How Should Fund Managers Approach Pension Plans in Private Market Investing? Featuring Edward Comerford

This episode explores strategies for pension plan investments in private markets, specifically focusing on the perspective of fund managers and allocators.

1. Consistent deployment is crucial in managing pension plans, especially in the venture capital space which is inherently long-term and cyclical.
2. Fund managers should maintain a focused mission when approaching pension plans, ensuring investments align with the pension's goals and responsibilities.
3. Effective pension management requires balancing current employee contributions with the need to generate returns that secure future retirements.
4. Transparency and maintaining a clear mission are key to managing the public perception and trust in pension funds.
5. The role of venture capital in pension portfolios is as a primary driver of growth through innovation, emphasizing its importance despite market fluctuations.

1: Introduction to the Episode

Alexa Benz and Earnest Sweat introduce the episode and guest Edward Comerford, discussing his role and the focus of the podcast on pension plan investments in private markets. Edward Comerford: "Thanks, Alexa. I really appreciate you bringing me here."

2: Fund Management in Pension Plans

Discussion on how fund managers should approach investments in pension plans, focusing on long-term strategies and consistent deployment. Edward Comerford: "We're talking about a ten-year-long asset class that can be cyclical and is illiquid."

3: The Role of Venture Capital in Pensions

Exploring venture capital's role in driving growth and innovation in pension portfolios and how it fits into the broader investment strategy. Edward Comerford: "Venture capital is our long-term growth driver for the plan."

1. For fund managers, consistently engage with long-term investment strategies that align with the pension's mission.
2. Understand the regulatory and public nature of pension funds to manage them effectively.
3. Ensure transparency in investment decisions to maintain trust among stakeholders.
4. Focus on sectors that promise long-term growth like technology and innovation when managing pension investments.
5. Regularly reassess and adjust investment strategies to adapt to changing market conditions and ensure alignment with the pension's objectives.

The San Francisco Employees’ Retirement System (SFERS) is dedicated to securing, protecting, and prudently investing pension trust assets, administering mandated benefits programs, and providing promised benefits to more than 77,000 active, vested, and retired City and County of San Francisco employees and their survivors. SFERS administers two benefit programs, a $33 billion Pension Plan (defined benefit plan) and a voluntary employee 457(b) Deferred Compensation Plan. For more information, visit their website.

Sydecar.io is a frictionless deal execution platform for venture investors. Our platform handles back-office operations for venture investors, automating banking, compliance, contracts, and reporting so that customers can focus on making deals and building relationships. Learn more at www.sydecar.io.

Swimming with Allocators is a podcast that dives into the intriguing world of Venture Capital from an LP (Limited Partner) perspective. Hosts Alexa Binns and Earnest Sweat are seasoned professionals who have donned various hats in the VC ecosystem. Each episode, we explore where the future opportunities lie in the VC landscape with insights from top LPs on their investment strategies and industry experts shedding light on emerging trends and technologies.

The information provided on this podcast does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this podcast are for general informational purposes only.

People

Edward Comerford, Earnest Sweat, Alexa Benz

Companies

San Francisco Employees Retirement System

Books

None

Guest Name(s):

Edward Comerford

Content Warnings:

None

Alexa Benz
Welcome to swimming with Alligators, the VC. Podcast from the LP Perspective, with your. Hosts Alexa Benz and Ernest Swett. You ready? Let's dive in.

Today we are speaking with Edward Comerford, director at San Francisco Employees Retirement System. Ed is a part of a team responsible for investing in San Francisco's private market portfolio, responsible for sourcing and underwriting private equity, mid market managers, emerging managers, sector specialists, and co investments. Ed has over a decade of experience in private markets investing, including managing his own real estate firm. Thanks, Ed, for joining us today on swimming with allocators. No, thanks for Ernest.

Edward Comerford
Thanks, Alexa. I really appreciate you bringing me here. This is fun for me to know there's someone on who knew Ernest before I did. Ed, you two are business school classmates. Are there any things I should know about either of you?

Earnest Sweat
Any favorite stories? Can't think. I think the big thing with learning is this. I remember learning pretty early on at business school is my man can hoot. So we had open gym at kellogg, 2 hours a day, five days a week type thing, and there was a crew of us that would build our class schedules and social schedules around being able to play basketball.

Edward Comerford
And ernest was there bunch all the time, and he was always tearing up the court. Best dude on the court every time. And we were in the same cohort together. And so when time came for intramurals, they cut up the teams by cohort. And so I was thinking, yeah, we have this in a bag.

