CIO Greatest Hits: Multi-Family Offices – Stan Miranda (Partners Capital)

This week's Summer Series is a multi-family office twofer, with Stan Miranda, co-founder and Chairman Emeritus of Partners Capital and Jenny Heller from Brandywine. Both firms started as multi-family offices that have evolved in different ways. Partners Capital has grown and scaled as a leading OCIO, while Brandywine has remained a boutique with a fixed set of family clients. Please enjoy my conversations with Stan Miranda from 2023 and Jenny Heller from episode 7 back in 2017 and a follow-up in 2021. Jenny Heller EP. 7 – May 17, 2017 Jenny Heller EP. 211 – August 29, 2021 Stan Miranda EP. 334 – August 21, 2023 Learn More Follow Ted on Twitter at @tseides https://twitter.com/tseides?lang=en or LinkedIn https://www.linkedin.com/in/tedseides/ Subscribe to the mailing list https://capitalallocators.com/ Access Transcript with Premium Membership https://capitalallocators.com/signup

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

• 0:01Ted Seides?

  Capital Allocators is brought to you by AlphaSense. Every allocator sits at their desk for hours preparing the work around investment decisions, getting up to speed on a new theme, prepping for the next investment committee meeting, and tracking what changes across an entire portfolio. AlphaSense just launched something built to help. It's called SuperAnalyst, an always-on agent that works like a power user on your behalf. It draws on over 500 million premium sources, including broker research, expert transcripts, company filings, and earnings calls, and keeps working long after you've gone home for the day. Point SuperAnalyst at a theme, company, or market, and it learns the coverage universe

• 0:46Ted Seides?

  so you can easily turn new insights into the briefs, models, and memos you'd otherwise build by hand. It was designed to work like an extension of your team, so it remembers your projects, follows your templates and processes, and links every output to its source so you can see where each conclusion came from. The best way to judge its quality is to give it a whirl. Pick the research task on your desk before your next committee meeting and hand it to SuperAnalyst. Start a free trial at alphasense.com/capital and see what it has ready for you. Capital Allocators is also brought to you by RidgeLine, the investment management platform

• 1:29Ted Seides?

  built for firms who are rethinking how work gets done. You're at your desk looking at a line graph of your firm's growth. The line is moving sideways, linear growth, and you know exactly why. You're constrained by your operational bandwidth that's been the same for so long, it just feels like the cost of doing business. RidgeLine is built to change that line's trajectory, to be the inflection point that takes your growth from incremental to accelerated with the team you already have in place. RidgeLine is the only AI-native investment management platform that brings together the front, middle, and back office with one set of data and powerful AI agents that automate

• 2:12Ted Seides?

  away operational drudgery, so your talent can shift from managing old technology to materializing new ideas. RidgeLine helps asset and wealth managers understand and improve their firm's growth trajectory. To see how your firm compares to 16,000 of your peers, visit ridgeline.ai/trajectory. If you file Form ADV, your firm is already there. Then talk to RidgeLine about how you can do more with the team you already have. Capital Allocators is also brought to you by Juniper Square, the operations partner trusted by the leading private market GPs. One theme that keeps coming up on the show is GPs that build the strongest and most durable

• 2:57Ted Seides?

  relationships with LPs are the ones that have both strong returns and strong operations. AI raises the stakes on operations, and having Juniper Square as your operations partner helps ensure your data is organized, accurate, and accessible, so you can unlock operational alpha. That's why thousands of GPs trust Juniper Square. Learn more at junipersquare.com/capitalallocators.

• 3:32Ted Seides?

  Hello, I'm Ted Seides, and this is Capital Allocators. This show is an open exploration of the people and process behind capital allocation. Through conversations with leaders in the money game, we learn how these holders of the keys to the kingdom allocate their time and their capital. You can join our mailing list and access premium content at capitalallocators.com.

• 3:59Speaker 01

  All opinions expressed by TED and podcast guests are solely their own opinions and do not reflect the opinion of capital allocators or their firms. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of capital allocators or podcast guests may maintain positions in securities discussed on this podcast.

• 4:18Ted Seides?

  With eight years and over 500 podcasts under my belt, I'm often asked to recommend my favorite episode. But I can't really answer that question. I feel like I have 500 children and don't think I've disowned a single one. So when asked, I usually offer up a great recent episode to get a listener started. Finding the best episodes in a big library of content isn't easy, so we thought we'd help. Each summer going forward, we're going to share our best. Over seven weeks, we'll replay conversations curated from our favorites and yours, excluding those from the last 12 months. Our 2025 Summer Series focuses on CIOs.

• 5:03Ted Seides?

  We're blessed to have an incredible library of long shelf life content, and we just couldn't pick seven. Instead, we'll share a dozen gems canvassing every type of institutional asset owner. This week's Summer Series is a multifamily office twofer with Stan Miranda, co-founder and chairman emeritus of Partners Capital, and Jenny Heller from Brandywine. Both firms started as multifamily offices that have evolved in different ways. Partners Capital has grown and scaled as a leading OCIO, while Brandywine has remained a boutique with a fixed set of family clients.

• 5:44Speaker 02

  Before we get to the interview, a quick announcement. We've set new dates for our Capital Allocators University for investor relations and business development professionals. Those dates are December 3rd and 4th in New York City. Later in the year is just a better time of year for this gathering. It's post AGM season, travel starts to wind down, it's right before the holiday crunch time, and it's a great time for capital raisers to reflect on their previous year and plan for the year ahead. December 3rd and 4th in New York City. CAU for IRBD is a closed-door gathering for capital raisers to connect with peers, learn from allocators and other experts, and really share invest practices with each other. You can learn more at capitalallocators.com/university. Thanks so much for spreading the word about Capital Allocators University for investor

• 6:29Speaker 02

  relations and business development professionals.

• 6:33Ted Seides?

  Please enjoy my conversations with Stan Miranda from 2023 and Jenny Heller from episode seven back in 2017 and a follow-up in 2021. Stan, great to see you.

