E209: $70B AUM: How Cresset Delivers Alpha at Scale

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.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00David Weisburd?

  Avi, I've been excited to chat. Welcome to the How Invest Podcast.

• 0:02Speaker 01

  Thank you. Thank you for having me. I'm excited to be here.

• 0:06David Weisburd?

  Avi, you started Cresset, which today has 70 billion. And before you had a prolific career in private equity, let's start from the beginning. How did you get into private equity?

• 0:16Speaker 01

  It was a securitas route, to be sure, how I got into private equity. I started out as a lawyer at Kirkland & Ellis and was actually very excited to be a lawyer, started out in litigation. And then because I was also a CPA and had a business background, one of the senior partners, a guy by the name of Jack Levin, tapped me to start doing deals. And Kirkland opened up a Denver office. I went out there and built a deal practice. Pretty soon into that, what I realized was that I liked the side of the doer of the deals versus the side of the person supporting the doer of the deals. And began talking to

• 1:01Speaker 01

  certain of my clients about potential opportunities. One of my clients made me an offer I couldn't refuse to run his oil and gas exploration and production company and to do deals for the parent company. It was a company called Cook International. They owned Terminix Pest Control, grain trading business, insurance business, and a real estate development business. So I got a very broad-based experience and got to operate and actually have my own P and L in the oil and gas exploration and production side. 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

• 1:41Speaker 01

  that, and then went to work for another client. It all kind of ties back to my Kirkland & Ellis roots, it seems, by the name of Harold Simmons, who today we would call an activist. In those days, he was called a corporate raider. Harold owned a number of businesses. I was running one of the businesses as well as helping him try to take over Lockheed. When that failed,

• 2:06Speaker 01

  And I was newly married and spending my life on airplanes. I decided maybe I ought to reorient my career a little bit. And I was offered the job of co-head of private equity of the old Continental Banks of Illinois, a private equity business. I ran it with a guy by the name of John Willis. And that was 1989. 1994, Continental Bank was bought by Bank of America. So we spun out our private equity business into a series of funds called Willis Stein. And that's really how I got into private equity, a bit of a securitist route.

• 2:45David Weisburd?

  Back then, you were writing these massive, at the time, $100 million checks. And private equity was still an emerging asset class, for lack of a better word. What was different back then? How was private equity different at that time?

• 3:02Speaker 01

  Private equity in those days was a very entrepreneurial business. You had a lot of entrepreneurially driven folks who were out trying to raise successively larger funds and make strategic investments. But they didn't have the sector focus generally. They didn't have the staff generally. They weren't using consultants in the same way that they use consultants today. Today, everything in private equity is, you know, Q of E by the name of your favorite accounting firm, hire McKinsey, hire Bain, hire BCG to do all the research, huge investment committees, you know, lots of layers. In those days, it was a much more entrepreneurial business, and there weren't that many funds

• 3:47Speaker 01

  above $5 billion. So it was really a much scrappier business. Today, it is a far more institutional business.

• 3:58David Weisburd?

  I interviewed a former partner at Carlyle who was recruited by David Rubenstein. And he talked about how Carlyle really revolutionized having multiple funds within a franchise. As somebody who was in the industry at that time, how did that affect how you were running your funds?

• 4:15Speaker 01

  Well, one of the biggest regrets I have in the private equity business, and by the way, I'd still be likely in the private equity business, except in 2010, I was very sick. And so I retired. That was before GP stakes and all these continuation things that you could do. So when I retired, John had already retired. So when I retired, he was pretty much winding the fund down, doing one annex fund. But one of my biggest regrets was in right around 2001, actually, right around 9/11, we were going to launch Credit Vehicle. And 9/11 happened, and we kind of lost our nerve, thought we needed to be insular

• 4:57Speaker 01

  for a while. And obviously, what Carlyle pioneered, and others have pioneered, including Apollo and Aireads and others, is the multi-strategy private funds group. And that, 59% of all the capital raised last year was raised by six groups like that. And so that was the right idea. And it didn't affect us because we didn't let it affect us because of 2001, and then we became very insular. But it was definitely the right idea, and one of my great regrets that I didn't follow through with that at the time.

• 5:31David Weisburd?

