Speaker 1you're seeing companies with extraordinary earnings growth, high valuations. We're seeing venture investments in the many billions, 20 billion value, 5 billion before. How do you decide those? How do you think about investing in a world where the underlying fundamentals are changing very quickly, but the price is very high? If the price was low, would you believe it was changing? Because the price is high, it's consistent with things going really well. When the price is high, you always recoil. Part of you needs to say something like, AI is going to work. 10 years from now, we'll be in a world we won't recognize. May not be the case. That's possible. Maybe only half of that's possible. It's still profound. Maybe only a quarter is possible. It's still profound. If I think that's true, it means that I need to do something about it. I need to do something about it. I need to think long-term and be comfortable owning things at high prices, knowing that in any normal investment environment, you'd never own them because this is different. Those are the most dangerous words in investing is saying this time is different, but this time is different.
Speaker 2I'm Ted Seides, and this is Capital Allocators. My guest on today's show is Andre Perrold, the co-founder and chief investment officer of High Vista Strategies, an alternative asset manager overseeing $14 billion that searches for alpha opportunities in structurally inefficient markets. Andre has twice been a past guest on the show, starting way back with episode number two, and both conversations are replayed on the feed. This time around, we start with Andre's assessment of the most expensive investment in the world, which is the interest rate. And he's going to talk about the most exciting and unusual investment environment he's experienced, alongside his thoughts on how to build capabilities and construct portfolios to navigate exponential change. We then turn to the beautifully inefficient markets where High Vista has built core capabilities across biotech, lower middle market buyouts, early stage venture,
Speaker 3and specialty private credit. Before we get to the interview, we spend a lot of time on this podcast asking other people questions. This time, we're turning the tables on the market. We're going to talk about the most expensive investment in the world, we just launched our latest audience survey. We want to learn more about who's listening, how you listen, and what we can do to make Capital Allocators even better. Links in the show notes. Thanks as always for listening and helping us compound knowledge and relationships. Capital Allocators is brought to you by AlphaSense.
Speaker 2Here's something for you. Most AI tools today are very good at sounding right. But can you actually trace it back to a filing transcript or specific paper? Can you trace it back to a filing transcript or specific paper? Are you just trusting the confidence of the output? For allocators, that's not a minor concern. A missed filing, incorrect source, or context that gets lost somewhere in the retrieval chain aren't edge cases. They're how decisions go wrong. AlphaSense is the AI platform built specifically for this. They own the content. Over 500 million curated documents from broker research and expert research. They own the transcripts to filings and earnings calls. And they own the retrieval layer on top of it. That means every answer can link back to an exact verifiable source. Because the answer is only as good as what's underneath it. And with AlphaSense, you know exactly what that is. See it for yourself. Try a free trial at alpha-sense.com slash capital. That's it for this episode of Morningstar. And I'll see you in the next episode of Morningstar. Game on to learn more. 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 slash capital allocators. Please enjoy my conversation with Andre Perrault. Andre, great to see you. Great to be here, Ted. Been a little while since you were on the show. I'd love you to catch me up with how you're thinking about the investment landscape.
Speaker 1A lot has happened over the years. We started Hyvesta in 2004. We went through the GFC. There's nothing like today. It is the most unique environment that I have ever seen. It's the most exciting investment environment that I've ever seen. It's the most uncertain environment that I've ever seen. The reason is there's so much change going on. It's exponential in nature, in many dimensions. It's not just one thing is happening that's big. At the same time that it's exciting from a different perspective, if you care about the next generation, if you care about society, there's some very ugly things. Don't confuse exciting investing with a great world, great society. It's not that. For investing, it's fantastic. Have you put on your investment lens? What makes it exciting? Innovation and rapid change means that if you're trying to invest well, you need an edge. Your choices are buy an index or you can try and outperform. Your ability to get an edge is much greater and easier when things are changing rapidly. If you were following General Motors decades ago, everyone knew GM. Everyone followed it. Nothing was changing. To get an edge is hard. At a time when things are changing exponentially, let's rattle off something. AI is exponential in what it's doing on many fronts. It's a tool for productivity that's helping firms get better margins. It's changing our lives, enabling wars. The facets of AI are hard to fathom and on each dimension, it's exponential. What's happening in healthcare, the exponential change. The GLP-1 drugs are changing the lives of people. They're changing the lives of people. They're changing the outlook for our health in profound ways. If you look at the budget deficit, we have $2 trillion and growing. It feels very exponential. The US debt was $5 trillion in early 2000s. It's $40 trillion. It's not all good. A big deficit is very exciting for investing. If the alternative is no deficit, it's not as exciting. The deficit's a problem for the next gen. If you're investing, it's great. That's the conundrum that we're in. You've got to separate. You've got to wear two hats. What I think about the actual world we're in versus the investing world.
