E404: Why This Billionaire Family Office Doesn't Rebalance Its Portfolio | Pincus Family CIO

Most investors obsess over pre-tax returns. Scott Abookire argues they're measuring the wrong thing. As Chief Investment Officer of Pincus Capital, Scott oversees globally diversified public and private portfolios for multi-generational families. In this conversation, he explains why after-tax returns are the metric that truly matters, why he abandoned the traditional endowment model, and how sophisticated family offices think about risk, liquidity, and long-term compounding. Scott also shares the portfolio framework Pincus uses to manage drawdowns, why governance matters more than forecasts, and how the best investors stay disciplined when markets become emotional.

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

• 0:00David Weisburd?

  In today's conversation, we explore why most investors measure performance incorrectly, why Scott moved away from the traditional endowment model, and how sophisticated families think about portfolio construction, risk, and preserving wealth across generations. Joining me is Scott Abuqair, CIO of Pincus Capital Management, where he helps oversee the wealth of the Pincus family and thinks deeply about maximizing after-tax returns for long-term investors. Without further ado, here's my conversation with Scott. Scott, one of the ideas that you've really spent a lot of time thinking about is after-tax returns. Why is nobody focused on it?

• 0:35Speaker 01

  It's really hard to calculate, genuinely difficult to calculate after-tax returns. We can get into the structure of our operation a little bit, but just like, maybe one way that a lot of sort of larger, single-family or multifamily offices might differ from your traditional wealth client is just the complexity of like entities. You have individuals, entities, sometimes pooled vehicles that are created, all of which kind of have different nuances in how they're taxed. Some income from a fund might flow from a fund to a pooled vehicle to a trust, and then certain types of income might stay there and get taxes get paid on behalf of the trust. Certain income goes down to an individual. These entities all can be in different jurisdictions.

• 1:16Speaker 01

  How do you attribute income tax liability appropriately to the right place and the right investment to actually do the right analyses? There's a whole bunch of reasons. It's just genuinely difficult. There's like timing issues. Oftentimes, you probably experienced this. Your accountant might call you around April to do like an extension thing, and you've got to make it at the same time. You're trying to truing up your prior year's tax liability. You're making a first quarter payment, and that might be sort of framed as like a lump sum. So somebody has to go through and say like, okay, well, what time period was that for? On the individual investment level, you've got things like, a simple example is like, private equity fund might write up a company two or three years ago, but realize it today.

• 1:58Speaker 01

  And so where does that liability go in terms of how you would adjust your time-weighted return or whatever it is you're looking at, your IRR? So there's just like a bunch of genuinely difficult calculation issues. And then I would say, equally as important, frankly, I think incentives are off a little bit here. I mean, in most, I'd say institutional investors, and certainly the case in family offices, because it's so hard. A lot of people are incentivized on pre-tax returns. And so I think the incentive to really roll up your sleeves and do this is not really there. I think in probably the same a little bit for the accounting profession, it's just a little bit easier for everybody if this is just so complicated that you just ignore it. Those are a few reasons.

• 2:42David Weisburd?

  It's deeper than even the incentives of the managers. You could argue their fiduciary responsibility to their investors, which are mostly institutional non-taxable, is actually to maximize their pre-tax returns, not their post-tax returns.

• 2:55Speaker 01

  Exactly, but it's all the way down. I mean, when I was saying the incentives, I was actually referring to like someone in my seat who's allocating typically to fund managers. But you're right, I mean, from the the fund manager's perspective, I mean, this is another one that's genuinely a difficult one to answer. Their clients might be, are all subject to different jurisdictions. And so what is the right way that they should actually report this? But yeah, I think, like you said, it's they're raising money from a variety of people, including people that aren't subject to any tax. And so what is the right way to show it?

• 3:25Speaker 01

  Obviously, these things are hard to, you can imagine if you start breaking out of different ways, SEC mandates and all other rules also come into play. Like, it's very hard to footnote everything that you're doing. But I sympathize a little bit with the managers in that this is a tough one to answer.

• 3:42Speaker 01

  But again, it goes all the way down to like the allocator.

• 3:45David Weisburd?

  Even the regulators themselves don't want the true after-tax returns to be reported to investors. Why? Because different investors are in different jurisdictions, so it's very difficult to do that.

• 3:57Speaker 01

  You could genuinely misrepresent something if you aren't taking into account every LP you have and what their situation might be.

• 4:06David Weisburd?

  Do you ever see this trend changing?

• 4:08Speaker 01

  I really hope technology is going to unlock some of it, definitely. There seems to be more emphasis on certain products getting more popular that I think hopefully provides some momentum that in the actual asset owners themselves, in this case, I'm referring to taxable families in particular, are sort of really seeing maybe the the benefit of certain types of tax efficient strategies. And so I think, in particular, the allocators that are using those strategies, maybe they need to do a better job of actually showcasing the value that they're adding. Maybe some of those incentives will shift a little bit and you'll see from the demand side of. You know, us as allocators demanding that certain technology solutions come around or accounting comes around, I'm cautiously optimistic.

• 4:50David Weisburd?

  Despite some of these complexities in calculating post-tax returns, you at Pincus Capital Management, you focus on these post-tax returns. How do you do that?

• 5:01Speaker 01

  It's hard. It's a lot of work. It's not very scalable. We show on a quarterly, annual basis really what the actual dollars that went to certain taxes were. And then it's really only meaningful, to be honest, on the longer timeframe. And so in some of our like more kind of quarterly, annual, like more formal, larger reporting sets, we actually show, we basically disaggregate all the P and L dollars from the investment returns, sort of net of the fees that we pay to outside investors and managers, then removing taxes, our fees, any spending that might have come from the accounts and literally tie it out dollar for dollar every year. Like I said, it's not that meaningful on an annual basis because there's a lot of noise. Just to give like an idea, like over 10-ish years of doing, some cases, looking back,

• 5:46Speaker 01

  it's roughly been like 20, 30% of sort of pre-tax gain, both realized and unrealized, that eventually goes to taxes. Assuming that you're a long-term investor and you're not spending a lot of money, this is the thing that eats up most of your gain. And so it's a big, I feel like we have to try to limit that as much as we can.

