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Hi, it's Tony Robbins. Welcome to the Holy Grail of Investing podcast.

The opportunity set to invest in private markets and companies is so big, we're only scratching the surface.

In this episode, my co host sits down with Michael Reese of Blue Owl Capital, a true expert in a powerful, often overlooked area of investing called GP stakes.

A lot of people don't know how profitable these businesses are and the return on the equity that the GP makes.

Recurring revenue, low capital intensity.

Is there a better business model on the plan it than managing a private asset management firm?

I have to say our gold standard that we're looking for in a firm comes down to longevity.

It's insane to think we're only going to allow it to go into a government bond instead of investing in the wonderful businesses that make up the United States of America. I know your buttons to push me a little wound up there.

There are a lot of private equity firms that don't know they're managing their last fund.

What counsel would you give to the audience? This is what you need to know before you invest in private markets.

Foreign.

Not familiar with GP stakes? The GP stands for general partner, basically an owner. Most investors can only get into private equity by being what's called a limited partner or an lp, and they pay fees for the privilege to invest. Usually the private equity firm charges you a 2% management fee on all your assets each year, whether they make you money or not. They also get 20% of the increased profits. But when you own a GP stake, you're not just investing in a fund. You own a piece of the entire private equity firm itself. That means you sit shoulder to shoulder with the owners because you are an owner and as a result, you participate in the revenue streams from all of their funds, the ones in the past, the present, and their future ones. Think of it this way. Would you rather own the racehorse or the racetrack? This is one of the most powerful ways to create sustainable compounding cash flow and participate in the growth of private equity. In this conversation, you'll learn why it's becoming so highly coveted as a strategy amongst the most savvy investors. Let's dive in.

So welcome to another episode of the Holy Grail of Investing podcast with Tony Robbins and Christopher Zuck. Honored to be joined by one of our partners, Mark Wade. And our special guest today is Michael Reese from Blue Owl, formerly known as Dial Capital Partners. And I'm still going to call him Dial just because it's been habit for a decade plus. But Michael, thank you so much for joining us.

We're really glad you' Christopher, Mark, great to see you guys as always.

I'm going to kick us off with kind of just a little bit of background, so don't really need to know a lot about the firm. People can look that up, but what they can't look up is a little bit more about Michael's story. So talk about your origin. How did you go from, you know, growing up in Pittsburgh to where you are today and how basically you made that transition over your career?

Well, Christopher, you know, a lot of who I am as a person and a lot of what our business is as a business really harkens back to growing up in Pittsburgh. You know, there's something they always show on Monday Night Football, you know, the blast furnace and the steel mill. There was a point in time where just about everybody in my family, from my parents generation to my grandparents, everybody worked in some job affiliated with the steel mill. So, you know, I was based on this blue collar, humble upbringing. And, you know, I've tried to keep that and carry that on with me throughout my professional care career and my personal life and, and a lot of dates back to being a good old Steeler fan from Pittsburgh.

It's funny because of the fact that I've seen a couple of terms that refer to growing up in Pittsburgh and kind of the toughness that comes from that. You know, that's got to be a big transition coming from that really, really good American work ethic in the steel mills, if you will, of Pittsburgh to the ivory tower, literally, in the world of mit. So talk about that transition of how did you end up there and how did you adjust to a very different environment potentially than where you grew up?

Well, I, you know, I didn't jump right out of Kansas. I started at the University of Pittsburgh. I, I, I really didn't even know that there were colleges. I, of course, knew there were colleges outside of the city, but it just made sense. Pitt gave me a really nice offer to come there for free, and I wanted to stay, stay true to my Pittsburgh roots and had an amazing experience at Pittsburgh, was fortunate enough to do a lot of great research and focus on science, engineering, et cetera. And that really was what gave me the basis. I was one of the top engineering students in the country. And at mit, they gave us an offer to come up there and study additionally, some engineering, some business. Anything I really wanted to do, they were willing to have me there under the auspices of the National Science Foundation. I had to take the leap. It was really the first time I Officially left Pittsburgh. I was 22 years old and heading to grad school at MIT. It was a culture shock for a while, truth be told. I mean, just the international nature of it. All the students that come from all over the world to Boston to mit, I was used to a certain homogenous Pittsburgh basis and this was a whole new group. I loved it and slowly got indoctrinated to the type of coursework and studying that we were able to do there. Loved my time at MIT and knock on wood, did fairly well and was able to jump into the business world after that.

Well, that's a big jump going from basically engineering and math and science to all of a sudden this world of finance. So take us through kind of how that transition happened and what drew you to wanting to be in the world of the financial markets.

Well, there's part of the book Outliers that Gladwell writes about Bill Gates and just the serendipity about Bill growing up in an area that was so close to the computing center at Washington. And if that didn't happen, who knows if we'd ever have Bill Gates. We'd have Bill Gates. I'm not sure if we'd have Microsoft. And there was a little bit of serendipity to my course study and the path I just took you guys on in that it was 1999 and here I was this sort of hodgepodgey engineering guy with business. I wasn't the perfect candidate. I wasn't the star quarterback coming out of mit, but everybody that was a star quarterback, they wanted to go.com and that left this wide open playing field for me. I got to interview at places like Goldman Sachs and Lehman Brothers, McKinsey and Maracon. And I decided that for the first step I wanted to go consulting and I wanted to go to a, a really high end boutique and picked a firm called Maracon Associates. Got a couple years there, but remembered back to my time interviewing in investment banking and how much I love that, and quickly hopped over to Lehman Brothers in investment banking and made that jump. But it was only made possible because all the really attractive candidates from MIT went to all these dot coms and sadly they were looking for work six to 12 months later and I was fortunate enough to have a good seat. But you know, it's one of those things in life. Christopher and Mark, sometimes it's better to be lucky than good. That's the truth.