• 6:45Speaker 03

  Thank you, Ted.

• 6:46Ted Seides?

  Why don't you take me back to the founding of Partners?

• 6:50Speaker 03

  Okay, this is right after the tech bubble burst. I'm sitting in my kitchen, as the story goes, with my next-door neighbor, Paul Demetrick. We have both been private equity investors. Paul started Investcorp in Europe, and I was working for Evolution Global Partners, which was a Kleiner Perkins spin-out. As the tech bubble burst, our balance sheets reflected that because we were very concentrated in, guess what, private equity, the asset class that could never go down, just went down a lot, especially if we had tech-oriented investments. So in our minds, we were embracing diversification as a solution to that problem.

• 7:31Speaker 03

  And in the weeks prior to that, we had been meeting with various private banks, mostly Goldman Sachs, Citibanks, UBS of this world. And it was just shocking what we learned. Number one, were just the conflicts, the number of Goldman products or Citibank products. It was just astounding. And if they did have third-party managers, there were generally no benchmarks. And if you did find a benchmark, it was the wrong benchmark. So you had not only conflict of interest issues, but transparency issues. We couldn't get to the costs, in many cases, of the assets. When we went through the managers' performance, we realized that most of the managers had no alpha.

• 8:14Speaker 03

  So why would we ever hire a private bank? And we thought about where do we find the solution? And it just didn't exist. And we're both very entrepreneurial, and we thought we should just start this. We should build something that's completely independent, uses proper

• 8:32Speaker 03

  Analysis and honesty in evaluating performance and is totally transparent with the costs and the performance with the clients. So we called it the island of integrity in the investment management world. So it was a wake up call for us that we needed something so desperately and it didn't exist. And so we thought we'd create it. And with my strategy consultant business school hat on, I thought what we need is the equivalent of Michael Porter's book on corporate strategy, but for the institutional investment world. What is that? This is no joke. It was sitting on the kitchen table. It was called pioneering portfolio management. So we read the book and felt it would be the cookbook that would get us started.

• 9:17Speaker 03

  The end of the story around the founding is that I had a set of friends that had the exact same problem. They were mostly private equity GPs. So before Evolution, our global partners, I was at Bain building their private equity consulting practice, which meant we did due diligence on mostly buyouts. And then we did all the post-acquisition operating value-added work. I knew the European private equity world cold. So it was the Premieras and CBCs and VC Partners, but also Blackstone and Bain Capital. These were all clients and friends and classmates. And there were 43 of them, to be precise, on April 1st, 2002, that signed up, recognizing that Stan and Paul knew very little about anything other than maybe private equity, but they trusted us to figure it out.

• 10:02Ted Seides?

  What was the capital base you started with?

• 10:04Speaker 03

  $7.7 million. You can do the math on 43 clients. They weren't giving us their whole balance sheets at that point in time.

• 10:12Ted Seides?

  So how did you take that initial high-level idea and dive in and start to learn how you were going to go about implementing the strategy?

• 10:23Speaker 03

  One of the things I learned at Evolution Global Partners was to take things slow because we took it really fast there. The backers were Bonderman and Colter of TPG and Byers and Schline of Kleiner Perkins. And then there was a Bain investment with John Donoghue. And they were just pushing us so hard. We hired 35 expensive people overnight, built these two offices, it never spoke together. It was not a good way to build a business. So I took it really slow. We started with three employees with one in Boston and two in London. We just chose the very next asset class and it was right on the back of the tech bubble. Nobody wanted any more equity exposure. So what did the doctor order? Absolute

• 11:04Speaker 03

  return hedge funds. We just started studying the hedge fund space. It was very much the market neutral and so equity market neutral strategies, merger arbitrage, fixed income arbitrage. And we just found and we got access to, just through relationships, things like Tudor and Caxton. And so we were off to the races. We just went to the next asset class and the next asset class and the next asset class, pulled out a blank sheet of paper, reminded ourselves what the Swenson book said, but really pulled out a blank sheet of paper and said, how do we invest in municipal bonds? What's the right way? Should it be high yield? What duration? Just every single aspect of every asset class, we just started from scratch and analyzed it very deeply.

• 11:46Ted Seides?

  On each of those, how did you go through the process of blank sheet of paper, asset class that a lot of other people understand and know about, but you don't yet, and you need to learn and get up to speed?

• 11:58Speaker 03

  We believed in something we called steal from the best, but it was also more euphemistically called triangulation. So we just talked to a lot of people and that was only confirmatory or it was something that would narrow down the universe. So we literally had a database where we had a number of hits on this particular fund, but that just got us down to the six or so final candidates for any particular strategy. But also, it had to be rooted in some deep insights about each asset class. And it always started there, not with the managers. That was another topic we picked up with friends at Lindsay Investment Office at Yale and at Stanford Endowments, family offices. And we talked to them, you know, what do you avoid in this asset class? What do you focus on in this asset class?

• 12:43Speaker 03

  But in the end, it was our data-driven analysis. We hired whatever we needed as time went on, rooted in investment decision-making. But we weren't necessarily hiring the person exactly in that lane of the asset class.

• 12:58Ted Seides?

  How did you go from the initial seven and change million, learning these different asset classes to beginning to scale into what became an OCIO business?

• 13:08Speaker 03

  So we had to get $25 million in year one, or something called US Blue Sky laws would have made our legal bills just astronomical. We hit 25 million at the end of the year just by adding the two asset classes, absolute return and municipal bonds for the US taxpayers. Then in year two, we'd hired people like Will Fox, who's still running North America with us today. And we said, we're not paying ourselves anything. If we don't get to $100 million, recognizing that break even was probably $300 million. If we didn't have the momentum, we weren't going to carry on. But in that second year, 2003, we actually got institutional clients. They were the institutions that knew about the Yale model, the endowment model. They're a little bit rebels.

