E323: How Billionaires Build Their Portfolios

What changes when wealth stops being about building and starts being about preserving? In this episode, I sit down with Jonathan Dane, CIO and Founder of Defiant Capital, to explore how family offices think about portfolio construction after a major liquidity event. Drawing on his experience at Goldman Sachs and Jefferies, Jonathan explains why independent advice matters and how families navigate the transition from wealth creation to long-term preservation.

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

• 0:00David Weisburd?

  Jonathan, I've been very excited to chat. Welcome to How to Invest Podcast.

• 0:03Speaker 01

  Thank you, David. Happy to be here today.

• 0:06David Weisburd?

  So Jonathan, you're the CIO at Defiant Capital where you work with families with a couple billion dollars. But before that, you were at both Goldman Sachs and Jefferies. What made you realize when you were at Goldman and Jefferies that there was a gap in the family office market?

• 0:21Speaker 01

  The sell side is a really interesting place. You learn a lot there. I enjoyed my time. But I think the longer you're on the sell side, the more you realize it's a factory that's a consensus machine. And what I mean by that is, so one, everything the sell side does is about not rocking the boat. And so they want to make sure that, hey, if you're moving things around the edges, whether that's smoothing a circle, making things better, you don't want to rock it. But you just want to kind of keep it status quo, adjust here or there, but no big changes. But the other big thing on the sell side is that there's this structural problem. You have institutions that are doing custody, advice and product under one roof. And when you do that, you have this situation where what advice you're giving may not be the best advice for a client. And so what we started to realize, what I realized more and more is that,

• 1:03Speaker 01

  let's say you're working with a family office that, or a founder that just sold a business for 30 million, 50 million, 60 million dollars. And all of a sudden, these institutions are talking about investments, nonstop investments. Hey, let's go into some great forward swatch. I have this great product here, this product I have here, this there. But for someone who just sold their business and they're building a family office, that's not what their focus is. Their focus is, did I implement my estate plan right? Is my QSBS treatment going to come in right? How is my family controlling these assets? The investments is a great piece of it, but that's maybe at number three on their list. And so when I started the business and my wife is a co-founder with me, she had this saying, it's only helpful if it helps. And so for us, we start with what a family needs and then you work backward. And I think that's the big difference with where I saw the inefficiencies there and what we wanted to build from day one with Defiant.

• 1:47David Weisburd?

  One of the biggest trends in taxable investing arguably is this rise of the RIAs, the independent wealth advisors. And the independent wealth advisors will say that you need really to have an independent advisor, that the big banks are conflicted. Explain to me maybe why that is. Why can't a large bank give you independent advice and maybe direct you to other products? What's incentive structure like?

• 2:14Speaker 01

  You can tell me you're fiduciary, you can tell me all day that you're talking my best interest. But when half of your firm is building products and your bonus structure and your incentive structure is all about those products, or when you're telling a client that, hey, I'm willing to waive a fee if you go into this product, that's not the best advice for your client. Maybe, maybe it's a good product, but that's not the best advice for them because right off the bat, you are incentivized to go with your firm's product. If you go with someone independent, when the meat isn't made in my factory, I'm looking at the whole universe and I really don't care whether I'm going with a Goldman or a Jefferies or a Blackstone or a BlackRock. It doesn't matter to me because all I care about is the right product for my client. I talk about this a lot to my clients. It's not that we're fee agnostic.

• 2:57Speaker 01

  Fees matter and we always look at fees, but that's not going to be the number one thing I look at when I look at a product. It doesn't matter who's waiving fees or who's giving me a discount. It's about where's the best product that fits the need that we have today.

• 3:09David Weisburd?

  Last time we chatted, we had this funny conversation about first generation wealth versus inherited wealth. What are the key differences and how does that show up in portfolios?

• 3:18Speaker 01

  For us, we focus a lot on first gen wealth. We really work to build family offices with them. And what I've seen coming from, I've worked with third generation wealth and second and a lot on the first now is the first generation wealth, those families, they are operators. They have been in the trenches their entire career and they have built it and they know every nuance of the business that they have built. I mean, they typically even know who all their employees are on a first name basis. And that level of detail, that level of involvement, when they come back into the investing world, for them, they're still in risk mindset. They're still, hey, I need to grow, I need to kill it, I need to get out there, hands on, do everything. And you see them kind of struggle sometimes because there's a mindset switch that happens.

