September 5, 2025 • 49 mins
In this episode, I speak with Avy Stein, Founder & Chairman of Cresset—a multi-family office known for its private markets access and co-investing model. We cover Avy’s path from Kirkland & Ellis lawyer to private-equity dealmaker, the Willis-Stein spinout from Continental Bank, why multi-strategy platforms scaled so quickly, how co-invest rights really add alpha (and where adverse selection bites), and the rise of private credit in the middle and lower-middle market. We also get into culture building at scale, how Cresset thinks about alignment with GPs, and Avy’s best career advice from four decades in law, PE, operating, and wealth.
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Episode Transcript
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(00:00):
Avi, I've been excited to chat.
Welcome to the HowInvest podcast.
Thank you.
Thank you for having me.
I'm excited to be here.
Avi, you started Crescent, which today has70,000,000,000.
And before you had a prolific career in privateequity, let's start from the beginning.
How did you get into private equity?
It was a circuitous route to be sure how I gotinto private equity.
(00:21):
I started out as a lawyer at Kirkland and Ellisand was actually very excited to be a lawyer.
Started out in litigation and then because Iwas also a CPA and had a business background,
one of the senior partners, a guy by the nameof Jack Levin, tapped me to start doing deals
and Kirkland opened up a Denver office.
(00:42):
I went out there and built a deal practice.
Pretty soon into that, what I realized was thatI liked the side of the doer of the deals
versus the side of the person supporting thedoer of the deals and began talking to certain
of my clients about potential opportunities.
(01:04):
One of my clients made me an offer I couldn'trefuse to run his oil and gas exploration and
production company and to do deals for theparent company.
It was a company called Cook International.
They own Terminix Pest Control, grain tradingbusiness, insurance business, and a real estate
development business.
So I got a very broad based experience and gotto operate and actually have my own P and L in
(01:27):
the oil and gas exploration and productionside.
So it was an offer I couldn't refuse.
I did that.
And then I got the itch to be an entrepreneur,did a consolidation strategy in the security
alarm and personal emergency space sold that.
And then went to work for another client.
It all kind of ties back to my Kirkland and howits roots it seems by the name of Harold
(01:49):
Simmons who today we would call an activist.
In those days, he was called a corporateraider.
Harold owned a number of businesses.
I was running one of the businesses as well ashelping him try to take over Lockheed.
When that failed and I was newly married andspending my life on airplanes, I decided maybe
(02:11):
I ought to reorient my career a little bit andI was offered the job of co head of private
equity of the Old Continental Banks of Illinoisprivate equity business.
I ran it with a guy by the name of John Willisand that was 1989, 1994, Continental Bank was
(02:32):
bought by Bank of America.
So, we spun out our private equity businessinto a series of funds called Willis Stein.
And that's really how I got into privateequity, a bit of a securities route.
Back then, you were writing these massive atthe time $100,000,000 checks and private equity
was still an emerging asset class for lack ofbetter word.
(02:56):
What was different back then?
How was private equity different at that time?
Private equity in those days was a veryentrepreneurial business.
You had a lot of entrepreneurial driven folkswho were out trying to raise successively
larger funds and make strategic investments,but they didn't have the sector focus
(03:20):
generally.
They didn't have the staff generally.
They weren't using consultants in the same waythat they use consultants today.
Today, everything in private equity is, youknow, Q of E by the name your favorite
accounting firm, hire McKinsey, hire Bain, hireBCG to do all the research, huge investment
(03:40):
committees, you know, lots of layers.
In those days, was a much more entrepreneurialbusiness, and there weren't that many funds
above $5,000,000,000.
So it was really a a much scrappier businesstoday.
It is a far more institutional business.
I interviewed a former partner at Carlyle whowas recruited by David Rubenstein, and he
(04:04):
talked about how Carlyle really revolutionizedhaving multiple funds within a franchise.
As somebody who was in the industry at thattime, how did that affect how you were running
your funds?
Well, one of the biggest regrets I have in theprivate equity business and by the way, I'd
still be likely in the private equity businessexcept in 2010, I was very sick, and so I
(04:27):
retired.
That was before GP stakes and all thesecontinuation things that you could do.
So when I retired, John had already retired.
So when I retired, he was pretty much windingthe fund down doing one annex fund.
But one of my biggest regrets was in rightaround 02/2001, actually right around
(04:48):
nineeleven, we were going to launch a creditvehicle and nine eleven happened and we kind of
lost our nerve, thought we needed to be insularfor a while.
And obviously what Carlyle pioneered and othershave pioneered including Apollo and Ares and
others is the multi strategy private fundsgroup and that, you know, 59% of all the
(05:12):
capital raised last year was raised by sixgroups like that.
And so that was the right idea and it didn'taffect us because we didn't let it affect us
because 2001 and then we became very insular.
But it was definitely the right idea and one ofmy great regrets that I didn't follow through
with that at the time.
(05:32):
And the argument is that if you're in theinvestment as a private equity investor, you're
gonna have a better vantage point on whetherthat business could return capital from a
credit perspective.
So there's this synergy between the privateequity and the private credit part of the
business.
Well, I think that's I think that's oneargument and a very good one.
I think what's happened more from a businessperspective for these funds is distribution is
(05:59):
incredibly expensive and a big deal.
So if you're creating a group of folks, I thinkCarlyle today has over 100 people that are on
their distribution team.
So it's a lot to pay to be distributing oneprivate equity fund.
It's a lot better if you have sector specificfunds, credit funds, you have other types of
(06:25):
vehicles.
So yes, there is similar expertise in creditand private equity, although I would argue
there are some specific skill sets for each.
But I think it's more about the business ofbeing in the private markets and the fact that
distribution is so important and yet soexpensive.
And to be able to spread that distribution overa group of vehicles makes a lot more sense.
(06:50):
Distribution being getting investors, gettingendowments, pension funds, but also today
retail.
Well, yes.
I might not use the word retail.
I think what I would say more is that thewealth, multi family office channels today are
about the same size, almost the same size,maybe a tiny bit smaller than the warehouse
(07:14):
channel.
So you have the warehouse channel, which isabout $10,000,000,000,000 You have the same
thing on the RIA side is about$10,000,000,000,000 So there's
$20,000,000,000,000 between RIAs andwirehouses.
$20,000,000,000,000 is a very big area andunder penetrated as compared to the
(07:34):
institutional side, which would be pensionfunds, life insurance companies, endowments,
and foundations.
That's one of the largest kind of non wirehousepools of capital in the country.
You guys have grown from, I think, a couplebillion assets to $70,000,000,000 extremely
quickly.
Yeah.
70,000,000,000.
(07:55):
And you now get the choice of whether you wannaallocate to the Carlyle or the Blackstone's,
which has all these advantages, brands.
There's an old saying you don't get fired forhiring IBM versus maybe more of these
entrepreneurial private equity funds or thesesmaller ones are focusing on the lower middle
market.
(08:16):
Talk to me about the trade offs.
Is there ever a reason to go with the largeprivate equity funds?
If so, when?
It's such a great question.
It's such an interesting topic that we couldtalk about for the rest of this interview.
But it doesn't make sense to me to say thatwe're going to be closed to some of the largest
(08:36):
players.
But it does make sense to me to say that wewant to do things that are differentiated with
them, whether it's the way in which we might coinvest with them for being a limited partner or
the way in which we might see new vehicles thatthey're putting together.
But we don't want to be close to them.
In general, I think that firms like oursbelieve three things are better.
(09:02):
They believe that earlier funds are better thanlater funds.
They believe that sector specific funds performbetter than generalist funds and they believe
that smaller funds in general perform betterthan larger funds.
But those are general rules.
So we do do a lot of middle market and lowermiddle market investing and fund investing.
(09:26):
But like I said, we don't wanna be closed tothe mega funds.
We wanna find out ways to use our capital likea sovereign wealth fund would to create unique
access points and differentiated investmentopportunities for our clients.
I often tell the story of when we were raisingour third Willis Stein fund and I got a call
(09:46):
from a Middle Eastern sovereign wealth fund andthey said, we want to invest $100,000,000 in
your fund.
A $100,000,000 is a lot of money at that time.
I said, that's great.
What do you need?
And they said, well, we need a co investment.
I said, okay, well, of course you'll get coinvestment rights with an investment of that
size.
And the person on the other end of the fundsaid, no, you don't understand.
I need to co invest in something you've alreadydone.
(10:08):
So, okay.
What else do you need?
And he said, well, I need you to come over hereto The Middle East and present the co
investment and your fund over the next sixtydays and and and then, you know, we'll we'll
see if we're going to do this but we're highlyinclined to do it given your reputation.
I said, great.
In thirty days, I was over there and I hadconvinced one of the entrepreneurs that we'd
(10:30):
invested in to allow us to add some capital toit so I could create a co invest.
And I would have done, you know, I would havejumped through all the hoops I needed to jump
through, including going to The Middle East atthe drop of a hat in order to get that
$100,000,000 investment.
So today, the large RIAs like us, especiallythose that are focused on the ultra high net
worth and family offices and allocate, youknow, $100,000,000,000 of capital are a target
(10:56):
for large funds and small funds.
What kind of terms are you able to get beingsuch a large investor on the co invest?
Is this typically some guarantee for somenumber?
Is it some first rights?