So thinking about all the different types of people you probably have, you worked with through that time frame, did anybody shape you in particular, I mean, I feel like, especially as a young person, you know, you're such a product of the leadership and the mentorship of those in front of you. So how did the people change and anybody have a particular impact on you?

Yeah, you know, it's a little cliched, but I really do fundamentally believe it was the type of upbringing that my parents sort of instilled in my brother Matt and I. You know, Matt works here at Dial Blue Owl, and we've worked together for 22 years. Never thought about not working together. And that sort of harkens back again to my parents, like, of course you should do things together. That's what we do. So, you know, a lot of it is just having that humility. Sure. That what you put above everything else is the personal relationship, the money and whatever comes with it is nice. The investment will work out or it won't, but don't break the bond of a personal relationship. And for my early days, it was my parents that instilled that in me. As I've sort of progressed through building this company and having tremendous relationship across the investing industry, I've been fortunate enough to have a lot of different mentors and folks who have shaped me. And I, I don't think it's one individual person. I think it's a little bit more of a mosaic. I've, I've learned a lot from great people like George Walker and Tony Tutrone at Neuberger Berman. A lot of the senior leaders and owners of private markets firms, certainly, you know, the Robert Smiths, the Egon Durbins, you know, the, the Ramsey Musalams. Like, those are really impressive people. And I, I try to, to study them from afar and take some of their qualities that I'd like to emulate and build them into who I am. But I'm blessed with the fact that I get to work with folks like you and folks like all of our partners that really are truly impressive and great people. And I get to watch it from a great vantage point and hopefully pick up some of those traits that I can emulate off of them.

I mean, Tony Robbins says it all the time. Success leaves clues. And so the more that we're able to identify what success looks like, the more we can model it, the more we can shape, you know, the way that we conduct ourselves, whether it be our daily routine or the way we look at transactions or the way that we build relationships. You know, obviously we can learn from a lot of people, and fortunately we can watch other people's Mistakes and hopefully learn from them. You know, as well, one of the things that's interesting about your path is that you kind of are a pioneer in a particular area. And in the world of GP stakes, I mean, there's no question that you started doing it really kind of earlier than everybody when you were at Lehman, obviously the Neuberger Berman and then, you know, created DIAL as part of that. What made you decide to focus on specifically GP stakes, private asset management firms and actually owning a piece of their business? Take us through just a little bit of that story, if you will.

I wish I could tell you that I had this great vision and I saw it coming 25 years ago. But really, again, serendipitously, the first project I was asked to work on at Lehman Brothers was an analysis of how Lehman could grow into asset management. It didn't have anything in asset management at the time and its peers Goldman Sachs had GSAM and Merrill lynch had Malim, et cetera. So the obvious question was what should Lehman do in asset management? And we knew there were some things we would build and some things we would buy. And at the time alternatives, hedge funds and private markets were small, but we could tell they were going to become a bigger part of the overall industry over time. And so the question was should we buy a hedge fund, should we buy a private equity firm? And I think as we looked out at that landscape, we came to the conclusion we'd rather own five 20% stakes in different hedge funds at the time versus owning one 100% stake. That allowed the tremendous entrepreneurial spirits of these entrepreneurs who went out and started these firms to continue. We didn't pull them right back into a, at the time 15,000 person investment bank at Lehman. So we rode their coattails, we helped them a little bit along the way. And that was the real basis of the strateg strategy, I guess, where I would give myself a little bit of credit. Maybe not having a 25 year old vision that this was going to be as big as it is, but I did stay with it because there were a lot of people that were involved from time to time in some of these transactions dating back to 2000 and 2001. I just happened to sort of see it and feel it in my gut that there would be a need over time for more partnerships like this where a great firm would want to sell a small piece, they'd want to keep their autonomy, but they'd like a partner. And so I, I guess dog on a bone strategy. I just didn't let Go of that bone.

Well, it's, it's amazing because so many people do start down a path that actually successful, but they get bored with it and they have to go chase something else and think that they're going to go recreate a different industry or a different sector. Sometimes that's a good thing. And that's where a lot of serial entrepreneurs go, where they do create multiple, multiple fantastic outcomes because they do different things. But in your case and in other cases, they have stuck with what is their knitting. Once they identify something, that's a winning strategy. Now obviously you transitioned quite a bit from the hedge fund model to, you know, more of the private asset management firm model. And I'm going to ask a question that maybe I've never asked you before, even as many times we've talked about it. Is there a better business model on the planet of any kind than managing a private asset management firm?

Well, putting me on the spot, I have to say. I can't think of it right away. I mean, these businesses are fantastic human capital businesses. They have long dated steady revenues. They attract really high quality young people and senior people and you get to work on really interesting, complex things. You could make a case, if you were more technologically oriented than I am, that a great software business has a lot of those same characteristics. And quite frankly, when I'm talking to clients, they all know it's great to own a software business. Recurring revenues and steady growth and low capital intensity, that rings true to them. I tell them, do you want to own a piece of a private equity or a private markets firm? And they scratch their head a little bit. So I say let's compare the two. So let's compare. They both are very capital, unintensive capital, light models. They have recurring revenues. They're in industries with long steady tailwinds. And so one of my ways of getting people interested in investing in private markets is to draw the parallels to what we see in software. So I put them up there as a close one and two. But since I'm in the private markets, I better, I better say private equity has a little bit of a heads up there.

Well, I agree with you and here's the way I do it because the fact that I use the enterprise software analogy a lot because it is a fantastic business model, it's very sticky. Anybody who's ever been through a CRM change knows how painful that is. So if you get a price bump, you go, okay, fine, I'll just accept it. At some point you'll make the Change because it's worth making, going through that pain. What I will say though, to people in talking about private asset management businesses is those customers, those clients, they cannot get out. They cannot make the change whether they want to or not. So they are truly captured. And to be able to have a business where you cannot get fired, that's a pretty good business to have. It's not permanent, but five to 10 years is a very, very, very long time. And so I obviously am biased in that I believe the private asset management business is the best business model and that exists on the planet. Let's talk about how the industry is changing a little bit. I mean, obviously you've been in there from the very beginning. We followed along, not very far behind. When you started getting involved in private assets, you know, we've seen this change. It's grown up as an asset class. What do you see as the next chapter or the next phase of the GP stake landscape?