Speaker 2When things are exciting, because there's so much change, they're also pretty challenging. We'd love to get your sense of if you're able to capture some of these exciting movements, what are the challenges that you're facing and have to overcome to make
Speaker 1that work? We're seeing venture investments. In the many billions, $20 billion value, $5 billion before. It may not be the case. That's possible. It's still profound. It's still profound. If I think that's true, it means that I need to think long-term and be comfortable owning things at high prices, knowing that in any normal investment environment, you'd be in a world where the price is high. If I think that's true, it means that I need to think long-term. This is different. The question is, how do you invest well? One way to keep your head straight is to say, I'm going to create an AI sleeve on the assumption it will be different. I'm not going to put all my money in it. I'm going to create that sleeve because I need to free myself from the idea that I can compare AI and non-AI investments and decide in each day which is the better one. Hard to do. The rest of your money is the anti-AI. you can be good at building a sleeve that if AI turns out to be this incredible evolution, innovation over time, will do really well. Then you need to think, if that's true, what would I invest in? It's a different mindset. You need two sides of your brain at work because we're so programmed to compare investments of all kinds with each other. You can't really compare them easily. That's a way trying to keep our heads straight and how to get it right. How do you think about navigating the investment world? You need to try to understand exponential math. We're very bad at exponential math. In COVID, we were going around the table here at High Vista asking people, how many COVID cases would there be in the country? The numbers were ridiculously low. No one could imagine an exponential phenomenon. Of course, the whole world got it. If it's true, then it's a good thing. What's truly exponential for the long time is almost no price you shouldn't pay, but you're not going to pay. That's hard. You need to find a way to get an edge. The only way we know to get an edge is to partner with experts in increasingly narrow areas. For example, if you think AI has legs, how do you figure it out? We've spent a lot of time trying to think, where in AI should we place our bets? We have a lot riding on compute. We've decided if AI was going to work, compute would be very big. We have found hard tech and other experts to work with to try and figure out where to do it. You need that narrow specialization to help you build a picture of what's going on to have some conviction. That's how we do. In all of these areas of evolution, rapid change, you have to do that.
Speaker 2What are some of the other areas where you found that narrow specialization that you can identify and partner with?
Speaker 1We do a lot of narrow specialization in everything we do. It's a hallmark of high vista. We do a lot in biotech. Some things in biotech might be exponential in change. GLP-1 drugs is a systemic thing in healthcare. In PE, we're trying to invest in a roofing company, small buyout. How do you figure out that the roofing companies, and you need to be with someone who really knows that space. We did a bottling company in small buyouts. We have evolved to where in everything we do, we look for very local specialization. It's a vast array of local specialists that inform these various portfolios that we run that then aggravate up.
Speaker 2I'd love you to walk through some of the evolution of your business that started as one pool. Now there's a couple other strategies within that.
Speaker 1We started off with a multi-asset management. Look around the world for the best opportunities. That's an important piece of what we do. There you get a sense from a top-down point of view, where are you cross-comparing against different areas? What are the best places to go to? It's bottom-up, but you're looking top-down and you're very macro-aware. We've also realized that over time, things get competed away very fast. The world has become much more sophisticated. The firms that invest are super sophisticated. Today, their clients are sophisticated. Today, if you look at what the clients can do today versus in the past, it's incredible to see the sophistication of clients across the board. Sovereign wealth funds, pension funds, family offices, endowments, anything that is vaguely attractive will get looked at quickly, get analyzed, and money will flow to it. We learned that, saw that happen when we started. Simple value investing was a great strategy. Today, that's no longer interesting. We said, where can we find outsized alpha that is endearing? That sounds like an oxymoron, because if it's outsized, it shouldn't last. It should get competed away. We've come across a range of areas where we think it can occur. They tend to be areas with a large number of opportunities, small opportunities, where you need deep specialization. Where there's big upside. An example would be in biotech equities. Micro cap, small cap biotech stocks, they're all burning money in pursuit of a therapy, or two, or three. They're either going to die if it fails, or if they succeed, they'll get sold to pharma. They seldom have any revenues. They're burning money. They're diluting shareholders' capital inefficient, risky, and you need to know the science. You need that specialization. Big money can't come and buy and sell easily. So the big money in biotech is buy and hold. The small money can come in and move around. We have found a way to find partners who are small, extraordinary investors who know the science and can figure it out. They run small amounts of money that can put up big numbers, because they can buy and sell while the big guys can't.