And what's kind of the best in class terms thatyou're able to negotiate?
There isn't there isn't one simple answer tothat because every every asset class, every
(11:23):
manager is different just to give you somegoalposts, for example.
In venture capital, it's about access.
It's about getting into those top decileperformers that are largely closed to anything
that isn't a foundation or an institution.
And we've been able to crack that, a lot ofhard work and a lot of relationships, but also
(11:46):
by showing them the consistency and who ourclients are very desirable for them.
Because a lot of our clients are wealthcreators and people who are creating businesses
that they want to invest in.
So we've been able to crack that.
So it's all about access there and it's aboutco invest access.
And sometimes you get co invest for free inventure capital, and sometimes you're you're
(12:09):
still paying one in 10 or something that lookslike 1% fee and and 10% or sometimes just an
access fee and that's all over the place.
With a larger private equity fund, which whichtrying to do is to be a seed investor in
something that they wanna launch, that might bedifferentiated for them, something that's a new
vehicle, where we might get a little bit of GPeconomics and some co investment rights.
(12:32):
It's very unusual that you're negotiating feebreaks, but that does happen once in a while as
well.
More so in places like real estate, maybecredit.
On the credit side, you can often get that.
I'd rather professor Steve Kaplan fromUniversity of Chicago, and he calculated just
what co invest rights mean on an IRR basis.
(12:54):
So if a fund is returning 25% gross IRR on netbasis, that's 19%.
Said another way that if you were to invest allof it on a zero and zero basis, you get kind of
six six hundred extra basis points.
Or if you do one to one, it's 300 extra basispoints.
So it it is a pretty significant source ofalpha if and when you can negotiate it.
(13:16):
And also big caveat, if and when you know howto not be adversely selected, in your co
investments.
That's a great point.
Steve is very thoughtful and very good.
I've known Steve since I was in the privateequity business.
And my son was recently a student of his, sothat was kind of fun.
Steve's great, and he's right about that.
(13:38):
The adverse selection thing is really animportant point.
Right?
So many foundations and institutions don't havethe kind of experienced staff to make decisions
on these co invest.
We have, you know, a huge investment staff,people who have been in the private equity
business for years.
(13:59):
So we hope to avoid the head for selectionissue.
The more powerful thing even than the co investis when you can be lucky enough to help seed
something for a manager, a new fund, adifferentiated fund, something that they, you
know, they really want really wanna do andreally wanna get off the ground quickly.
(14:20):
And you can get some GP economics as well sothat you're you're you're not only getting some
co invest rights, but you're also participatinga little bit in the carry is is really where
where the the unique opportunity comes.
Maybe you could double click on the seatingopportunities maybe without giving the exact
name of a manager.
(14:41):
What do some of these opportunities look likewhen they come on your desk and you decide to
pull the trigger?
Pick one that would be interesting.
You've got GP stakes.
You know, the issue with GP stakes today isthat most of those investments were done
without a liquidity provision.
In other words, you have a a perpetual feestream which is very nice but there's no way to
(15:07):
monetize that fee stream And different thingshave been tried.
Secondary sales typically are at a discount, sothat's not a great event.
Although, you know, it may be better than nothaving a liquidity event.
So if someone was looking to launch a perpetualGP stakes vehicle that would have in it its own
(15:30):
internal liquidity like a an interval fund, atender offer fund.
That's something that maybe we would seed andwe would be part of the GP.
Something like that, something new that'sdifferentiated.
I just use that one because, it's it'ssomething that we we are looking at and
thinking about.
It kind of goes back to Procter and Gamblemodel.
You only you keep one pivot foot.
(15:50):
So you either do new product with the samecustomer or a new customer with the same
product.
So you like to seed not a new relationship, butyou like to seed an existing relationship with
a new product.
You can do that.
That is true.
Or, one of the things that's important and mostimportant is team.
(16:11):
So we're okay seeding a fund, a first fund fora team that spun out of and has a track record
as a team, as long as it's the team, right?
And or largely the team.
What we're not okay is people are just comingtogether for the first time and from disparate
(16:33):
places usually aren't excited about doingthose, but, you know, there are always
exceptions to every rule.
And as you mentioned, you your 70,000,000,000AUM, your 100,000,000,000 including assets
under advisement, You're starting to approachthis very large pool of capital, comes with its
its own challenges.
(16:53):
How do you retain alpha with going around witha $100,000,000,000, and how do you practically
operationalize that in a way that keeps yourclients kind of getting out in the market?
Yeah.
You know, there's 12,000,000,000,000.
If we're just talking private markets, there's$12,000,000,000,000 between now and 02/1930.
(17:15):
It's going to be private investments byindividual investors.
In other words, non institutional investors.
There's a lot of places to put capital.
We are not yet at a point where it'sconstrained.
Now people often say, well, what about theones?
What about the ones where you can only write$20.30, $50,000,000 checks?
Well, the answer is those have to be in apooled vehicle.
(17:37):
So you're not going to do direct co investmentsvery often in, you know, venture capital
opportunities where you only have a 20 or$30,000,000 allocation.
That's gonna have to be part of a co investvehicle.
So, you can still create the alpha.
The only thing that you're not getting ispeople who like to kick the tires and do things
(18:00):
by the each.
They're not getting that opportunity in thosesmaller smaller vehicles.
I personally don't think that's an issue.
There are some financial advisers and investorswho think it is, but it's just the nature of
it.
I think there really isn't a choice.
So the larger co investments, the larger fundinvestments can be done direct as a one by one.
(18:22):
The smaller ones have to be in pool vehicles.
When I think about co investments, I thinkabout it as all about incentive alignment.
So there's two aspects to it.
They're like, where are the incentives for themanager, and also is the manager good at their
craft?
So if you think of kind of a two by two matrix,you could have somebody that's very good at
their craft that has bad incentives, probablyeven worse than somebody that's not good at
(18:46):
their craft and has good incentives.
We we could argue that.
But, what I really wanna double click is whenyou create these pooled capital and when you
negotiate with GPs, how do you make sure thatyour incentives are aligned and how much
thought goes into that very question?
So
when we're creating a co invest vehicle, we arenot charging our clients anything for that co
(19:08):
invest vehicle.
So our incentives and our clients' incentivesare 100%.
What we're trying to do is to get the bestreturns for our clients.
So what we're looking at is making arrangementswith GPs who we believe are gonna create
interesting opportunities for us to invest andmaking sure that we are to use your vernacular
(19:32):
double clicking on the diligence to see that weagree with them in where these investments make
sense.
Their incentives are twofold.
Right?
Raising more capital and the need to create coinvestment.
They want to raise more capital that they getfee and carry on.
So they know that it's a necessary evil tocreate some co investment so large capital
(19:56):
sources will invest with them because that'swhat they require.
But they also have incentives sometimes to todo larger deals than perhaps their fund size
would dictate.
And in those situations, they need the coinvestors.
So they they have two sets of of of incentives.
And we obviously wanna be part of both and bethere for them when they need us, as well as,
(20:21):
creating a better return as Professor Kaplantells us through the co invest vehicle.
By the way, this was an interesting article, Ican't remember exactly where it was, but it was
about David Swenson.
And it was about that everybody believes thatDavid's brilliance in the Yale model was
because he was first into private markets in avery large way.
(20:44):
And that is true.
That is a big part of his brilliance.
But what also was part of his brilliance andwas pointed out in this article was his ability
to get to know GPs early on and to be a greatpartner to these GPs.
So having been a GP, I understand their side ofthe equation.
And what we try to do is to be great partnersto them from the beginning, so that there is a
(21:08):
series of opportunities that when they think oflaunching things or doing something
differentiated, or when somebody spins out ofthose GPs, think of us because they know that
we are there for them, to advise them, to tellthem what will work and to to be there if they
need additional capital for something or theyneed to seed something that they wanna start.
I'm always fascinated double clicking on theselong term games with long term people.
(21:32):
This this Naval quote of how do you play theserecurring games with the same actors and how do
you build build relationships over years andsometimes decades.
Unpack a relationship like what you're talkingabout where you're investing with them early
and then you're you continue to invest.
And how does that start?
And is it kind of always quid pro quo, or isthere just this reputational relationship
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capital that builds and you're kind of alwaysgiving to each other?
So double click on that a little bit.
I, you know, I hesitate to say any namesbecause there's confidential provisions and
all.
So so there is one very well known name that isone of the top six that I mentioned that raised
(22:17):
59% of the capital that we as a firm and someof our predecessors have been investing with
over a very long period of time.
And we have invested in many of their vehiclesthat span credit, GP stakes and other related
(22:40):
investment vehicles.
And the idea is that we have the kind ofrelationship where when they're launching
something or thinking about something, we'retalking to them early and they're gauging what
our appetite might be for that and we'regauging, you know, how we see it and whether it
fits or not.
Just double click on kind of why the how thoserelationships build out.
(23:06):
Businesses, people, and this is no different.
It can become very transactional, and andthat's unfortunate, it should always have that
element of relationship and culture.
And when you can be consistent in the way thatyou approach things and they are consistent in
(23:26):
the way they approach things, you do build up acadence and trust that I think you know, is is
makes it much easier, to get to yes on aninvestment.
It's not unlike a co investment opportunitywhere in beginning, you're diligencing the
manager, and then you're only diligencing theactual underlying company.