• 6:05David Weisburd?

  You have 20, 30% across the entire portfolio. You have certain investments like private credit, sometimes up to 50%. You have other ones like venture capital, sometimes under QSBS, zero. But 20 to 30% of tax, that's 2,000 to 3,000 basis points per year.

• 6:24Speaker 01

  In dollar terms, if we made a hundred million dollars over the course of a period, 20 to 30 million dollars went to the IRS or state and local, federal. It obviously depends, but yeah, it's big and that compounds. I mean, that's 20, 30 million dollars less than you have going forward. You laid it out pretty well. I mean, it really varies. If you go down to the investment level, it's, there's a wide range of treatment, but that's what we've experienced. And spent a lot of time, it sounds simple, but that's a lot of work just to generate those kind of numbers. That's the weighted average of what we've experienced.

• 6:50David Weisburd?

  How has your behavior changed, knowing what you know now?

• 6:53Speaker 01

  I hate to pick on any one thing, but since you mentioned it, I mean, I think private credit, for a lot of families, for the general taxable pool of capital, we think in most periods, if you look at just like what you could get from municipal bonds or something and. The tax equivalent yield in private credit, you're getting a lot of extra risk, illiquidity for not much after tax yield. And so I think that goes back to the incentives, though I think it's really hard for us to show like, okay, munis were yielding 3%, 4%, or 5%. Private credit was doing double digits. But you know, just like showing that we were actually generating

• 7:37Speaker 01

  the equivalent kind of after tax.

• 7:40David Weisburd?

  It could be, especially in private credit, oftentimes the management fee is not tax deductible. So you might be getting a 16% return, having a 6% net.

• 7:48Speaker 01

  That's a good point. I forgot to mention earlier about going back to like just the challenges of after tax. I mean, that that management fee thing is a sort of, what, eight or nine years ago that that became law? And so if you're going back and looking at the tax efficiency of certain investments, how do you? That's just another complexity. And like, how do you adjust the after tax return of this investment that actually experienced the change in law?

• 8:10David Weisburd?

  Given that you're a taxable investor, how does your portfolio differ from the traditional endowment approach?

• 8:16Speaker 01

  Well, some things about the endowment approach that I like, I'm not as well versed in maybe I should be on like all the specific hallmarks, but to just think about it in terms of like long-term exposure, really capturing the liquidity premium, diversifying, working with best-in-class managers, like those things we really embrace. I think the biggest thing I would say that I associate with the endowment model that we've totally gotten away from is detailed strategic asset allocation targets that we basically rebalanced to. There's a lot of, you know, rabbit holes to go down in here, but one simple thing is we really, the way we refer to asset classes is very simplified. It's just growth, diversifiers, and deflation hedging. Everything falls into one of those three categories.

• 9:01Speaker 01

  The other thing is that in terms of specific like targets, what we've decided is that arbitrary rebalancing to like a 70/30 or something is. There's not a ton of science behind like those numbers. It's pretty arbitrary. And so we've thought through like, we sort of like a strategic framework. We're not just winging it. And we do agree to some way. We have a way of quantifying kind of the risk tolerance and agreeing with the, you know, the family entities, what it should be. But we've also created a way to sort of dynamically adjust the percentages we work with based on the actual asset value of the portfolio we're talking about. What we do is we really think hard about what the liabilities are of this.

• 9:45Speaker 01

  I'm going to use the word entity because it's not just one family or one person. It's actually the legal entity that we're talking about here, like a trust or a foundation has very different, like very specific liquidity parameters and things. So we think a lot about risk in terms of dollar terms and what the liabilities really are. But as you look at the last few years in particular, like you had this bull market run. And if you're taxable, this arbitrary rebalancing to like a 70 30, if your dollar liabilities haven't risen commensurately, it's sort of silly, we think. And so we basically have a way of somewhat reflexive where as the market rises, we allow our entities to take more risk. And conversely, there's situations on the downside where that can kind of be tricky.

• 10:29Speaker 01

  Our actual benchmark adjusts as the market continues to go up. And that's a way that we think we can actually hold things longer and let them compound and continue to like not interrupt that compounding with tax payments. And that's worked right for us over the years. I mean, obviously the market has continued to go up, but we think that sure, would that leave us sometimes like in a higher allocation than your, the market all of a sudden goes through a drawdown? Well, we have wished that we just stuck to the simple basic 70 30. I mean, maybe, but I think we're pretty confident that avoiding that as taxes on the upswing and sort of staying invested and then not trying to time these things or doing arbitrary rebalancing is going to end up being like the better thing over the time horizon that we're referring to.

• 11:11David Weisburd?

  Fascinating framework, which is you have some finite amount of liabilities, which is basically expenses, family expenses.

• 11:19David Weisburd?

  And those expenses end up being a constraint on the portfolio. In other words, you need to deliver some amount of cash flows to account for those expenses. And then everything else, you want to be as illiquid as possible. Why? Because you want to capture the liquidity premium. And you also want to be as riskful as possible. Why? Because again, you get compensated for that risk. As the market goes up, your liabilities, if they stay the same, then you just have more capital to deploy into more risky and more illiquid opportunities, which should give you a higher return.

• 11:50Speaker 01

  Exactly. I mean, we basically work with a couple of constraints on our portfolio that takes the place of a strategic asset allocation. We have a drawdown threshold, which is based on some heuristics and we can get to that. And then we have a note, we do, I wouldn't phrase it as we want to be as illiquid as possible with the rest. But we definitely want to be as riskful as the rest. And so we sort of have this drawdown threshold. We sort of say like, under no circumstances, we structure the portfolio, well, it will not fall below this, this threshold. Cause that's a threshold where in dollar terms, it really compromises what the family is trying to do. We, under no circumstance, we want to risk that. So this is where we kind of get into more of a barbell approach to sum it all up. We really have this drawdown threshold. We've set the right amount of lower risk assets to make sure that that's solved.