Speaker 2What have you learned from doing that in biotech over the years? When your DNA is to work with lots of experts,
Speaker 1it becomes wash, rinse, repeat. There's certain characteristics you look for. They are basic characteristics to working with any expert. How good are they? Are they original thinkers? How do they form judgments? You have to know the science. You have to also be what is a traditional great investor. You need to know when to buy or you buy more. If the stock is up, do you sell, take profits, or buy even more? Those judgments are investment skills that transcend any area. You've got to make those judgments. We've been doing that forever. Also, in the case of biotech, as an example, it's the small firms that do well. So how do you get a brilliant person who's running a small amount of money, another oxymoron? A brilliant person is running a small, they should have a lot of money. Turns out there's a large supply of brilliant people at bigger firms who leave to form their own firm, and we will back them. They attract capital. Now they're big. Then we have a question, what do we do? That's a high class problem to have. There's that dimension as to how sized are they for the opportunity set, and you can be too big or not. Then all the other normal questions, are they still aligned? Are they still coming to work? That's our business every single day.
Speaker 2Wash, rinse, repeat. On the back end, getting to the point where you think a particular manager who's been successful for you may not be able to continue to deliver that going forward, and let's assume all the durable characteristics are still in place. They're still hungry. They're still coming to work. They're still motivated. They're still aligned with you. What have been the determinants of the times when you've decided to exit one of the biotech managers? It's seldom performance.
Speaker 1It's more the alignment isn't there. When someone has been successful and they have a large pool, it's a real conversation. Show me that this larger denominator, you can still do well. Show me you're no longer constrained by the denominator. Sometimes you get a good answer. An answer might be, I never was. I was always running a strategy that was much more liquid. I'll show you the statistics. Nothing's changed. That's fine. In other cases, you see big changes because size is a real issue in the space. Then you have to make a decision.
Speaker 2Biotech was one of the original strategies you offered in addition to the diversified multi-asset strategy. What have the other ones been that you've grown into?
Speaker 1One is small company buyouts. Small company buyouts is the bottom of the food chain of private equity. Mostly family-owned businesses being sold that have a future that is fantastic. If you can roll it up, fix it up, morph it, into something exciting, that you can buy at a low price. Families don't sell companies in auctions. They care very much who they sell to. There's thousands of these available. If we can find small PE players, partner with them, put some money in their funds, invest alongside them directly as well, we can find the right ones. Fantastic way to do it.
Speaker 2What are some of the things you've learned from doing that? Over the years that might be not obvious, let's just go find some smart people with a good track record in this space.
Speaker 1The thing to emphasize is the scale. Your ability to look across thousands of opportunities is profoundly valuable. There are tens of thousands of small companies. How do you pick them? You need to follow small sponsors, fund sizes of a few hundred million. Fundless sponsors, independent sponsors, have no funds. They may have come from PE, there's a whole thing going on with PE where there's no longer carry available and they leave a PE firm and now they have their own thing, but they don't have a fund. There's 2,000 such either fundless or small sponsors in total. When you have that breadth, we have a brand. Most investments we've ever made are working with partners that are early in that entity. We back early players. That's when the motivation is the greatest, when they're most able to put up the numbers. That's a fantastic recipe.
Speaker 2You mentioned that there's a wave of people spinning out of larger buyout funds because the carry isn't there. I'd love you to talk more about the implications of that dynamic in the private equity landscape more broadly than what you're doing.