(23:47):
So there's almost like this two step two stepdiligence, and it's it's
all And and we're all human.
We all have things, you know, that we do betterthan other things.
And we all have mistakes that we makeconsistently, and we try to learn from, and we
all have our own frailties.
So you learn, you learn what is the sweet spotfor someone and why it makes sense to invest
(24:09):
with them in those kinds of things and maybenot in other things that are not perfect for
what you're trying to accomplish.
In that vein, have has there ever been asituation where a GP has given you back the
money because the strategy no longer made senseor made a mistake and communicated well that
you backed that GP in another fund?
(24:31):
In in what cases did that happen?
There has been a case where we backed a GP andthe strategy got overpriced very quickly.
And we went to the GP and said, look, you know,we we have given you a commitment.
(24:55):
We don't think it's in your interest or or inour interest to continue down this road.
Why don't we work something out?
We've made one investment.
Let's, you know, maybe if there's anything inprogress that we think we're committed to do,
let's do and then let's not go forward.
Let's you release us from our commitment.
(25:16):
We'll make sure that we deal with you fairlyAnd and that was the right thing to do at the
time, and it didn't work out.
No.
I've not we've not done another thing with thatparticular GP, but we would because it it
worked out well.
Taking a step back, when it comes to pickingprivate equity firms and your first commitment
into them, what's the criteria that you lookfor and how's that evolved over your career?
(25:41):
When I started in the private equity business,people would ask me what was important in
private equity and how do you make decisionsabout investments?
And I would say, oh, you know, it's aboutindustry dynamics, competitive positioning, and
people.
And if you'd asked me ten years into it, whatwould I say?
I would say it's about people, culture, people,culture, and that the industry dynamics and the
(26:07):
competitive positioning are table stakes.
You have to have it.
But, you know, you really need the right peopleand the right culture.
And in today, depending on the asset class,some of it's about sourcing, some of it's
about, you know, what happens when things gobump in the night.
(26:29):
But in the end, it's always about having theright people with the right reps and the right
backgrounds.
And perhaps it's painstakingly obvious, butmaybe you could double click why it's people
and culture and how that plays out within amanager.
Look, everybody makes mistakes and andeverybody makes hiring mistakes, everybody make
(26:50):
strategic mistakes, investment mistakes.
You miss things, right?
I look back on the There were two investmentsthat I made that I wish I had mulligans on and
I look back and say, well, how did I do that?
How did I make those mistakes?
It was always somebody in the daisy chain thatyou should not have trusted in the way that you
(27:16):
did that gave you information that turned outnot to be what you what you learned it to be
ultimately.
Now that's not to say people can't be great andstill make mistakes.
They can't.
The best investors still not gonna bet athousand.
Ted Williams didn't bet a thousand.
Nobody bets a thousand.
But but it is to say that you can usuallypinpoint if you do a postmortem where you went
(27:40):
wrong, what you missed.
And, you know, without getting into tremendousdetail, it's usually something that was in
hindsight painfully obvious and if it was theright person doing the right digging might have
been a little bit more of a factor in yourinvestment decision.
As you build out you're also building out apretty sizable organization.
(28:07):
And how do you set the culture and the policiesin a way to make it succeed?
When we started Crescent, first thing we did,there were I think 10 of us at the time.
We went off-site with a woman by the name ofLaura Desmond, who had just retired as the CEO
of Starcom Media, whose specialty was brandblueprint and culture.
(28:33):
We spent three days off-site talking about whatour culture needed to be and where we wanted to
take it.
That got memorialized in a one page culturecard, which exists today.
We review it all the time, I would say,formally annually, but all the time.
(28:54):
And there's only been a couple of very smallchanges to that culture card, over time, which
goes through our spirit, our behaviors, and allof the things that we measure ourselves on.
We try very hard to hire against those factors,and we try very hard to weed out when those
factors are not being adhered to.
(29:17):
It's not perfect.
Culture is not a perfect game.
You're going to make some mistakes and have toadjust.
But so long as you hold yourself up to it andyou understand what your key tenants are,
right?
So for Crescent, it's built by clients forclients.
It's having the use of our scale for thebenefit of all of our clients and the full
(29:37):
alignment with our clients, putting our clientsfirst without ever losing that boutique feel.
It's extreme accountability.
It's optimistic energy.
It's all those things.
And when we have members of our firm that arenot exhibiting those things, we make changes.
One of the things that I always try to improvemyself is how to hire for culture.
(30:00):
It's much easier to hire for quantitativeskills.
How do you suss out somebody's culture fit inthe hiring process?
It kind of depends on the level.
If you're looking at the very top levels, Ihighly recommend and you can, I will use his
name because you can do that using GH Smart,Jeff Smart?
(30:22):
It's yeah.
Yeah.
I mean, you really wanna put people through thepersonality paces, and and when you don't do it
is when you make mistakes.
And we've made it.
I mean, you you if you really wanna understandwhat motivates people, what their strengths
are, what their weaknesses are, and the type ofmanager they are and the type of leader they
(30:43):
are.
So at the highest level, I I mean, I reallythink you do have to do the assessment.
As you go lower down in the organization,personality profiles are okay.
You know, we do use personality profileindices.
There are a number of those that you can usethat helps.
But there is some pattern recognition that youcan get to by giving people scenarios and
(31:10):
seeing how they react to those scenarios.
How do you react when a person does this?
What's your reaction when someone tells yousomething that you find out is not factual.
Those are the kinds of things that you canlearn a lot about what they're really about.
So use the PPI stuff, use, other, personalityentities if you like them, but ask questions to
(31:33):
elicit how people will behave in certaincircumstances.
And then at the very top levels, I really dothink you need an industrial psychologist
review.
I read Jeff Smart's book back in 02/2008, mysenior year in college.
And the I think the best way to explain it isthat people do not change, so all hiring
(31:54):
processes should be based on their track recordof behavior.
And how you phrase it and how you getreferences to tell the truth and all those
things that's detailed in the book.
And that's that's kind of the how to.
And but I think it's an interesting thing thatif you look at people's track record of what
they're doing, aka don't listen to theirnarrative or they're selling themselves in the
(32:18):
interview, you're gonna get much better hiringdecisions.
No question.
But I do like also something that Jeff says,which is you wanna ask the same questions to
the same, you know, to a group of people.
So you're getting some comparative data.
But I also like to add the, you know, thescenario questions and and see how they react
(32:40):
to the scenario questions.
Kind of hypothetical.
If you were in the the situation, what wouldyou do?
Yeah.
Yeah.
So last time we were chatting, you corrected meand telling me that lower middle market where
it's a place that you guys are very active in,there is an opportunity to have financial
leverage on investments.
(33:00):
So tell me about the lower middle market and A,where's the opportunity set and how do firms
invest via using leverage just like the largefirms do today?
Maybe we take a step back and talk about thedifference between where lending is generally
today and where it was maybe ten years ago.
(33:23):
So today, you have many opportunities forleverage.
And those opportunities are, you know, banksyndicated loans, which at the higher end still
are the largest share of the market, but areless so in the middle market and the lower
middle market.
(33:45):
Sponsor credit today is much higher share ofsponsor credit is private debt over private
credit than there used to be.
There are even unique lenders in the lowestpart of the middle market that will do somewhat
(34:05):
of asset based stretch loans.
And there are more and more players coming inevery day and more and more products being
launched by the areas of the world and even thelargest players.
So if you really think about what's happenedsince the GFC, you've seen a proliferation of
private credit.
(34:26):
That was starting to happen in 2010, 12/14,those areas.
But where it really accelerated was 2019 whenrates started to change and you could really
make good returns investing in credit.
And today, you might say an average is probablyabout 11% return on a sponsor credit in the
(34:48):
middle market, maybe 11.5% or higher in thelower middle market for senior debt risk.
What's the difference in the middle market ofthe lower middle?
Lower middle market, you have the risk that thecompanies are smaller and things go bump in the
night.
It's easier for them to not not be there Butyou're using a little bit lower leverage.
So maybe four times or less versus, you know,four and a half to five times or less in the
(35:12):
upper side of the middle market and you'regetting a little more spread.
You might be getting another 120, 140 basispoint spread in the lower middle market to
compensate you for the risk.
But there is plenty of capital available toleverage in the lower middle market, especially
for sponsor credit.
And why is that?
Because when I started in private equitybusiness, my first deal was 10% equity and 90%
(35:36):
debt.
You know, that was 1989.
Today, very few deals aren't pretty close toone to one.
Right?
So you're putting a dollar of equity in for adollar of leverage in.
And there's more dry powder in the equity sidestill than there is on the credit side.
So everybody's so worried about this big blowup in private credit and you read a lot about
(35:57):
it.
I personally am not concerned.
It'd be easier to say I am concerned becausethen if it happens, I look smart.
But I really believe that, you know, in sponsorcredit with solid sponsors, it is not a highly
risky proposition because you've got a dollarof equity behind the dollar of debt.
(36:19):
And the one thing you know is that GPs abhor azero.
They don't want a zero.
So, you know, if things get a little scratchy,they're going to put more money and if things
are really awful, you know, sure.
