopinions as opposed to group think and then
(02:34):
embraces humility, especially in admitting toand learning from mistakes.
The investment philosophy should be focused.
It should demonstrate some sort of nuanced ordifferentiated understanding of the market
dynamics that actually create the opportunitiesthey're trying to pursue and then the
characteristics that qualify for a down thefairway deal.
And then when you think about, right, how doyou execute on the philosophy, there then needs
(02:57):
to be a consistently applied investmentprocess.
This spans from, you know, how do they source,what do they dig into during diligence, how are
the decisions made, how do they approach valueadd initiatives, and then their discipline in
doing buy, hold, sell analyses to determinewhen is actually the appropriate time to exit
an investment.
And finally, performance is the output ofcogency amongst the first three factors.
(03:21):
The track record should outperform relevantbenchmarks across market cycles and then
demonstrate both resilience as well as abilityto adapt and react to changing environments.
Performance, of course, shouldn't be driven bya couple of deals to the point where it's
really hard to differentiate whether it wasmanager skill or luck.
You sometimes take years to invest into amanager, and you're meeting with a manager
(03:44):
multiple times, and you're tracking them.
What exactly are you trying to ascertain fromspending years on investment decision?
You have to spend sufficient time seeing wherethe rubber actually meets the road.
In other words, it's developing context on theexceptionality of the people and then
monitoring the consistency of their,executional progress relative to what they
(04:08):
articulated is their investment philosophy andprocess.
It takes time for me to landscape comparablestrategies.
It takes time to really embed myself in anecosystem enough that people actually feel
comfortable and compelled to share what reallygoes on versus just the polite responses.
So you're trying to see whether theirphilosophy translates into their behavior?
(04:29):
Yes.
And what about during market downturns?
What would you like to see managers do whenthere's turbulence in the market?
What's a good way to handle a market downturn,and what's a bad way to handle it?
Oftentimes, market downturns, are a test ofyour conviction.
If you have truly studied and developed anuanced understanding of this market, you
should have the conviction to deploy and toactually capture some of those dislocated entry
(04:54):
evaluations.
But at the same time with your existingportfolio assets, there are likely to be some
more challenges on the operating side.
And so hopefully you have the team andcapabilities in house to be able to quickly
identify what are the drivers of what'scurrently going wrong and then right size kind
(05:15):
of for those companies to get on the the righttrajectory.
And and observing managers during downturns, Ithink learning agility has a high correlation
with success.
I want to see if they voluntarily share theirmistakes and what are the reflections and what
could have been done better, as well as howquickly they tend to implement feedback.
(05:37):
I also am very interested in observing teamdynamics in purposely different circumstances
and settings.
Getting to meet people across different rolesand seniorities also gives you a sense of if
there is this strong cohesive culture.
You're tracking managers over several years andyou're getting these data points.
What is the mismatch between what people saythey're gonna do and then they actually do
(06:01):
through their behavior?
If you were to invest with a manager that saysthey take a truly long term oriented approach,
but then when you observe the average time theytake to bring an asset to market is, like, two
years or so, that clearly shows to you that,you know, perhaps their definition of long term
is just a bit different from yours.
(06:23):
We try and look for folks who stay verydisciplined and do not operate on any sort of
access of FOMO.
So the idea being they know what type of dealis exactly for them.
It usually falls within a certain check sizerange as well.
And over the course of their fund, you don'tsee them kind of creeping into increasingly
(06:44):
larger check size deals, or even sometimes,pursuing those that might seem off thesis,
whether it be geographically or sector wise.
Those are kind of the more obvious ones thatyou can observe.
When we were last chatting, you mentioned thatif a GP has nuanced understanding of a
strategy, he or she won't need to sell you, heor she will simply need to explain the
(07:05):
strategy.
What did you mean by that?
When you're learning about a particular topic,your understanding kinda goes from simple to
complex back down to simple.
So that first simple is because you really justdon't know very much.
And then when it gets to the complexity, it'sbecause you're actually cobbling together kind
of all these, like, disparate facts andfigures.
And how you ultimately end back at that lastsimple starting point is by organizing
(07:29):
everything that you know and just sealing itdown into a coherent framework.
The idea being if a GP has spent sufficienttime and effort truly studying their market,
they're able to design their strategy with theintent to capture a very specific
underappreciated opportunity.
Then in talking to you, all they have to do isreally tell you what that target opportunity is
(07:52):
for them, why is it attractive, and then whythey're best positioned to invest in it.
It it's simple.
There's no selling.
It's just explaining.
I have found that strategies that are notpurpose built based on some nuanced insight,
that that's where you really require someselling.