Speaker 1There's several things going on. One is firms are private for longer. They are also being held by their owners for longer. If you own a private, you can sell it to someone else who's private. Few of these go public. The public firms come out of VC, not out of PE. PE is not a breeding ground for public firms. It's a place for concentrated ownership to own, fix up, and create a firm from A to B. Then you exit either to a strategic or to another PE firm. Seldom do you go public. Increasingly, it's the same owner wants to hang on to it. That leads to continuation vehicles, GP-led secondaries, same thing. Because it's private for longer, there are fewer realizations. So there's much less carry. You've had a phenomenon that people tended to overpay a few years ago. Those are going to struggle to hurdle and generate carry. If you're working at one of these firms, what do you do? Is it worth hanging on for a small carry or you go somewhere else for a better opportunity? Secondly, it's leading to this continuation vehicle world where we're also doing things. That's a rich hunting ground for fantastic companies in the lower middle market area. The low DPI is a problem. A private equity business is simple. You have fund N, then you've got to raise fund N plus one. Fund N is what it is. It's invested. The question is, can you raise fund N plus one? For a lot of these firms, raising fund N plus one is going to be hard. It's going to be hard to raise a bigger fund. Some of them won't be able to raise the next fund. That's leading to the talent is then shifting. We partner with that talent.
Speaker 2You mentioned the continuation vehicle. continuation vehicles, direct investing as other prongs. How have you leaned into that side of pursuing small buyouts?
Speaker 1In the continuation vehicles, we've hired a team that is now directly looking at continuation vehicles. The beauty there is you can find these gem businesses. If you're a PE sponsor and you have a gem business, there's much more to be done with the business. You can keep rolling up stuff. You can keep adding to it and get a much higher value down the road. Why do you want to sell it? Someone has to take that business and continue to morph it. You're in the best position to do that. Better you keep it and fix it, yet you want DPI. The continuation vehicle is a way to bring in new investors, to take out investors who want out. Our whole idea is to go in there, create a capability to do exactly that, look for those gem businesses. By definition, those are the ones they want to keep.
Speaker 2As you look at the universe of potential opportunities for continuation vehicles, how do you assess what portion of those are a real gem business compared to whatever else is being put into CVs?
Speaker 1It's hard to know, except there's a bias towards the gems. The gems is a combination of what can be done with them, but also the price at which you can get in. In some cases, you can get in at very attractive prices. It's a combination of the price and the firm itself. The lower middle market is especially interesting because the prices are lower, the opportunities for multiple expansion are much greater. That's true in CVs as well. How much of those are gems versus not? There's a lot of stuff that isn't, but it's going to be hard to do a real CV if it's not a gem. We're not saying all gem. There's a range. Some of the stuff is pretty
Speaker 2phenomenal. Has the team tilted their underwriting process to direct assets from what was a fund underwriting
Speaker 1process? We've been doing co-invests for a very long time. A co-invest with a sponsor is different than a GP-led investment. It's usually an investment they're making that is new for them, new for us. We'll work with them, but we have to do a lot of our own work. With a GP-led, a lot more information, working with a sponsor, and you see their whole history with that firm. It's a different underwriting.
Speaker 2When there are more and more of these opportunities for all the structural dynamics in the industry, how do you go about finding the time and the process to assess potential opportunities? The inbox, whether
Speaker 1it's stuff we didn't solicit or did, is big these days. We have built AI tools to help us do it. We work inside an AI sandbox that's secure, need to protect our data and everything. We have created an AI robot to imagine it's the investor. How would it evaluate each of these opportunities? It's an AI agent that takes the decks, gets industry information, gets information about the sponsor, gets information about the management team, gets information about the industry and the opportunity set. We'll build a little model. We'll create a scorecard. We've given it what the scorecard entries are. Client concentration would be an example. As a risk meter, you have a whole pile of things that you are scoring it on. And if it scores high, the team will look at it and say, wow, this looks incredible. Then we need to do the work to make sure that the AI did it correctly. We're running a back test to see if we had done this in the past, how well would it have done without any intervention on our product? It's an attempt to say, use AI to get you a long way without human intervention. Where can the humans spend the time where they are the best?
Speaker 2As you're able to put more money in the ground, the co-invests and the funds in that space, there's been this DPI problem across private equity. How do you think about what that looks like in smaller managers compared to the industry as a whole? The smaller managers
Speaker 1doing small deals, small firms, they're at the bottom of the food chain. They are selling to the next layer up of PE that sells to the next layer up of PE, ultimately to the large cap PE. It's toughest at the large end where the entry multiples are the highest. The carry problem is the highest. We have found the DPI is much less of an issue in the lower middle market. It's still there, but it's nothing as bad
Speaker 2as at the high end. Let's move on to the next category, maybe venture. How have you thought about. Prosecuting that opportunity.