Yeah, look, we're following a natural adoption path and growth path that lots of industries take as they mature. And you know, private markets is, is really, if you look at it in an institutional way, it's only about a 20 or 25 year old industry and that's pretty young when you compare it to a lot of others. And so we're still, we believe in the early, early innings, maybe third or fourth inning of where private market investing will go, but a lot of these firms are, are growing up and maturing like a, like they do in a lot of industries.

So Mich, I'm going to interrupt you there if I can because I'm curious about something. This is a space and playing devil's advocate here for a moment. How is it possible, be more specific if you can, of why is this in the third or fourth inning? We have been investing in this space for a decade now. Likewise you guys, even longer. We obviously are very enthusiastic about it, but it's hard for someone who's been along for this ride the entire time. Help them understand why we're not further along this path. Like why, why have we not crested that growth curve that people see where something ramps up and then it, and then it starts to bend. Why, why is that not necessarily the case?

Yeah, I think Mark, there we're in a point where, you know, the, the opportunity set to invest in private markets and private companies is so big that we're only scratching the surface. And when you look at the total invested dollars around the world, where individuals and institutions are putting money with other providers who are investing it on their behalf. The private markets are a tiny slice of global wealth and global investable dollars. So we're still at a point where a lot of organizations are only allocated to privates to the tune of 2, 3, 4%. And they have public bond and public equity portfolios that represent the other 97. So that would seem logical, but for the fact that the private economy is as big as the public economy. So the number of companies that are private dwarfs the number of public companies. And when you aggregate all of that value, it's as big as all of the market cap of the public companies combined. Now, most of those private companies are owned by their founder. A building is owned by, you know, an individual landlord. So there's a lot of stuff that still sits privately and owned by an individual that is ripe for a professional owner. And that's why you've seen different types of companies from time to time, you know, mature into a professional ownership. You've A great example that we all talk about now is, you know, servicing your, your home H Vac. It used to be 10 years ago that every single H Vac company was a sole proprietorship. You had a Mr. Smith's H Vac and you saw his van driving around your town. Now, with the help of institutional capital and professional investing, we're seeing a lot of those businesses become institutionally and professionally run. And it's giving a bigger and bigger opportunity for private investors to get allocations and exposure to that success and that step change in the growth of that industry. And there are not just dozens, there are hundreds and thousands of other industries that will go down that path because they've been private sole proprietorships forever and ultimately will end up with institutional money. So I do think we're just early, early days of client adoption where individuals and institutions will put more money into the private economy. And that Runway is super long and will take time. So we have more Runway ahead of us than we've covered behind us thus far.

My name is Christopher Zook, founder of CAS Investments, and we wanted to be able to provide a little bit more detailed information about the topic we're talking about today, which is GP Stakes. So if you would like to download a free white paper that we've prepared, you can go to ygpstakes.com wh y gpstakes.com where you can get that information and learn a little bit more about the concepts that we've talked about today.

So with that, let's return to the episode.

Well, and, and, and Mark, one of the things about you Know, our theme, which is the growth of private markets is it's backed on what Michael referred to, which is that just there's not as much capital allocated as many people think. So they might see some of the big sovereign wealth funds or the big public, big, big public pension plans that are well allocated to alternatives. The data shows that the really large family offices have like 40% of their assets in alternative investing. Well, you know, I sit on the pension review board of the state of Texas and I can tell you, having looked at all 100 plans, they're very low relative to those family offices or the larger institutions. You look at the Teacher Retirement System of Texas, it's designed very, very different than the fire of the local municipality pension plan as an example. And then individuals, you know, it's literally 2% or 3% compared to that 40% for the ultra high net worth. And because of the fact that we're now getting so much more regulatory freedom for investors to be able to invest where they've never been able to invest before, that is, I think, a massive amount of new capital that's going to come to the space. And that's before we even talk about 401s, 401ks. It's been slow moving, it's already kind of approved, but it's coming and it's coming very quickly. And just like the old saying is, you know, we, we overestimate what's going to happen in the short run and we underestimate what's going to happen in the long run. People thought three years ago that 401ks were going to become a main thing. Well, it's taken longer, but it's probably more impactful. Just think, Michael, when we actually have target date funds inside of 401 s that have 30% private markets allocations, the amount of capital that that brings.

Yeah, I couldn't agree with you more. And speaking of holy grails, the holy grail for private markets will be when that 401k access point is unlocked, as you said. I mean, when you think about it, a 401k investor is the perfect investor for privates. You know that for private markets, that investor does not need or cannot access that money for another 50 years in some cases. So why wouldn't there be an allocation capturing some of that illiquidity premium that you get or benefit you get from accessing private markets and being able to source these new and interesting pools of investment ideas. So I don't think it's far down the horizon. We'll get there. I just think it'll take a little bit of regulatory reform, but it will open up a vast new set of clients for private markets.

Well, I'd be curious maybe to talk about the regulatory environment. It's a question for both of you because you guys are a lot more plugged into that political world than I am. What are we hearing from the new administration? What has already started being handed down because I saw some emails this week about some new rules that are being clarified around distribution and marketing. What do you guys think is the general tone now for this adoption of private markets for those who traditionally have not had access to them? Or it's been more friction?

Michael, you go first.

Well, I think it's hard to know during this second Trump presidency exactly what he or, you know, or the administrators are likely to focus on. But if you look back to, you know, four years ago and Trump won, there was a higher degree of openness about allocating to private markets, a higher degree of freedom. I do think we're in an accommodating regime, so to speak, for investing in privates by a wider swath of individuals and institutions. So we'll see. We're only 100 days in here, but I think there's more of a tailwind, certainly than the headwind that existed under the Biden administration.