• 4:00Speaker 01

  They have been all about growing their wealth, doing whatever they have to do, being aggressive. And they kind of have to take a step back and talk, maybe I need to preserve it, think bigger picture about legacy. And then you have gen two that comes in. Gen two never built a business, but gen two has benefited from day one with. The wealth that the family has had with the success of the business. And their mentality day one is actually preservation. I don't want my lifestyle to change. I want to continue doing what we're doing. So let's, let's be a little more conservative. Let's do things. But at the same time, I see in gen two, they'll take a risk, but it might not be as calculated as gen one. Because for gen two, a little bit of a loss here or there. Okay, I took a risk. It's not a big deal. And I think that there is this hunger that it starts to go away. And you really see it with the family investment committee

• 4:44Speaker 01

  and how they think about this pool of capital and growing it over time.

• 4:48David Weisburd?

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• 5:31David Weisburd?

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• 6:14David Weisburd?

  A subtlety in that gen one is hungry for returns, hungry to build their empire, hungry to actually get actual returns. And gen two is almost hungry to prove themselves to. Satiate their ego to prove to the family that they're as smart as Gen one. But I find this like different hunger and different drive in terms of what they're trying to prove, where Gen one is willing to take more risk, willing to really go after it. But it's not because they're trying to prove themselves, it's because they're trying to really grow well. Some of the best entrepreneurs, they're so focused on their business that they oftentimes don't think about wealth planning and all these things. What are one or two things that an entrepreneur that's 24/7 in this business can focus on? That could set them up for more optimal structures post liquidity?

• 6:57Speaker 01

  When you're deep in it, you're right, you don't think about it every day. And one of the problems that we see is a lot of these families, especially to your point, it's the Gen one. So people who have built it, they don't even think about the real estate picture until they're at the finish line. We talk a lot about thinking about what your family office will be as you approach your exit and putting that structure in place years before. So, so whether that's setting up an FLP, whether that's setting up the trust, whether it is gifting shares now. We tell a family, and this is one of the more important things too. Even if you think the exit's 10 years away, you're in that business every day. You know better than anybody else what it's going to do. You might have an opportunity today to gift shares at a valuation that you'll never get again. And the valuation might be low because the business isn't doing well or it's a down year.

• 7:42Speaker 01

  But you're in it every day. Like we said, Gen one knows exactly what they want to do. There's your opportunity. So if you think about estate planning as you're building that business, especially in the times that are tough, a down year, or right when you hit the inflection for growth, get in there, move shares, gift shares, set up that structure. And if you do it proactively, the benefits of it down the road are millions, I mean truly millions of dollars in savings.

• 8:05David Weisburd?

  I have a high appreciation for people that are building their businesses that are not optimizing around crazy tax structures. But if you really distill it to the very basis, if you have a company that's worth $100 million and let's say it's only worth $50 million on paper. You could take those shares at a lower 409A valuation and gift it to your heirs and be under that tax exclusion. So essentially you don't pay that 50% of state taxes. Is that a good kind of simple, simple thing that families could do?

• 8:35Speaker 01

  We try to look at it in two phases. To your point, if you do the trust the right way for the QSBS, for the gifting, moving it outside of your federal taxable state, that's really all it's to. And you can build great trust documents that give you the flexibility you need to later establish the foundation of your family office. And so, yeah, we tell our clients, look, how many kids do you have? What's your charitable inclination? What do you want to set up? Let's build this out with you, your wife, your kids, bringing the family, move the shares in now. In the process, it is, to your point, it's not that hard. It does take time, but you can get it done pretty quickly. And once that's done and in place, then you spend the hours, the weeks, the months, developing the family office infrastructure.

• 9:18David Weisburd?

  Last time we chatted, we talked about these two universes that exist from investable side for families that have less than $50 million and more than $50 million. Talk to me about the investment universe when a family has more than $50 million, which fundamentally changes?