Speaker 1Venture is a fantastic area. If you think about AI, there's non-AI venture, but most of venture today is basically AI. There's the AI side of how you invest and there's the anti-AI. If you think of small buyouts, roofing company, healthcare delivery services company, an engine testing company, it's not AI. It's the anti-AI. On the other side, venture is all about disruption. You want to be a disruptor. Exposure to venture and great VC firms is a fantastic way to be a disruptor. A balanced portfolio, you want both. Venture is a way of doing it. It's hard to time venture. The venture investments made in the 2010, 2012, when mobile applications were beginning a few years after the iPhone came out, incredible returns from that period. Would you have known at the time? I don't think so. Would you have known that? Crypto would have worked out as well as it has. You have to be in venture. You got to be thoughtful who you're partnering with. Do you partner with durable firms, the bigger firms that have a lot of money, have a lot of clouts? We always love newer firms. Partners at the big firms leave and form a new firm. We do both. Then do you partner with highly specialized? Some of the VCs are super specialized in what they do. If you think AI will change the way you think about it, I think it will. It will change the world profoundly down the road, which we do. How exactly? We don't. How much exactly? We don't. If you think there's a chance it's real, that five to 10 years from now, it's a world we don't really recognize, you need to be invested in things like VC. It's a critical piece of an AI strategy. A balanced portfolio will have that with other things. You will have biotech, you'll have small biots and other things. The AI piece and venture is just a fantastic way as an arrow in that AI quiver.
Speaker 2We're going to take a quick break in the action to tell you about Ridgeline, the investment management platform 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 away operational drudgery, so your talent can shift from managing old technology to materializing new ideas. Ridgeline is built to change that line's trajectory, to be the inflection point that takes you forward. Ridgeline helps asset and wealth managers understand and improve their firm's growth trajectory. To see how your firm compares to 16,000 thousand of your peers, visit ridgeline.ai slash 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. When you think about those two opportunity sets in venture, the established brands and newer firms, most people think of venture as a pure access game. On that first side, how do you go about getting access to firms that already are well-known as top players in the space? In our case, we're
Speaker 1fortunate to have been doing VC for decades. We have longstanding relationships. We have access that we keep nurturing. That part is a continuation of what we have always done. I'm not tired of it.
Speaker 2Most of the firms that have been stars in the venture world have stayed that way. Occasionally, there's one that falls off. How have you thought about trying to be rigorous about, well, we think something might be wrong here. We should move on. But if we're wrong, we're done.
Speaker 1It's nuanced because it's so relationship-driven that not continuing is basically saying we're done. This is how it works. It's not like in a hedge fund, you can take out half your position. It's a critical piece. We want to re-up in size with these. In those, we are going to pass knowing it may be a mistake. For us, on average, these are good decisions. You know that you're ending a relationship potentially. You've got to think it through.
Speaker 2How obvious is it to you when you decide to not continue with someone who has a longstanding pedigree?
Speaker 1Some of it is easier. It's a version of what I was saying in the biotech stuff. You were the venture firm. They haven't added any partners. They're raising a ton of money. But the organization isn't adapting to the capital flowing in. Therefore, what they're doing is different from what they were doing in the past in an obvious way. Then you have to say, why all of a sudden are they doing bigger investments that they've never done before? The same people with no additional resources. Why is that still a good bet? Sometimes you can see maybe there's a path to that. Sometimes this is clear.
Speaker 2Can't be. How about on the lesser known manager side? Huge universe of those venture capital managers, however many people used to be at Google or Meta or wherever else they're coming out of now. How do you filter through to decide the ones that you think are more likely to be successful, even knowing they don't have that many at bats? A lot of the ones
Speaker 1that we do are experienced. People with great track records coming out of big firms. Sometimes it's someone out of firm A and someone out of firm B. They've done some investing together. They may sit on boards together. They know each other well. They decide to team up. We look at their track records. The track records take work to sort out. We do the work. You try and understand the firm's strategy and everything else. Usually other people see the same thing. It's often clear these are superstars. They're going places. Then it's a question of can we get access? You can get in more easily than you think. You have to ask why. It's the Groucho Marx problem. Why do you want to join a club that'll have you? That's called investing. Investing is all about you joining clubs that'll have you. How you do that well, that's our skill set.