But so I think that the proposition is that theprivate lenders are taking, they're taking a
lot of share from the banks, and they'reproviding a lot more liquidity in the market
(36:42):
and because rates are high enough today toprovide a return to the investors, people are
pouring in because if you can make eleven,twelve, even 10% on senior debt risk and
private equity over a long period of time is13% with a lot longer duration and a lot more
risk, you can see why people are allocatinghigher and higher amounts to the private credit
(37:04):
side.
I wanna double click on something veryinteresting.
There's a game theory to the private credit inthat the private equity funds do not, to your
point, wanna do a zero, and the private creditis senior to the private equity.
So there's this incentive to follow, I guess,put good money after bad into some of their
(37:25):
struggling deals.
Yeah.
I mean, I good money after bad has a pejorativeconnotation, so I'd I'd I'd probably stay away
from that.
But what I would say is if you're a privateequity investor and you've used a lot of
leverage, even in the lower middle market,you've used four times.
(37:47):
And a business starts to struggle, andespecially in the upper middle market or the
higher end where it might be six, seven timesEBITDA leverage.
And the business starts to struggle, you have achoice to make.
And that choice is risk the possibility oflosing the business entirely or delever and
(38:09):
maybe hurt your returns, but still make somereturn, some reasonable return.
And usually, decision to delever is the rightdecision.
Now, that's not true in a scenario where you'vetotally missed something that has fundamentally
changed the industry, right?
(38:29):
So Google comes into the marketplace andmagazine publishers are gonna really struggle.
And that was one of my failings.
We had a big magazine publisher when Googlecame into the market marketplace and throwing
good money after bad there probably didn't makesense, right?
That was good money after bad.
(38:51):
But, know, manufacturing business, there's somenew technology, it hurts a little bit, but
doesn't kill it.
You delever, maybe you're gonna make an eightor 10% return instead of a 13 or 15 or 18%
return.
It's better than losing your money.
So I think that's the bet, and that's the rightstrategy for most private equity firms in those
situations.
One of the unique aspects of your large pool ofcapital is that it's mostly taxable.
(39:16):
I know there's some probably nontaxable CRTs orIRAs, etcetera, but mostly taxable.
Have you found a solution on how to give accessto credit in a tax efficient way?
Yes, it's not for everybody, but there are acouple of things that work very well.
(39:37):
One thing that works very well is obviously thesmaller investor that has an IRA, four zero one
ks, putting it in those vehicles.
So that works for a lot of people.
For larger investors, for very wealthyfamilies, setting up insurance dedicated funds
using private placement life insurance orprivate placement variable annuities is a
(40:00):
really good strategy.
Now, there's a lot of complexity to that.
It's not an automatic easy button.
But if you can work through the complexity forvery wealthy investors, those strategies are
less than a 100 basis points of cost for theinsurance piece of it and you shelter the tax.
(40:25):
If you could go back to 1980 when you graduatedHarvard Law School and you were just getting
into your, legal career, which which thenturned into private equity and now now with
Crescent Partners, what would be one piece ofadvice you could give yourself that would
either accelerate your career or maybe help youavoid a mistake?
(40:47):
One piece.
Well, you let me start with what I tell youngpeople today.
I tell young people that you are going to have,you know, the lion's share of a piece of a
puzzle.
And it's imperative that you do that the bestyou can possibly do it.
(41:09):
And you work your tail off to get it absolutelyright and keep asking questions about how to
make it better.
That's step one.
Step two is you understand where that piece ofthe puzzle fits into the overall puzzle.
And you learn as much as you can about how itfits and how the overall puzzle works.
(41:36):
In shorthand, you have a perch.
And from that perch, can see a lot of things,make sure you take it in, make sure that you
understand how everything works.
So if I could go back to myself, those timeswhere I got hyper focused on just the little
piece and didn't understand the bigger piece, Ididn't advance as much as I did in those
(42:01):
situations where I understood how everythingfit together.
And so my best advice to the 24 year old me orthe whatever would be that, right?
Guess 25 year old me if it's nineteen eighty.
Make sure that you understand how everythingworks.
(42:22):
Never stop learning.
And today, in today's world, lifelong learningis so much easier than it was in my world.
And continue to pursue other ways to learnaround the periphery of that one puzzle piece
that you have.
I think that would be the best advice I couldgive.
(42:44):
Generations are so different today.
We talk about work life balance and generationsnow.
Work life balance for me growing up was worklike a dog so that when you're older, you can
have some balance.
It just wasn't the same as what it is today.
So I think if I could give a second piece ofadvice, it's really be present in those moments
(43:11):
where you're having that balance.
In other words, if you're at an event for yourspouse or your child, know, really be there and
then go do what you gotta do work wise.
I can think of so many times when I wasn't aspresent as I might have been.
Know, I remember coaching my son's hockey gameand, you know, I'm in the middle of a deal and
(43:35):
you know, the phone's ringing and I'm and I'mlike, oh my god.
Just be present for that hour or hour and ahalf and and then go do your thing afterwards.
So that would be the other piece of advice I'dbe is always be present in whatever it is
you're doing.
We touched on earlier one of your regrets ofnot building out the credit side of the
business, but you clearly have made some verygood calls.
(43:58):
What's the best career call that you made overyour entire career?
What's the best bet that you made and and endup being very fortuitous?
It's gonna sound almost Pollyanna ish, but,I've enjoyed every step of the journey.
(44:18):
So the call to be a lawyer, know, after havinga business background was probably a great
call, even though in hindsight, I did it over,I might have started in business because that's
where I ended.
But I learned a lot being a lawyer.
I think that those relationships also havesuited me really well over time.
(44:42):
So I would say that was a very good call.
Going out and actually having to make a payrolland starting something with my own money was
also a huge call because until you've donethat, it's very hard to tell people how to do
it.
And it creates an enormous sense of respect forwhat it takes to operate a business.
(45:04):
Very few people are great operators.
That is definitely the skinniest set of peoplewho can really operate a business.
There are a lot more people who can makeinvestments than people can actually really
operate a business.
So, that was, I think, really critical in mydevelopment.
Having worked for people who were doing so manythings in the public marketplace that were so
(45:28):
unique and differentiated like Harold Simmonswas huge for me because, you know, I ended up
being a private markets person, but myknowledge of the public markets and how they
work in all the various securities.
That was a great call for me.
Going into the private equity business, which Ihad no idea I was going to do that.
It was, you know, it turned out to be really anatural move from having been an operator, a
(45:53):
lawyer, having done a lot of deals.
It was a great move.
And so I think that was a great call.
And then I didn't mention that when I wasrecovering from cancer in 2011 and decided I
(46:13):
wanted to do something instead of startinganother private equity business, which would
have been the natural thing to do, I decided tobuild another operating business.
I built an alternative energy developmentcompany and then sold that.
And that was a great chapter.
It was a great call because it got me back intowhat I love to do, which is build things.
But of all those things, and it's gonna sound,I don't know how it's gonna sound, but I always
(46:41):
pinch myself that Eric Becker and I gottogether, started investing our own personal
capital, buying some companies, doing some realestate things.
And then realizing that there was this enormousopportunity to build something that not only
optimizes wealth for ultra high net worthindividuals, but also optimizes their lives.
(47:04):
And to build something that was built byclients for clients, taking the clients land,
creating this enormous alignment and buildingsomething that really didn't exist.
And I would say still today, Crescent is verydifferent from all of the competition because
we optimize wealth, we optimize life, we createlifelong learning for all of our clients.
(47:28):
We create unique investment opportunities.
We create unique opportunities for them toenjoy their lives, their lifestyles, pay their
bills, do their taxes, everything in one place,one neck to grab, outsource family office.
And I actually think that's my crowningachievement that I think that is the thing that
(47:49):
I am most proud of because, you know, we'rehelping thousands of people to really live a
great life and to maximize their wealth andcreated something that really didn't exist
before Crescent.
That's so interesting because you have thiscareer of stacking these skills that together
there's probably you're the only person in theworld that has all these skills, legal, then
(48:13):
private equity, then then dealing with with thepublic markets, dealing with alternative
energy, dealing with family office.
And I I failed to double click on this, butCrescent was started because you had the same
pain point.
You didn't need any more money clearly based onyour track record.
You wanted to solve your own problem and thosethose are oftentimes some of the best
(48:35):
organizations.
Yep.
Find a need.
I mean, we talked before about perch.
That was my perch.
Find a need.
Sit on a perch.
Find a know, people talk about, oh, I'm gonna abusiness.
My own son came out of University of ChicagoBusiness School and you know, his first
reaction was I'm going to start something.
I said, well, what are you going to start?
I don't know.
Does it matter?
Hell yeah, it matters.
(48:56):
Start something that you know.
Start something that you've seen, startsomething you know there's a need.
Well, you can find things that there's a needeven though you haven't been in a related
business, but it sure helps if you've been in arelated business.
I like the whole thought experiment is youshould only start a business that won't get out
of your head.
You try to you try to procrastinate startingin, and it keeps on saying, you need to start
(49:17):
this.
Like, this is a pain.
I keep on having this pain.
Other people have this pain.
I have to start this business versus thisromanticized idea of being an entrepreneur.
Absolutely.
Well, Avi, this has been absolute masterclasson private equity RIAs, building enduring
businesses.
Thank you for jumping on.
I look forward to continuing this conversationlive.