• 9:33Speaker 01

  Once you've reached that threshold, once the wealth becomes truly, in our view, it becomes generational, becomes, the idea becomes, what happens tomorrow if you make $5 million versus lose $5 million? And the downside becomes more damaging. Over $50 million is now about family governance. It is about putting structures and processes and these other types of vehicles into place that'll guide the wealth for generations. This is really where we talk to families about, let's talk, what does your family office look like? What are your goals? What is important to your family? And we start building that. And yes, the investment plan, everything else becomes a piece of that. And how we invest becomes, needs to be more documented, and it needs to be more institutionalized. But that all happens once you reach that threshold. Beforehand, under 50, there's still

• 10:16Speaker 01

  a lot of scrappy investing going on. You're looking for those best deals. There might not be as much structure, but once you break that threshold, now it's time to talk structure. And that's where you need to talk, not just about the investment structure, but it has to tie into the estate even more. What trust is owning it? What asset location is this going into? Who's controlling that? How are these things being handled? And it becomes a much bigger piece at that point.

• 10:39David Weisburd?

  Let's talk portfolio construction. What's the portfolio construction look like for a typical $1 billion family office?

• 10:45Speaker 01

  When you, in a billion dollar family office, you're going to be heavy in the alts. Public markets are a very small piece. You have a little bit of fixed income, but your alts portfolio is going to dominate it. And it's going to be well over 50% of the portfolio. I mean, that's just on, on average, what it looks like. And in that alt sleeve, then you have to start breaking it down. How much is private equity? How much is venture? How much is real asset? And what I would say when it comes to portfolio construction there is thinking about the income, because at that level, families, they may not have an operating business anymore. The income that the portfolio is producing matters more than ever. And so when we look at those portfolios and we think about it, you really need to develop the alt program in place. The equities, the bonds, you can put processes in place for that. But in the alt bucket, you need a diversified program.

• 11:28Speaker 01

  You can't just be putting money into every single need opportunity that comes to you. You need a process. You need to figure out, we need our real assets because why? Because it's going to generate income and provide our stability. We want the private equity for this reason. We want this. This is going to be our risk bucket of venture. Here's how we're doing it. And so I think at that point, the diligence becomes even more important because you're not just diligencing it for, hey, a one-off return. You're now looking at it as this holistic portfolio of how does each piece talk to the other? Is adding this new venture investment truly adding any portfolio value? And that's where having the teams and being able to actually analyze what you're investing in becomes so much more important.

• 12:07David Weisburd?

  One of the most positive developments for family offices is now managers are focusing, for the first time, I would argue, on taxable investors and tax aware strategies. How should portfolios for family offices, let's say it's a billion dollar family office, how should that differ from a billion dollar endowment or foundation?

• 12:25Speaker 01

  It drives me crazy when you talk to managers because they don't, half the time, they don't think about taxes. And so you get there and you start talking to them and all of a sudden, well, what's your turnover? What do you, what's your tax looks like? Can you send me a sample K1? And they just don't care because half of their investments have been, to your point, these endowments where taxes have never mattered. When the managers realize asset location matters that much, it really opens up a seat in them because I am so much more willing to go into it when I know that you're thinking about taxes too. And that, that's the other. And the other, I'd say the other piece too, is when it comes to K1 reporting, you know what managers worry about taxes when you get their K1s? How are they breaking things down? How are they classifying versus the manager that they've never had to deal with taxable money before? So the K1 is what it is. There's no effort spent to it. It's an afterthought.

• 13:08David Weisburd?

  This trend of managers being more focused on the taxable investor is going to take care of itself. One of the most underappreciated things is that institutional investors in most asset classes have more or less picked their core managers. They've picked their 15 to 25 core managers. They're looking for very specific things. I'll talk to an institutional investor and they'll say, I'm looking for a secondary product. I'm looking for a lower middle market PE, very specific things, sometimes even more niche than that. They're looking for lower middle market PE focused on AI implementation in widget companies. So something they're looking for something very specific. The taxable investor, on the other hand, is just coming on board. So you have a confluence of factors.

• 13:47David Weisburd?

  You have retail coming in, which doesn't mean literally, but oftentimes it's through platforms like iCapital or it's through RIAs. It's through multifamily offices. I think we're going to see much more tax aware strategies by virtue of it's going to be a big enough market. And it may become the biggest net new investor over the next decade.