When we were last chatting, you mentioned thatmany LPs are looking for fundless sponsors
(08:13):
today.
Why are LPs interested in the space?
Institutional LPs.
We tend to love lower middle market buyoutbecause it has this potential to generate,
right, attractive returns by capitalizing onmarket inefficiency.
What you're dealing with essentially is youhave less sophisticated sellers and
intermediaries that equates to cheaper entryvaluations, and then there's usually a lot of
(08:34):
low hanging fruit in terms of value creationopportunities to professionalize these
suboptimized businesses.
Unfortunately, what happens is the mostsuccessful lower middle market buyout firms,
they quickly raise the increasingly largerfunds, and then they abdicate the inefficient
market that actually generated their success.
For us to find these groups early, ideallybacking them from the beginning in fund one, it
(08:57):
requires spending time with them even earlierin their life cycle of development to to build
that conviction.
That's the reason why LPs are now flocking tofocusing on fund less sponsors.
It essentially just represents this earlierphase of private equity investors who are just
raising capital for opportunities in the lowermarket, mid market on a deal by deal basis.
And, you know, given how difficult thefundraising environment for emerging managers
(09:21):
is today, I would say it is an opportune timeto access the highest caliber of talent that's
probably being forced to operate in thisformat.
By investing in fundless sponsor deals, are youlooking to generate alpha through those
specific deals, or is it a way to get arelationship with the fundless sponsors ahead
of a fund?
Specifically chose to, invest in fundlesssponsors for both its ability to generate alpha
(09:46):
as well as this sort of, strategic systematicapproach to then creating almost like a funnel
for, for backing fund ones.
TIFF actually has a really great set of datathat shows, you know, if you look at call it
like the top quartile cutoff for fundlesssponsor deal performance versus those of, lower
middle market buyout.
(10:06):
It does in fact, outperform across vintages.
That being said, the dispersion of returnsamongst fundless sponsors is far higher than
that of lower mid market funds, and that isdefinitely a risk that you need to take into
mind when when choosing to approach this assetclass.
Thank you for listening.
To join our community and to make sure you donot miss any future episodes, please click the
(10:29):
follow button above to subscribe.
What's the largest fundless sponsored deal thatyou've seen come across your desk?
Our allocations to these deals are prettyreasonably sized, you know, just a couple of
million dollars.
But that being said, there are now folks whoare, call it, spinning out from kind of larger,
more established name brand firms who want tojust operate kind of single assets at any given
(10:54):
time, and those can easily have equity checksizes in the hundreds and millions of dollars.
I was
hoping you would say Elon Musk's ninety sevenbillion dollar offer for OpenAI.
Yes.
I suppose it would be.
Although, I think he's got, like, three or fourfunds that would be on the hook.
Tell me about your team at Inatay.
There are seven folks, five on the investmentside and two on the operation side.
(11:16):
On the investment side, we are all generalists,although people naturally gravitate towards
different areas depending on their interestsand passions as well as background background
of experiences and expertise.
And in recruiting, I do think we probably didourselves a favor by being deliberate in
selecting for, people with these common valuesof humility, intellectual curiosity, and grit,
(11:38):
but diverse backgrounds and complementary skillsets.
So, you know, some are stronger in riskmanagement, others, private markets
underwriting, and we even have someone who diddirects.
This really creates a team with pretty wellrounded capabilities.
There's pros and cons to having generalistsversus specialists as an LP.
Talk to me about the strengths and weaknessesof a generalist team.
(12:00):
The advantage of being a generalist team isflexibility to evaluate opportunities across
asset classes, geographies, sectors.
You really can then pursue, right, the bestrisk adjusted returns rather than being
pigeonholed to any particular opportunity set.
I think it also creates a rich learningenvironment for team members since your day to
day really can vary dramatically.
(12:22):
Probably the most important aspect is increating robust investment discussions and more
folks around the table trying to questionassumptions since they're not siloed and
therefore actually are more equipped withcontext and knowledge and experience to
contribute meaningfully in reviving at highquality decisions.
(12:43):
The disadvantage of a generalist team is, youknow, the risk of being a mile wide and an inch
deep on any particular area.
And there can certainly be bandwidthconstraints in trying to prosecute on too many
things, because you can actually do all of thethings.
How we try and manage that internally is youstart each year with planning out your
commitment budget, and you also set a forwardcalendar of what your strategic priorities are
(13:08):
and then research topics for folks to dedicatethree to six months sprints.
And then you assign leads, right, foraccountability to deliver some pretty distinct
results.
What is the financial mandate for the InatayFoundation?
What are you trying to achieve through yourportfolio?