Well, and to follow along with that, what we can say for sure is the SEC has taken a stance and we want to protect the investor. At the same time, we don't want to restrict commerce. And so they've been much more clear with what they expect people to do in order to have full disclosure, fair disclosure, but not, you know, create this enormous burden on those that are in the industry. At the same time, you know, I think it's going to help drive adoption and innovation to be able to bring the opportunities to those that are not able to access it today. So, you know, Tony and Tony Robbins and I have been involved with a bill that made it through the House last year, was overwhelmingly supported in a bipartisan way to allow people to take a test, to be able to take, to become an accredited investor, to take a test in order to become an accredited investor, as opposed to having to meet some arbitrary income level or net worth level. Well, there's a lot of very, very smart people that are really capable of investing in things that are sophisticated, that don't happen to make a lot of money just earlier in their career. So being able to get that through the Senate, it's in the Senate Finance Committee right now, get it adopted and then signed by the President, I think will open up enormous opportunities for investors of all sizes to be able to invest in what is best for them for the long term. That helps them secure their retirement. And financial freedom, which is ultimately a big part of the American dream, is financial freedom. So Michael, as we.

I think the tension there, if I could add, is that you've got something that, that every type of investment comes with risk. People automatically assume private markets are riskier because they're private. And it's not so much that it's a quantity of risk, it's a quality of the risk. It's just a different risk factor, which is really what people are after when they're talking about building a portfolio as you're trying to diversify your risk factors. But they talk about the risk, but they don't talk about what's the opportunity cost. I love the way you said that about giving. People need to have access to the good thing. So I think the challenge becomes the process to this point has been managing the system to eliminate all the risks. But what are you giving up and what are people losing as a result of that? I mean, the difference between compounding your money between 3 to 400 basis points per year over 25 to 30 years, like you were talking about, Michael, that's a huge magnitude difference that people don't understand.

Well, I'll borrow from someone else that's been hitting the news a lot here in the last couple of weeks. Weeks is that if we had just started when the gold standard was changed in 1972, the Social Security system, instead of it being just literally buying nothing but government bonds, but being able to actually put that into the s and P500, just in the index itself, the amount of wealth that we would have as a country as opposed to the deficit of now, how are we going to save Social Security? It would be amazing the difference that it would make for the well being of our country and obviously for those retirees.

Is that why the whole sovereign wealth fund conversation?

It's very much. And the point was we already have a sovereign wealth fund. It's called, you know, Social Security System. And you know, I'm borrowing from some others that have made this really publicized here last couple of weeks. They've done a great job articulating it, but it's just, it's insane to think that the, the amount of wealth that we're going to set aside as a country and we're only going to allow it to go into a government bond instead of Investing in the wonderful businesses that make up the United States, America, and to give the opportunity for our own retirees to benefit from what other people all over the world are allowed to do. It's just.

I know your buttons to push.

Yeah, yeah. Got me a little wound up there. But, Michael, as you think about that, you know, when you think about the opposite side. Right. So if you're going to give access to people, one of the reasons that Tony and I wrote the book is because the fact that we wanted people to have education and what private markets are, there's good, there's bad, and there's ugly in every kind of investment. What counsel would you give to the audience to be able to say, okay, this is what you need to know before you invest in private markets? And what counsel would you give to those that are providing service to a different, you know, type of investor than they have before that we want to make sure that they don't mess it up by providing the right amount of education, et cetera. What counsel would you give to both parties?

Yeah, well, first is, let me commend you and Tony for the initiative around the bill to allow individuals to. To test into an accredited status versus just making it a monetary test. That's. That that's such a. A wholesome and worthwhile initiative. And I, and I wish you the best. I, I certainly will support it. Look, I think the, the risk that a lot of industries face is the big client gets the good stuff and the little client gets the bad stuff stuff. And that's something we really need to avoid, I believe. And our firm, Blue Owl, from its origin story, has always focused on giving a client that's an individual that has given us $20,000, the same experience that a large pension fund that gives us a billion dollars gets. And if we can make sure that the experience, the returns, everything about it is the same, we can feel comfortable that we're treating the individual in the right way. You can't do that 100%. There's just certain limitations. But I think what we found in sort of the mutual fund world of investing is that a lot of the protections that have been overlaid, and some of These protections are 85 years old, dating back to 1940. They limit the ability of the manager, the money manager, to generate outsize returns for the investor. I know they were set to protect the investor, and that probably was due to abuses, but nonetheless, it now limits the overall ability for the smaller investor monetarily to get the same type of experience that you would from. From A larger investment size. So our goal, and I think what the goal of the regulatory regime should be, is to try to level the playing field so that you get the same experience for $20,000 that you do for a billion.

When you think about that, it becomes a really interesting dichotomy of this regulatory push or pull, really in this situation, the industry trying to push to be able to add alpha, to be able to add value, to be able to create outsized returns. And those two things can be aligned. There can be good guardrails where people are not harmed by bad actors. At the same time, it allows for the entrepreneurial freedom to take place, to be able to generate results the way that obviously really talented people have the ability to do. And as long as those, you know, we, as a firm we talk about all the time, we're freakish about alignment. As long as people are aligned and as long as they truly are motivated in the same way and benefit in the same way, usually good things happen. Happen. Let's pivot a little bit to the industry as a whole. You know, we talked about how it's maturing, the next phase of the world of private markets from the standpoint of GP stakes. You know, there's been a lot more consolidation lately. You know, we have certain positions that we already know are being bought and publicly announced. HBS is selling to BlackRock. You know, there's been the Bridgepoint transaction of ECP. As we look at the industry, do you think. I have my own opinion. Mark has his own opinion. But do you think that consolidation is just getting started or do you think that it's going to actually pause a little bit because of the way the capital markets are shaping up?