• 13:53Speaker 03

  They weren't the traditional people worried about what somebody else is going to think. And so they were going to hire the new guys on the block. Gondville and Keys College, Cambridge hired us in that year. We hit the $100 million target with a mix of high net worth individuals, private equity GPs mainly, and smaller institutions. And then the next year, Will Fox and I said the same thing. We hired John Collis, who's just retired after 20 years, who ran Europe. And we started adding clients in the institutional market, mostly in Europe. At that point, we hit 400 million in 2004. We were calibrating how much we grew by. And in 2005, we hit 1.5 billion, a lot of institutions, a lot of private equity GPs. And we shut.

• 14:37Speaker 03

  And we got our Excel turned into more institutional technology and so forth. The next year was three billion and we capped ourselves about one and a half billion a year until the global financial crisis, but even in that year, we added one and a half and we lost one and a half. So we flatlined then and then since then carried on growing. We let off the 1.5 billion limit and it's now today at about four, five billion dollars a year that we net.

• 15:03Ted Seides?

  How did you figure out what product you were going to offer in that initial very fast growth, those first couple of years?

• 15:10Speaker 03

  It was always the endowment model. We were always going to have all asset classes. It's just that most of our clients were overweight private equity, so that was low on the list initially, but we had the full endowment model by 2003. We only started investing in private debt in 2009. That was asset class after the initial set, but we had hedge funds, fixed income, liquid credit, private equity, including venture and property. That was our lineup in the end of 2003, beginning in 2004.

• 15:42Ted Seides?

  Every client has their own reason for being, their own set of values, their own goals. How did you scale trying to do this for lots and lots of clients?

• 15:52Speaker 03

  First of all, you're right that almost all our clients want something highly customized. And the primary reason that would make sense is that they had a very different risk profile or they had particular biases against their current balance sheet of property and private equity, and so they'd have a different allocation. But in the end, the private equity GPs ended up doing something that looked a lot like the endowment model and of course, the institutions did. Even the customization is generally about asset allocation and not about which asset classes are included. Almost all asset classes are included in almost all client portfolios, even the private equity GPs today. So the customization came down to really sizing of

• 16:37Speaker 03

  managers or simple allocation decisions, whether it's 8% private debt versus 10% private debt.

• 16:44Ted Seides?

  When you initially sought out to say, we're going to replicate or triangulate on the Yale model, what did that mean to you in what you were delivering for your clients?

• 16:54Speaker 03

  After 19 years at Bain, you just had an appreciation for the fact that there was a best way of doing almost anything. I'm an academic purist and our mission is to take the most advanced, proven institutional investment approach to our clients. The endowment model in our definition, and may not be your definition, may not even be David Swensen's definition, but it had three pillars. Number one, high static risk. So static means no market timing, and that was definitely David Swensen platform. But also the high meant it's long-term money. You can take the volatility. Secondly, multi-asset class diversification with a bias towards

• 17:35Speaker 03

  illiquid assets, but not necessarily defining them as illiquid, but just you can take higher risk, you can take the illiquidity, let's go for it. So that was certainly the second pillar. And something we definitely copied of the Yale model was that you don't give money to the big retail publicly listed asset managers that are in the business of churning out 40 new funds every year. You went with the concentrated specialist entrepreneurial owner-operated asset managers who had the bulk of their balance sheet in their own funds. So the skin was in the game. And so those were the three platforms that we followed, and that was enough work. Really, the focus in the early years was just being a deep expert

• 18:17Speaker 03

  on every asset class. We always had a benchmark that we wanted to beat for every asset class. So in hedge funds, it was Blackstone's BAM outfit. Their performance was ahead of everyone else's. We just had to make sure that we could beat them on each asset class.

• 18:32Ted Seides?

  When you applied this concept of there's a best way of doing things to manager selection, in addition to those couple of criteria you mentioned, how did you go about the process for manager selection to Vanessa classes?

• 18:46Speaker 03

  Really, three things. Number one is the Malcolm Gladwell phenomenon that the team...

• 18:52Speaker 03

  Has to have had a lot of reps. It's really important and it's really hard in asset management because of the timeframes. Secondly, it was narrowing down your field of investment choices through quantitative techniques, mainly beta and factor analysis, multiple regression, which goes way back in my history. It's in my blood. And then thirdly, very importantly, is knowing the psychology of a great asset manager. So it's psychometrics, basically. On the reps, I always think, who do you want doing heart surgery on you? You want somebody who's done a lot of them, right? And so it's the same in the asset management world.

• 19:34Speaker 03

  If we've got a client, some big institution, first question they should ask us, who's making these decisions on asset managers? And how many experiences do they actually have? And how are you capturing that inside your organization? So one individual gets the benefit of another individual's reps. The most important thing is not just how many mistakes you've made, but did you stop, analyze it, codify it and teach it? Did you educate your team about why that was a bad idea? Why you succeeded with certain managers?

• 20:08Ted Seides?

  What are some of those mistakes that you made that you've tried to transfer onto the team?

• 20:13Speaker 03

  Commodities is a great one. Okay. As we say today, it's a graveyard of failed investment decisions. Because almost every strategy that we were looking at had commodities in there. And they're active commodities, not passive commodities, because you learn about commodities. There's no yield, there's no income. So over time, they actually go down because of economies of scale. It turns out in commodities, to know enough about what you're investing in, you have to specialize. So you just do energy commodities and you are whipsawed all over the place. So it's up 80, down 60. You have to own four or five of them, but they go out of business after three years. That was a big learning, so we don't do commodities today.

• 20:59Speaker 03

  That's a whole asset class learning and there's more specifically. Learning about individual managers in every asset. How about some of those other ones? We started life with equities actually saying, this is too hard. We're just going to go with Mr. Vanguard. That's the best way. Nine basis points. We know what's going to happen here. But then we thought, wait a minute. This is 30% of our clients' portfolios. We're not generating alpha for it. We've got to crack this. So we started with the private equity approach to public equity investing as you'd expect us to, because that's deep fundamental analysis and that's only possible explanation for how you could have security selection alpha. That worked actually from about 2005 to about 2009,

• 21:41Speaker 03

  when it stopped working because growth was introduced and the value factor killed the private equity style managers. I'm not naming managers that we necessarily invested in, but that was the SPOs and the Sevians and ValueX. That was a bad factor trade. We migrated into the growth sector and we believed in the extreme focus in biotech or China or emerging technology because these were deep experts. It's inefficient. What did we learn there? We learned that there's a lot of risk other than equity beta in these portfolios. Okay. China, there's geopolitical risk and biotech, there's basic regulatory risk.