(49:39):
Thank you, David.
I would love to do it anytime, and yourquestions were great, and your style is great.
And it was a lot of fun to do it.
So anytime.
Thank you.
Anytime.
Happy to help.
Alright.
Thanks for listening to my conversation.
If you enjoyed this episode, please share witha friend.
This helps us grow.
Also provides the very best feedback when wereview the episode's analytics.
Thank you for your support.
Avi, I've been excited to chat.
Welcome to the HowInvest podcast.
Thank you.
Thank you for having me.
I'm excited to be here.
Avi, you started Crescent, which today has70,000,000,000.
And before you had a prolific career in privateequity, let's start from the beginning.
How did you get into private equity?
It was a circuitous route to be sure how I gotinto private equity.
(00:21):
I started out as a lawyer at Kirkland and Ellisand was actually very excited to be a lawyer.
Started out in litigation and then because Iwas also a CPA and had a business background,
one of the senior partners, a guy by the nameof Jack Levin, tapped me to start doing deals
and Kirkland opened up a Denver office.
(00:42):
I went out there and built a deal practice.
Pretty soon into that, what I realized was thatI liked the side of the doer of the deals
versus the side of the person supporting thedoer of the deals and began talking to certain
of my clients about potential opportunities.
(01:04):
One of my clients made me an offer I couldn'trefuse to run his oil and gas exploration and
production company and to do deals for theparent company.
It was a company called Cook International.
They own Terminix Pest Control, grain tradingbusiness, insurance business, and a real estate
development business.
So I got a very broad based experience and gotto operate and actually have my own P and L in
(01:27):
the oil and gas exploration and productionside.
So it was an offer I couldn't refuse.
I did that.
And then I got the itch to be an entrepreneur,did a consolidation strategy in the security
alarm and personal emergency space sold that.
And then went to work for another client.
It all kind of ties back to my Kirkland and howits roots it seems by the name of Harold
(01:49):
Simmons who today we would call an activist.
In those days, he was called a corporateraider.
Harold owned a number of businesses.
I was running one of the businesses as well ashelping him try to take over Lockheed.
When that failed and I was newly married andspending my life on airplanes, I decided maybe
(02:11):
I ought to reorient my career a little bit andI was offered the job of co head of private
equity of the Old Continental Banks of Illinoisprivate equity business.
I ran it with a guy by the name of John Willisand that was 1989, 1994, Continental Bank was
(02:32):
bought by Bank of America.
So, we spun out our private equity businessinto a series of funds called Willis Stein.
And that's really how I got into privateequity, a bit of a securities route.
Back then, you were writing these massive atthe time $100,000,000 checks and private equity
was still an emerging asset class for lack ofbetter word.
(02:56):
What was different back then?
How was private equity different at that time?
Private equity in those days was a veryentrepreneurial business.
You had a lot of entrepreneurial driven folkswho were out trying to raise successively
larger funds and make strategic investments,but they didn't have the sector focus
(03:20):
generally.
They didn't have the staff generally.
They weren't using consultants in the same waythat they use consultants today.
Today, everything in private equity is, youknow, Q of E by the name your favorite
accounting firm, hire McKinsey, hire Bain, hireBCG to do all the research, huge investment
(03:40):
committees, you know, lots of layers.
In those days, was a much more entrepreneurialbusiness, and there weren't that many funds
above $5,000,000,000.
So it was really a a much scrappier businesstoday.
It is a far more institutional business.
I interviewed a former partner at Carlyle whowas recruited by David Rubenstein, and he
(04:04):
talked about how Carlyle really revolutionizedhaving multiple funds within a franchise.
As somebody who was in the industry at thattime, how did that affect how you were running
your funds?
Well, one of the biggest regrets I have in theprivate equity business and by the way, I'd
still be likely in the private equity businessexcept in 2010, I was very sick, and so I
(04:27):
retired.
That was before GP stakes and all thesecontinuation things that you could do.
So when I retired, John had already retired.
So when I retired, he was pretty much windingthe fund down doing one annex fund.
But one of my biggest regrets was in rightaround 02/2001, actually right around
(04:48):
nineeleven, we were going to launch a creditvehicle and nine eleven happened and we kind of
lost our nerve, thought we needed to be insularfor a while.
And obviously what Carlyle pioneered and othershave pioneered including Apollo and Ares and
others is the multi strategy private fundsgroup and that, you know, 59% of all the
(05:12):
capital raised last year was raised by sixgroups like that.
And so that was the right idea and it didn'taffect us because we didn't let it affect us
because 2001 and then we became very insular.
But it was definitely the right idea and one ofmy great regrets that I didn't follow through
with that at the time.
(05:32):
And the argument is that if you're in theinvestment as a private equity investor, you're
gonna have a better vantage point on whetherthat business could return capital from a
credit perspective.
So there's this synergy between the privateequity and the private credit part of the
business.
Well, I think that's I think that's oneargument and a very good one.
I think what's happened more from a businessperspective for these funds is distribution is
(05:59):
incredibly expensive and a big deal.
So if you're creating a group of folks, I thinkCarlyle today has over 100 people that are on
their distribution team.
So it's a lot to pay to be distributing oneprivate equity fund.
It's a lot better if you have sector specificfunds, credit funds, you have other types of
(06:25):
vehicles.
So yes, there is similar expertise in creditand private equity, although I would argue
there are some specific skill sets for each.
But I think it's more about the business ofbeing in the private markets and the fact that
distribution is so important and yet soexpensive.
And to be able to spread that distribution overa group of vehicles makes a lot more sense.
(06:50):
Distribution being getting investors, gettingendowments, pension funds, but also today
retail.
Well, yes.
I might not use the word retail.
I think what I would say more is that thewealth, multi family office channels today are
about the same size, almost the same size,maybe a tiny bit smaller than the warehouse
(07:14):
channel.
So you have the warehouse channel, which isabout $10,000,000,000,000 You have the same
thing on the RIA side is about$10,000,000,000,000 So there's
$20,000,000,000,000 between RIAs andwirehouses.
$20,000,000,000,000 is a very big area andunder penetrated as compared to the
(07:34):
institutional side, which would be pensionfunds, life insurance companies, endowments,
and foundations.
That's one of the largest kind of non wirehousepools of capital in the country.
You guys have grown from, I think, a couplebillion assets to $70,000,000,000 extremely
quickly.
Yeah.
70,000,000,000.
(07:55):
And you now get the choice of whether you wannaallocate to the Carlyle or the Blackstone's,
which has all these advantages, brands.
There's an old saying you don't get fired forhiring IBM versus maybe more of these
entrepreneurial private equity funds or thesesmaller ones are focusing on the lower middle
market.
(08:16):
Talk to me about the trade offs.
Is there ever a reason to go with the largeprivate equity funds?
If so, when?
It's such a great question.
It's such an interesting topic that we couldtalk about for the rest of this interview.
But it doesn't make sense to me to say thatwe're going to be closed to some of the largest
(08:36):
players.
But it does make sense to me to say that wewant to do things that are differentiated with
them, whether it's the way in which we might coinvest with them for being a limited partner or
the way in which we might see new vehicles thatthey're putting together.
But we don't want to be close to them.
In general, I think that firms like oursbelieve three things are better.
(09:02):
They believe that earlier funds are better thanlater funds.
They believe that sector specific funds performbetter than generalist funds and they believe
that smaller funds in general perform betterthan larger funds.
But those are general rules.
So we do do a lot of middle market and lowermiddle market investing and fund investing.
(09:26):
But like I said, we don't wanna be closed tothe mega funds.
We wanna find out ways to use our capital likea sovereign wealth fund would to create unique
access points and differentiated investmentopportunities for our clients.
I often tell the story of when we were raisingour third Willis Stein fund and I got a call
(09:46):
from a Middle Eastern sovereign wealth fund andthey said, we want to invest $100,000,000 in
your fund.
A $100,000,000 is a lot of money at that time.
I said, that's great.
What do you need?
And they said, well, we need a co investment.
I said, okay, well, of course you'll get coinvestment rights with an investment of that
size.
And the person on the other end of the fundsaid, no, you don't understand.
I need to co invest in something you've alreadydone.
(10:08):
So, okay.
What else do you need?
And he said, well, I need you to come over hereto The Middle East and present the co
investment and your fund over the next sixtydays and and and then, you know, we'll we'll
see if we're going to do this but we're highlyinclined to do it given your reputation.
I said, great.
In thirty days, I was over there and I hadconvinced one of the entrepreneurs that we'd
(10:30):
invested in to allow us to add some capital toit so I could create a co invest.
And I would have done, you know, I would havejumped through all the hoops I needed to jump
through, including going to The Middle East atthe drop of a hat in order to get that
$100,000,000 investment.
So today, the large RIAs like us, especiallythose that are focused on the ultra high net
worth and family offices and allocate, youknow, $100,000,000,000 of capital are a target
(10:56):
for large funds and small funds.
What kind of terms are you able to get beingsuch a large investor on the co invest?
Is this typically some guarantee for somenumber?
Is it some first rights?
And what's kind of the best in class terms thatyou're able to negotiate?
There isn't there isn't one simple answer tothat because every every asset class, every
(11:23):
manager is different just to give you somegoalposts, for example.
In venture capital, it's about access.