• 12:33Speaker 01

  And that's sort of Charlie Mungerism, like inversion, like he has the sort of quip, like, show me where I'm going to go die, so I never go there kind of thing. So we're going to try to clip the downside. And that sounds like a pessimistic or neurotic outlook, but really that it's kind of the opposite. What we want then is to be able to just go for it with the rest. And so it's not necessarily illiquid, what we're doing with the rest, but it's growth exposure typically. And I would say the other parameter that we really use is some, is specific to the illiquidity. We have to make sure that because we're working typically, this is where we do stick with the endowment approach. What we think are best in class investment managers. More often than not, that requires some unfunded commitment. And so we have to make sure that we're managing those liabilities as well.

• 13:16Speaker 01

  But we need to make sure that sort of risk on portion of the portfolio is set up well to make sure that we don't default there.

• 13:28David Weisburd?

  And the drawdown is just how much your portfolio goes down. So you have 100 million, it draws down 20%, it'll go down to 80 million. You set a drawdown threshold. Why is that?

• 13:37David Weisburd?

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• 14:22Speaker 01

  I just think it's easy to relate to, honestly. I mean, I've been doing this for a long time. I started my career at Cambridge Associates, did the CFA. Like, I think I'm qualified to say, like, I understand kind of the modern portfolio theory, the math behind trying to make assumptions around correlations and sharp ratios and all that stuff. I think it's just not kind of nonsense when you get in front of a family and you tell them that your portfolio has a standard deviation of 15% or whatever the number is. Like, that doesn't work for most normal humans.

• 14:46David Weisburd?

  It's hard to intuitively...

• 14:47Speaker 01

  Yeah, like, what does that mean? So that's one big thing. We try to stay, and it obviously has other things. Like, you assume that all these things have a normal distribution. We've seen that they don't. So even as an investor, like, the amount of time that we would theoretically spend to try to do that kind of modeling, we just don't like it. At the end of the day, I think you just don't get a good pat on the back where if you say, like, "Yeah, we didn't perform that well, but our sharp ratio was great." Like, no individual cares about that. So, we've tried to come up with something that's really more just, like, practical and relatable, and I think actually has a connection with people's everyday lives. Even though the people that we work with are extremely wealthy, they are, in a lot of ways, just like us. In some cases, even though the balance sheet might be big, they really depend on distributions and other

• 15:29Speaker 01

  things like that. Just a real need to make this kind of relatable. And so what we do is, it's a little walkie, but we kind of work with the client to really understand what are their, like, fundamental needs. And we can relate to this, like, we all have fixed costs in our lives and stuff like that. And then you can kind of think of, like, if you quantify that in dollars...

• 15:50Speaker 01

  There is a level of, I think, assets relative to those dollars that causes a problem. If you have a million dollar annual need and all of a sudden your portfolio is worth 10 because of a drawdown, and so your annual need is 10% of the portfolio. Like you're no longer like a long-term investor. You're kind of like, you're selling and you're doing all sorts of stuff. And now you've sort of, you no longer can continue with the sort of mandate that we're trying to do. And a lot of this is like in Nassim Taleb, kind of, he talks a lot about like death events. And I think of it as-

• 16:18David Weisburd?

  Black swans.

• 16:20Speaker 01

  Yeah, but like there's specifically a point where you really kind of take yourself out of the game. Going back to the families you work with are very long-term. Like, and we're pretty confident that if we just do the kind of strategy that we're executing for as long as possible, like they're going to do great, right? So the worst thing we could do is take them out of the game. And so we work with them about, this is the drawdown dollar value that would really cause a problem relative to your need. And we kind of agree on that. And then we, we kind of go for it. And so if, instead of it being, have your million dollar need, your portfolio is 10. If it continues to grow and you're at 100, 150, and it continues to grow and your lifestyle doesn't change that much, I mean, obviously inflation, it's going to.

• 17:02Speaker 01

  But if you don't like basically increase your need proportionally, we can take more risk. Couldn't afford a larger drawdown. And so we use our own tech. This is not rocket science, but is a little bit of orchestration to like real-time, keep track of this for every entity we work with. But that's a dynamic number that you can look at that does minimally change every day with the value of these accounts. That's our asset allocation framework. We try to make sure that we're taking as much risk as we can, but no more. But we do also, it's important, it's part of the benchmark process as well. And so we do equate that drawdown threshold to a mix of just sort of stocks and bonds,

• 17:46Speaker 01

  like kind of like a 70/30, because I do think that's a good, fair representation of the family's cost of capital. I do think that we owe them like something better than they could go out and just do on their own or through a passive, easy way. So we do translate this into a benchmark.

• 18:00David Weisburd?

  So to many people, this is such a weird and esoteric thing, but as you gain more wealth, you start going from liquid indices like the S and P 500 and bonds to these illiquid investments. And at least today, more than 90% of these are what's called drawdown vehicles. So you commit to a private equity fund, they call your capital over three years. So the question becomes, what do you do with that capital over three years? So what's the best practice there?

• 18:27Speaker 01

  Well, so I went back, I think earlier I alluded to the fact we have two basically constraints that we manage our portfolio with and they're not at all like endowment model type things. The first one, I mentioned the drawdown threshold. The second one is just our version of the, our answer to this problem that I've thought about for a long period of time and finally kind of got to where I want to be, is we always make sure that we have, so we'll go back to heuristics. We apply that same kind of mental model I described. The equity was, has been in prior years, it was once down 55% or so. We do kind of the same exercise for every asset in our portfolio has a benchmark, like a more, I'd say better proxy for that investor, that investment.

• 19:11David Weisburd?

  Like a private equity or venture capital could have a benchmark.