We are simply trying to generate the mostattractive risk adjusted returns, and that is
the reason why we actually have so fewconstraints.
(13:30):
We invest globally.
We don't have any asset allocation targets.
And, truly, it is about trying to capture thosethings that I had chatted about before,
innovation and market inefficiencies as webelieve that that tends to generate alpha over
the long run.
You have a flexible mandate.
How do you manage the infinite opportunities?
(13:51):
So we're about 80% committed now.
And so, you know, really reaching that steadystate where when we choose to add an additional
manager idea, it'll probably be at the cost ofneeding to exit another partnership.
A one in one out.
But really what we tend to lean on is that ideaof trying to invest, with high conviction.
(14:12):
We try once we have, elected to partner with aGP, we really try and lean on them as the
dedicated specialists that spend so much timebreathing all of the, market context and being
able to identify kind of the relativeattractiveness of opportunity sets as compared
to historic.
How do you think about diversification?
(14:33):
Diversification is important in the sense of ifthere are different drivers of fundamental
value in your portfolio, it equips yourportfolio to hopefully weather market cycles in
different areas.
But I do think that sometimes diversification,if done for the sake of diversification, just
(14:54):
creates a portfolio where any one investment issized in a way that, like, even if it's
successful, won't really be able to drive yourreturns.
That's really what we're trying to wardagainst.
And so, right, when I said concentratedportfolio construction, our portfolio is meant
to have around 35 GP relationships across theboard, at steady state.
(15:18):
And we're tracking there.
We intend to stay there.
It does mean you have to make some pretty toughdecisions in terms of keeping the bar really
high and also being willing to say, you know,if we do believe in adding an incremental
manager, you know, where in the portfolio do webelieve less has that same opportunity to
generate meaningful alpha.
(15:39):
If you're not willing to kind of make thesetrade offs and it's always consistently adding,
in in some ways, you're also not forcingyourself to make those comparative decisions as
to, what would be a better use of capital.
I had an interesting conversation with MelWilliams of Truebridge, and he was talking
about this forced ranking, how sometimes themain competitor to a fund is not actually a new
(16:00):
fund.
It's more of a great fund.
They might have a founders fund gives them moreallocation to that.
So that was, like, a really disciplined way tolook at it.
We used to do that exercise, while I was atMedley Partners, and I thought it really
enforced a lot of discipline and alsotransparency because the way that different
people kind of perceive certain GPs may changeover time, and it's just good to be able to
(16:23):
naturally surface that and and sync thosediscussions.
Sometimes brand could be a lagging indicator ofreturns.
In other words, sometimes returns depreciatequicker than the brand.
Mhmm.
Always.
And you mentioned Medley Medley Partners.
You're also at Iconic.
You're obviously at InaTie.
You've sourced GPs in many different contexts.
(16:45):
What has been the number one way to source thebest GP ideas or relationships?
There's something to this, like, top downapproach.
So if you really commit yourself to, you know,let's say, for Latin America, I committed
myself to kind of reading about each of thecomposing countries.
What were the key industries, who were the keyplayers, spending time chatting with LPs who
(17:09):
had been committed to the region for a longtime.
If you do all of that work upfront, you'reequipped with hopefully enough context and
knowledge to then be able to engage in a moremeaningful conversation the first time that you
meet a GP.
And that in and of itself, I think, is whatkind of builds a foundation for what can feel
(17:30):
like more of a reciprocal relationship oflearning.
The most talented GPs are incredibly ambitiousand smart, and they're always looking for ways
to get better.
And I think by trying to learn more so that youcan share more, that's been something that has,
I think, enhanced my ability to to source somepretty interesting GPs.
(17:51):
Are there any others of LP value add?
A lot of the times, it's just about being,like, a authentic, congenial human.
At the end of the day, money is green, and itcan come from anywhere.
But who are you actually working with on a dayto day basis?
It impacts your mood and kind of the, I think,like, the joy that you get from doing the same
(18:11):
job.
That to me is also very important, having thatpersonal touch of really getting to know people
as people.
Listen to podcast with Sahil Bloom, and he wastalking about his energy calendar, which is
going over your calendar and seeing which whichwhich, which meetings gave you energy, which
depleted you.
I think it's a really valuable exercise.
Absolutely.
LPs tend to we we always ask the GP, you know,okay.
(18:34):
So how are you being value add to the founders?
But if you think about that sort ofrelationship dynamic, the way that the GP tries
and provides value to their founders ormanagement teams should actually be also
mirrored in the way that we try and hopefullyprovide some sort of value to our GPs.
But perhaps the expectation historically hasjust been, you know, by simply providing the
(18:57):
capital, that is my value.