  And the argument is that if you're in the investment as a private equity investor, you're going to have a better vantage point on whether that business could return capital from a credit perspective. So there's this synergy between the private equity and the private credit part of the business.

• 5:48Speaker 01

  Well, I think that's, I think that's one argument, and a very good one. I think what's happened more from a business perspective for these funds is distribution is incredibly expensive and a big deal. So if you're creating a group of folks, I think Carlyle today has over 100 people that are on their distribution team.

• 6:13Speaker 01

  So it's it's a lot to pay to be distributing one private equity fund. It's a lot better if you have sector-specific funds, credit funds, you have other types of vehicles. So yes, there is similar expertise in credit and private equity, although I would argue there are some specific skill sets for each. But I think it's more about the business of being in the private markets and the fact that distribution is so important and yet so expensive. And to be able to spread that distribution over a group of vehicles makes a lot more sense.

• 6:50David Weisburd?

  Distribution being getting investors, getting endowments, pension funds, but also today, retail?

• 6:58Speaker 01

  Well, yes, I might not use the word retail. I think what I would say more is that the wealth, multifamily office channels today are about the same size, almost the same size, maybe a tiny bit smaller than the warehouse channel. So you have the warehouse channel, which is about $10 trillion. You have the same thing on the RIA side is about $10 trillion. So there's $20 trillion between RIAs and wirehouses. $20 trillion is a very big area and underpenetrated as compared to the institutional side, which would be pension funds, life insurance companies, endowments, and foundations.

• 7:41David Weisburd?

  That's one of the largest kind of non-wirehouse pools of capital in the country. You guys have grown from, I think, a couple billion assets to $70 billion extremely quickly. Yeah, 70 billion. And you now get the choice of whether you want to allocate to the Carlyle or the Blackstones, which has all these advantages, brands. There's an old saying, you don't get fired for hiring IBM versus maybe more of these entrepreneurial private equity funds or the smaller ones are focusing on the lower middle market. Talk to me about the trade-offs. Is there ever a reason to go with the large private equity funds? And if so, when?

• 8:22Speaker 01

  It's such a great question and such an interesting topic that we could talk about for the rest of this interview. But it doesn't make sense to me to say that we're going to be closed to some of the largest players. But it does make sense to me to say that we want to do things that are differentiated with them, whether it's the way in which we might co-invest with them for being a limited partner, or the way in which we might seed new vehicles that they're putting together. But we don't want to be closed to them. In general, I think that firms like ours believe three things are better. They believe that earlier funds are better than later funds.

• 9:06Speaker 01

  They believe that sector-specific funds perform better than generalist funds, and they believe that smaller funds in general perform better than larger funds. But those are general rules. So we do do a lot of middle market and lower middle market investing and fund investing. But like I said, we don't want to be closed to the mega-funds. We want to find out ways to use our capital, like a sovereign wealth fund would, to create unique access points and differentiated investment opportunities for our clients. I often tell the story of when we were raising our third Willi Stein fund and I got a call from a Middle Eastern sovereign wealth fund and they said, "We want to invest $100 million in your fund."

• 9:51Speaker 01

  $100 million is a lot of money at that time. I said, "Well, 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 co-investment rights with an investment of that size." And the person on the other end of the fund said, "No, you don't understand. I need to co-invest in something you've already done." I said, "Okay, what else do you need?" And he said, "Well, I need you to come over here to the Middle East and present the co-investment and your fund over the next 60 days and then we'll see if we're going to do this, but we're highly inclined to do it, given your reputation." I said, great. In 30 days, I was over there and I had convinced one of the entrepreneurs that we had invested in to allow us to add some capital to it so I could create a co-invest.

• 10:34Speaker 01

  And I would have done, and I would have jumped through all the hoops I needed to jump through, including going to the Middle East at the drop of a hat in order to get that $100 million investment. So today, the large RIAs like us, especially those that are focused on the ultra-high net worth and family offices and allocate $100 billion capital are a target for large funds and small funds.

• 10:59David Weisburd?

  What kind of terms are you able to get, being such a large investor on the co-invest? Is this typically some guarantee for some number? Is it some first rights? And what's kind of the best-in-class terms that you're able to negotiate?