It's about getting into those top decileperformers that are largely closed to anything
that isn't a foundation or an institution.
And we've been able to crack that, a lot ofhard work and a lot of relationships, but also
(11:46):
by showing them the consistency and who ourclients are very desirable for them.
Because a lot of our clients are wealthcreators and people who are creating businesses
that they want to invest in.
So we've been able to crack that.
So it's all about access there and it's aboutco invest access.
And sometimes you get co invest for free inventure capital, and sometimes you're you're
(12:09):
still paying one in 10 or something that lookslike 1% fee and and 10% or sometimes just an
access fee and that's all over the place.
With a larger private equity fund, which whichtrying to do is to be a seed investor in
something that they wanna launch, that might bedifferentiated for them, something that's a new
vehicle, where we might get a little bit of GPeconomics and some co investment rights.
(12:32):
It's very unusual that you're negotiating feebreaks, but that does happen once in a while as
well.
More so in places like real estate, maybecredit.
On the credit side, you can often get that.
I'd rather professor Steve Kaplan fromUniversity of Chicago, and he calculated just
what co invest rights mean on an IRR basis.
(12:54):
So if a fund is returning 25% gross IRR on netbasis, that's 19%.
Said another way that if you were to invest allof it on a zero and zero basis, you get kind of
six six hundred extra basis points.
Or if you do one to one, it's 300 extra basispoints.
So it it is a pretty significant source ofalpha if and when you can negotiate it.
(13:16):
And also big caveat, if and when you know howto not be adversely selected, in your co
investments.
That's a great point.
Steve is very thoughtful and very good.
I've known Steve since I was in the privateequity business.
And my son was recently a student of his, sothat was kind of fun.
Steve's great, and he's right about that.
(13:38):
The adverse selection thing is really animportant point.
Right?
So many foundations and institutions don't havethe kind of experienced staff to make decisions
on these co invest.
We have, you know, a huge investment staff,people who have been in the private equity
business for years.
(13:59):
So we hope to avoid the head for selectionissue.
The more powerful thing even than the co investis when you can be lucky enough to help seed
something for a manager, a new fund, adifferentiated fund, something that they, you
know, they really want really wanna do andreally wanna get off the ground quickly.
(14:20):
And you can get some GP economics as well sothat you're you're you're not only getting some
co invest rights, but you're also participatinga little bit in the carry is is really where
where the the unique opportunity comes.
Maybe you could double click on the seatingopportunities maybe without giving the exact
name of a manager.
(14:41):
What do some of these opportunities look likewhen they come on your desk and you decide to
pull the trigger?
Pick one that would be interesting.
You've got GP stakes.
You know, the issue with GP stakes today isthat most of those investments were done
without a liquidity provision.
In other words, you have a a perpetual feestream which is very nice but there's no way to
(15:07):
monetize that fee stream And different thingshave been tried.
Secondary sales typically are at a discount, sothat's not a great event.
Although, you know, it may be better than nothaving a liquidity event.
So if someone was looking to launch a perpetualGP stakes vehicle that would have in it its own
(15:30):
internal liquidity like a an interval fund, atender offer fund.
That's something that maybe we would seed andwe would be part of the GP.
Something like that, something new that'sdifferentiated.
I just use that one because, it's it'ssomething that we we are looking at and
thinking about.
It kind of goes back to Procter and Gamblemodel.
You only you keep one pivot foot.
(15:50):
So you either do new product with the samecustomer or a new customer with the same
product.
So you like to seed not a new relationship, butyou like to seed an existing relationship with
a new product.
You can do that.
That is true.
Or, one of the things that's important and mostimportant is team.
(16:11):
So we're okay seeding a fund, a first fund fora team that spun out of and has a track record
as a team, as long as it's the team, right?
And or largely the team.
What we're not okay is people are just comingtogether for the first time and from disparate
(16:33):
places usually aren't excited about doingthose, but, you know, there are always
exceptions to every rule.
And as you mentioned, you your 70,000,000,000AUM, your 100,000,000,000 including assets
under advisement, You're starting to approachthis very large pool of capital, comes with its
its own challenges.
(16:53):
How do you retain alpha with going around witha $100,000,000,000, and how do you practically
operationalize that in a way that keeps yourclients kind of getting out in the market?
Yeah.
You know, there's 12,000,000,000,000.
If we're just talking private markets, there's$12,000,000,000,000 between now and 02/1930.
(17:15):
It's going to be private investments byindividual investors.
In other words, non institutional investors.
There's a lot of places to put capital.
We are not yet at a point where it'sconstrained.
Now people often say, well, what about theones?
What about the ones where you can only write$20.30, $50,000,000 checks?
Well, the answer is those have to be in apooled vehicle.
(17:37):
So you're not going to do direct co investmentsvery often in, you know, venture capital
opportunities where you only have a 20 or$30,000,000 allocation.
That's gonna have to be part of a co investvehicle.
So, you can still create the alpha.
The only thing that you're not getting ispeople who like to kick the tires and do things
(18:00):
by the each.
They're not getting that opportunity in thosesmaller smaller vehicles.
I personally don't think that's an issue.
There are some financial advisers and investorswho think it is, but it's just the nature of
it.
I think there really isn't a choice.
So the larger co investments, the larger fundinvestments can be done direct as a one by one.
(18:22):
The smaller ones have to be in pool vehicles.
When I think about co investments, I thinkabout it as all about incentive alignment.
So there's two aspects to it.
They're like, where are the incentives for themanager, and also is the manager good at their
craft?
So if you think of kind of a two by two matrix,you could have somebody that's very good at
their craft that has bad incentives, probablyeven worse than somebody that's not good at
(18:46):
their craft and has good incentives.
We we could argue that.
But, what I really wanna double click is whenyou create these pooled capital and when you
negotiate with GPs, how do you make sure thatyour incentives are aligned and how much
thought goes into that very question?
So
when we're creating a co invest vehicle, we arenot charging our clients anything for that co
(19:08):
invest vehicle.
So our incentives and our clients' incentivesare 100%.
What we're trying to do is to get the bestreturns for our clients.
So what we're looking at is making arrangementswith GPs who we believe are gonna create
interesting opportunities for us to invest andmaking sure that we are to use your vernacular
(19:32):
double clicking on the diligence to see that weagree with them in where these investments make
sense.
Their incentives are twofold.
Right?
Raising more capital and the need to create coinvestment.
They want to raise more capital that they getfee and carry on.
So they know that it's a necessary evil tocreate some co investment so large capital
(19:56):
sources will invest with them because that'swhat they require.
But they also have incentives sometimes to todo larger deals than perhaps their fund size
would dictate.
And in those situations, they need the coinvestors.
So they they have two sets of of of incentives.
And we obviously wanna be part of both and bethere for them when they need us, as well as,
(20:21):
creating a better return as Professor Kaplantells us through the co invest vehicle.
By the way, this was an interesting article, Ican't remember exactly where it was, but it was
about David Swenson.
And it was about that everybody believes thatDavid's brilliance in the Yale model was
because he was first into private markets in avery large way.
(20:44):
And that is true.
That is a big part of his brilliance.
But what also was part of his brilliance andwas pointed out in this article was his ability
to get to know GPs early on and to be a greatpartner to these GPs.
So having been a GP, I understand their side ofthe equation.
And what we try to do is to be great partnersto them from the beginning, so that there is a
(21:08):
series of opportunities that when they think oflaunching things or doing something
differentiated, or when somebody spins out ofthose GPs, think of us because they know that
we are there for them, to advise them, to tellthem what will work and to to be there if they
need additional capital for something or theyneed to seed something that they wanna start.
I'm always fascinated double clicking on theselong term games with long term people.
(21:32):
This this Naval quote of how do you play theserecurring games with the same actors and how do
you build build relationships over years andsometimes decades.
Unpack a relationship like what you're talkingabout where you're investing with them early
and then you're you continue to invest.
And how does that start?
And is it kind of always quid pro quo, or isthere just this reputational relationship
(21:56):
capital that builds and you're kind of alwaysgiving to each other?
So double click on that a little bit.
I, you know, I hesitate to say any namesbecause there's confidential provisions and
all.
So so there is one very well known name that isone of the top six that I mentioned that raised
(22:17):
59% of the capital that we as a firm and someof our predecessors have been investing with
over a very long period of time.
And we have invested in many of their vehiclesthat span credit, GP stakes and other related
(22:40):
investment vehicles.
And the idea is that we have the kind ofrelationship where when they're launching
something or thinking about something, we'retalking to them early and they're gauging what
our appetite might be for that and we'regauging, you know, how we see it and whether it
fits or not.
Just double click on kind of why the how thoserelationships build out.
(23:06):
Businesses, people, and this is no different.
It can become very transactional, and andthat's unfortunate, it should always have that
element of relationship and culture.
And when you can be consistent in the way thatyou approach things and they are consistent in
(23:26):
the way they approach things, you do build up acadence and trust that I think you know, is is
makes it much easier, to get to yes on aninvestment.
It's not unlike a co investment opportunitywhere in beginning, you're diligencing the
manager, and then you're only diligencing theactual underlying company.
(23:47):
So there's almost like this two step two stepdiligence, and it's it's
all And and we're all human.
We all have things, you know, that we do betterthan other things.