• 22:26Speaker 03

  Small company size risk, unprofitable or profit tomorrow company risk. And all of those are risks that you're going to get paid for. But you're way ahead of your budget. When the market goes down, you give so much back. So anyway, public equities, we're learning from individual managers through time, how difficult that really is today. How about venture capital managers? The learning there is more about the asset class than the individual managers. Because of the Kleiner Perkins Association that we believe, or what everybody else believed, which was if you weren't in the top eight, 10 managers, you just didn't go there. And you needed the early stage.

• 23:09Speaker 03

  The early stage was really where all the real returns were back in the early 2000s. We couldn't get access to them, so we did some alternative things like the Tiger globals of this world, but we didn't have much early stage at all. And that did really well, thanks to the tech bubble that we rode. But today, you don't get early stage from those managers, because it's a tiny percentage of their overall book. They're getting the early stage somewhere in their house, not necessarily in your portfolio, but they're accessing the best early stage, so they have proprietary insights and access to the late stage. So you want to invest in their late stage, and we do. But we don't get any of the early-stage venture capital.

• 23:52Speaker 03

  And it's our assertion, that's a much higher return because it's higher risk. But you want it. There's lots of data that you pick the right timeframe, late stage is the same as early-stage returns, but if you're, just for tech bubbles, tech bubbles included in both the beginning and the end, the early stage is where you definitely are generating superior returns. So you want some of that. And it's uncorrelated to late-stage and equities. But how do you access it? Emerging managers. It turns out the second tier isn't necessarily any worse than the emerging managers. And the emerging managers are small enough where they can make the small investments in 50 different deals, and they benefit from the home run, if you will, of early-stage

• 24:37Speaker 03

  venture, because their mind is totally focused on the unicorn. The total adjustment of market has to be big enough that that company can realistically become a unicorn. And if that's your lens, that's a great investable emerging early-stage manager model.

• 24:53Ted Seides?

  How do you reconcile the difference between the belief that emerging managers and venture capital are the way to go with what you originally said?

• 25:02Speaker 03

  Of the importance of reps. We almost never invest in early stage manager without reps. So they've almost always come from another place. And our classic example is H I G. We love this manager. There are a lot of spin outs which got superb training. And not all of them have been terribly successful, but many have. And that's a classic example of what we love doing. So reps being the first of those three pillars. And we walked through the second and third. The second is we've got this funnel. We've got access across the globe to all these managers. So guess what? Our funnel is really, really wide. And we narrowed down the funnel with this triangulation approach. But more importantly, just quantitative statistics.

• 25:44Speaker 03

  And what thoughtful investors have realized is that you're not just being paid for equity beta. There's credit beta buried in there. There's inflation beta in there. There's certain aspects of sectors. There's factors. There's so many things in there. So take taking public equities as the most obvious example. We run massive regressions against their historical performance. And we attribute that performance to certain factors that we can replicate. And we create the multi-factor replication benchmark. And if they didn't beat that by a significant amount, they don't get through. That knocks out 95% of the equity managers over a five year period minimum. And then we have to stop and do all kinds of thinking about whether they did pass that test.

• 26:30Speaker 03

  Can they continue doing it? And by the way, there are some managers that didn't pass the test. And we didn't invest with them because they didn't meet the alpha test that we just talked about. But we thought they would based on changes in a team and so forth. And so we went into that from having not passed the quantitative historical test. But they definitely passed the reputational test. And just certain team changes made us think that they were going to be a success. So that's a quantitative screen that saves us in every asset class. We even apply it to private equity, the multi-factor, what we call beta replication tool.

• 27:08Ted Seides?

  So you have reps, you have your quantitative filter.

• 27:11Speaker 03

  We've got the psychometrics. The shorthand is the best investors are square pegs. Okay. And there's lots of exceptions in the investment world. There's lots of investment rules that have exceptions. We see that more often than not, that they're not balanced individuals. They're workaholics. They're highly ambitious, energetic people, but they're highly analytical, high integrity, very trustful people. And so there's more than just the lack of balance. They're forces of nature, really. They identify a goal in terms of what they want to achieve in terms of performance, or where they see the insights, and they're just going to walk through walls to get to that other side of the wall.

• 27:53Ted Seides?

  How do you tease out positive psychometric elements in your diligence process?

• 27:57Speaker 03

  We send more senior people in that have seen this across a number of different reps, if you will, in the first instance. Some people you see the real person very soon, but not always. And so I'd say a number of hours with them, and it's at least the fourth or fifth meeting. We do, on average, 300 to 500 hours of due diligence on the average private equity fund, for example. So later in the due diligence, we learn that, but also from references. We do a ton of reference, typically 20 references. So ideally with people that know them very well and will be honest with us about them.

• 28:33Ted Seides?

  As the years have gone on, 20 years plus since David wrote Pioneering Portfolio Management, how have you evolved how you've thought about the endowment model?

• 28:44Speaker 03

  So number one is risk. You think about the result of an endowment model. You end up with, pick a number, 60, 200 managers. Okay. And you think you understand from their exposure reports what you own, but you don't know what you own just from their exposure reports. So you have to go really deep in knowing what you own. We understand the underlying stocks that most of the portfolios have. We get all that data, and then we run it through our factor models to know where we've got over and underweights. Because one manager may be doing the same thing as four other managers, and all of a sudden... We've got tons of exposure to clinical trials risk. Okay. That's the single biggest change in the endowment model is the risk management. And that's what risk management means to us.