Speaker 2Before private credit became the juggernaut that it has over the last couple of years, that was one of the first strategies that you had carved out. I would love to hear what's happened with your private credit investing.
Speaker 1Private credit's a fantastic space. It's a space of many things. Credit's just a contract. Someone says, I'll pay you X under these conditions. There's direct lending, unsecured. If there's EBITDA, you get paid back. If there isn't, you don't. There's collateralized lending. Our credit strategy is always based on where can I find great borrowers? We're making a loan in size is what they need. Fashion alone that's highly collateralized, that meets our needs, takes a lot of work. For that work, we solve their problem, but we get paid an extra return. It's a return for the work we're putting in. It's a return for complexity. If you can do those well, that's great. There's a lot of hoopla today, a lot of concern about software and private credit. The software thing is not going to work. It's not something we have done. It's out there. It's overblown. We think a lot of the software will be okay because the credit's a short-term loans. They're not long-dated. The software, you just need it to pay off within a few years and you're going to be okay. It's not like if you own a software firm where if you own the equity, the terminal value of that software firm is critical. Terminal value at a time of disruption is one of the hardest things to sort out. If you take the money, you take the money, you take the money, you take the money, you take Salesforce, a great CRM, its market cap peaked over $300 billion. It's down by 40% in less than a year because of the fear of disruption. Its earnings growth is fantastic. The earnings growth continues high and expectations offer it to continue to be spectacular through something like 2028. Beyond that, we don't know. It's croaked in price. The future value isn't known. The earnings are great. Could you lend to Salesforce and be okay all day? You want to be an equity owner of Salesforce, you need to understand terminal value at a time of enormous disruption. On the credit side, there's a lot of software that could be just fine. Even though software is suffering, it doesn't mean the loans are a problem.
Speaker 2The notion that the loans are short-dated, you only need to get paid back almost presumes that someone else is going to take you out. How do you think about that? When you're underwriting a private credit manager, they may make a short-dated loan. If there's no one else to take them out, they're the ones who need to roll to keep the company going.
Speaker 1Absolutely. So the end game in credit, it's rolling. Where there's a risk of impairment, it's a negotiation. It's extension. Extension on what terms? If you're sufficiently collateralized, then the issue is you can take a fair hit and still get your money back. We do most of our loans with originators. We do, one loan at a time. We'll do an energy loan. We'll do a transitional real estate loan. We'll do a housing loan. We'll do an equipment loan. Each with a specialist in that area. Equipment lending needs a specialist. You wouldn't do it with a generalist. We have a detailed, very sharp pencil on what is the loan, what is the collateral, what would have to happen for it to be impaired. In the way you're describing, where things get worse, maybe you're in a negotiation, an extension. You have to handicap that risk. That's part of the math.
Speaker 2In the broad universe of types of loans you could make, where have you found the most exciting opportunities?
Speaker 1It's in GP solutions. GPs have a need for money. GPs have to commit to their funds. They have to raise money for their funds. They have to show they can't always raise the money. If we can structure a solution through a form of a loan that helps them do that, it's an interesting part of the credit space is the GP solution space. What are some of the other ones you like? They come and go. Energy was fantastic. These days, everyone's back into energy. It's less interesting. Data centers are huge and massive. There's only so much that the end investors want to do in data centers. You can get some fantastic loans in the data center space. Someone's building a data center. It's a construction loan. Under certain conditions, it's highly collateralized. They're deposits people put up and you get the deposits the minute you cross thresholds. The collateral is directly or indirectly related to a hyperscaler often. You got to think about their credits. What if it goes wrong? But it's become a fantastic space. Are there areas in private credit you're decidedly avoiding? We've always avoided direct lending, lending to sponsors, uncollateralized, where you make a loan and you hope there's enough profit. That's the vast bulk of private credit is direct lending. So we've always avoided that. Why? Because we want to see the collateral. We want to get paid for complexity. It's a far more commodity space in the lending markets. It used to be you got very high returns. We're not sure you're getting paid enough for the risks. If things don't work, you're arm wrestling the PE sponsor as to how to renegotiate the loan to extend it if they can't exit. Their position in the firm that they own, we can't easily get an edge there. We think it's a pretty commoditized space. The bespoke loans where you're solving someone's problem one loan at a time, there's a lot of complexity, but a lot of value you can create.
Speaker 2In addition to these four, biotech, private equity, venture, and credit, I'm curious what else you've dove into as a niche strategy?