• 11:16Speaker 01

  There isn't, there isn't one simple answer to that because every, every asset class, every manager is different. Just to give you some goalposts, for example, in venture capital, it's about access. It's about getting into those top decile performers that are largely closed to anything that isn't a foundation or an institution. And we've been able to crack that, you know, a lot of hard work and a lot of relationships, but also by showing them the consistency and who our clients are are very desirable for them. Because a lot of our clients are wealth creators and people who are creating businesses that they want to invest in. So we've been able to, to crack that. So it's all about access there and

• 12:01Speaker 01

  it's about co-invest access. And sometimes you get co-invest for free in venture capital and sometimes you're still paying 1 in 10 or something that looks like 1% fee and 10% or sometimes just an access fee and that's all over the place. With a larger private equity fund, what you're, what you're trying to do is to be a seed investor in something that they want to launch that might be differentiated for them, something that's a new vehicle where we might get a little bit of GP economics and some co-investment rights. It's very unusual that you're negotiating fee breaks, but that does happen once in a while as well.

• 12:40Speaker 01

  More so in places like real estate, maybe credit. On the credit side, you can often get that.

• 12:47David Weisburd?

  I had Professor Steve Kaplan from University of Chicago, and he calculated just what co-invest rights mean on an IRR basis. So if a fund is returning 25% gross IRR on net basis, that's 19%. Said another way that if you were to invest all of it on a zero and zero basis, you'd get kind of 600 extra basis points, or if you do one to one, it's 300 extra basis points. So it is a pretty significant source of alpha if and when you can negotiate it. And also, big caveat, if and when you know how to not be adversely selected in your co-investments.

• 13:23Speaker 01

  That's a great point. Steve is very thoughtful and very good. I've known Steve since I was in the private equity business, and my son was recently a student of his, so that was kind of fun. Steve's great, and he's right about that. The adverse selection thing is really an important point, right? So many foundations and institutions don't have the kind of experienced staff to make decisions on these co-invests. We have a huge investment staff, people who have been in the private equity business for years. So we hope to avoid the adverse selection issue. The more

• 14:04Speaker 01

  powerful thing, even than the co-invest, is when you can be lucky enough to help seed something for a manager, a new fund, a differentiated fund, something that they really want to do and really want to get off the ground quickly. And you can get some GP economics as well, so that you're not only getting some co-invest rights, but you're also participating a little bit in the carry is really where the unique opportunity comes.

• 14:33David Weisburd?

  Maybe you could double-click on the seeding opportunities, maybe without giving the exact name of a manager. What do some of these opportunities look like when they come on your desk and you decide to pull the trigger?

• 14:48Speaker 01

  Pick one that would be interesting. You've got GP stakes. You know, the issue with GP stakes today is that most of those investments were done without a liquidity provision. In other words, you have a perpetual fee stream, which is very nice, but there's no way to monetize that fee stream. And different things have been tried. Secondary sales typically are at a discount, so that's not a great event, although, you know, it may be better than not having a liquidity event. So if someone was looking to launch a perpetual GP stakes vehicle that would have in it its own internal liquidity,

• 15:30Speaker 01

  like an interval fund, a tender offer fund, that's something that maybe we would seed and we would be part of the GP, something like that, something new that's differentiated. I just use that one because it's something we are looking at and thinking about.

• 15:46David Weisburd?

  That kind of goes back to Procter and Gamble model. You only, you keep one pivot foot. So either do new product with the same customer or a new customer with the same product. So you like to seed not a new relationship, but you like to seed an existing relationship with a new product.

• 16:04Speaker 01

  You can do that. That is true. Or, you know, one of the things that's important and most important is team. So I'm, we're okay seeding a fund, a first fund, for a team that's 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 coming together for the first time and from disparate places. We usually aren't excited about doing those. But, you know, there are always exceptions to every rule.

• 16:39David Weisburd?

  And as you mentioned, you're 70 billion AUM, you're 100 billion, including assets under advisement. You're starting to approach this very large pool of capital, which comes with its its own challenges. How do you retain alpha with going around with 100 billion dollars? And how do you practically operationalize that in a way that keeps your clients kind of getting alpha in the market?