• 29:29Speaker 03

  We show our clients, what are called a risk dashboard, which has over 16 different metrics, including the value and quality and momentum factors, as well as liquidity factors, currency. You have to understand all of this because odds are when you got an overweight that was unintentional, it goes against you. And when it goes for you, you call it alpha and you don't pay attention to it, but you should. You should pay huge attention to any source of alpha. It's probably beta.

• 29:58Ted Seides?

  When you do that quantitative assessment to figure out what you own underneath, how does that then impact the way you construct your portfolios?

• 30:08Speaker 03

  The main impact is that we will counterbalance certain overweights that we don't want as intentional overweight. So we have to have enough liquidity in the portfolio where we can use ETFs or index funds or futures that we can offset those. That's the primary implication. But there's a positive implication of having so much data on what we own. You can actually then fine tune your allocation to different SKUs. So if you think structured credit at this point in time is cheap, we can do something with that. We'll find a manager and add to them or whatever it takes.

• 30:43Ted Seides?

  How do you balance the notion of static risk with the concept that there may be something like structured credit that you think is an opportunity?

• 30:51Speaker 03

  So we break our tactical asset allocation model into three layers. We call layer one is just absolute risk. So we convert all those different betas and factors into one measure. We call it ENE, equivalent net equity beta. It's equity like risk. And we set the target, say at 75 for a given endowment. And then when markets move it to 73, we rebalance up. Markets move to 77, we move it down. So we never time markets on level one. Level two, we have 13 asset classes or seven beaches, whichever way you want to look at it. And we've got targets for each one of those. Markets move those. Or we have valuation views on level two, say, one of the 13 asset classes emerging market equities. If we think that's gotten cheap, we'll do something there.

• 31:37Speaker 03

  That's also very difficult to do, so we don't do a lot of it. The third level is sub asset class tactical moves. So those are where our managers are giving us some insights. Railways, that was one of our recent ones. We had as a unsuccessful one, community banks going into 2023. Anyway, that's our level three tactical moves. And those tend to generate at least enough alpha to pay for our fees, if not a little more.

• 32:04Ted Seides?

  So we're all paying fees to active managers. And sometimes you're buying the package that they're delivering. Once you start disaggregating this composition of returns and understanding what the alpha is, what the beta is, how do you then go about applying what you've learned to the implementation of your investments in a manager? When it relates to fees or structure?

• 32:25Speaker 03

  If it's a manager with very constrained capacity, we have no influence over that manager. Over time, it's getting better, mainly just through relationships. We're, we're working hard to actually add value to them, even though they've got limited capacity. We're competing with all their other LPs and we will do things like educate them about the energy transition. We'll talk to them about the best incentive programs we've ever seen for hedge funds, or how big an average compliance team is. So we're always trying to add value to those individual managers. But in the case of a lot of the private equity, private debt managers, especially if they're fund two or three, we're allocating so much capital to them that we can talk about separately managed accounts. We can negotiate terms.

• 33:08Speaker 03

  We're always trying to make sure we're only paying performance fees on the alpha, not the beta. And so those sorts of negotiations do take place.

• 33:17Ted Seides?

  We're going to take a quick break in the action to tell you about Brookfield. Brookfield invests in the thing behind the thing behind the next big thing. Their focus across infrastructure, energy, real estate, private equity and credit is helping to build the backbone of the global economy. Brookfield combines deep operational expertise with disciplined, long-term investing, uncovering value and partnering alongside clients to shape tomorrow's economy today. Invest in the businesses that shape tomorrow. Learn how you can own what's next at Brookfield.com slash own.

• 33:55Speaker 02

  This is not an offer to sell or investment advice. Investing involves risk, including the loss of capital.

• 34:00Ted Seides?

  And now, back to the show.

• 34:04Ted Seides?

  What else have you done in the more modern version of what you've applied to the original endowment model?

• 34:10Speaker 03

  I've mentioned two, so the risk management and then the tactical asset allocation. The third one is just focus on being a value-added LP is very intense. We have actually a best demonstrated practices book. It's about 70 pages on post-acquisition operating value-added that we share with private equity managers. So that's a very meaningful part of it. On top of that, I'd say this focus on beta as a risk measure, not volatility, is very important. A lot of people out there in our business think about the average endowment portfolio should have 10% standard deviation around its annual returns, 10% volatility budget, which makes no sense because what happens when markets go down,

• 34:55Speaker 03

  volatility goes up, all of a sudden your portfolio is over risked. What do you do to de-risk it? You sell right after the market got cheap. So you're selling into lower prices and the opposite. When markets go up, vol goes down and you're buying at expensive prices. So that's another aspect of it. Are those some main changes?

• 35:16Ted Seides?

  How have you thought about in the public markets? You said in the old days, you thought maybe Mr. Vanguard was the right solution. Then it was such an important part of your portfolio. You started looking for active managers and now it's just increasingly hard with all of these other factors to prove that you're adding value. What have you done about that?

• 35:35Speaker 03

  There's a portfolio construction solution. Turns out information ratio is probably the most important metric in liquid securities or asset classes. Okay, so how much alpha do you expect is the numerator? How much volatility, single standard deviation around that alpha do you expect in any one year? And if you think about that all the time and you're adding managers, theoretically, what you do is you start with The highest information ratio manager allocate as much as you think you can based on that volatility. Maybe it's 6% of your total portfolio is a large allocation for us. And then you add the next highest information ratio.

• 36:16Speaker 03

  And then you look at what you own underneath that and you find, oh, we've got a lot of growth in there and you have to rebalance it. So that's the basic portfolio construction model for liquid securities. Credit's a little bit different because there's a lot of tactical asset allocation in there. So we're always taking a view on the different sub asset classes of credit.

• 36:36Ted Seides?

  Have you thought about internal capabilities compared to giving money to external managers?

• 36:41Speaker 03

  Well, we started life, no conflicts here. So there's a high bar on that. But we do have such strong relationships with liquid and illiquid managers. So we do a lot of co-investing, private equity and private debt and property in the liquid illiquid asset classes. We've always done co-investing and it's been very successful. Our targets today are about 20% in there. But about seven years ago, we started co-investing in public equities. So with our long hold closest manager relationships, we just talked to them about those positions and said, do you care if we double up on them? We're not going to pay you any fees. And most of them said, no, you're a big investor, probably be helpful. So that's the closest we've come to direct investing.