Yeah, look, I think there's a massive consolidation trend that is underway, but I think it's 90% just driven by market share gains and firm unsuccessful firms leaving the industry, which is creating consolidation. A smaller number of firms than it is an M and A story. There are some unbelievable and attractive M and A stories that you highlighted. But I think the real driver of taking this industry from they throw out stats of 16,000, 12,000. Who knows how many total private markets investing firms are out there. But we don't need that many. We need that. And that will shrink. I think we've been saying that since 2015. Maybe a little bit of a Chicken little story. We ran around and said it and it didn't happen for the first five or six years of us saying that. Now it's starting to happen. The problem with 2015-20, halfway through 22, was that everything worked. There were low interest rates, there was an appetite for investing more and more in private markets. And so pretty much every firm that wanted to raise a fund was able to raise a fund that has stopped. And we're at a point where investor capital is still sizable, but, but it's more discerning and it's going to pick who are the winners and who are the losers. There's a phrase that a lot of people say, and I kind of like it. There are a lot of private equity, private markets firms that don't know they're managing their last fund. Part of what we're going to need to do in owning a piece of those firms is to make sure that we can identify which ones those are. But I think the base of the pyramid made it such that there were a lot of really small and early phase, early stage firms. And I don't think we'll see a lot of those make it the next five to 10 years. I think these big top 200, 400 firms who are exceptional, I think the vast majority of them will take market share and really drive the industry going forward.

What do you think is a sizing mechanism there? Like, what's like a minimum threshold? You think a firm needs to be at, at generally speaking, recognizing that different strategies accommodate different fund sizes. But like, what's a size that, if you're not at this scale today, you, you've got some, you've got some questions to answer.

Yeah, look, I think to attract a reasonable amount of institutional capital, you know, an investor has to be able to put a, a 25, 50 or $100 million ticket in. And that will mean that fund's going to have to be, you know, 750 million, a billion dollars or more. And if you look across a firm that has a couple vintages, that means that's going to be a $2 or $3 billion firm. And at that scale, you could feel comfortable that you can allocate to it. There's enough fee earnings to be able to retain talent, to keep the lights on and make sure that money is invested well. So I kind of look forward, and I'm not in the business of, of seeding or starting firms. I think in general, we like to see them for our earlier stage fund, we like to see them on fund three or four, having proven the first two, three funds are working and successful. And on our bigger flagship strategy, we want to see firms that are on flagship number 8, 9, 10, 11, 12. So those firms certainly have a Lot more staying power, a lot more brand and attract really great people. So that's kind of the way I would think about it as an, as a investor into these funds, make sure they have the financial resources that they're going to be able to support the strategy throughout its entire fund life.

One of the things that was beginning to really kick in at the time that we got into the bear market of 22, 23 and the tougher fundraising environment was effectively the growth of GP stakes outside of just in the US and getting more into Europe primarily was still not many transactions being done in Asia. Do you see more of an international push and obviously your brother's in London. You have other people in London. Are they seeing more opportunities to deploy capital in Europe? And what about Asia?

Well, I think when you look at the domicile, the headquarters of the vast majority of the private markets firms, they're almost entirely, entirely North America and about 10 or 15% in Europe and a small 5% by count are in Asia. And so we fully expect that our allocation will naturally follow that perhaps with the caveat being a slight under allocation to Asia because in Asia the vast majority of the larger funds are affiliated with the mega firms, the Blackstones, the kkrs, the Carlisle, the tpgs. So you don't have as many startup independents that would be interested in a GP stake in Asia that are scaled, that would want a partner. So I think Asia will be slightly underrepresented in the balance of North America to Europe. I don't really see changing. They're about at the same level of maturity. Unlike a lot of other things, it didn't sort of unbelievably start here and then trickle to, to Europe 20 years later. There have been really high quality institutions on, on both sides of the proverbial pond. We've got great relationships with bridgepoint, with cvc, with pai, a number of others on, you know, in Europe. And I, and I think that will, that will continue but just by count it's a, it's just a smaller pond efficient.

I, I'd like to maybe take a bit of a pivot here year and, and talk more specifically about how these transactions are structured, why they're happening. We all, we all know what the story was. For those of us who have been around for a decade in this asset class, we know, we know why GPs were looking to sell a stake in their business 10 years ago. And I always like to ask this question of like well, why is this specific firm doing a deal, maybe, maybe share with the, with, with our listeners and our viewers here, what's happening with these transactions? Why are GPs interested in them? What gets them to finally do it? Right, Because I think there's a perception immediately of somebody selling. There must be a problem or they're selling or they're at least making a discrete decision to make a transaction at this point in time. So why are they happening now? And how has the reasoning behind it changed or not changed over the last 10 years?

Well, Michael will remember to build upon that. The very first question that I asked, the second question that I asked, the third question I asked ask is these are really, really smart people. If they're a seller, why would I want to be a buyer? So answer that question because we answer it all the time. Love to hear your way that you do that.

Well, you guys, you guys know I've been doing this for a long time answering that question, and you've been answering it probably just as, as many times as I have. I think it's amazing that in technology and other industries, taking on an outside investor for growth capital is an amazing thing. Oh, oh, you know, so and so sold their Series B. Sequoia's in for 50 million, 100 million. That's viewed as a right of passage and a firm getting there because they need capital to grow. They want to continue their journey and you can't, in most cases, you can't do it without an outside investor. Now, I blame myself. The folks and you hinted at it earlier, sometimes give me credit for being the quote, father of, of this, of this industry. I'm not sure that's well deserved, but it said, I give myself fault for calling it GP Stakes. Why didn't I just call it GP Growth Capital? It would have made this degree.

You should have done that. That would have been easier.

Yeah, like, hey, I'm here to raise a fund for GP Growth Capital. And then they'd say, oh, what do they need capital for? And you would say, well, they put more and more money into their GP commitment commitment. That GP commitment on average, which used to be 0 or 1% is now 5%. Talking to a firm this morning that, that runs a $20 billion fund and has a 7% GP commitment, a billion 4As, as their own capital and they want to continue with that. They want to get a little more growth capital from outside of the firm. They'll take that and they'll put it in different use cases, cases GP commitment to their big funds, maybe start a new strategy. So, you know, blame me. Mark and Christopher for, for the, the know.