• 19:13Speaker 01

  We basically just come up with like the public equivalent-ish of, in some cases, this is hard, but like if we have a biotech fund, we use the biotech index or in a venture capital, it's a 3X levered ETF. That's a good one, actually. We use the telecom index because, because it had such a horrible return to the dot com. But, so yeah, I mean, venture, I think we ascribe like a negative, 85 in that case. So we always, that's how we kind of always look at our, the drawdown potential of our portfolio is these proxies. So again, the math is super simple, very easy to understand. But when it comes to the unfunded commitment specifically, what we do is we basically take the liquid assets in our portfolio, and I mean like purely daily liquid. So SMA equities or fixed income and cash, and we apply those drawdowns in a draconian way, kind of all at

• 19:58Speaker 01

  the same time. And we make sure our unfunded commitment is never higher than that stressed amount. So let's say, just to keep it simple, let's just say our liquid portfolio is 100, like 100 million dollars of equity.

• 20:11Speaker 01

  We think the drawdown potential of that is roughly fifty, forty-five, whatever. And so we make sure that at any given point in time, in that case, our unfunded liabilities would be no more than forty-five. And this is a very draconian situation. It sort of implies that what we're trying to make sure is that if all of our things experience this drawdown at the same time, and all of our managers that we've committed to call at the same time, which is not going to happen.

• 20:36David Weisburd?

  And that liquid portfolio is not sitting in cash and treasuries.

• 20:39Speaker 01

  No, so it can be in. But it's sort of like a capital charge in some ways. The more we put in equity, which has a high drawdown, the more it doesn't help us against the unfunded as much as just like cash, you can hold dollar for dollar for unfunded, right? Because we actually ascribe a zero percent drawdown threshold to cash. So forty-five million dollars of cash laying around, you could easily, in our system, justify forty-five million dollars of, but you need whatever it is. Ninety million dollars of equity to do that same thing. So we're always, I mean, again, it sounds a little bit silly in a vacuum. I don't know if you've ever read any Kevin Kelly. Out of Control is one place where this shows up. He talks a little bit about like cybernetics and in this any kind of tightly coupled system, which our portfolio kind of is. You've got distributions coming and

• 21:21Speaker 01

  capital calls coming and you've got the market influence on the value overall in AV and you've got all this stuff going on. You can just like control a few specific things. You can, you can have like a very, you can, it's like he uses example of a thermostat that actually has no idea what it's doing. It just knows that like when the temperature goes below a certain amount, it like adds, goes above a certain amount, it takes away. So we've kind of tried to find, like, that's sort of a philosophical way. We've got these two kind of like thermostat like things going on, drawdown threshold and the sort of illiquid or liquid asset relative to our unfunded. And we think if we just make sure that we don't mess those up, that our portfolio actually looks pretty good. And

• 22:04Speaker 01

  that metric is not like directly tied to like NAV of private assets at all.

• 22:11Speaker 01

  But those are our controls. It just keeps it simple.

• 22:15David Weisburd?

  A lot of people listening to this will think this is unnecessarily pedantic or academic conversation about risk. What they fail to realize, and I know this because I've interviewed so many CIOs that have been CIOs for 20, 30 years, like Larry Coachart, who is a CIO at McKenna. What he talks about is that a portfolio is only as good as its stress test in the real world. Meaning, he would be at so many institutions and you would see peers where they would have this perfect portfolio, this perfectly optimized portfolio where maybe they're 100% equities or 90% equities. And low and behold, the next crisis comes down. They sell everything at the very bottom.

• 22:53Speaker 01

  Yeah.

• 22:53David Weisburd?

  Sometimes via secondaries if it's illiquid. So they have to take another, in a crisis, another 30% discount. And low and behold, this 2% alpha that they were squeezing out because they were so risk on the previous decade. Not only do they lose all that to, they're also dipping down. So now they have 300 days points of negative alpha. So yes, on paper, this was this perfect portfolio. But when you bring human beings in the mix, which at least today, we have human beings running these portfolios, it not only did not have an advantage, it actually cost millions and millions of dollars for these clients.

• 23:28Speaker 01

  It's huge. I mean, I sort of saw that from the endowment world and stuff and peers.

• 23:31David Weisburd?

  You've seen this play out in real.

• 23:32Speaker 01

  Yeah, I've seen it play out. And I just think that even what I'm referring to, if you actually were to sit down and kind of do the math on it, it's pretty conservative ultimately. And like what we're, how much unfunded we take depends. Everyone has a different lens to look at. I mean, I'm coming from a private equity family who was 100% private equity not too long ago. We're still like, I guess I said conservative, but we have in a lot of portfolios, like 40, 50% in privates.

• 23:55Speaker 01

  But this is how we manage it. It's challenging. I think just the specific on like managing unfunded. You go through times when it's like frustrating to be in these drawdown vehicles. I mean, I've sort of, I would say doing less blind pool drawdown vehicles, even though I feel like I have a good handle on it. I think go back to like 2022, we went through 2021 and it was awesome for everybody. And then 2022 rates rose and the market kind of tanked. Private valuations were really squishy. We had a decent amount of unfunded going into that.

• 24:28Speaker 01

  I would say we were under impressed by the amount of capital that was actually called.

• 24:35David Weisburd?

  So in other ways, the GPs were not as bullish or not as aggressive.

• 24:39Speaker 01

  Yeah, and I can actually, I should, I can say the same about COVID, actually. But, but so you kind of these, you know, we do stress test.

• 24:45David Weisburd?

  So how did this play out in 22, when there was a crisis? What did GPs do?

• 24:51Speaker 01

  22, I think you just saw like an actual valuation reset. And I think one of the challenges for us as somebody, we were sitting on a good amount of unfunded commitments. Sort of great because our managers that we had committed to, and this is why you work with like top class managers. They weren't, some of this was like commitments we made that they could have been shoving into the market in 21, right? As valuations were getting crazy. And so a lot of this was.