• 37:26Speaker 03

  The rule is that if we can't find it externally, we're allowed to do it internally. So we launched something on the back of COVID called the New World Equity Portfolio. The New World post COVID was one that was embracing technology, working from home. And you can imagine the sorts of things we invested in. They were both overcorrected companies like retail and airlines. We own those and we own the beneficiaries like Zoom. And so that was one that we just couldn't find anyone else doing. We did it, it worked. The logical lifespan came to an end and we stopped it. Right now, we're looking at one in the energy transition space. It's all about owning brown to green. We cannot find anyone else doing it.

• 38:11Ted Seides?

  How have you structured your team?

• 38:13Speaker 03

  Initially, first 12 years, we had all client-facing people were also research people. Back to the kitchen table with Paul Demetri, we wanted the person across the table from us to know what they were talking about, okay, about this hedge fund manager and so forth. And so we kept that model as long as we possibly could. But now with $50 billion of assets and 360 people, it's not possible. And so about six, seven years ago, we created the Client CIO. There are about 130 team members under the Client CIO. Each client has the primary point person, and they historically have probably worked on the research team during asset manager research.

• 38:54Speaker 03

  But today, that's all they do is construct portfolios and manage the risk of client portfolios. Then there's roughly 64 people that are dedicated to the research team. There's a central research team, which does all the macro work under Cameron Mogadom. Then there are four groups of asset class teams. So equities, privates, private debt has its own team because the complexity is there. And then absolute return hedge funds and liquid credit. So those teams are roughly 12, 15 people each. We believe in specialization. We don't believe in the generalist model. And so that's all they do, is live and breathe their asset classes.

• 39:31Ted Seides?

  I'd love to dive through some of your thoughts and lessons learned across asset classes and maybe start with private equity. Where you started in the business, how do you see the landscape today?

• 39:43Speaker 03

  So private equity. Turns out it's one of the asset classes where you can actually pencil out the expected return. You just pull out an Excel spreadsheet, you put in what you paid for it in terms of multiples on earnings and what you're likely to get for it when you sell it. You've got the debt, the cost of the debt, you've got the 2 and 20 in terms of fees. Most important number of all, earnings growth. Put all those together, certain assumptions usually get you to about 15% historically with nice growth of earnings and cheap interest rates. We just live around that model. We think about who can grow the earnings the most? What are they paying? What can they sell things for? And that has always pointed us in the direction of lower middle market buyouts.

• 40:28Speaker 03

  And specialists, software specialists, for example. And so we've always been focused on that. And we had the data to prove that it's harder to grow earnings in a big company than it is in a small company. The private equity owner can be a more value-added owner than a huge Apollo, Blackstone, even Bank Capital today and CBC, they're buying multi-billion dollar companies. It's just harder to grow earnings. But then you look at the performance, you realize, actually, they haven't done any worse than the lower middle market. But if you break out the attribution of that performance, the average private equity firm over the last 10 years earned 15% net.

• 41:08Speaker 03

  Seven and a half percent of that was from multiple expansion, which is basically referencing the public equity markets multiples. And those companies get valued in line with those. And so they went up by 7.5% because of the last 10 years' growth of the public equity markets on the back of the global financial crisis. The other seven and a half percent is rather pedestrian average earnings growth combined with some inflation in there. So there's no real value added from the average private equity firm, even in the last 10 years, if you adjust for the public equity multiples and the debt aspects of it. So if you leverage small-cap public equities, we think you could have done better. Okay, but huge dispersion.

• 41:52Speaker 03

  So there are big exceptions in the mega-cap, large-cap, all the way down to the middle market who would violate that observation.

• 42:00Ted Seides?

  So if you've grown your asset base and grown your allocations to these managers, how have you tackled the sweet spot of this middle market?

• 42:10Speaker 03

  So we're now in the fund number two and number three space. That's our sweet spot. We have great relationships with certain names and we get big allocations with them. And they've gone up to five or six billion dollar funds, but it's still working. We can call that middle market these days. But the best solution is just no.

• 42:30Speaker 03

  The middle market firms that are most likely to create spanoffs and watch. And we have a relationships with the search firms and others. So we get usually early heads up on firms that are leaving. We'll typically meet the management team the first time. We pass in most cases, not in all cases. We've done some fun ones, but generally we say, we're going to watch you. Please hold some space for us for fun too. And we're in fun too.

• 42:54Ted Seides?

  There's probably nothing that's changed more in these 20 years than hedge funds. And your next asset class you tackled way back when, how are you investing in hedge funds today?

• 43:02Speaker 03

  So first of all, we break them into two totally different groups. Hedged equities, anything with a B to more than point two to the equity markets. We call it an equity manager. And frankly, the learning is the same as in the long only equity space. But we do have more alpha from the hedged equity managers. They just tend to be deeper, more fundamental and more specialists in a lot of cases. So our biotech managers are mostly equity long short. But in the absolute return space, first of all, more managers is better than few managers. There's a minimum where you debate whether it's 12 or 20. And you're all about diversifying your sources of alpha. So what we learned is you can create, say with 20 managers with the right mix of strategies

• 43:48Speaker 03

  and a very consistent source of alpha, call it three to 4%, not big numbers, with only 3% or even 2% alpha volatility. So information ratios of 1.2. And then what do you do with that information ratio? You leverage it. Okay, so that's how we invest in absolute return hedge funds. We create a very stable, solid stream of alpha and then we leverage it.

• 44:15Ted Seides?

  When you think about that area, the 12 to 20 managers, as you define a manager can mean a lot of different things because so much of the assets have gone into these platform hedge funds that are effectively doing that aggregation diversification for you. So how have you balanced the ability to put capital in some of those strategies with, say a millennium or Citadel, an individual, single strategy manager?