And we all have mistakes that we makeconsistently, and we try to learn from, and we
all have our own frailties.
So you learn, you learn what is the sweet spotfor someone and why it makes sense to invest
(24:09):
with them in those kinds of things and maybenot in other things that are not perfect for
what you're trying to accomplish.
In that vein, have has there ever been asituation where a GP has given you back the
money because the strategy no longer made senseor made a mistake and communicated well that
you backed that GP in another fund?
(24:31):
In in what cases did that happen?
There has been a case where we backed a GP andthe strategy got overpriced very quickly.
And we went to the GP and said, look, you know,we we have given you a commitment.
(24:55):
We don't think it's in your interest or or inour interest to continue down this road.
Why don't we work something out?
We've made one investment.
Let's, you know, maybe if there's anything inprogress that we think we're committed to do,
let's do and then let's not go forward.
Let's you release us from our commitment.
(25:16):
We'll make sure that we deal with you fairlyAnd and that was the right thing to do at the
time, and it didn't work out.
No.
I've not we've not done another thing with thatparticular GP, but we would because it it
worked out well.
Taking a step back, when it comes to pickingprivate equity firms and your first commitment
into them, what's the criteria that you lookfor and how's that evolved over your career?
(25:41):
When I started in the private equity business,people would ask me what was important in
private equity and how do you make decisionsabout investments?
And I would say, oh, you know, it's aboutindustry dynamics, competitive positioning, and
people.
And if you'd asked me ten years into it, whatwould I say?
I would say it's about people, culture, people,culture, and that the industry dynamics and the
(26:07):
competitive positioning are table stakes.
You have to have it.
But, you know, you really need the right peopleand the right culture.
And in today, depending on the asset class,some of it's about sourcing, some of it's
about, you know, what happens when things gobump in the night.
(26:29):
But in the end, it's always about having theright people with the right reps and the right
backgrounds.
And perhaps it's painstakingly obvious, butmaybe you could double click why it's people
and culture and how that plays out within amanager.
Look, everybody makes mistakes and andeverybody makes hiring mistakes, everybody make
(26:50):
strategic mistakes, investment mistakes.
You miss things, right?
I look back on the There were two investmentsthat I made that I wish I had mulligans on and
I look back and say, well, how did I do that?
How did I make those mistakes?
It was always somebody in the daisy chain thatyou should not have trusted in the way that you
(27:16):
did that gave you information that turned outnot to be what you what you learned it to be
ultimately.
Now that's not to say people can't be great andstill make mistakes.
They can't.
The best investors still not gonna bet athousand.
Ted Williams didn't bet a thousand.
Nobody bets a thousand.
But but it is to say that you can usuallypinpoint if you do a postmortem where you went
(27:40):
wrong, what you missed.
And, you know, without getting into tremendousdetail, it's usually something that was in
hindsight painfully obvious and if it was theright person doing the right digging might have
been a little bit more of a factor in yourinvestment decision.
As you build out you're also building out apretty sizable organization.
(28:07):
And how do you set the culture and the policiesin a way to make it succeed?
When we started Crescent, first thing we did,there were I think 10 of us at the time.
We went off-site with a woman by the name ofLaura Desmond, who had just retired as the CEO
of Starcom Media, whose specialty was brandblueprint and culture.
(28:33):
We spent three days off-site talking about whatour culture needed to be and where we wanted to
take it.
That got memorialized in a one page culturecard, which exists today.
We review it all the time, I would say,formally annually, but all the time.
(28:54):
And there's only been a couple of very smallchanges to that culture card, over time, which
goes through our spirit, our behaviors, and allof the things that we measure ourselves on.
We try very hard to hire against those factors,and we try very hard to weed out when those
factors are not being adhered to.
(29:17):
It's not perfect.
Culture is not a perfect game.
You're going to make some mistakes and have toadjust.
But so long as you hold yourself up to it andyou understand what your key tenants are,
right?
So for Crescent, it's built by clients forclients.
It's having the use of our scale for thebenefit of all of our clients and the full
(29:37):
alignment with our clients, putting our clientsfirst without ever losing that boutique feel.
It's extreme accountability.
It's optimistic energy.
It's all those things.
And when we have members of our firm that arenot exhibiting those things, we make changes.
One of the things that I always try to improvemyself is how to hire for culture.
(30:00):
It's much easier to hire for quantitativeskills.
How do you suss out somebody's culture fit inthe hiring process?
It kind of depends on the level.
If you're looking at the very top levels, Ihighly recommend and you can, I will use his
name because you can do that using GH Smart,Jeff Smart?
(30:22):
It's yeah.
Yeah.
I mean, you really wanna put people through thepersonality paces, and and when you don't do it
is when you make mistakes.
And we've made it.
I mean, you you if you really wanna understandwhat motivates people, what their strengths
are, what their weaknesses are, and the type ofmanager they are and the type of leader they
(30:43):
are.
So at the highest level, I I mean, I reallythink you do have to do the assessment.
As you go lower down in the organization,personality profiles are okay.
You know, we do use personality profileindices.
There are a number of those that you can usethat helps.
But there is some pattern recognition that youcan get to by giving people scenarios and
(31:10):
seeing how they react to those scenarios.
How do you react when a person does this?
What's your reaction when someone tells yousomething that you find out is not factual.
Those are the kinds of things that you canlearn a lot about what they're really about.
So use the PPI stuff, use, other, personalityentities if you like them, but ask questions to
(31:33):
elicit how people will behave in certaincircumstances.
And then at the very top levels, I really dothink you need an industrial psychologist
review.
I read Jeff Smart's book back in 02/2008, mysenior year in college.
And the I think the best way to explain it isthat people do not change, so all hiring
(31:54):
processes should be based on their track recordof behavior.
And how you phrase it and how you getreferences to tell the truth and all those
things that's detailed in the book.
And that's that's kind of the how to.
And but I think it's an interesting thing thatif you look at people's track record of what
they're doing, aka don't listen to theirnarrative or they're selling themselves in the
(32:18):
interview, you're gonna get much better hiringdecisions.
No question.
But I do like also something that Jeff says,which is you wanna ask the same questions to
the same, you know, to a group of people.
So you're getting some comparative data.
But I also like to add the, you know, thescenario questions and and see how they react
(32:40):
to the scenario questions.
Kind of hypothetical.
If you were in the the situation, what wouldyou do?
Yeah.
Yeah.
So last time we were chatting, you corrected meand telling me that lower middle market where
it's a place that you guys are very active in,there is an opportunity to have financial
leverage on investments.
(33:00):
So tell me about the lower middle market and A,where's the opportunity set and how do firms
invest via using leverage just like the largefirms do today?
Maybe we take a step back and talk about thedifference between where lending is generally
today and where it was maybe ten years ago.
(33:23):
So today, you have many opportunities forleverage.
And those opportunities are, you know, banksyndicated loans, which at the higher end still
are the largest share of the market, but areless so in the middle market and the lower
middle market.
(33:45):
Sponsor credit today is much higher share ofsponsor credit is private debt over private
credit than there used to be.
There are even unique lenders in the lowestpart of the middle market that will do somewhat
(34:05):
of asset based stretch loans.
And there are more and more players coming inevery day and more and more products being
launched by the areas of the world and even thelargest players.
So if you really think about what's happenedsince the GFC, you've seen a proliferation of
private credit.
(34:26):
That was starting to happen in 2010, 12/14,those areas.
But where it really accelerated was 2019 whenrates started to change and you could really
make good returns investing in credit.
And today, you might say an average is probablyabout 11% return on a sponsor credit in the
(34:48):
middle market, maybe 11.5% or higher in thelower middle market for senior debt risk.
What's the difference in the middle market ofthe lower middle?
Lower middle market, you have the risk that thecompanies are smaller and things go bump in the
night.
It's easier for them to not not be there Butyou're using a little bit lower leverage.
So maybe four times or less versus, you know,four and a half to five times or less in the
(35:12):
upper side of the middle market and you'regetting a little more spread.
You might be getting another 120, 140 basispoint spread in the lower middle market to
compensate you for the risk.
But there is plenty of capital available toleverage in the lower middle market, especially
for sponsor credit.
And why is that?
Because when I started in private equitybusiness, my first deal was 10% equity and 90%
(35:36):
debt.
You know, that was 1989.
Today, very few deals aren't pretty close toone to one.
Right?
So you're putting a dollar of equity in for adollar of leverage in.
And there's more dry powder in the equity sidestill than there is on the credit side.
So everybody's so worried about this big blowup in private credit and you read a lot about
(35:57):
it.
I personally am not concerned.
It'd be easier to say I am concerned becausethen if it happens, I look smart.
But I really believe that, you know, in sponsorcredit with solid sponsors, it is not a highly
risky proposition because you've got a dollarof equity behind the dollar of debt.
(36:19):
And the one thing you know is that GPs abhor azero.
They don't want a zero.
So, you know, if things get a little scratchy,they're going to put more money and if things
are really awful, you know, sure.
But so I think that the proposition is that theprivate lenders are taking, they're taking a
lot of share from the banks, and they'reproviding a lot more liquidity in the market
(36:42):
and because rates are high enough today toprovide a return to the investors, people are
pouring in because if you can make eleven,twelve, even 10% on senior debt risk and
private equity over a long period of time is13% with a lot longer duration and a lot more
risk, you can see why people are allocatinghigher and higher amounts to the private credit
(37:04):
side.