Well, here, let's do this. Let's do this, Mike. Okay. You're the 800 pound gorilla. You know, maybe we're the 300 pound gorilla. I don't know where we fit in the overall scope of, let's just start calling it that. Let's change all of our materials to say it's GP Growth Capital. That's what we're investing in. And we might just change the terminology, but what are, most of the time, you know, is, is, is, is what you love to see. Okay, this is what they're going to use the money for. This is why I want to invest in this company. And this is a smart reason. What's that smartest reason that you see?

Well, it comes down to math and we see it all the time. A firm that's done well, their fund size has gone from 5 billion to 7 billion to 10 billion million over the last three vintages. And because they're doing well, that maybe is only a five year window, six year window. And they put 200 million in the first one, 300 million in the second one and 400 million in the third. And none of that money's out of the ground yet. So we see these firms and their partners that are very wealthy on paper, but the money is all invested alongside their investor LP in their products and they really can't make that next commitment to the next fund. And so we see the math and when we see that, it's music to our ears. That's true. GP Growth Capital, they're going to take our money and they're going to funnel it all into the next several vintages. Yes. At Some point that 200 million in the $5 billion fund that comes out and that helps them, but hopefully by the time that comes out, out, they're already to a $15 billion fund and they're going to put a billion into that. So you can see how it's a timing play. And, and most of the use cases for our capital is to plug that gap where, you know, if, if, if you manage that first fund for $5 billion fund, you put $200 million in it. And you said, I'm not going to do anything until I get all that money out. Well, then you could fund the next one, but the gap in timing would be a definition decade. And so if you want to do a new fund every three or four years, there are many, many use cases where you, you actually need outside capital. And I guess the final point on that is, you know, Mark, you Said it. Is there something wrong with this firm if they're selling a stake? That the. The exact opposite is true? And I'm sure you answer this question all the time. It's the firm that's doing well that comes to us, not the firm that's in trouble. If a firm's in trouble, the last thing they're going to need is more capital. They need a bucket to bail out the boat. But the better a firm is doing, the more opportunities they have in front of them. They say, you know what? I need some more capital. There's three or four more things I think I could do if I just had a half a billion dollars and I could start deploying it across new products. So that's.

I love the way you said that. That it's just like. It's just math, right? It really is just math. When you, when you really stop and think about what's happening here. I mean, to get a little finance wonky for a second, it's cost of capital arbitrage, right? If a lot of people don't know how profitable these businesses are and the return on the equity that the GP makes from every dollar of their money that flows through into the fund, right? Because they have this leveraged outcome called carried interest, right? So if they can put more money into their own fund and they can then attract more capital from outside investors because of that, and the whole pie expands, well, they can sell equity. I mean, you think about it, right? Like, what's a target rate of return? What do we say we're trying to generate 20%, 25%. Like, that'd be a phenomenal outcome. We're all very, very pleased with that. We've obviously had some that have higher, some that are lower. It is what it is. But if you think about, okay, what's my cost of capital? If it's 20%, well, then. Well, then a GP is better off owning. And I love the way that Robert Smith said this one time, a slightly smaller piece of a much bigger pie. Because if they can take that capital that we provide for them, that you provide for them, Michael, and they can invest that and earn over a 20% rate of return on those dollars, well, the difference accrues to them, right? And they have a, like you said, a slightly smaller piece of a much bigger pie.

Well, and it's one of the things that. When we did the interviews for the bond book, you know, there. There was a lot of different types of things that we learned from all the various people we interviewed, including you, Michael, but the one that jumped out to me, you know, I. Pattern recognition is a big part of what everybody in our industry tries to focus on. But the pattern that was very obvious is that every single person said, if you could go back and do it over again, they would have built their balance sheet to be bigger, faster. So talk about how these firms use their balance sheet sheet not just for GP commit, but to be able to facilitate the growth of their business and to ultimately make all of the owners, including us, more money.

Yeah, I've got a great anecdote, and it's from one of the smartest guys in our GP partnership group. He runs a firm. I won't use his name because he might be embarrassed when I tell the story, but he just walked around all the time. I saw him and he shook his head. He said, I sold too early, I sold too soon, cheap. I sold too early. I sold too cheap. And. And he. He did. It was relatively early, but it was a decade ago now. And he. And I said. I said to him, almost used his name. I said to him, we invested money with you. We're doing really well with our investment. It's a 3x so far. We're thrilled with it. And he said, yeah, I know. I sold. I sold too early, too cheap. And I said, well, what did you do with those hundreds of millions of dollars? And I gave. It was a $300 million deal. And he said, well, I put some of it in my fund. I started a new strategy and I've done co investments and continuation vehicles all with that money you gave me. And I said, well, what's that worth now? And he said, that's worth a billion three. So I said, wait a minute, you're sitting on a 4.3x, I'm sitting on a 3x, which I'm happy about, but. And you're walking around telling me that you sold too early, too cheap. I think we just, we both did fine. And Mark, that's your. That's your example right there.

He.

We get a great return for our investors and for you guys, which is fantastic. But if they use the money the way they think they can, they're going to even make an outsized return. So that's the Robert Smith example. Yes. This person who I'm talking about only owns 80% of his GP right now.

Now.

But he now has a billion 3 of cash on top of a bigger business that he was able to create because of that money that we invested with him. So that's the perfect use case. A little Bit of a lot of different things. A little bit of co invest. You need, you need to add a little bit of money sometimes to a continuation vehicle to prove to investors you're all aligned and you're all in. If you want to step out into a slightly different strategy and offer that to your clients, you can't say I'm only putting X dollars in. You got to put a big ticket in there. So this individual who runs a great technology firm, he's a great use case for why a firm would do this and how it can be win win, even though he's in a fund of ours that's generated a 25% IRR. So that fund is doing great for our investors, but doesn't mean he gave up a 25% IRR opportunity. If he uses that money properly, he can arbitrage it and get a better return, as you said. Very well, Mark.