• 44:38Speaker 03

  We probably should have allocated to the citadels and monuments. Okay, we should have. We just always look at the fees. We have an acronym for everything, as you've highlighted. EROC is our excess returns on costs. The EROC is terrible. And another way to think about it is of the total gross alpha, how much do they keep? It's about 80%. We get 20% of the alpha. The alpha is huge, absolutely huge. But we could never get comfortable with only getting 20%. So what do we do? We allocate it to their spin offs. And it's mostly Citadel spin offs. They've done very well and they're closer to 220. And we get roughly 50% of the gross alpha. And we diversify.

• 45:22Speaker 03

  They'll be specialists in consumer or specialists in tech. And we have to create a diversified portfolio of those.

• 45:28Ted Seides?

  So beyond the equity long, short, low beta, absolute return, maybe some credit. There's this whole world of alternative alternatives. How have you thought about participating in that?

• 45:37Speaker 03

  So we were early pioneers into that. You know what they say about pioneers? We started with insurance, including life, life settlements as well as catastrophe insurance. Quickly went into litigation financing, royalties, both music and drug royalties. And then one of our favorites is actually clinical trials and sports athlete financing. So that's the journey over about 10 years. We've been looking for this holy grail, which is high 12, 15% type returns that are completely uncorrelated to financial markets. And all of those strategies I just mentioned are pretty much uncorrelated. The problem with them is that they have limited capacity.

• 46:19Speaker 03

  And as soon as I start talking about them on a podcast, then all of a sudden the alpha goes away. But in most of those categories, it has gone away unless they're in certain specialist areas. But it's been a good asset class. We can't take our allocation in client portfolios up above much more than 5 or 6% today.

• 46:39Ted Seides?

  How about real estate?

• 46:40Speaker 03

  Real estate, first of all, stay away from the double promote. You don't pay a private equity firm to pay a private equity firm. Okay, so we go with regional specialists generally and we build a national portfolio. Obviously, real estate has tax implications that make it hard to have a global portfolio. So our Europeans don't invest in US property. But frankly, the US property market is a lot more alpha-rich than European and Asian property markets. So our US clients, a lot of them being taxpayers, benefit hugely from a diversified North American property portfolio. And then our European and Asian clients benefit from European and Asian diversified portfolios that are pulling together regional and sector specialists.

• 47:24Speaker 03

  So then in terms of office and industrial and residential and hospitality, that's where you can almost time markets, not quite. When you're allocating for the next three to four years deployment, you may still want to be in all. So we do use generalists, in some cases, regional. But lately, last six, seven years, we have invested almost entirely in industrial. So a lot of logistics and that's been a big success.

• 47:54Ted Seides?

  How about real assets?

• 47:55Speaker 03

  We've moved away from them. Early on, we invested in oil and gas. It just seemed that it was a great landscape for real specialists. People talk about reps. These are great opportunities for reps, but commodity prices take you out. And all our due diligence had us being convinced by these managers saying that they hedge the commodity risk. They don't. The risk is just taking out too many resource companies. So not just oil and gas, but mining. It's a pretty difficult area to invest in unless you really take a 20-year timeframe and you live with this massive cyclicality. So we do not do anything in traditional resource areas. We are primarily focused on the energy transition.

• 48:38Speaker 03

  And those are effectively real assets in many cases.

• 48:42Ted Seides?

  So with a lot of this idea of taking on a new asset class, having a clean sheet of paper, in the last couple of years, there have been some opportunities to do that. There's the crypto and the blockchain world. There's certainly all the developments in AI. And I would love to hear your thoughts as you've mapped out and looked at these areas, what you've found.

• 49:01Speaker 03

  On AI, it's too early. First high level question is how is it going to affect institutional investing, asset allocation, the timing of various moves? But then how it's going to affect basic fundamental research at the asset manager level? So we don't have an answer to that. And frankly, it's too early to tell right now, but we will be in front of that when it happens. On crypto, we have studied it and we have come to a decision not to invest other than in blockchain venture capital. The simple explanation is that it's like gold. It has no income. It has a market because people buy it.

• 49:42Speaker 03

  Okay, so quoting Jacob Rothschild, when the central banks are buying gold, you buy gold, ideally before they start buying. But so crypto is the same. It has its pricing set by the scale of purchases and that is driven by a lot of momentum and psychological factors. If you look at the value of Bitcoin, it bears no resemblance to any value proposition or utility that Bitcoin has. Okay, Bitcoin has utility, especially in just moving currencies across capital borders. There's a real value to that. I'm not sure it's legal in many cases, but there's a value to that. It's not $40,000 a coin.

• 50:25Speaker 03

  That's clearly speculation driven. And we'll invest in cryptocurrency when they reflect their utility or they're cheap relative to their utility.

• 50:37Ted Seides?

  What's different today managing $50 billion at Partners than at different stages along the way with smaller asset sizes?

• 50:46Speaker 03

  By far, the biggest difference is our relationship with the asset managers. We're just always the top of their table. And so we get every question answered. We get more transparency than the average investor and we can come up with creative new ideas with them. The managers are getting bigger, but some of them are getting bigger and developing their capabilities even faster. And we want to grow with those. And we're going to do that if we're close to them and we're contributing to their own capability improvements.

• 51:18Ted Seides?

  I'd love to hear what you've learned about succession of asset management firms. You've certainly seen a lot of it in the managers in your portfolio. You've undertaken aspects of it with some retirements, as you mentioned.

• 51:30Speaker 03

  It's difficult, but not as difficult as you think. We always assume there's so much more to that one individual that when they leave, it will be a disaster. It generally doesn't end up that way. Does succession work in all cases in terms of just the politics and no casualties in terms of the partner group? No. But asset management firms, if they're good ones, they've really embedded their capabilities so deep in the organization that no one or two people really are that important, especially in the bigger institutional portfolios. If it's a team of six, succession is vitally important. And so you've got to really focus on that.