I wanna double click on something veryinteresting.
There's a game theory to the private credit inthat the private equity funds do not, to your
point, wanna do a zero, and the private creditis senior to the private equity.
So there's this incentive to follow, I guess,put good money after bad into some of their
(37:25):
struggling deals.
Yeah.
I mean, I good money after bad has a pejorativeconnotation, so I'd I'd I'd probably stay away
from that.
But what I would say is if you're a privateequity investor and you've used a lot of
leverage, even in the lower middle market,you've used four times.
(37:47):
And a business starts to struggle, andespecially in the upper middle market or the
higher end where it might be six, seven timesEBITDA leverage.
And the business starts to struggle, you have achoice to make.
And that choice is risk the possibility oflosing the business entirely or delever and
(38:09):
maybe hurt your returns, but still make somereturn, some reasonable return.
And usually, decision to delever is the rightdecision.
Now, that's not true in a scenario where you'vetotally missed something that has fundamentally
changed the industry, right?
(38:29):
So Google comes into the marketplace andmagazine publishers are gonna really struggle.
And that was one of my failings.
We had a big magazine publisher when Googlecame into the market marketplace and throwing
good money after bad there probably didn't makesense, right?
That was good money after bad.
(38:51):
But, know, manufacturing business, there's somenew technology, it hurts a little bit, but
doesn't kill it.
You delever, maybe you're gonna make an eightor 10% return instead of a 13 or 15 or 18%
return.
It's better than losing your money.
So I think that's the bet, and that's the rightstrategy for most private equity firms in those
situations.
One of the unique aspects of your large pool ofcapital is that it's mostly taxable.
(39:16):
I know there's some probably nontaxable CRTs orIRAs, etcetera, but mostly taxable.
Have you found a solution on how to give accessto credit in a tax efficient way?
Yes, it's not for everybody, but there are acouple of things that work very well.
(39:37):
One thing that works very well is obviously thesmaller investor that has an IRA, four zero one
ks, putting it in those vehicles.
So that works for a lot of people.
For larger investors, for very wealthyfamilies, setting up insurance dedicated funds
using private placement life insurance orprivate placement variable annuities is a
(40:00):
really good strategy.
Now, there's a lot of complexity to that.
It's not an automatic easy button.
But if you can work through the complexity forvery wealthy investors, those strategies are
less than a 100 basis points of cost for theinsurance piece of it and you shelter the tax.
(40:25):
If you could go back to 1980 when you graduatedHarvard Law School and you were just getting
into your, legal career, which which thenturned into private equity and now now with
Crescent Partners, what would be one piece ofadvice you could give yourself that would
either accelerate your career or maybe help youavoid a mistake?
(40:47):
One piece.
Well, you let me start with what I tell youngpeople today.
I tell young people that you are going to have,you know, the lion's share of a piece of a
puzzle.
And it's imperative that you do that the bestyou can possibly do it.
(41:09):
And you work your tail off to get it absolutelyright and keep asking questions about how to
make it better.
That's step one.
Step two is you understand where that piece ofthe puzzle fits into the overall puzzle.
And you learn as much as you can about how itfits and how the overall puzzle works.
(41:36):
In shorthand, you have a perch.
And from that perch, can see a lot of things,make sure you take it in, make sure that you
understand how everything works.
So if I could go back to myself, those timeswhere I got hyper focused on just the little
piece and didn't understand the bigger piece, Ididn't advance as much as I did in those
(42:01):
situations where I understood how everythingfit together.
And so my best advice to the 24 year old me orthe whatever would be that, right?
Guess 25 year old me if it's nineteen eighty.
Make sure that you understand how everythingworks.
(42:22):
Never stop learning.
And today, in today's world, lifelong learningis so much easier than it was in my world.
And continue to pursue other ways to learnaround the periphery of that one puzzle piece
that you have.
I think that would be the best advice I couldgive.
(42:44):
Generations are so different today.
We talk about work life balance and generationsnow.
Work life balance for me growing up was worklike a dog so that when you're older, you can
have some balance.
It just wasn't the same as what it is today.
So I think if I could give a second piece ofadvice, it's really be present in those moments
(43:11):
where you're having that balance.
In other words, if you're at an event for yourspouse or your child, know, really be there and
then go do what you gotta do work wise.
I can think of so many times when I wasn't aspresent as I might have been.
Know, I remember coaching my son's hockey gameand, you know, I'm in the middle of a deal and
(43:35):
you know, the phone's ringing and I'm and I'mlike, oh my god.
Just be present for that hour or hour and ahalf and and then go do your thing afterwards.
So that would be the other piece of advice I'dbe is always be present in whatever it is
you're doing.
We touched on earlier one of your regrets ofnot building out the credit side of the
business, but you clearly have made some verygood calls.
(43:58):
What's the best career call that you made overyour entire career?
What's the best bet that you made and and endup being very fortuitous?
It's gonna sound almost Pollyanna ish, but,I've enjoyed every step of the journey.
(44:18):
So the call to be a lawyer, know, after havinga business background was probably a great
call, even though in hindsight, I did it over,I might have started in business because that's
where I ended.
But I learned a lot being a lawyer.
I think that those relationships also havesuited me really well over time.
(44:42):
So I would say that was a very good call.
Going out and actually having to make a payrolland starting something with my own money was
also a huge call because until you've donethat, it's very hard to tell people how to do
it.
And it creates an enormous sense of respect forwhat it takes to operate a business.
(45:04):
Very few people are great operators.
That is definitely the skinniest set of peoplewho can really operate a business.
There are a lot more people who can makeinvestments than people can actually really
operate a business.
So, that was, I think, really critical in mydevelopment.
Having worked for people who were doing so manythings in the public marketplace that were so
(45:28):
unique and differentiated like Harold Simmonswas huge for me because, you know, I ended up
being a private markets person, but myknowledge of the public markets and how they
work in all the various securities.
That was a great call for me.
Going into the private equity business, which Ihad no idea I was going to do that.
It was, you know, it turned out to be really anatural move from having been an operator, a
(45:53):
lawyer, having done a lot of deals.
It was a great move.
And so I think that was a great call.
And then I didn't mention that when I wasrecovering from cancer in 2011 and decided I
(46:13):
wanted to do something instead of startinganother private equity business, which would
have been the natural thing to do, I decided tobuild another operating business.
I built an alternative energy developmentcompany and then sold that.
And that was a great chapter.
It was a great call because it got me back intowhat I love to do, which is build things.
But of all those things, and it's gonna sound,I don't know how it's gonna sound, but I always
(46:41):
pinch myself that Eric Becker and I gottogether, started investing our own personal
capital, buying some companies, doing some realestate things.
And then realizing that there was this enormousopportunity to build something that not only
optimizes wealth for ultra high net worthindividuals, but also optimizes their lives.
(47:04):
And to build something that was built byclients for clients, taking the clients land,
creating this enormous alignment and buildingsomething that really didn't exist.
And I would say still today, Crescent is verydifferent from all of the competition because
we optimize wealth, we optimize life, we createlifelong learning for all of our clients.
(47:28):
We create unique investment opportunities.
We create unique opportunities for them toenjoy their lives, their lifestyles, pay their
bills, do their taxes, everything in one place,one neck to grab, outsource family office.
And I actually think that's my crowningachievement that I think that is the thing that
(47:49):
I am most proud of because, you know, we'rehelping thousands of people to really live a
great life and to maximize their wealth andcreated something that really didn't exist
before Crescent.
That's so interesting because you have thiscareer of stacking these skills that together
there's probably you're the only person in theworld that has all these skills, legal, then
(48:13):
private equity, then then dealing with with thepublic markets, dealing with alternative
energy, dealing with family office.
And I I failed to double click on this, butCrescent was started because you had the same
pain point.
You didn't need any more money clearly based onyour track record.
You wanted to solve your own problem and thosethose are oftentimes some of the best
(48:35):
organizations.
Yep.
Find a need.
I mean, we talked before about perch.
That was my perch.
Find a need.
Sit on a perch.
Find a know, people talk about, oh, I'm gonna abusiness.
My own son came out of University of ChicagoBusiness School and you know, his first
reaction was I'm going to start something.
I said, well, what are you going to start?
I don't know.
Does it matter?
Hell yeah, it matters.
(48:56):
Start something that you know.
Start something that you've seen, startsomething you know there's a need.
Well, you can find things that there's a needeven though you haven't been in a related
business, but it sure helps if you've been in arelated business.
I like the whole thought experiment is youshould only start a business that won't get out
of your head.
You try to you try to procrastinate startingin, and it keeps on saying, you need to start
(49:17):
this.
Like, this is a pain.
I keep on having this pain.
Other people have this pain.
I have to start this business versus thisromanticized idea of being an entrepreneur.
Absolutely.
Well, Avi, this has been absolute masterclasson private equity RIAs, building enduring
businesses.
Thank you for jumping on.
I look forward to continuing this conversationlive.
(49:39):
Thank you, David.
I would love to do it anytime, and yourquestions were great, and your style is great.
And it was a lot of fun to do it.
So anytime.
Thank you.
Anytime.
Happy to help.
Alright.
Thanks for listening to my conversation.
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