We're gonna win it all. We got the best player in the school, and kind of the way it played out is we had Ernest, absolute stud, and then, like, the rest of the court were. What's the best way to say this? We're business school students, the rest of us. Yeah, that's what it was.

The mind is willing. The body was unathletic, and lack, I would say so it was a little bit of a rough go there, but. But, yeah, he definitely shined on the basketball court. Yeah, I had no idea, ernest. Yeah, I was a pretty good basketball player.

Alexa Benz
I mean, depending on who you talk to at what aspect of my life my high school teammates would probably be like, yeah, he was okay. But as I got to more and more unathletic communities, I started to shine a lot more. Yeah, but you know, the whole story, I play this quick as I, you know, I played LeBron James when I was in high school. Right. Like, and Chris Paul.

I was a pretty good, I was on a pretty good traveling team. So, yeah, that was pretty good. That's a. I say a decent gap between Braun and CP three and, and me. Yeah.

Edward Comerford
And then from you to the rest of us at Kellogg's, probably, I am. Doing a podcast and those two are still playing at the highest level with 20 year olds. So, yeah, one day they'll be retiring and doing what we do, so it'll all come full circle.

Earnest Sweat
Speaking of full circle, are there from your career journey, curious why you chose spheres after you've been at hall Capital and USB, you've done your own real estate thing. Yeah. So, yeah, I was looking for a few different things and I was fortunate enough to find them all at spurs. So the first one being kind of the structure, the one of the key, at least in my opinion, one of the really key things in all of private markets, but especially in venture, is commitment to consistent deployment, commitment to the asset class. We're talking about a ten year long asset class that can be cyclical and is illiquid.

Edward Comerford
So a group like spurs that had been investing in VC since the nineties has shown that long term commitment, long term stable deployment there was really important. Yeah, and so that was an important box to check. Another one, like spheres like the mission, appealed to me. My mom was an educator here in California for her entire career, so there's people at Calstrs or hustling every day for her retirement. And so that means something.

I was born in San Francisco, so giving back to the people who spent their careers in San Francisco, helping San Francisco means a lot. And then the way that teams approach towards private markets, the teams approach towards venture was an important one too. And here it's not really a set it and forget it mentality. It's continually trying to evolve. Find that next good manager, keep pushing the portfolio forward, always thinking about what can we do better?

What's the old sports analogy? Skate to where the puck is going, not to where it's at. So we try to encompass that as best we can. And so I think that combination was important and I wasn't necessarily expecting to find it at a pension plan. But, you know, when you do, if you can kind of look through the traditional, the common thinking, I guess, around pension plans and kind of see the value underneath, I really made this an attractive landing place for me in my.

Alexa Benz
Career as a native San Franciscan. I think that's right.

Could you speak to just kind of like your position and how you take that seriously and kind of like. The. Importance of investing on behalf of folks who work for San Francisco? Yes, there's, you know, the idea of a pension is somewhat of an intercalated one to begin with. It's not something, you know, the sixties, seventies, you saw it all over the place.

Edward Comerford
Now, not so much for hostages. And in cases like this, where if people are going to specifically select to working for a city, a government, any sort of institution like that, where they know they're giving up some comp up front for this security on the back end, I mean, that's a meaningful trade. And people are relying on this pension, retirement. They leave something for the kids, to help their kids along the way, so that it's a, you know, for people that make that trade off, I think it's really important to deliver. You're on the back half of that trade and not have something that proof disappear at the end.

And the overall structure of pensions is a little bit tough too, because I was like, I got in trouble for this one. It's a little bit of a pyramid scheme. You need the new employees paying in. Growing the number of employees really helps to kind of keep everything working the way it should. And one way we can help alleviate some of those pressures is by performing really well on the investment side.

And so that's where, at least for me, the mission speaks, where we really feel like you can step in and do a lot to drive performance, to drive our returns that can help ensure this retirement that was promised, that contractually promised to people, the people that specifically gave up money upfront to have that stability on the back end to make sure that comes to fruition. So I think that's really important for that social contract, I guess, if you would, between the city and the employees. That work there, given that there's such a strong mission, how should a fund manager approach pension plans? And kind of the context around this question and why I love doing this podcast is because I think there's a lot of misconceptions on just what allocators do and what their purpose is. And most think it's just like, make the rich richer, right?