• 25:14David Weisburd?

  There was some discipline.

• 25:15Speaker 01

  There was some discipline, a lot of it was prudence. I'd say the challenge, though, it's kind of a double edged sword. Then comes 22, when in theory, everything's on sale. You realize there would ended up being this like, it's sort of why kind of talked about a lot now, this sort of bid ass spread in the private markets that make. It was just hard for them to put money to work. But for us, you know, we're looking at this unfunded and we're saying, well, public markets are kind of attractive right now. We probably want to put something to work and we did, but like, you're still always thinking about this unfunded commitment. Like, you gotta be careful if, especially as you're going down, let's say you're wrong and you catch a falling knife. You've now put money in and you sort of make your ability to ultimately. If you have a big unfunded commitment, you just make it that much harder to meet those commitments if they do end up calling it.

• 25:58Speaker 01

  So you're always, I don't know, we're, one of the things that we've worked on our last few years is finding ways to, again, like, being really self-aware about our core competency. We don't do a lot of like private, direct investing ourselves. So we want to work with great managers, great partnerships, long-term relationships. We want to make commitments to them, but we also want to like control our destiny a little bit more in those situations. We don't want to have too big of a, outsource so much of our portfolio allocation to them. Where they may or may not be able to actually put it to work when they had time comes. And some of that, just like who you're, what strategies you're trying to invest in. I mean, obviously there were specific things that were more or less dislocated in that time period. So it's not an acute problem. But it's just, we've thought a lot about, I think there are ways to, you know, we've probably been doing a little bit more co-investing.

• 26:42Speaker 01

  Maybe making our blind pool commitment a little bit more modest. Leaving some kind of room for when and if the time comes, if our capacity is there, we have the dry powder to lean into a specific co-investment. And we, I don't necessarily mean like specific in the sense that I'm going to re-underwrite the whole thing and judge the manager's work and make our own decision. But it's really more about where are we in terms of liquidity at the moment that those things come up. And if we think highly of the manager in general, we could use that as a way to size up the exposure. Unfunded management is, like I said, I think that's one of the areas where if you tell me you're a single family office that doesn't have an operating business, you don't have any money coming in. I think this discipline is just huge. If you want to do private investing with really high quality managers.

• 27:27David Weisburd?

  And a big part of that is if you don't have the downside figured out and the downside explicitly discussed and modeled, then you're always coming to every investment almost from two frames. One is the upside and one is the downside. But if you have this pool of capital where you're safe no matter what, then you could play offense in the areas that need to, you need to play offense. For example, it's not good to go into venture capital and judge every manager based on how many losses they have on their portfolio. Oftentimes the top decile funds actually have higher loss rate, but higher returns.

• 27:58Speaker 01

  Right.

• 27:58David Weisburd?

  So being conservative and thinking about the downside is not only good governance. It's also allows you to play much more aggressively in other parts of your portfolio.

• 28:07Speaker 01

  Yeah, absolutely. And we think a lot about, like I mentioned, the deflation hedging allocation that we have. I mean, it's really, obviously, I think the title is meant to be very explicit about what it's meant to do. But it provides something that you could use as an offensive tool in the right timeframe. Which we've done. So, but yeah, I mean, and then the flip side, though, is that being able to lean in and be offensive, you still need to think about pacing in general. Like, it's hard sometimes to manage something that's come to look really attractive, but when you're making these commitments, you can't just, you gotta think about what's coming down next year and think about, okay, I really love this manager they raised two years ago, that more than likely back in the market this year and next year. So you have all

• 28:48Speaker 01

  of this map going on of like this pacing sort of game plan. And we're always thinking a lot about that. And this goes back to what I said, like, the overall complexity of these portfolios is actually quite great. You have to sort of, at any given point in time, like, thinking like, what is the right commitment to this or that that's here now in front of me? Thinking about my conviction and what it is, what's coming down the road that I also have high conviction in, where I'm at relative to these other drawdown things. So that's stuff that we've worked hard at over the years. I mean, I think we've got a good system in place, but that's the challenge.

• 29:19David Weisburd?

  Specifically as it relates to venture capital, it's another thing that CIOs that have been in the seat for 20, 30 years, they talk about the number one thing is pacing. Some of the best vintages over the last 40, 50 years have been the exact year after everybody stopped deploying to the asset class because they thought venture was over and all these memes. But there's a very rational reason for that. Why? Because the best returns are not in a vacuum. They're when, on entry level, on average, valuations are low. On the exit level, they're very high. So if you have after a bull run, you have a market that's not very hot, those entry levels are going to be lower. And then you hope 10 years later, they'll be higher than those initial bear entry points.

• 30:01Speaker 01

  And all the things I'm talking about with zeroing in on the right dollar amounts, and we, it's also with the point of making, and just like the last comment I made about being careful about what might be, what's coming next year, we try to make sure that we're being evenly deploying across time periods. We don't want to make, if for whatever reason, we could do 50 next this year, but that would mean that we have to do 10 next year, like, we're trying to avoid that.

• 30:21David Weisburd?

  This recency bias, these behavioral biases, I'm always shocked by how the most high IQ people make these errors. The most recent one was the MAC7. Everybody was talking about, well, why even invest in venture capital? Because you could have just invested the last five years in the MAC7, as if that was... The idea five years ago, but retroactively now you look at today, the Mac 7 has not done really well, but people have this recency bias, even very high IQ, very sophisticated investors don't realize how much of a recency bias they're applying to their portfolios.

• 30:54Speaker 01

  That's the biggest challenge, I think. I mean, that's like sums up a lot of challenges with managing portfolios for a third party, like for clients and trying to help them think through it. And also while holding yourself accountable, I think I sort of see both arguments. I see

• 31:11Speaker 01

  there's obviously like, we'll see if the queues can keep doing what they've been doing. But it is true, to be fair, if you look back over the last 10 years, I mean, what I just described to you is pretty complicated. And I'm telling the principal that like, hey, we've got a significant portion of your portfolio sort of earmarked for like future commitments. So like, if you want, if you call me to do something, like let's just say you have a change of heart about your life plan, like it's not going to work, right? We're not really facing that. But I think in general, like you're dealing with a lot of complexity. And that also comes down to like team size. How do you, just doing the analytics that I just referred to, I mean, that's not something that, at least at the moment, you can just fire off your agent to go deal with. So there's a team involved and relationship management on going out and pounding the pavement and finding all of that.