• 17:05Speaker 01

  Yeah, you know, there's 12 trillion, if we're just talking private markets, there's 12 trillion dollars between now and 2030. It's going to be private investments by individual 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's constrained. Now, people often say, well, what about the smaller ones? What about the ones where you can only write 20, 30, 50 million dollar checks? Well, the answer is those have to be in a pooled vehicle. So you're not going to do direct co-investments very often in, you know, venture capital opportunities where you only have a 20 or 30 million dollar allocation. That's going to have to be part

• 17:50Speaker 01

  of a co-invest vehicle. So you can still create the alpha. The only thing that you're not getting is people who like to kick the tires and do things by the each. They're not getting that opportunity in those smaller, smaller vehicles. I personally don't think that's an issue. There are some financial advisors and investors who think it is. But it's just the nature of it. There really isn't a choice. So the larger co-investments, the larger fund investments can be done direct as a one by one. The smaller ones have to be in pooled vehicles.

• 18:25David Weisburd?

  When I think about co-investments, I think about it as all about incentive alignment. So there's two aspects to it. There are like, where are the incentives for the manager? 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, probably even worse than somebody's that's not good at their craft and has good incentives. We can argue that. But what I really want to double click is, when you create these pooled capital, and when you negotiate with GPs, how do you make sure that your incentives are aligned? And how much thought goes into that, that very question?

• 19:03Speaker 01

  So when we're creating a co-invest vehicle, we are not charging our clients anything for that co-invest vehicle. So our incentives and our clients' incentives are 100% aligned. What we're trying to do is to get the best returns for our clients. So what we're looking at is making arrangements with GPs who we believe are going to create interesting opportunities for us to invest and making sure that we are, to use your vernacular, double-clicking on the diligence to see that we agree with them in where these investments make sense. Their incentives are twofold, right? Raising more capital and the need to create co-investment.

• 19:47Speaker 01

  They want to raise more capital that they get fee and carry on. So they know that it's a necessary evil to create some co-investment, so large capital sources will invest with them because that's what they require. But they also have incentives sometimes to do larger deals than perhaps their fund size would dictate. And in those situations, they need the co-investors. So they have two sets of incentives. And we obviously want to be part of both and be there for them when they need us, as well as, you know, creating a better return, as Professor Kaplan tells us, through the co-invest vehicle. By the way, there was an interesting article. I can't remember exactly where it was,

• 20:31Speaker 01

  but it was about David Swensen. And it was about that everybody believes that David's brilliance in the Yale model was because he was first into private markets in a very large way, and that is true. That is a big part of his brilliance. But what also was part of his brilliance, and was pointed out in this article, was his ability to get to know GPs early on and to be a great partner to these GPs. So having been a GP, I understand their side of the equation. And what we try to do is to be great partners to them from the beginning so that there is a series of opportunities that when they think of launching things or doing something differentiated, or when somebody spins out of those GPs,

• 21:16Speaker 01

  they think of us because they know that we are there for them to advise them, to tell them what will work, and to be there if they need additional capital for something or they need to seed something that they want to start.

• 21:28David Weisburd?

  I'm always fascinated and double clicking on these long-term games with long-term people. This Naval quote of how do you play these recurring games with the same actors? And how do you build relationships over years and sometimes decades? Unpack a relationship like what you're talking about where you're investing with them early and then you continue to invest. And how does that start? And is it kind of always quid pro quo? Or is there just this reputational relationship capital that builds and you're kind of always giving to each other? So double click on that a little bit.

• 22:01Speaker 01

  I hesitate to say any names because there's confidential revisions. So there is one very well-known name that is one of the top six that I mentioned that raised 59% of the capital that we as a firm and some of our predecessors have been investing with over a very long period of time. And we have invested in many of their vehicles that span credit, GP stakes and other related investment vehicles.

• 22:41Speaker 01

  And the idea is that we have the kind of relationship where when they're launching something or thinking about something, we're talking to them early and they're gauging what our appetite might be for that. And we're gauging how we see it and whether it fits your mind.

• 22:59David Weisburd?

  Just double click on how those relationships build out.

• 23:06Speaker 01

  Businesses, people, and this is no different. While it can become very transactional and that's unfortunate, it should always have that element of relationship and culture. And when you can be consistent in the way that you approach things and they're consistent in the way they approach things, you do build up a cadence and trust that I think makes it much easier to get to yes on an investment.

• 23:38David Weisburd?

  It's not unlike a co-investment opportunity where in the beginning you're diligencing the manager and then you're only diligencing the actual underlying company. So there's almost like this two-step diligence. And it's all.