Alexa Benz
This is not the case. And so since there's this unique mission for pension plans, how do you think fund managers should approach, you know, someone like you? Tons of bribery, I think works. That's definitely not gotten anyone in trouble before. Are we trying not to like, have this edited?

Earnest Sweat
Okay, I'll cut the joke.

Alexa Benz
Don't work there. No, there's a dude, really? The mission, the sanctity of the mission, I think is so important that we try to separate that from, from the investment side. Right. So from what we're doing, from where I sit maximizing the level of return per unit of risk, however you want to calculate that is 100% the goal, the role that venture plays.

Edward Comerford
We achieve that goal by focusing on growth. That is, our long venture capital is our long term growth driver for the plan. We don't want to dilute that by adding extra missions or side quests or whatever the heck you want to call it, which is a little bit different than endowment or foundation, which can make other financial choices to emphasize something else besides risk of adjusted return in their investing. So from that point of view, a lot of the mission type investing stuff we've discussed in a lot, there's definitely political pressure to focus on some different mission type investing things, but I think we've really strove to keep that risk adjusted return as the only way. Like, it's very difficult to serve multiple masters and do so successfully.

Right? So if we know that ensuring the pensioners can have, can you receive their pension benefits is the gutting light and you kind of work backwards from that, then we are 100% risk adjusted return focused. We don't necessarily have the flexibility of taking other aspects into account. And that's not saying, you know, we'll never do anything, ESG or whatever the jujure when it comes to different mentions like that all can that. We all take that into consideration when we're looking through risk profiles.

But as far as saying we're going to try to achieve high returns and do x like, no, no x, we're solely return driven investor speaking sort of. To pension plans in general. Are there eccentricities of how they work that make them a unique LP or more challenging to work with or easier to work with? Yeah, everyone knows the perception out there, right? It's dumb money.

That's a ton of red tape. And there's always a decade behind the trends and, you know, and there's. I'm not gonna, you know, and a lot of those perceptions exist for. For a reason. But I don't think it's quite as bad as what everyone thinks it to be out there.

There's going to be more red tape. I joke a little bit about. Yeah, pay for services, right? There's a ton of structure in there to make sure that stuff doesn't happen and that stuff's not able to happen, you know, so there's going to be a little more red tape. You know, we're probably not going to be as nimble as some family office.

That said, what I would recommend gps do. And maybe now it's maybe an interesting time in the universe to say this because you're struggling to raise capital. Just go get that dollar, proof it out and come back. But if you're fortunate enough to be in a position where you have some options when it comes to LP's, do some homework in LP's too. Figure out which organizations have consistently deployed, are willing to be forthright into the decision making.

And those are the levels that we can control and that we try to control, like consistency, honesty, transparency. That doesn't matter if you're an Enf or a family office or a public pension, that kind of talks about the quality of the organization. And so from that point of view, I think we just try to run a really high quality organization and that's going to, I think, offset a lot of like, the pain points that I think most gps would, would think of when it comes to dealing with the public pension plan. Like, yeah, California baseball. With pension plans, we're gonna have disclosure requirements.

There's always gonna be some stuff that we can't get away from that's gonna be suboptimal, maybe from some people's point of view, but I think the quality of our organization, and I'm definitely talking to my own book here a little bit, I think the quality of the organization is massively important and in a lot of cases can overshine some of the standard perceptions about dealing with public pensions. You lead the team responsible for private equity investments. What's the role of venture in your. Portfolio ventures 100% are growth driver. Venture capital is our growth engine and specifically achieving growth through innovation from both a long term us economy point of view, and I think stems, I think ties pretty directly to investing.

Innovation is super critical and important and we believe that that power of innovation going back for over 30 years now has puts us in a position to drive outperformance. I think we're north by 20% IRR our VC portfolio since inception because of this focus on innovation and focus on what comes next. And yeah, I think it's important to view each asset class and understand what its role is in the portfolio. And from a growth driver, innovation driver vent, VC is 100% king. That's what we do with it.

Alexa Benz
Was there in these last couple of years, any issues with the public markets and their kind of roller coaster and having you kind of relook at your venture, maybe being overweight at any point, did that ever impact your deployment? So we're fortunate that it hasn't. Definitely the dominant effect is real. I think every lp that's invested in private markets, invested in venture, has dealt with that at some point since 2021, 2020, the pullbacks, etcetera, this is where organizationally, having that long history in VC investing, having that long history in private markets investing, and understanding that there's going to be boom times and there's going to be bus times, the portfolio was up 50% in 2021. On the VC side, even without the subsequent pullback in 2022, we were going to be above allocation.