• 31:57Speaker 01

  Having those calls and updates and trying to make those views, I mean, it's work. It's right to push back for some people, like, why am I dealing with all the illiquity? I mean, venture, I think we're in this moment where obviously a lot of venture has done quite well. But there's a lot of stuff in between that's I'd say middling at the moment. Your generic private equity, I think, is in terms of illiquity, you're kind of having the, you deal with the same issues. And I think it's right for an owner, asset owner to say, I could have, why am I paying you and dealing with all this when I could have done that?

• 32:25David Weisburd?

  It's one of the tough things about investing in general. Cliff Asness, founder and CIO of AQR, talked to me about how he's always, regardless of the product and regardless of the year, he's being on some way psychologically benchmarked against the S and P 500. And half the time, it's actually unfair to him and half the times it's too generous to him. And he says, he oftentimes tells LPs, like, yeah, that was good, but it wasn't as relatively as good as last year, which I actually lost a little money and it was actually very relatively good. And you kind of have to have your mind in two different worlds. One is on a relative basis and one is just against S and P 500 or QQQ or other index.

• 33:01Speaker 01

  That goes back, I think the families that do the greatest over a long period of time have like a very Strong governance structure and like our

• 33:09David Weisburd?

  On the right framework.

• 33:11Speaker 01

  Yeah, and it's easier said than done. I mean, a lot of families in particular don't necessarily have the came from Cambridge endowment and I think some of the, there's a lot of things that were great about that path for me, but like seeing like true governance in action and trying to apply that

• 33:28Speaker 01

  at a family is part of what I tried, have been trying to do. But that said, a family also has an advantage of being nimble and you don't want to overdo. There's some bureaucracy and box checking in those processes. And so it's something finding the sweet spot. The endowment model, going back to that, like,

• 33:43Speaker 01

  I don't love the, setting targets and making the benchmark, the way that the endowment model traditionally does it. We've gotten rid of that, but still needing a framework where you have

• 33:54Speaker 01

  an honest, transparent way of quantifying what expectations are with your client is just, I think incredibly important because yeah, I mean, I think unless you do that, then you're always toggling between absolute and relative judgment.

• 34:09Speaker 01

  You have to have a benchmark.

• 34:10David Weisburd?

  So in another way, asset allocations and frameworks can be weak because they're fragile and they're somewhat arbitrary, but the only thing worse than that is not having any framework, which is even more weaker and more fragile. And then you're just at the behest of whoever's yelling at the investment committee or or whatever. Somebody met another wealth manager at the gym and they told themselves, so not having a framework is actually even worse.

• 34:33Speaker 01

  Totally. I mean, we have frameworks for a lot of different layers of what we do. The more you can be transparent as a team and document things of the best of your thinking that continues to evolve, of course, but I just think being on the same page, and this is the advantage of good thoughtful families. I mean, you have a very small group of people that are making the decisions. And if you do it well, you could kind of be, you're at the same time being very disciplined about what you're doing because you've thought these things through, prepared mind, all that stuff. But you can make it happen quickly if the opportunity comes.

• 35:09David Weisburd?

  You started your career at Cambridge and you were exposed to some of the world-class family offices in the world. What are some of your learnings from those family offices?

• 35:20Speaker 01

  Well, I'd say Cambridge, it wasn't just family offices, it was a broad mix of institutional allocators. So college endowments, pensions, actually, and a wide range. I think that was just really illuminating, just sort of appreciating the breadth of the landscape and like how capital market, this whole system kind of functions. Cambridge was my first job out of school, but you know, I think like hedge funds and private equity is all very sexy. And people understand that, but like, where does that money come from? Like, what is it trying to accomplish? I think that was, you know, just fascinating to get that big lay of the land. And like, what is everyone's incentives? I think just like sort of developing an appreciation for like,

• 35:55Speaker 01

  you might think this or that investment doesn't make sense, but for somebody it actually does. And I think just like-

• 36:00David Weisburd?

  Or they wouldn't have done it.

• 36:01Speaker 01

  Yeah, and also just the structure, it may look silly for one type of investor, but another investor, it's like what they need for, because their balance sheet is, it has something. So I just think like a little bit of like, just that really, really broad exposure to both the allocators themselves. And then all the different ways that you could invest that money through funds and other things. They were just playing a big role in this part, but just the governance of that in those frameworks is, I think, really important. I think by definition, if they're working with Cambridge, I think they took it seriously. But I think now I sort of see families that maybe haven't taken that more rigorous approach and they're shooting from the hip. And they do a bunch of private deals and, oh gosh, now we're actually out of money.

• 36:42David Weisburd?

  Going back to lack of structure being a problem. You've spent a lot of times talking about criticisms of different models, but in Cambridge, you saw some of the most world-class, both family offices and institutional investors. What are one or two best practices that you learned from them?

• 36:57Speaker 01

  This goes back maybe to more challenging to maybe when like the endowment model started. It's just that like rigor around finding best-in-class managers. It's just gotten harder. There's just so many more funds out there. And I think that really think hard as an investor about what your edge is and how you can monitor certain types of strategies. And I even take that to heart in a meaningful way, even for us, I think we have to be honest about our value add in these certain situations. And so just like, you know, a lot of people like we utilize some passive strategies. One in particular, the bigger one that we lean on, we actually do ourselves, which is a separate conversation. But part of that is, is kind of coming to terms with like some of the challenges of

• 37:39Speaker 01

  underwriting certain types of active strategies and how challenging it could be to genuinely stay on top of certain developments that matter. And relative to the alpha potential that's there's a lot in there. We continue to do a lot of the private stuff that I was just alluding to. But I think that's where like, and part of it is we do the passive, it kind of goes back to like how we were talking about the risk portion of our portfolio is set aside. Part of the beauty of the passive portfolio is because it can become effectively on autopilot. And now we can really spend our time where it matters. And that's like where the, the true underwriting really, really matters. And like, I think that just the number of reps you have and the pattern recognition, like obviously Cambridge has it and other, you know, piped and agreed offices have it.