• 14:03Speaker 01

  It's an important concept and I think it also ties to something else that we're seeing in the investing world. And that is this shift from portfolio silos to holistic portfolio construction. For for family offices, for taxable investors, we've always looked at every opportunity as how does it matter in your portfolio? Yes, I like lower middle market, but it doesn't have to only do this. What I want is this theme and I'm looking at you in absolute terms. What are you doing to get me value? What is the net of tax, net of fee return that you're putting in my portfolio? And when I look at that, I compare it to everything, whether it's public act, these bonds, venture, I'm looking at it. And what I think you're starting to see is that approach is broadening to institutions and endowments.

• 14:46Speaker 01

  And I think the focus on just true net of tax, net of fee, absolute return, what are you adding to my portfolio's value? Is another trend that when the slack on the edges where they could get away with things goes away. And one of those is inefficient tax management. Because now people are looking at you more in absolute terms for everything, you have to really batten it down. And you have to get the institutional infrastructure in place to do it the right way.

• 15:11David Weisburd?

  How would you go about building out that portfolio for this taxable investor that just came into a billion dollars?

• 15:16Speaker 01

  Day one, for us, it's working backwards and it's about the net fee, net of tax return. So we're going to start day one with what is the cash flow that we need to generate off your portfolio? What's it look like and how are we going to make our capital calls? Because liquidity, at the end of the day, liquidity management is one of the biggest pieces of investing that people don't care enough about. The big institutions might do it, but family offices and even the $100 million, $500 million families, there's not enough focus on how you think about liquidity management. And that's going to be our focus day one of how do we think about how much capital we're committing to the funds because we don't want to over allocate to the wrong places? I think the other thing that we always look at day one is where do you want to be actively involved versus where do you want to be passively involved?

• 16:00Speaker 01

  So are there boards that you want to be on? Are there industries that because you sold your business, you don't just want to buy into a fund, you want to be there? And we're going to carve that into its own piece of the bucket. We're not, for those specific instances, we're going to do one of three things. We're going to write a huge check to a fund to make sure that we can be on the LPAC committee and be a part of it. We're going to go out and buy a company and operate it ourselves, or we're going to go out with another family office or another investor, we're going to buy a company and we're going to be some type of executive chairman role helping guide it. And that could be a huge piece of the portfolio. I mean, I have families that after they've sold it, they'll put 20, 30% of what their liquidity back into another business. And so you have that piece of it has to be considered in the holistic portfolio. So once we know that, where you want to operate, what it looks like from a cash flow need, then the rest of it starts to fall into place. We build a program.

• 16:45Speaker 01

  How much do you want to do in venture? Real assets, public markets, we need the beta exposure, what's that look like? But I really think it comes down to just working with the family to understand where their mindset is.

• 16:57David Weisburd?

  I love that. So you start with the liquidity because that's essentially a constraint. If you need to have $10 million a year, you can never have a situation where the market draws down so much that you can't access that $10 million. So you start with the constraint and then you actually go another direction, which is you play to their strengths. Where does that family have alpha? Where could they build alpha within their portfolio? And then size that accordingly and then build out the rest of your portfolio.

• 17:19Speaker 01

  I'll give you an anecdote because I have a family. They're actually still owner operators of a business and I spoke with them recently and they overcommitted all these funds. And what ended up happening is I was reviewing their private investment portfolio with them. And they had capital calls coming in they couldn't meet because they just kept committing, committing, committing. And what they had to do is go into their operating business, get a new line of credit, draw down from that just to fund their capital calls and commitments. And that's what happens when you build your investment portfolio without that liquidity structure in place from day one. Cause they weren't changing their lifestyle. They still needed their money to live their life, the business was running. So how do you get the money to fund the capital calls? Unfortunately for them, they had to go into the operating company and do it that way. That's never a good answer.

• 18:01David Weisburd?

  Institutional investors talk to me about they're much more sensitive towards long dated commitments and drawdown vehicles. Do you see that transfer over to the family office side? And so what are some ways to solve around that?