• 23:52Speaker 01

  And we're all human. We all have things that we do better than other things. And we all have mistakes that we make consistently and we try to learn from. And we all have our own frailties. So you learn. You learn what is the sweet spot for someone and why it makes sense to invest with them in those kinds of things and maybe not in other things that are not perfect for what you're trying to accomplish.

• 24:17David Weisburd?

  In that vein, has there ever been a situation where a GP has given you back the money because the strategy no longer made sense or made a mistake and communicated well that you backed that GP in another fund? And in what cases did that happen?

• 24:36Speaker 01

  There has been a case where we backed a GP and the strategy got overpriced very quickly. And we went to the GP and said, look, you know, we have given you a commitment. We don't think it's in your interest or in our 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 in progress 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. We'll make sure that we deal with you fairly. And that was the right thing to do at the time and it did work out.

• 25:21Speaker 01

  Now, we've not done another thing with that particular GP, but we would because it worked out well.

• 25:28David Weisburd?

  Taking a step back, when it comes to picking private equity firms and your first commitment into them, what's the criteria that you look for and how's that evolved over your career?

• 25:41Speaker 01

  When I started in the private equity business, people would ask me what was important in private equity and how do you make decisions about investments? And I would say, oh, you know, it's about industry dynamics, competitive positioning and people. And if you'd asked me 10 years into it, what would I say? I would say it's about people, culture, people, culture, and that the industry dynamics and the competitive positioning are table stakes. You have to have it, but you know, you really need the right people and the right culture. And today, depending on the asset class, some of it's about sourcing, some of it's

• 26:25Speaker 01

  about, you know, what happens when things go bump in the night. But in the end, it's always about having the right people with the right reps and the right backgrounds.

• 26:34David Weisburd?

  And perhaps it's painstakingly obvious, but maybe you could double click why it's people and culture and how that plays out within a manager.

• 26:43Speaker 01

  Look, everybody makes mistakes and everybody makes hiring mistakes. Everybody makes strategic mistakes, investment mistakes. You know, you miss things, right? I look back on the, there were two investments that 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 that you should not have trusted in the way that you did, that gave you information that turned out not to be what you, what you learned it to be ultimately. Now, that's not to say people can't be great and still make mistakes. They can't.

• 27:28Speaker 01

  The best investor's still not going to bet a thousand. Ted Williamson bet a thousand. Nobody bets a thousand. But, but it is to say that you can usually pinpoint, if you do a postmortem, where you went wrong, what you missed. And without getting into tremendous detail, it's usually something that was, in hindsight, painfully obvious. And if it was the right person doing the right digging, might have been a little bit more of a factor in your investment decision.

• 28:00David Weisburd?

  As you build out Cresset, you're also building out a pretty sizable organization. And how do you set the culture and the policies in a way to make it succeed?

• 28:15Speaker 01

  When we started Cresset, the first thing we did, there were, I think, 10 of us at the time, we went offsite with a woman by the name of Laura Desmond, who had just retired as a CEO of Starcom Media, whose specialty was brand blueprint and culture. We spent three days offsite talking about what our culture needed to be and where we wanted to take it. That got memorialized in a one-page culture card, which exists today. We review it all the time, I would say, formally, annually, but all the time. And there's only been a couple of very small changes to that culture card over time, which

• 29:00Speaker 01

  goes through our spirit, our behaviors, and all of 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. It's not perfect. Culture is not a perfect game. You're going to make some mistakes and have to adjust. But so long as you hold yourself up to it and you understand what your key tenets are, right? So for Cresset, it's built by clients for clients. It's having the use of our scale for the benefit of all of our clients and the full alignment with our clients, putting our clients first, without ever losing that boutique feel. It's extreme accountability.

• 29:45Speaker 01

  It's optimistic energy. It's all those things. And when we have members of our firm that are not exhibiting those things, we make changes.

• 29:54David Weisburd?

  One of the things that I always try to improve myself is how to hire for culture. It's much easier to hire for quantitative skills. How do you suss out somebody's culture fit in the hiring process?