I think that's an interesting component. You sort of, I don't know if you feel this way, Michael. I know I do. Christopher, I'd be curious your feedback but like you sort of run into some people who think they know more about what's happening in this space or think they have some type of insight because they see this world.

I never run into those. Ever do I run into those, those.

People where they, they, in their view, it's, it's a zero sum game, right? Where like what, one plus one, you know, it's got to come out of my pocket. It's got to come out of your pocket and they sort of lean on. And Michael, I was struck by like your, your commentary about when you guys were investing more primarily hedge funds. It was sort of like, hey, you know, give me the money and then don't call me again anymore. As opposed to the GPS you guys invest with today, it's much more of a collaborative nature. But, but the reality is, is if it's, if it's done properly, if you find firms that are poised for growth that they don't need the money. Because again, I like to describe it and say, well, people ask the question, like, why do they need the money? And my answer is, you're using the wrong word. There is no need here. There is want, right? What do they want? They want to grow their business. And it's really just a simple discounted cash flow calculation. You can see, like if I want to grow my funds by a certain amount over a certain period of time, well, you might not need to do a stake sale in that case. And that's why firms don't sell growth capital. Right.

Growth capital.

Right. You might not need to do a growth capital transact growth capital transaction. We're going to get hats made up.

Yes, I like that.

There we go.

Maybe for the next one, but if you want to grow your fund sizes more, if you want to raise them faster, if you see an opportunity in the market that you want to take advantage of, well, then we're all constrained by the capital we have Available. Available. Right.

So I'd love to get Michael's thought on this. I'll give mine first, which is, you know, if it is an exit transaction, a control transaction of going to the beach, it's time to just ride off into the sunset. You want the absolute highest price you can possibly get. And it is a zero sum game. Somebody's going to win, somebody's going to feel great, somebody's going to feel lousy at the end of that. Not always, but that can be the way it is. If it's a true partnership, particularly with 10 or 15 or 20% percent of a business, it's all about growing the pie much, much, much larger. What would you add to that, Michael?

Yeah, I mean, that's one of the more comical questions we get. Like these people are going to the beach, that's why they're selling to you. And I say, well, if they were going to the beach, they'd sell a lot more than 15%. That's a lot of work. And you're still, they're, they're still sitting on 85% of what they had. You know, that's not a recipe for going to the beach. But yeah, you're spot on. I mean, it's, it's easy to see. And there are from time to time there are cases where the capital is used to facilitate an intergenerational transfer. That's one of the, not primary use cases, but secondary use cases for the capital, you know, to clean out some old owners that may have retired or that may were seed capital providers and get the use that money to buy the ownership back into the firm. We get a piece of whatever comes back and the firm gets a little piece so that you can put it on a firm standing for the next leg of growth. And we've done that from time to time. And that's a really good use case. You reinvigorate an organization. They used to own 60% of the firm. We throw some money into it, we take 20%, they take the other 20%. They own 80 now and they're off and running. Rejuvenated and they're going to build something great. So we've had some great experiences when we've helped that kind of situation as well.

Well, it comes back to what we talked about earlier, which is, you know, it's one of my favorite sayings. Where there's proper alignment, there is usually good decisions. When there's bad alignment, there's frequently not good decisions or bad decisions that are made. So it's all about finding transactions, finding partnerships, where it is truly a partnership where we can add growth capital capital to that business to help everybody that wants to go out and climb the mountain, climb the mountain faster, stronger and better. That ultimately is what it's all about in GP Growth Capital. I'm going to just start repping this so that way we get it in, in, in place here. But let's talk about the other side, because it is just math, but there's a lot of qualitative stuff that needs to be done as well. You know, when you're looking at management teams, you know, we can obviously invest in so many of the thousands of different firms that are out, out there. But the qualitative side and the quantitative side has to line up. What are the key metrics or things that you're looking for, better word in the qualitative side when you're evaluating these firms.

Yeah, our, our gold standard that we're looking for in a firm all comes down to longevity. Because, you know, as, as we've talked about, GP stake investing is unique in that you get cash right away, you don't have a longevity J curve. And so, you know, yes, you want that, the size of that cash flow stream to ideally grow. But even if it's not growing that rapidly, if it's going on and on and on, that's a good thing. So we opt, optimize on firms that we think have the qualitative attributes that they're going to be around for a long time. So what are they? They have to have an ownership mentality. They have to think of the firm as a thing and not completely disregard it. So that means they're investing in people, they're investing in technology, they're investing in their clients. And so that sort of mentality is what we look for. They also have to have a succession mentality. We started this, you know, we've made a few errors along the way. 25 years, you're entitled to a few errors, one of which is naming it GP Stakes. We're calling it GP Growth Capital. Now. The other thing we did was Was we only looked at firms where we thought we could chain the manager, the lead guy or girl to the desk for a long period of time. And we said, how long are we sure that this very small group of individuals will be running this place? What we look for now is a great group today, but a mentality around making sure that the group lives, even if individuals fall out. And that's what a true professional services firm, and that's what these are. That's what a true branded franchise is all about. The Yankees or the Yankees, it doesn't. The players change, but the Yankees always stay the same, which is an amazing testament to their brand. I should have used the Steelers. What is wrong with me? The Steelers are the Steelers. But same thing for these firms. We want to find firms that certainly have key players, people. Key people are important, but the key people will evolve over time. And we're going to be partnered with the firm, not one individual. And that has really changed a lot. And that ultimately is at the core of some of the things we look for. On the qualitative side, the quantitative is easy. Are the returns good? Are they growing? You know, are there, is it a profitable and attractive business that's easy to do. The qualitative side is harder. And it comes down to some of those, those ownership mentalities and succession mentalities that we look for.