• 18:15Speaker 01

  I get a ton of pushback lately about every single long dated fund we go into, especially in the venture world, because I'm hearing endowments live forever. Institutions live forever, but families, family money, if you want to see that return materialize. And so every time we bring another fund to the table, the term of it becomes, I would say, a top two discussion. What's this, what's this fund look like? Where are we going to hit our returns? When do we even get our money back? I would say families have become more and more stuck on the idea of, am I really locking up money for 15 years in a venture fund to maybe, what, where do I ultimately get a 3X return? Is that worth it?

• 18:58Speaker 01

  And so I think that's where, when we invest now, there has to be something in that structure. It's not just private markets beta. If we're going to lock up for 10 years, 15 years, ideal liquidity premium has to justify that lockup. And the families care about it more so than ever.

• 19:13David Weisburd?

  Do you think that's the right approach?

• 19:15Speaker 01

  I think that locked up money needs to be rewarded. Nobody would give the IRS, nobody likes paying quarterly estimates and nobody likes overpaying taxes because that's a free loan to a company. If I'm working with a manager and their docs say that I'm paying a 2% fee on committed capital, which maybe that phases down after the investment window, but I'm paying a 2% fee on the capital I commit to you, but I'm not going to see the bulk of my return until after eight years. Is that really the best way to give you money and earn a return versus hindsight and recency bias aside, the NASDAQ, which has kicked off 15% a year, which I could have put into a tax efficient structure, tax loss harvested, did a long, short extension and sit here with almost no tax implications of it versus I just sat through a 300-page K1 from this

• 20:00Speaker 01

  company, I'm paying taxes across 17 different states. I think it matters a lot. I think that, I think if I'm locking up capital for a long term, you have to show me something unique that you're doing with my capital that justifies that long-term lockup.

• 20:15David Weisburd?

  I think there's a couple of things at play here. One is I think there's a psychological aspect. There's almost this desire that you don't want to believe that in 15 years, you'll be 15 years older and you don't want to wait till 15, you want that money sooner. So I think that's probably noise and that's probably inefficient. What you said about if you're getting a 3X over 15 years, depending on when that cash flow comes in, that's not a great return. You should be getting a higher return in that asset class in venture. On the other side, I see the best thing you could do from a tax structure is to compound the returns for as long as possible because you're not paying money on the compounding. Obviously take advantage of QSBS and other things. So I kind of see both of, both of those sides, but I do think there's this egotistical drive to want to have the money sooner and to feel like you're doing well sooner that distorts

• 21:00David Weisburd?

  the thinking.

• 21:02Speaker 01

  It does, and it also comes into play with older families. So when, let's say you, you've been working with a family, our family became liquid when the founder was in his 40s, 50s. The, the horizon, you know, at 40, 50 years old, your horizon still feels endless. You're 40 years away, 50 years away, it doesn't matter. So now flash forward 20 years, the, the family's patriarch is 72 years old and now he's starting to think about life expectancy and legacy and you bring him an investment, a phenomenal venture fund that is doing the earliest of early-stage venture investments. We're looking at an 8X projected return. For 15 years. So he sits there and he's like, I'm 72 now. So maybe at 87, I'll see this return. Is it even going to work? I don't know. Where are my kids? Where are they going to see? Are they going to understand why we did this?

• 21:45Speaker 01

  And so I think this, to your point, the psychological aspect starts playing a bigger factor, the older the family gets, which is why the investment committee matters so much. But when you're older, you want to see those returns hit faster and sooner. And it doesn't help that the media just sensationalizes the one or two big wins that come out every two to three years. And if you had invested yesterday, you would be at a billion dollars today. But people see that. That's what's on top of your mind. And then why am I investing for 15 years when I could have been in something that hit it in two years?

• 22:14David Weisburd?

  When the MAC7 is beating venture beta, that's, that's a problem.

• 22:19Speaker 01

  Yeah. I mean, I, I hear that every single day. We, it's, hey, why, I mean, I, I had this conversation two weeks ago with the family. Why am I still putting money in early stage venture when the MAC7 has outperformed it for the past, I think it's five years now. Or I guess roll it back, it's even a whole decade. Well, why am I still locking up capital on them? Why don't I just go on the MAC7? We'll do a long short extension. We'll overwrite it. We'll do all this. There won't even be taxes on it. That's a, that's a really tough conversation to have. Yes. Portfolio construction, beta side, drawdown volatility. But if you're just worried about returns, I mean, that is a very hard conversation and that is top of mind with people. And I have a lot of families that they're very frustrated at the lack of DPI coming out of funds. It's great that you're marking me on paper after four or five years, multiples, three, four, five X, that's great.