• 30:09Speaker 01

  It kind of depends on the level. If you're looking at the very top levels, I highly recommend, and you can, I will use his name because you can, you can do that, using G H Smart, Jeff Smart. It's, yeah, yeah, I mean, you really want to put people through the personality paces. And when you don't do it is when you make mistakes. And we've made. I mean, if you really want to understand what motivates people, what their strengths are, what their weaknesses are, and the type of manager they are, and the type of leader they are. So at the highest level, I mean, I really think you do have to do the assessment. As you go lower down in the organization, personality profiles are okay.

• 30:52Speaker 01

  You know, we do use personality profile indices. There are a number of those that you can use that helps. But there is some pattern recognition that you can, you can get to by giving people scenarios and seeing how they react to those scenarios. How do you react when a person does this? What's your reaction when someone tells you something that isn't, that you find out is not factual? Those are the kinds of things that you can learn a lot about what they're really about. So use the PPI stuff, use other personality indices if you like them, but ask questions to elicit how people will behave in certain circumstances.

• 31:36Speaker 01

  And then at the very top levels, I really do think you need an industrial psychologist review.

• 31:42David Weisburd?

  I read Jeff Smart's book back in 2008, my senior year in college. And I think the best way to explain it is that people do not change. So all hiring processes should be based on their track record of behavior. And how you phrase it and how you get references 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 that if you look at people's track record of what they're doing, AKA, don't listen to their narrative, or they're selling themselves in the interview, you're going to get much better hiring decisions.

• 32:22Speaker 01

  No question, but I do like also something that Jeff says, which is you want to ask the same questions to a group of people, so you're getting some comparative data. But I also like to add the scenario questions and see how they react to the scenario questions.

• 32:41David Weisburd?

  Kind of hypothetical, if you were in this situation, what would you do?

• 32:45Speaker 01

  Yeah.

• 32:46David Weisburd?

  So, last time we were chatting, you corrected me and 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. So tell me about the lower middle market and, A, where's the opportunity set and how do firms invest using leverage, just like the large firms do today?

• 33:10Speaker 01

  Maybe we take a step back and talk about the difference between where lending is generally today and where it was maybe 10 years ago. So today, you have many opportunities for leverage. And those opportunities are bank syndicated loans, which at the higher end still are the largest share of the market, but are less so in the middle market and the lower middle market. Sponsor credit today is much higher share of sponsor credit is private debt or private

• 33:53Speaker 01

  credit than there used to be. There are even unique lenders in the lowest part of the middle market that will do somewhat of asset-based stretch loans. And there are more and more players coming in every day and more and more products being launched by the areas of the world and even the largest players. So if you really think about what's happened since the GFC, you've seen a proliferation of private credit. That was starting to happen in 2010, 12, 14, those areas, but where it really accelerated

• 34:32Speaker 01

  was 2019, when rates started to change and you could really make good returns investing in credit. Today, you might say an average is probably about 11% return on a sponsor credit in the middle market, maybe 11 and a half percent or higher in the lower middle market for senior debt risk. What's the difference in the middle market or the lower middle? In the lower middle market, you have the risk that the companies are smaller and things go bump in the night. It's easier for them to not be there, but you'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 upper side of the middle market. And you're getting a little more spread.

• 35:15Speaker 01

  You might be getting another 120, 140 basis point spread in the lower middle market to compensate you for the risk. But there is plenty of capital available to leverage in the lower middle market, especially for sponsor credit. And why is that? Because when I started in the private equity business, my first deal was 10% equity and 90% debt. You know, that was 1989. Today, very few deals are pretty close to one to one, right? So you're putting a dollar of equity in for a dollar of leverage in. And there's more dry powder in the equity side still than there is on the credit side. So everybody's so worried about this big blow up in private credit and you read a lot about it. Personally, I'm not concerned.

• 35:59Speaker 01

  It'd be easier to say I am concerned because then if it happens, I look smart. But I really believe that, you know, sponsor credit with solid sponsors, it's not a highly risky proposition because you've got a dollar of equity behind the dollar of debt. And the one thing you know is that GPs are poor, a zero. 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 the private lenders are taking a lot of share from the banks and they're providing a lot more liquidity in the market.

• 36:42Speaker 01

  And because rates are high enough today to provide a return to the investors, people are pouring in. Because if you can make 11, 12, even 10% on senior debt risk and private equity over a long period of time is 13% with a lot longer duration, a lot more risk, you can see why people are allocating higher and higher amounts to the private credit side.