I I really do think that we can do a little bitbetter than that.
What are the best ways that LPs can provideincremental value to GPs?
It it parallels a lot of the same things thatthey're able to do.
GPs, you know, they try and hire and retainexceptional talent.
And that endeavor, you can send them relevantreferrals from kind of your expanded network.
(19:23):
And, of course, you'd be more equipped to dothis.
You did the landscaping exercise, kind of knowwhere some of, like, the exceptional investors
are, and also have a dialogue with them so youknow if there are certain people looking for
opportunities.
In terms of fundraising, a lot of GPs do wantto be very thoughtful and who they welcome into
the partnership fold and, and being able tokind of matchmake as to which LP institutions
(19:48):
might have similar investment philosophies andalignment.
You can make kind of more curated introductionsthat might shorten their fundraising exercises.
I think this is the also part of the beauty ofbeing a generalist.
For example, you know, we when we are thinkingabout our biotech exposure in the portfolio, we
(20:09):
have evaluated strategies that span kind of theprivate markets as well as the public markets.
And if you are structured in a particular way,you might not know what your counterparts in
the public markets or the private markets aredoing.
Being able to kind of collect that, overarchingmarket view and then relay it back to them can
(20:29):
actually maybe provide them with someincremental context that would help them, when
they're dealing with these, folks as, you know,fellow, fellow stakeholders or even in better
understanding why the market might behave incertain ways.
I've also heard on the value add is being goodthought partner, giving good feedback, getting
the right amount of feedback and encouragement,and also being either quick to act on a new
(20:54):
fund or maybe coming with ideas.
I'd like to invest in this kind of fund.
I'd anchor GP and you say, I wanna back you ina crypto strategy and you're that first check,
that's a huge value add for for managers.
It really scales.
I've heard managers with tens of billions ofdollars that would love that those kind of LP
relationships.
(21:15):
Absolutely.
Yes.
The the thought partner piece, I guess, perhapsthe same way that, you know, founders, like,
saying, my best VCs are simply the ones that Ican call up and ask any question to.
Perhaps that's that's what we should alsoaspire to on the LP side.
It's VCs to start ups, LPs to VCs, goes all theway down.
What would you like our audience to know aboutyou, about Inatay, or anything else you'd like
(21:39):
to share?
We are based in Seattle, Washington, but we aretrying to find a more more racially just
socially equitable Washington state and beyond.
What was, a bit unique in terms of ourstrategic development is in 2022, we actually
launched an investment management company, andthen last year became SEC registered.
Now we are an outsourced chief investmentoffice, and particularly, we want to serve
(22:04):
other charitable entities seeking to fundsimilar initiatives on the grant making side
and to thoughtfully select our partners.
It's such a value when an OCIO is also has adiscretionary bucket, and they're in the
business of investing, not just advisingpeople.
And, hopefully, you you like the access thatyou're able to gain in in signing up to be a
(22:26):
part of, a much larger pool.
Well, Charlotte, I appreciate you jumping onthe podcast.
Look forward to seeing you down in SanFrancisco or New York City very soon.
That would be lovely.
I'm looking forward to that as well.
Thank you, Charlotte.
Thanks for listening to my conversation withCharlotte.
If you enjoyed the episode, please share itwith a friend.
This helps us grow and also provides the bestfeedback when we review the episode's
(22:49):
analytics.
Thank you for your support.
Popular Podcasts
Stuff You Should Know
If you've ever wanted to know about champagne, satanism, the Stonewall Uprising, chaos theory, LSD, El Nino, true crime and Rosa Parks, then look no further. Josh and Chuck have you covered.
Dateline NBC
Current and classic episodes, featuring compelling true-crime mysteries, powerful documentaries and in-depth investigations. Follow now to get the latest episodes of Dateline NBC completely free, or subscribe to Dateline Premium for ad-free listening and exclusive bonus content: DatelinePremium.com
On Purpose with Jay Shetty
I’m Jay Shetty host of On Purpose the worlds #1 Mental Health podcast and I’m so grateful you found us. I started this podcast 5 years ago to invite you into conversations and workshops that are designed to help make you happier, healthier and more healed. I believe that when you (yes you) feel seen, heard and understood you’re able to deal with relationship struggles, work challenges and life’s ups and downs with more ease and grace. I interview experts, celebrities, thought leaders and athletes so that we can grow our mindset, build better habits and uncover a side of them we’ve never seen before. New episodes every Monday and Friday. Your support means the world to me and I don’t take it for granted — click the follow button and leave a review to help us spread the love with On Purpose. I can’t wait for you to listen to your first or 500th episode!