Speaker 1There's a lot of niche stuff you can do. It's not clear how long lasting it is. These others we've talked about, we're deep in the weeds. see it as being pretty enduring. I'll give you an example. Japan activism is a very interesting strategy, but we don't have to stay there. We'll go there opportunistically in a multi-asset mandate. Long short traded credits. Is it enduring? Not so clear. Is it a niche that has the moats that these other niches we've talked about have? No. Can others carton onto it and go and compete away? Yes. We expect that'll happen. Right now, they're very interesting. It's being opportunistic in the moment to take advantage of them. What are some of those other opportunities that you have your eye on today? There's interesting things going on in Europe. If you look at Europe compared to the US and emerging markets, slower growth, it's messy. There are fantastic opportunities, for example, in restructuring. There are opportunities cross-jurisdictional. Every country is its own jurisdiction. A firm is doing business in two or three or four or five jurisdictions, or there are several firms involved. There's an issue to be resolved. If you can find a way to cut across those and solve a problem, you've got something real. In Europe, there are great franchises that people don't seem to care about. It's non-AI. Europe's an interesting place for less flashy things, but phenomenal stuff if you're set up for it.
Speaker 2If you take a look at the US and emerging markets, there are fantastic opportunities for you to take a step back with your flagship multi-asset portfolio. You have a couple of core prongs in these activities and then this series of tactical opportunities that come and go. How have you brought that all together into a single strategy?
Speaker 1The compass has always been, where can we find alpha? In a multi-asset fund, where can we find interesting opportunities? Through a lens of alpha. What is scarce is alpha. Beta, you can get cheaply. The recipe is put your money where there's alpha. For each investment that has alpha comes with some exposure to a market, beta. You say, okay, I put my money in all these places where there's alpha. What is the beta I'm getting from each? You aggregate the beta. Then you ask, is the beta where I want it to be? There are two investment processes. The main one, what we do every day, come to work, bottom up, find alpha. The main one, what we do every day, then we run a beta management process that adds it all up and then we true it up to the beta we want. If we're way underweight Europe because we didn't find much alpha in Europe, we'll add to Europe to get the beta right. If we like that beta, not always. There's a beta process and an alpha process. The firm is about alpha. The beta thing is important, but side process. How do you calibrate your desired beta selection? It's mostly broad market, we're going to have a strong bias to the US. We find a lot of alpha in the US. We'll find alpha in China. We'll find other stuff in Asia. We'll find stuff in Europe. It's not that different from the broad market beta weights.
Speaker 2Over the last bunch of years, you've gone from that one multi-asset strategy to a whole set of different things in different ways. There's the basic buy and build at different points in time. I'd love you to take me through each step of how you did that, the decisions you made to buy or build along the way.
Speaker 1The main thing was the realization, if we could find these inefficient markets, I call them beautifully inefficient markets. There are a lot of inefficient markets that are ugly. You can be right about some company in Africa will make money, wrong that you'll get your money back. Because when they make money, things go wrong. The government will tax them. Insiders will transfer price the money away. There are a lot of inefficient markets you don't want to touch. The beautifully inefficient ones are the ones where it's very clean. If you can figure it out, it'll work. It needs a moat from competition. What protects you is limited capacity and the need for deep specialization. Once we saw that recipe, we said, wow, where can we do this? We made some, we acquired others. We made the biotech and the credit. We acquired the small buyouts and the venture capitalists in continuation vehicles we are making. We've added a team that is doing that. It's related to the small buyout thing that we have now that we acquired a number of years ago.
Speaker 2What does that process look like internally when you know there's a strategy you're interested in and you're trying to figure out how to go about building it or buying it?
Speaker 1A lot of it is understand the opportunity. You say to yourself, there are opportunities. How would I source them? How would I underwrite them? What team would I require? How protected is it? Are there moats? A lot of it is the availability of the right people. Sourcing is the name of the game. Our firm is built on making connections. It's finding the right people.
Speaker 2Some of that has all happened through COVID, which changed a lot in the way people were working. How has the culture of the organization evolved over the years?