Edward Comerford
But understanding that this is something that happens in a long term volatile liquid asset class, and then understanding that we're not managing the venture capital portfolio to hit targets in 2025, we're trying to hit targets in 2035. So how do we set a consistent deployment rate that maybe takes up a hair? Takes down a hair, but doesn't have those wild swings which end up building in inherent your risks associated with different deployment years? We're trying to diversify, have good vintage or diversification that's consistent and not like, okay, so now we're going to under allocate coming into what could be a good market and then overallocate, you know, it's going to be a hotter market. How do you avoid that?

Right. So having that long term view is important and we're fortunate that, you know, our leadership understands that and has our backing and they'll push and we'll ask questions. But as long as our messaging is consistent and our messaging is based in like is a fact based messaging, then we've been fortunate that everyone's understood and our consistent deployment, excuse me, has been able to be consistent. And with your deployment, will you be looking for new managers in 2024? Yeah, I'd say we're always looking for new managers.

So probably, if I think about VC, the higher priority items right now, we've spent a lot of time in Europe recently. It's been an underway part of our portfolio. If you look back at the performance, this is where VC is really neat. A lot of asset classes. US has really dominated performance over the last decade venture because of that ability to really generate breakout performance repeatedly.

It's less of a us centric asset class, I think, and us is going to be the vast majority of what we do. But we have us exposure, we have good APAC exposure, and so we're making sure we're not missing anything in Europe. So we're spending extra time thinking about that right now and then looking through our credit portfolio. Yeah, everyone was written up. I mentioned we're up 50 plus percent in 2021, but valuations haven't come down.

It is at a similar rate. And yeah, growth will make up some of that. But whose valuations do you trust? Maybe overextended a little bit during the hot time. So we're going.

So going through and doing that analysis now, I'm sure will lead to opportunity in the future for new relationships. I say, like, in a perfect world, we'd be adding a new relationship a year or so. We don't always hit that. Sometimes it's too right. But I think the goal to continually refresh is important because groups is VC, groups age, there's turnover amongst professionals.

You know, there can be a little bit of style drift. There's always something to think about when it comes to reop, and there will always be opportunities for new managers there, specifically on our end. We also have a vehicle set up for new relationships. If we're not ready for a full squares check and we want to put in 2 million, 5 million, something like that, that's also a really great way, we found to start developing a relationship, get that first hand seat for something that fund. Two funds from now can graduate into the portfolio.

Alexa Benz
Can you talk about those two vehicles? One, the kind of the core vehicle, what type of, what does that fund manager look like? What does that fund look like? And then I would love to hear for that 2510 million dollars check, what does that fund look like too? Yeah, yeah.

Edward Comerford
So I'd say the, for the primary portfolio, you know, I don't know if this is going to be anything unique or different from any other VC allocator out there, right? But established group, strong performance, conviction that they're sticking to their knitting, conviction that they're able to continue to generate that performance going forward. And like, sizes vary anything from a $200 million fund to some of the bigger groups out there. So those will usually be checks in the 20 to 70 range, I guess, depending on conviction level, detail, blah, blah, blah, etcetera. For the.

I don't want to call it a strictly emerging manager fund because that's maybe emerging relationship fund might be a better way to think about it. Those can be a combination of newer groups, you know, that are, that have very, have a promising background, but maybe a less built out actual history working together, less round trip transactions. Those could be groups that are entering like a newer market. If we're doing something at India, I'd probably go through something like that, et cetera, for AI groups, for a new AI focused group that might be a good vehicle for something like them. You know, we're very interesting opportunity in the US, I'm clear.

Maybe if it's going to be quite as impactful as like the shift to SaaS was what's the market really look like 1015 years from now, but like probably worth building. Starting to build relationships and thinking about who could be a good partner there long term or groups that are going through pivots. You have a bunch of old partners who have moved on. The next generation is taking over. Now they're building out that track record.

So groups that maybe don't have the perfect mix that you look for as an LP, but have a lot of promising signs that we can, like I said, start small, check, have that front row seat, start building that relationship in person, and then look for a fund or two down the line to graduate to a full year. Now we're going to take a quick break to speak with our sponsor on the show today we have an industry expert and sponsor, Nick Talbreja, co founder and CEO at Sidecar IO. Sidecar helps you start and run your fund or SPV, so you can focus on making deals, not spreadsheets. Sidecar is a frictionless deal execution platform for venture investors. Their platform handles back office operations for venture investors, automating banking, compliance contracts and reporting so that customers can focus on making deals and building relationships.