• 23:05Speaker 01

  But I haven't seen more than a thousand dollars get distributed to me. So when do I actually get this money? And that's becoming a real concern of families that I talk to that I don't really care what paper says. When am I actually going to see the dollar?

• 23:19David Weisburd?

  Talk to me about lower middle market PE. It's one of your favorite ASK classes. Why do you love it so much?

• 23:25Speaker 01

  There's three reasons we like it. One, the growth of mega funds has created this massive inefficiency in the space. Because the bigger funds, which to your point of bringing in retail money and all kinds of money, they can't write 30 to 40 million dollar equity checks. It doesn't even move the needle on their fund. So you have a lot of smart institutional money that can no longer invest in the space. And when you do that, it narrows the bucket to a lot of regional private equity firms, or I'll call them the super regionals that want to come into it. So you have this smaller bucket of people, some of it less institutionalized, less experienced. But in this country, in the Midwest, in the Rust Belt, we're private business owned in this country. I mean, that's where all wealth is created. That's the majority of how businesses are. You have this huge pool of companies and you have a lack of smart money chasing it.

• 24:10Speaker 01

  That creates an inefficient market and great opportunities for buyers. So that inefficiency is something that we love. The other thing is there is simply tangible value creation in middle market private equity. These are family owned businesses. These could be first gen or second gen families that they've just been running it and the families have done really well for themselves. They've made a lot of money. They have a great lifestyle. But there may not be processes and procedures in place. They may not have a real CFO or a real sales channel. They may not have integrated into ERP systems. And so when private equity comes in, there is actually a legitimate playbook you can put in place to create operational value. We're not even financially engineering or talking bolt-ons for top line and multiple R.

• 24:50Speaker 01

  We're talking true operational value of just coming into a company with a fresh set of eyes and making things efficient in it. And so I love that because it's not contingent on multiple expansion or engineering. It is, there's a core operating way to increase it. And then the last piece of it, and this is where my love hate relationship comes in. How do you, how do you exit it? Well, you bought in a space that the big funds couldn't play in. But if you grew it, you may have grown it to a size where you can now exit to the big funds. And so it's this interesting dynamic of I don't need to compete with the big fund to buy. I can put tangible efficiencies in place to grow it. Oh, but now I'll take advantage of this massive market of dry powder, billion, billion dollar funds and sell to them because they have to deploy.

• 25:34Speaker 01

  And if I have a half decent company, what a great eggs that we can build.

• 25:37David Weisburd?

  Said another way, the amount of dry powder is a problem for the large buyouts. It's an opportunity for the lower middle market that's selling to them.

• 25:44Speaker 01

  That's correct. A hundred percent is.

• 25:47David Weisburd?

  Lower middle market, I think there's, correct me if I'm wrong, hundreds of thousands, if not maybe a million of these small businesses. What specific sub-sector of the lower middle market do you like the most?

• 25:58Speaker 01

  I'm in Pennsylvania. We're, we're based in Pittsburgh and in this demographic, which I'm just going to lump into the Rust Belt. The lower middle market manufacturing is a phenomenal space to play in. There, there are so many opportunities there, especially in this region of the country that. I look at them and we love it because you don't have the volatility of like a consumer packaged good or something. You have businesses that because of manufacturing, they can be scaled. They can grow because of what they do. You can put sales systems in place and truly create value. And it's really our favorite place in all of middle market of all of lower middle market private equity. We love manufacturing. We love value add distribution and I would say we love

• 26:40Speaker 01

  anything on the industrial side. There is just so much value to be unlocked there.

• 26:46David Weisburd?

  One of the most interesting trends that I see in the lower middle market is independent sponsors. To your point, you have these former KKR, former Blackstone partners that have been classically trained in large buyers are now coming in and buying smaller assets. How does a family go about accessing something like that?