• 38:22Speaker 01

  But if you don't be honest about that or hire somebody who does, because I think it's, you see a lot of poorly managed funds get funded, it's all the time.

• 38:31David Weisburd?

  You mentioned being honest as an LP about what your edge is. What is the edge for Pincus Capital Management?

• 38:38Speaker 01

  I think duration is a big one. I think that's like simple and I think we're, it's behavioral. I think we genuinely have-

• 38:47David Weisburd?

  Actually long-term versus saying that you're long-term.

• 38:49Speaker 01

  Yeah. And I think everybody says, says that. I think we've structured it a way that I genuinely believe that, that we are, and we've proven that through track experience. The team itself has been-

• 38:58David Weisburd?

  You've shown a consistent behavior of thinking long-term with your partners.

• 39:00Speaker 01

  And as a team, we've had the same team for many years now. We're slowly adding to it, but my principal and I are incredibly close. Like the relationship itself, I think has compounding benefits to it. Investment decisions, we've proven through some of the sort of case studies we've mentioned now around what we did or didn't do in these periods of stress, relationships with GPs that we've worked with for a long period of time.

• 39:27Speaker 01

  And I think just structurally, like the, the actual like, and this is hard to see from the outside, but like the way that the trusts are set up. And this is a nuance. Some people probably don't appreciate when you see someone that's super wealthy. Just because they got, like I said, a big balance sheet, a big trust with a big number on it. They, they might not have access to this or that. What I mean, it might be set up. We have a lot of money that's set in trusts for a future generation that isn't even born yet. There's this guy, Cal Newport, that has this concept of like slow productivity, I think he calls it. Where like, it's a very different question. Like if I honestly, if how you prioritize your day, if I said, go back to the cliff. Your challenge is to outperform next year versus your challenge is to outperform over 10 years. Like, how would you prioritize? Like, what is the most important thing?

• 40:05David Weisburd?

  Different optimizations you would make.

• 40:07Speaker 01

  Yeah, like what should you do today? Literally, if you were really like, it's harder to like actually execute that day to day than.

• 40:13David Weisburd?

  I think a lot about this, which is if you truly believe things like relationships are compounding. It's one of these other things that people say, people say, I'm a long-term investor. And they say, I believe in the compounding of relationships. I've never met anyone in finance that does not believe in the compounding of relationships. But if you actually take it to heart and you actually believe in it, you end up doing very different behaviors. And I'll give you an example that just happened to me. I had investment banker reach out to me on a deal I could probably make a couple million dollars on. Serious money, a couple million dollars to me is serious money. And then at the same time, I had Danielle Polley from Oak Tree, previous guest and a friend of mine. She wanted to meet up after dinner just to talk business.

• 40:57David Weisburd?

  And I decided to go with Danielle Polley, which is quite interesting because I don't foresee any short-term business with her. And there may not even be short-term business, but I saw that as such a valuable and compounding relationship. And the opportunity cost of that was real. Whether that deal would have come together or not, who knows? But there was true opportunity cost felt today at the potential compounding of a relationship in the future. And making that trade-off is not easy.

• 41:24Speaker 01

  That's a great example. I mean, I think another one that, as you were speaking, kind of came to mind at thinking about like opportunity costs. Like one of my more prouder ones that we did in recent history, like we've talked about COVID. Any, every allocator, the moment the market was really crashing, got called by maybe Oaktree, but all of the credit shops raised these like opportunistic, like put money in kind of vehicles, right? Um, which are compelling because they all trotted out this, the nice chart, like if the GFC spreads widen by this much and that was obviously kind of temporary and look how much money you make once they compress.

• 42:04Speaker 01

  And I think as a, as because of our long-term orientation, we look at that and we're like, that's probably true. Like I believe that, like that's a pretty good investment. And I think there's a lot of like reasons why the lower downside, this is credit. That would be like a very nice, like quick juicy, I don't know, 20, 30% IRR. Like assuming it all plays out, but then it, it a year or two, immediately it, let's say you pull the par, you get cashed out at par. That's a taxable gain and then we've got to redeploy that at what will obviously be a better environment and higher valuations. Or we could just do like the more boring thing and buy the SPY. And I don't believe it's going to snap back like that. I mean, this is in the moment, right?

• 42:48Speaker 01

  It's not going to get like your immediate trading at 60% on the dollar to 100 or whatever. But if you play it out over a few years, over the, to say, make the equal, look at the same to your timeframe. Maybe you've got a 10 or 20% IR, but then at the end of that period, you still own something that's growing and that will continue to compound long-term. So that's what we did. We ended up like, it was just very good exercise for us to like, at the moment, there was so much stuff like that you could invest in and do. It felt like if you were willing to put risk on, like all manner of things where people were saying like, this is the thing you should do to make a lot of money immediately. And we just, we thought about that, but then it was so clarifying just to say like, we're going to keep it simple. Like this is how we will compound long-term. We did pile a bunch of money into.

• 43:32Speaker 01

  A mix of like managers we like and like ETFs. And so that was a huge.

• 43:39Speaker 01

  I mean, for us going in then 21, I mentioned like the equity rally that ensued was huge. And a lot of that stuff we still own like that's those it's nothing sexy, but it's just ETF shares.

• 43:48David Weisburd?

  And speaking of compounding, that's the financial compounding is a great example.

• 43:51Speaker 01

  Yeah.