Alexa Benz
Thank you, Nick, for partnering on the show. So you mentioned when you were going on this journey and investing in these companies, startup companies, you were looking at what's out there in the market. You didn't want to do it. You're experienced attorney, but you didn't want to create all those documents. What is the competitive landscape for your market today and how do you believe sidecar compares to traditional and emerging competition?

Nick Talbreja
That's a great question. Competitive landscape, it's pretty broad. You have traditional fund admins that can do what we do, but they would do so pretty cost and efficiently because again, it's very manual and they can't compete with us on pricing because we have software doing what people do in their businesses. You have law firms that do something like what we do as far as just creating the forms, now that's a very rote and manual process. Again, you wouldn't want to pay a lawyer for then you have certain software first, businesses like you have Carta and Angelist who are two behemoths in our space.

And I think, look, I actually respect everyone in our space. I think they're all great businesses and they have great teams. Our wedge, however, is unique in that we've again vertically integrated in a certain part of this space and built software that automates literally everything that can be automated. We've invested a lot to do that because we have a belief that that wedge is going to scale us over time into something that's powerful. And people will adopt software first as a means of engaging with private investments over time and not require us to just intake a lot of custom forms.

But that's an investment in the future that we've made. And the only way we could have gotten to where we are is by staying really focused on making that investment. Whereas our competitors in large part look at any of our competitors. You can take your custom forms to them and they will handle your business with a manual team behind the scenes. We just had a hard line rule on not doing that, which means that we will always be software first, not just software as a surface layer.

Alexa Benz
Makes a lot of sense. How do you think fund managers should get the most out of their fun admin services or fund admin stack? Well, one, I think you should really get to know your fund admins because they are your long term partners. Like they're not going to just be there when you create your fund, but you're going to want them to be there every single year for all of the routine needs, whether it's accounting or tax related or storing documentation or relating to your LP's. And they are the firm, the individuals that are speaking to your most precious resource, which is your LP's.

Nick Talbreja
They're your customers, right? So you really have to trust your fund admin. So I think to get the most out of the relationship, make sure you can build that trust. And I think do your diligence, make sure that they know what they're doing. Speak to their other customers, understand from personal references that they do things on time, they do things well, they don't make mistakes because we frequently hear horror stories about such and such fund admin late on k one s, and there were errors in them, right?

That's something that of course we solve via software. But if you're using a traditional fund admin, make sure you can trust that they have a team that's really credible, that they do things on time and an error free manner, and that they have an ability to retain a strong team. There's also commonly attrition in this business. So Sidecar has emerged as a platform to streamline spvs. This topic and concept of spvs is particularly interesting to our GP, both emerging managers as well as established managers and LP audiences.

Alexa Benz
Have you seen any trends of late when it comes to spvs? Yes. You know, in 2021 to 22, there was a trend of, hey, hey, everyone's investing, everyone can be an investor, a fund GP. Of course that led to an explosion in the use of things like spvs and fund structures.

Nick Talbreja
I think an interesting trend, however, is even in a market that I think if you read the news around like, it just doesn't sound like a great market, people are still using spvs and I think that because spvs can be used to build a track record, but also maintain a powerful business, spvs are used in every cycle and we're seeing that in a challenging market as well. Spvs are being very commonly used to support co investments behind your winners, or support doubling down on a business that you really believe in that the market may not appreciate today for whatever reason. So it's been a strong product for us through every market that we've been a part of. Yeah, I'm a living testimony testament when it comes to the continuing I've been at funds and had a track record there, but also continue to build on my own track record through spvs and through your platform. So I can definitely tell that a lot more people are still doing that, especially in challenging times with the kind of institutional LP market being a little frozen.

Exactly. Have you seen anything when it comes to different terms that are used now within your user base? Yeah, you know, one thing that has emerged of late that I think is maybe a little counterintuitive is for those that had aspirations of raising a fund but are having a hard time. If you think about a fund versus an SPv, I think you kind of like maybe attribute having a management fee with a fund and maybe not so much with an SPv because a fund is actively managed over a period of years and you're deploying capital from it, maintaining communication with portfolio companies and LP's. However, because raising a fund may be more challenging, we're seeing that folks who are doing great work in raising spvs and deploying capital that way are more justifiably charging a management fee for spvs.