• 37:04David Weisburd?

  I want to double click on something very interesting. There's a game theory to the private credit in that the private equity funds do not, to your point, want to do a zero and the private credit is senior to the private equity. So there's this incentive to follow, I guess, put good money after bad into some of their struggling deals.

• 37:26Speaker 01

  Yeah, I mean, good money after bad has a pejorative connotation, so I'd probably stay away from that. But what I would say is, if you're a private equity investor and you've used a lot of leverage, even in the lower middle market, you've used four times. And a business starts to struggle, especially in the upper middle market or the higher end where it might be six, seven times EBITDA leverage, and the business starts to struggle, you have a choice to make. And that choice is risk the possibility of losing the business entirely, or delever

• 38:09Speaker 01

  and maybe hurt your returns, but still make some returns, some reasonable return. And usually, the decision to delever is the right decision. Now, that's not true in a scenario where you've totally missed something that has fundamentally changed the industry, right? So.

• 38:33Speaker 01

  Google comes into the marketplace and magazine publishers are going to really struggle and that was one of my failings. We had a big magazine publisher when Google came into the marketplace and throwing good money after bad there probably didn't make sense, right? That was good money after bad. But, you know, manufacturing business, there's some new technology, it hurts it a little bit, but doesn't kill it. You delever, maybe you're going to make an eight or 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 right strategy for most private equity firms in those situations.

• 39:11David Weisburd?

  One of the unique aspects of your large pool of capital is that it's mostly taxable. I know there's some probably non-taxable CRTs or IRAs, et cetera, but mostly taxable. Have you found a solution on how to give access to credit in a tax-efficient way?

• 39:30Speaker 01

  Yes, it's not for everybody, but there are a couple of things that work very well. One thing that works very well is obviously the smaller investor that has an IRA, 401K, putting it in those vehicles. That works for a lot of people. For larger investors, for very wealthy families, setting up insurance dedicated funds, using private placement life insurance or private placement variable annuities is a really good strategy. Now, there's a lot of complexity to that. It's not an automatic easy button, but if you

• 40:09Speaker 01

  can work through the complexity for very wealthy investors, those strategies are less than 100 basis points of cost for the insurance piece of it and you shelter the tax.

• 40:25David Weisburd?

  If you could go back to 1980 when you graduated Harvard Law School and you were just getting into your legal career, which then turned into private equity and now with Cresset Partners, what would be one piece of advice you could give yourself that would either accelerate your career or maybe help you avoid a mistake?

• 40:47Speaker 01

  One piece huh? Well, let me start with what I tell young people today. I tell young people that you are going to have, the lion's share of a piece of a puzzle. And it's imperative that you do that, the best you can possibly do it. And you work your tail off to get it absolutely right and keep asking questions about how to make it better. That's step one. Step two is you understand where that piece of the puzzle fits into the overall puzzle. And you learn as much as you can about how it fits

• 41:31Speaker 01

  and how the overall puzzle works.

• 41:36Speaker 01

  In shorthand, you have a perch. And from that perch, you 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 times where I got hyper-focused on just the little piece and didn't understand the bigger piece, I didn't advance as much as I did in those situations where I understood how everything fit together. And so my best advice to the 24-year-old me, or the whatever, would be that, right? I guess 25-year-old me if it's 1980. Make sure that you understand how everything works.

• 42:21Speaker 01

  And never stop learning. And today, in today's world, lifelong learning is so much easier than it was in my world. And continue to pursue other ways to learn around the periphery of that one puzzle piece that you have. I think that would be the best advice I could give.

• 42:44Speaker 01

  Generations are so different today.

• 42:48Speaker 01

  We talk about work-life balance. Generations now, work-life balance for me growing up was work like 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 of advice, it's really be present in those moments where you're having that balance. In other words, if you're at an event for your spouse or your child, really be there and then go do what you gotta do work-wise. I can think of so many times when I wasn't as present as I might have been. I remember coaching my son's

• 43:32Speaker 01

  hockey game and in the middle of a deal and the phones ring and I'm like, "Oh my God, just be present for that hour or hour and a half and then go do your thing afterwards." So that would be the other piece of advice I'd be is always be present in whatever it is you're doing.

• 43:50David Weisburd?