• 43:51David Weisburd?

  Also, there's the relationship compounding. You probably got that trade from 20 different entities given your given your seat. And you weren't judging these relationships just in time or who brought you the bread spreadsheet is who had built the relationship with you over a decade.

• 44:06Speaker 01

  True. And I think part of that is like I said, you can't maintain relationships with everyone and you take our GP relationships very seriously. Right?

• 44:15David Weisburd?

  Is that the thought experiment? You shouldn't invest in a GP if you're not willing to spend time over the next 10, 20 years.

• 44:20Speaker 01

  I think that's a great one.

• 44:21David Weisburd?

  Great, great narrative and maybe even great investments, but not compounding. Meaning they might have invested in the right company, returned you a three, four X, but maybe it was just a time and place. And maybe it's not somebody that you want to build a long-term relationship with.

• 44:34Speaker 01

  It's classic like life's too short and I want to enjoy the people I work with stuff. I definitely apply that and I think.

• 44:40Speaker 01

  Look, there's just some number where my ability to maintain those relationships taps out. And so we, it's a good example, like the random one-off deal that comes that itself looks pretty cool. If it's. Going to require like a, a new relationship, I gotta really think hard about what that, do I have the bandwidth to like.

• 44:59David Weisburd?

  Or are you going to cut?

• 45:00Speaker 01

  Be a good partner and maybe a venture, that's the hardest thing in venture. You want to have a diversified portfolio. You want to be able to be proactive if common best opportunities come up and things like that. But you have to be mindful, like it takes a lot of work to build that and be like that to manage that relationship.

• 45:17David Weisburd?

  Think it's a Dilbert principle, 150 people, relationships we can manage. I'm trying to push it with the podcast, but it's hard to beat that number as a human being.

• 45:26Speaker 01

  So that's personal and business kind of.

• 45:28David Weisburd?

  I think it's personal and business.

• 45:30Speaker 01

  Yeah. And so that means that if you, yeah, I think it's important going back to. Compounding and power laws, like there's a subset of that you really need to spend a lot of time with. I think a lot about that stuff.

• 45:41David Weisburd?

  If you could go back to 2009 when you had just started your career and you could give yourself one piece of timeless advice, what would that be?

• 45:47Speaker 01

  It took me a long time to be like really good at saying no, I think. I think there is like a

• 45:52David Weisburd?

  Saying no to meetings?

• 45:54Speaker 01

  Meetings, yeah, juicy opportunities. I kind of go back to what we were just saying, like

• 45:58David Weisburd?

  There's a deal junkie aspect to it.

• 45:59Speaker 01

  When you're first starting out in this business, and I think there's part of this is probably just the way it has to go to develop your own taste and all that. It's a great place to work, is it out? I mean, one reason which why it was such a great place for me in the moment in career. I mean, obviously, it's just like a fantastic institution and everyone raising money wants to talk to you.

• 46:17Speaker 01

  And I do think there's a part of that, like take advantage of that, go out and see as much and learn as much. And I did, but I think at some point you have to transition to now developing and honing the mental models that allow you to filter things. I think that took me a while to like get good at and really comfortable with. And maybe just even like the politeness or lack thereof of how to manage just an inbox. It's constantly flowing with like good people wanting you to like help them. Like that kind of is like both the enjoyable part of the business is like genuinely working with what I think mostly are like very high quality people, smart people with like you can't do it all. So how do you develop the sort of conviction to like lean in where you should? And like literally just say no quickly to the things you don't. It took me a while to like

• 47:00Speaker 01

  develop that skill. It's I don't know if it would be something that I could have done in 2009 or 10, because I think you just have to like practice and like learn what good is. But I think I wish I'd done it earlier.

• 47:13David Weisburd?

  There's a paradox because in order to be a great investor and managers, you need to be able to have high EQ, be able to understand people, be able to pick where you're going to have these long-term relationships, but also requires you to almost have a opposite side to that and not care about the 99 out of 100 people that you meet. If you're really taking to brass tacks, so you have to have both this ability to deeply empathize and understand people while also being extremely focused on who you want to spend time with.

• 47:43Speaker 01

  Well said. And I think one other thing, I mean, we're not the biggest allocator out there. So we're not. The type of institution where some manager with tons of excess capacity is going to move things around to like always fit us in.

• 47:56David Weisburd?

  So you have to pick your battles.

• 47:58Speaker 01

  Well, to pick my battles, but also like there are situations like that where we're like we've got, I have to figure out how to manage that and try to like, one of the value adds to my clients, I think, is that we've weaseled our way into certain things. And that's not something I can really rely on or like always going to happen, but it's, yeah, it's, I think, figuring out how to find that, whatever it is, EQ, how you, how do you say no when it matters, but figure out when to lean in when it, when it does matter and maybe like punch above your weight in terms of prestige that just a little family, we're not a charitable institution that obviously everyone would want to have the logo on their, the deck where they show their LPs. Like, I don't think that family offices typically.

• 48:35David Weisburd?

  You don't have an unlimited free option with every GP. You have to earn it. The way that I look at it is in order for me to be present and to be emotionally available, to have time and resources for the, for the relationships that I care about and I choose to engage with, I must make the sacrifice of being picky on the front end and it's of service to my relationships.

• 48:58Speaker 01

  I totally agree. And I guess, I think one thing has been pleasantly surprising to me is just life has gone on. If you do it well on the know, or at least even if it's not thoughtful, but it's convicted and fast, meaning like you don't necessarily have to spend a lot of time like trying to articulate some reason, I think people respect that. And I think that I've had situations where I've said, whether it's, I've had people I've hired, I've people I've invested in, we, we obviously do fire managers. I'm pretty proud of like, in some of those cases, the relationship has been maintained

• 49:32Speaker 01

  and come back around or had a second bite or whatever. So that's something I think about.

• 49:36David Weisburd?

  Scott, this has been an absolute masterclass. Thanks so much for jumping on.