You know, it's time for us to wrap. But I just got to say, you know, the most interesting thing about what you just articulated is people think investing is science. It is science. There's also a lot of art involved in investing. And blending those two together is something that creates over time. The thing that I personally think and our firm thinks is the most important, which is persistency. And as you said, everybody's going to make mistakes over a 25 year period of time. What's amazing for us is our firm actually is going to celebrate our 25th anniversary next year. And so we're trying to figure out all the ways to really celebrate that, to really find a way to rejoice in that accomplishment. But the persistency over time is what really differentiates firms from one from another. And obviously that's what you're looking for in the partners that you have. And also obviously one of the reasons why we're so proud to be partners, you know, with you. So, Michael, thank you for taking your time and sharing your story. We look forward to talking to you very soon.

Thank you both. Appreciate it.

All right, well, Mark, that was obviously a lot of fun. I mean, you know, we have A great relationship with Michael and the entire team there at Dial Now Blue Owl. And it's obviously a space we are very, very involved in, so it's easy to get excited about it. But what were some of your key takeaways? Your aha, mom, if you will.

The first is how much history is there and shared history between their firm. And as we're asking questions and talking about it, it's really fun to reflect on the success that they've had, but the success that we've had and we've done it together and how partnership is so important there. They've been great partners to us. I think we've been to them as well. The second thing is, I think people really misunderstand how much room the private markets have to grow. Grow just the AUM of the entire industry. If you look at it relative to public markets and from an allocation standpoint, I thought the numbers that we discussed and how people see headlines about an endowment or foundation that's got 20, 30, 40, 50% in alternative investments, and they think that, okay, we've sort of hit an upper bound here, but there's so many other pockets of wealth in the world that are significantly under allocated. So I think that, I think that's an interesting conversation. I love, I mean, I love the basics, right? I love, like why. Why do gps want to do this transaction? Like, none of this whole asset class works if you don't have the right motivations and the right structures for the capital to go in the first place. And so continuing to hear why that is the case, and especially now, the story that Michael shared about the GP who said they sold too early, sold too cheap, and the profits that they've generated, because that's ultimately the proof of the concept. It's not just what are the returns that we make as investors into the gp. Because then that can be a bit of a what's in it for me mentality, but it's seeing the results that are generated for these gps. That's what's going to continue to drive the industry growth. Especially when you think about the many hundreds of gps that you probably would want to own a stakeholder that you don't yet. What's it going to take for them to sell? They need to see their peers, they need to see their friends.

If they see their friends take 300 million and make a billion dollars extra because they did the transaction, that tends to cause people to want to say, huh, maybe I should consider doing that. And that is what's so amazing about this Entire asset class is the way it's really still misunderstood. And you made the comment about the industry's ability to grow, talking about private markets in general, which is so true. I mean, it's literally trillions of dollars that will be managed by someone. Obviously our view is, let's go own the people that are going to manage all that money and get paid the management fee and the carry for doing that. Well, the other thing a lot of people don't fully appreciate is how small this industry actually really is when we start talking about GP Growth Capital, which is what we're obviously going to call it from now on. So y' all are going to have to help me remember, GP Growth Capital is what we're going to use. But you, the industry, when we first got involved, the entire net asset value value was $10 billion. The entire GP stake landscape was $10 billion. It's now a little over 100 billion. Well, there's no reason in the world why it can't become 200 billion, 500 billion, a trillion dollars, just like so many other industries and sectors across the marketplace. And that's going to provide enormous opportunity for us in the world of not only new opportunities with new growth capital to provide to sponsors, co investments alongside firms like Dial and Blue Owl, but also in the world of the secondary market, which is the area personally I'm so excited about, is the ability to participate in the evolution of the asset class. And as assets transition from one hand to the other, and us being able to be the largest and most active by far, we feel like we're in a great place to take advantage of that and to profit for that, for our investors and for our personal capital capital. You know, when we think about, you know, firms like this and conversations like this, it's just, it's one of the reasons why it's so fun to come to work for every day. Doesn't mean there's not challenges, doesn't mean there's not, you know, as I refer to it, sometimes, you know, just life, you know, life happens and it's something to where we got to deal with that. That's what running a business is all about. But being able to invest in some of the most interesting things on the planet and some of the things that we're going to continue to talk about in this podcast on a regular basis, I think the audience is really going to enjoy seeing, you know, how much fun we get to have every day talking about really fun stuff.

If you're someone who really values peeling the onion back and getting to really dig deep into an idea. And I mean the idea of GP growth capital and how it's evolved over the years, like which. Which I consider myself to be. It's so much fun to. To continue to get to pull this back because. Because the interesting thing about this onion is that this onion changes as the markets change, and the private markets are going to continue to change quite rapidly. And so you think you're at the. Whatever the core of an onion is, right? It doesn't have a seed, I suppose, but whenever you think you're at the middle there, you find out you're not right. Because. Because that onion has changed. And I think that. That people are going to appreciate that after the conversation with Michael.

No, I definitely think that they're going to appreciate, you know, how unique this asset class is. It is really kind of becoming its own asset class now. And ultimately, we love being in the middle of it because it has so much variety across not only geography and sector and style, from private equity to private credit to infrastructure to real estate, et cetera. And it is always going to evolve. And at some point in one of these podcasts, we'll talk about how it's changing in areas like real estate and in infrastructure. Infrastructure and other sectors as well. Well, we're going to wrap it there, but what I would encourage everybody to do is to, you know, just really take the time to understand a lot of what it is that we're talking about. Obviously, we'd love for people to be able to do that. You can go to casinvestments.com learn a little bit more about what we're doing as a business and specifically what we're doing in the world of GP growth capital. We need to change the tile on the website right away, so. So, you know, we need to get some people on that. But, you know, thank you for joining us for the holy grail of Investing with Tony Robbins and Christopher Zuk. Mark Wade, thank you so much for being with us. And Michael, thank you again for your time today.