  We touched on earlier one of your regrets of not building out the credit side of the business, but you clearly have made some very good calls. What's the best career call that you made over your entire career? What's the best bet that you made and it ended up being very fortuitous?

• 44:12Speaker 01

  It's gonna sound almost Pollyanna-ish, but I've enjoyed every step of the journey. So the call to be a lawyer, after having a business background, was probably a great call, even though in hindsight, if I did it over, I might have started in business because that's where I ended. But I learned a lot being a lawyer and I think that those relationships also have suited me really well over time. So I would say that was a very good call. Going out and actually having to make a payroll and starting something with my own money was also a huge call because until you've done that, it's very hard to

• 44:57Speaker 01

  tell people how to do it. And it creates an enormous sense of respect for what it takes to operate a business. And very few people are great operators. That is definitely...

• 45:09Speaker 01

  The skinniest set of people who can really operate a business. There are a lot more people who can make investments than people can actually really operate a business. So that was, I think, really critical in my development. Having worked for people who were doing so many things in the public marketplace that were so unique and differentiated, like Harold Simmons, was huge for me because, you know, I ended up being a private markets person, but my knowledge 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 I had no idea I was going to do that. It was, you know, it turned out to be really a natural move

• 45:51Speaker 01

  from having been an operator, a 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 was recovering from cancer in 2011 and decided I wanted to do something, instead of starting another private equity business, which would have been, you know, the natural thing to do, I decided to build another operating business. I built an alternative energy development company and then sold that. And that was a great chapter. It was a great call because it got me back into what I love to do, which is build things.

• 46:33Speaker 01

  But of all those things, and it's going to sound, I don't know how it's going to sound, but I always pinch myself that Eric Becker and I got together, started investing our own personal capital, buying some companies, doing some real estate things, and then realizing that there was this enormous opportunity to build something that not only optimizes wealth for ultra-high net worth individuals, but also optimizes their lives. And to build something that was built by clients for clients, taking the client's land, creating this enormous alignment.

• 47:12Speaker 01

  In building something that really didn't exist, and I would say still today, Cresset is very different from all of the competition because we optimize wealth, we optimize life, we create lifelong learning for all of our clients, we create unique investment opportunities, we create unique opportunities for them to enjoy their lives, their lifestyles, pay their bills, do their taxes, everything in one place, one nectogram, outsourced family office. And I actually think that's my crowning achievement, that I think that is the thing that I am most proud of because we're helping thousands of people to really live a great

• 47:54Speaker 01

  life and to maximize their wealth and created something that really didn't exist before Cresset.

• 48:00David Weisburd?

  That's so interesting because you have this career of stacking these skills that together, there's probably you're the only person in the world that has all these skills, legal, then private equity, then dealing with the public markets, dealing with alternative energy, dealing with family office. And I failed to double click on this, but Cresset was started because you had the same pain point. You didn't need any more money, clearly, based on your track record. You wanted to solve your own problem and those are oftentimes some of the best organizations.

• 48:36Speaker 01

  Yep. Find and need. I mean, we talked before about perch. That was my perch. Find and need. Sit on a perch, find and need. People talk about, oh, I'm going to start a business. My own son came out of University of Chicago Business 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. Start something that you know. Start something that you've seen. Start something you know there's a need. Well, you can find things that there's a need even though you haven't been in a related business, but it sure helps if you've been in a related business.

• 49:08David Weisburd?

  I like the whole thought experiment is you should only start a business that won't get out of your head. You try to, you try to procrastinate starting it and it keeps on saying, you need to start this. Like this is a pain. I keep on having this pain. Other people have this pain. I have to start this business versus this romanticized idea of being an entrepreneur.

• 49:25Speaker 01

  Absolutely.

• 49:26David Weisburd?

  Well, Avi, this has been absolute masterclass on private equity, RIAs, building enduring businesses. Thank you for jumping on and I look forward to continue this conversation live.

• 49:39Speaker 01

  Thank you, David. I would love to do it anytime and your questions were great and your style is great and it was a lot of fun to do it. So anytime, anytime. Happy to help. All right.

• 49:49David Weisburd?

  Thanks for listening to my conversation. If you enjoyed this episode, please share with a friend. This helps us grow. Also provides the very best feedback when we review the episode's analytics. Thank you for your support.