• 27:05Speaker 01

  We work with independent sponsors, but they're not the number one place that we go to. And for us, it really comes down to skin in the game. I'm happy to work with an independent sponsor, but I like to see them put something into the table, too. My biggest concern with them is many of them know the playbook and they know how to do these things. But then it's just on from one deal on to the next. Bought it, dropped it. I'm finding the next opportunity. And that that lack of conviction around the idea, that lack of staying power can be problematic. I like independent sponsors who they are, they're, they're, they came out of a larger institution. They want to make a name for themselves. And so they're out there deal hunting, but they're putting everything into it. Like this is going to be their deal. They're going to buy this company, pour their personal

• 27:50Speaker 01

  capital in, they're going to build it, grow it, get it sustained, and then they'll find another one. I mean, I love that. That's almost like a family office buying a company because that independent sponsor, they are hungry for everything and you know that you can get behind them and actually rely on them to do something.

• 28:05David Weisburd?

  What's the most common mistake that families with 50 to 500 million routinely makes?

• 28:12Speaker 01

  I see families just starting out, building their family office infrastructure, over investing. When you have 50 million, you do not need to be in 30 different private equity funds. You do not need 22 different managers that you're investing in. What that does is basically give you a beta private equity portfolio that you could have just invested in one fund of funds. You didn't create anything interesting. And I can tell you all the arguments about why a family wants to do it. We're building relationships. We want to make sure that as further liquidity comes in, we have access to their funds. But what you forget along the way is you need to keep investing in every fund or the manager is going to cut you. I mean, if you don't invest in fund two, they might not give you the offer for fund three. And so I don't like that argument. That is the biggest problem I see because it leads to a consolidation of returns.

• 28:58Speaker 01

  From a family office structure standpoint, you can barely manage it because you don't have a full infrastructure in place yet. And then just trying to understand and follow and monitor those investments doesn't work. I I tell smaller families all the time, just go into a fund of funds.

• 29:12David Weisburd?

  What's the highest leverage way that you're implementing AI today as far?

• 29:18Speaker 01

  Let me start by telling you where I'm not implementing AI. And that's for investment decisions. Especially in private markets, nothing will beat judgment and experience and talking to a person. We have a saying that we don't invest in funds, we invest in people. And that is more true than ever today. Because AI is doing so much work that people are forgetting to meet with the person. Compare stories across analysts and GP and managers, everybody aligned in the infrastructure. So we are not using it there. So where are we using it? Data processing, research processing. If we're digging into a data room and we're looking at decks and we want to start aggregating returns and ripping out that data. We're absolutely using it there because it will do the work of two analysts in two minutes.

• 30:03Speaker 01

  We can load in memos and we can load in quarterly commentary. And it can scan it, extract what we need to do and show us performance numbers. We can use AI to help overnight with, hey, we want to see how the beta of this fund compares to our portfolio. And it can just show us from historical numbers and investment types and what they've done, how it compares. So quantitatively, we love it. It saves time overnight. You know, the other big place to use it is we are using it with our client communication. AI is absolutely helping to prepare client for content or helping to prepare content for clients. That doesn't mean it's doing it all. But if you're not using AI to enhance your workflow, you're just shooting yourself in the foot.

• 30:43David Weisburd?

  If you could go back to 2008 and you could give younger Jonathan one piece of advice that was timeless. What would be that one piece of advice be that would either help you accelerate your career or help you avoid cost of mistakes?

• 30:56Speaker 01

  I would tell my younger self, the answer is always no if you don't ask. And I would say in my career, whether it's been working with families, whether it's been working with managers, if you're afraid to ask, then the answer is already no. So what's the worst that could happen? Hey, can I join the board of this company that you just invested in? No. Okay. I wasn't on the board anyway. It didn't hurt me. But being afraid to ask that question, being afraid to ask any question is a, it's a career hinderer. You won't move forward because you've never put yourself out there. And so I would say I, I didn't start asking the questions early enough in my career.

• 31:33David Weisburd?

  Jonathan, this has been absolute masterclass. Thanks so much for jumping on the podcast. Looking forward to continue this conversation live.

• 31:39Speaker 01

  Thank you. Join it as well.

• 31:40David Weisburd?

  That's it for today's episode of How I Invest. If this conversation gave you new insights or ideas, do me a quick favor. Share with one person in your network who'd find it valuable or leave a short review wherever you listen. This helps more investors discover the show and keeps us bringing you these conversations week after week. Thank you for your continued support.