• 52:14Speaker 03

  But it's extremely difficult. Have you gone abandon to partners? First of all, we were a partnership. So it wasn't a single person running the investment decisions. So it's not Andreas Halverson at Viking. It was Stan Miranda who built a partnership and initially three partners and now 19 partners. And all the partners were involved in many different specific aspects of the investment process. So no one person really mattered that much. But when I gave up the CIO role, Colin Pan was already doing it. So I think succession in all companies, not just investment companies, is about giving the job to the individual before they take it on. And then it just happens more naturally.

• 52:58Speaker 03

  And you always expect as the founder, whatever, some big fanfare, but it's always just a little tiny applause when the transition actually takes place. Where do you think partners goes from here? I do think we end up doing some more direct investing. We see 1,000 managers a year in any one asset class. We just know so much about each asset manager. Most of us just sit there and perspire over all the opportunities we're seeing that aren't being exploited. So when I said the rule is we can only exploit those opportunities that haven't already been exploited by amazing people outside Partners Capital, there are

• 53:40Speaker 03

  a lot. And so I think we're going to cross that boundary at some time, very delicately. We don't want to break the rule that created us, no conflicts. But I think there's some opportunities our clients should benefit from where they could see much lower fees and a lot more alpha if we integrate forward into asset management.

• 54:01Ted Seides?

  And how about Partners as a business, three, five, 10 years down the road?

• 54:05Speaker 03

  Privately owned, management run, outsourced CIO, continuing to be one of the most highly respected in terms of thought leadership in investment management.

• 54:15Ted Seides?

  Great. Well, Stan, I want to turn to a couple of closing questions before I let you go. What's your favorite hobby or activity outside of work and family?

• 54:21Speaker 03

  Okay, so outside family, family is definitely first port of call outside of work. Every moment of free time is spent in sports, basically. And I do triathlons, so mostly just the individual running, swimming and cycling a lot. But I collect sports. You name the sport. The only one I don't do is golf because it would take too much time and it would take out all the other sports. But I do ice hockey, kayaking, every racket sport you can think of. I just love sports. It may be the competitor in me, but it can't be because I'm not that good at any of them. It turns out focus matters. I may be a good skier, that's about the closest one. But I am a master of none.

• 55:02Ted Seides?

  What's your biggest investment pet peeve?

• 55:04Speaker 03

  Clearly, people who mistake alpha for beta. And we do it all the time. Oh, we just did fantastically well in those biotech firms. It's gotta be beta.

• 55:15Ted Seides?

  How about your biggest personal pet peeve?

• 55:17Speaker 03

  Okay, I have a lot of those. I was asking my wife, for example. She said, well, plastic bottles, brown shoes. Entitlement is probably the one because people that are entitled, you don't succeed with them. I think you succeed with people who have a basic philosophy that hard work earns you the right to whatever you have, whatever you experience. So I believe in hard work and focused efforts to get ahead.

• 55:43Ted Seides?

  What investment mistake have you made that you'd never make again?

• 55:46Speaker 03

  I think invest in catastrophe insurance.

• 55:50Speaker 03

  Okay, so you already said we're long global warming. That's what catastrophe insurance is, but global warming has always been ahead of pricing. So that was a painful experience. Which two people have had the biggest impact on your professional life? Number one was my second family. I was very close to Dr. Tom Eliason in Fresno, California, where I grew up, and his wife, who was my den mother in Cub Scouts. And I spent so much time with them because their son was my best friend. Dr. Eliason was a leading cardiologist and he was my role model. The impact he had on me was to be calm and thoughtful.

• 56:33Speaker 03

  My family was full of drama. So it must be the Portuguese DNA or whatever it is, but he gave me a sense of perspective and calm that compared to my siblings is distinctive. I think most of my work colleagues would say, really? I haven't noticed, but they have to understand what it could have been. And then secondly is a gentleman named Archie Norman. He's a serial CEO and chairman. He was the CEO of Asda, Turnaround Asda Energous ITV, and he's currently the chairman of Marks and Spencer. And I worked with him when he was at Asda and I was a strategy consultant. And he has two unique characteristics as a leader.

• 57:18Speaker 03

  And one is that he just doesn't like doing anything ordinary, anything normal. He just strives to do things that surprise people out of the ordinary. And he taught me to always be brutally honest and face into the unvarnished truth. I'm the chairman of the board of Partners Capital. You don't go into the board meeting to convince them that our investment performance is great. You find the area that's not great. You spend all the time on that and you're honest about it and you focus them on it and you face into the unvarnished truth. That's what Archie taught me, which I think is incredibly valuable. What teaching from your parents has most stayed with you? Okay, so 1972, I'm thinking about university,

• 58:02Speaker 03

  and there's the financial crash, the markets crash. My father happens to be a stockbroker. Okay, this was a bad period for him. He sat down with me and he just said, well, first of all, that college fund, not so big anymore. But secondly, if you do anything in life or in university, have a skill that people will pay for, and you will land on your feet. And that just always stuck with me. And so my first degree was in business and accounting, so took care of it. I think that's wonderful advice for anyone early in life.

• 58:36Ted Seides?

  Stan, last one. What life lesson have you learned that you wish you knew a lot earlier in life?

• 58:41Speaker 03

  Keep your loved ones close to you. That sounds so obvious. But in a global world where we have the ability to send our children anywhere, or they have the ability to go anywhere, and your friends have the same freedom, we all end up all over the world. And I'm at that stage where I'm trying to gather them back into one place. And in some ways, wishing I didn't have the truly global experience I had, because I'm just living on planes, going, visiting children and family and friends. But so the advice I give to young parents in particular is don't let your kids go to university abroad. Keep them home, or you'll never regret it.

• 59:19Ted Seides?

  Stan, thanks so much for sharing your wisdom and experience.

• 59:23Speaker 03

  I've loved it, Ted. Thank you very much.

• 59:26Ted Seides?

  Thanks for listening to the show. To learn more, hop on our website at capitalallocators.com, where you can join our mailing list, access past shows, learn about our gatherings, and sign up for premium content, including podcast transcripts, my investment portfolio, and a lot more. Have a good one, and see you next time.