Speaker 1It has many aspects to culture. One is what is hardcore will never waver from it. Rigorous thinking, honest communication, being very frank, having debate about an investment will always do that. Increasingly, you need to source further afield. There's not a lot of investment opportunities sitting here in the Boston Common. There's more opportunities walking down Fifth Avenue. Even there, there are a lot of people chasing them. How you source is the key. How you source is the single biggest thing, where and how. You've got to locate yourself in those places. Increasingly, we find we need to go further afield. Everyone comes to work every day. How do you build a culture where you can have that rigor? People know each other, yet more of it is done remotely. It's a constant tension because you're trying to get the best of both worlds. You want to be remote, but you want the culture to be intact.
Speaker 2What are some of the small things you've found that have been effective in making that work? Four times a year at a
Speaker 1minimum, maybe five, maybe six. Everyone comes to the office. We do a lot of sessions. We do town halls. We'll have company outings. We'll have deep dive investment sessions, meetings with the senior leadership about a question such as data. What do we do about data? How important is data? Critical. Where can we do better? What skill sets do we need? Who do we need to hire? We had a phenomenal session on each team. We talk about if they had to build a robot, what would it be? In the presentation, they came out and said, oh yeah, I've already built it. Don't worry. Here it is. It was fantastic. Things like that where people talk about what they're doing. The rate of adoption of AI in each team has been amazing. As they talk about it, everyone learns. The value of being together and sharing these ideas, it's profoundly valuable. You do that in a way that you don't want to. You don't want to do it enough. The place keeps humming, but you got to do it enough and you have to do it well. What's next over the next five, 10 or 20 years for Hyvista? We love the recipe of beautifully inefficient markets. It's looking for new opportunities to do those. We have a bunch we're looking at as we speak. As you talk about the next five or 10 years, we just have to understand AI is big. It's going to be a different world. The nature of competition, it's all going to change. How do we do well for our clients, put up great numbers in a world of dramatic change? That's what we need to do. To have a compass that keeps you balanced, have an edge, it's exciting. You got to keep at it. You can't relax. The next five years, the next 10 years is going to be doing these beautifully inefficient markets at a time of dramatic change. What will
Speaker 2it take for both you and your team, the partners that you're working with to be able to stay on the ball in a time where there is such rapid change? It's a version
Speaker 1of what I said about the AI robots and the adoption. It's incredible to see how people naturally are drawn to AI. If I say, hey, Ted, I don't have to tell you it's cold outside, take a sweater, you're better off. The team naturally is adopting AI, not because you're pushing them into it, because they're finding it's helpful. They get much more done. If we are that kind of firm where we give people the ability to do that, make available the resources that they can innovate in what they do.
Speaker 2All right, Andre, I want to make sure I ask you a couple of additional closing questions from the last time we talked. What's the most rewarding thing you do outside of work?
Speaker 1My wife and I are blessed with a small, young grandson. Our first, Remy, we watch him play and learn. It's fantastic to watch. What is so interesting is you see how much you learn by playing as a kid. Then you draw the parallel with AI. The way to learn AI is to play. You prompt, you try, you learn. If you can't play, improvise and be comfortable just being a kid, in AI. You can't. So we watch Remy. I say, hey, that's what everyone should do. do as an adult.
Speaker 2It's fantastic. What are you unusually good at that most people don't know
Speaker 1about? I love making things, fixing things. I'm a good carpenter, plumber, electrician. I used to do it as a kid. I still love doing it.
Speaker 2It's therapeutic. What have you changed your mind about the last few years?
Speaker 1The single biggest thing is coming to believe that exponential change is real on many dimensions. War is never going away. It's too easy to make a drone and shoot at someone. I don't see deficits going away for a long time. I don't see AI suddenly withering. I don't see innovations in healthcare disappearing. It's a very big change.
Speaker 2Andre, last one. If the next five years are a chapter in your life, what's that chapter about?
Speaker 1I go back to one of my first chapters, which is I was, a pretty hardcore programmer back in the day. You play with Claude code, Claude co-work, vibe code. It's amazing. I want to program my calendar. I want to program my email. I want to program a lot of this and only I can do it because it's me. It's my life. It's my tastes. I'm now playing with it and doing it.
Speaker 2It's exciting. Andre, always so much fun to catch up. Thanks for taking the time. Thanks, Ted. Thanks for listening all the way to the end. If you made it this far, how about one ask from me? Tell one friend about the show. It's the best way to keep growing this incredible community. Thanks so much. And until the next one, stay curious and keep compounding knowledge, relationships, and capital a little bit at a time.
Speaker 4All 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 you. 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 and securities discussed on this podcast.
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