That's something that we didn't see as much of previously. Another thing is around carry. Carry, I think is something that people are negotiating harder. And I think this is as family offices and high net worth individuals who are commonly the LP's of these funds and spvs, as they get more exposure to interesting opportunities to invest in things, maybe feel like they can command more power in a challenging market. We're seeing that carry is more heavily negotiated.

We previously would see carry 25 30% on some deals, but now it's all kind of returned to sort of like normalization in the market of standard 20%, sometimes a bit less than 20%, while fees are something that are on the table. Given that it is hard work to run a syndicate and people want to be compensated for that work. Well, that one is kind of a surprise to me on the management fees, but I would assume in harder times finding great companies and the work to do it, to actually get the allocation in great companies, you know, these, these emerging managers or fund managers want to get compensated for that. So that's, that's really interesting. Yeah.

Alexa Benz
Do you also, a concept that, you know, I think that your platform helps for is, again, people building out a track record. Have you seen anything interesting around warehousing deals? You know, yes, there are a lot of interesting, you know, I'm pausing here because I'll kind of talk about something that may be a little legal nuance, but warehousing a deal, what that means, right? For those who may not know, this concept of warehousing is, hey, you want to raise a fund, but you're still fundraising, right? You haven't closed the fund yet.

Nick Talbreja
There are interesting deals that you can do that you want to invest in through your fund, but the fund's not closed yet. So you make the investments either personally or through some other capital source. And the intention is that the fund will then receive that investment that you made at the cost basis. If you invest at like a dollar a share in this company, the fund will take it over at a dollar a share. Basically, we're warehousing it to give it to the fund later.

Now, what we have seen is that there's a lot of interest in warehousing. However, not everyone understands, like, some of the limitations around this concept of warehousing. One, you have to be actively fundraising to a fund. Two, the documentation for your fund has to stipulate that, like, it will have warehouse investments and investors consent to receiving the warehouse investments. The third thing is, if you're raising spvs to warehouse and put into your fund later, your lp's in that SPV will basically lose the right to that specific investment.

Right. When it's, when it goes into the fund, they're not going to. They should be okay with becoming fund LP. So I think people want a warehouse, but they're maybe not thinking about the mechanics of it around how it actually happens and how you need to, like, get consent for it to actually be be the case. However, there's definitely increased interest in warehousing.

So I think a little bit of a nuance there, but definitely interest. I think not everyone appreciates that some of the things that they're doing may not actually be complementary to this notion of true warehousing. Yeah, and I think that's where your perspective is very helpful too. And all that nuanced legal parameters. There's this one concept and you're trying to mash things together and it might not actually fit and be best suited for all your customers.

Alexa Benz
It's great for your institutional LP customers, but not those who started with you at the beginning. You're clearly out ahead of the future of venture capital. For those interested in using sidecar software, please visit Sidecar IO allocators. And now back to our allocator interview. Comparing all these managers and tracking your existing ones.

Earnest Sweat
Is there a little bit of work that needs to go into to make them apples to apples? Just curious how people are reporting and what you do to sort of dig in or get under the hood on some of their numbers. Yeah, so this is where having the underlying portfolio level data really is important, because lots of groups will have overlapping holdings and so it's really easy to compare it. Group X is holding it at twelve times, group Y is holding it at eight times, and it's soft, right? Like who's right, who's wrong, who knows, you know?

Edward Comerford
So, so we definitely go in and try to make those. I don't know if it's necessarily modifications, but just kind of get a sense like I'm not going to sit here and tell you I'm an expert on what a VC company devaluation should be. None idea. But we can have a good idea, you know, if there's, you know, some creative financing rounds that probably should have been done rounds but weren't. Okay, like then we'll take a little bit of a, what's the right haircut?

1015 20%. You kind of stress test a portfolio through things like that. Again, looking at those common investments that we've seen either other managers or our managers have, make sure that everyone's holding that at a reasonable basis. So we definitely go through in a minute, when we're looking through the data, try to get a good sense of do these valuations compared to a group of peers, feel middle of the road, feel conservative, feel aggressive groups that mark everything up 20%, like a quarter before they start fundraising, having this sufficiently frequently. Those are kind of the signs.

Again, maybe there's a little more weakness here than top line performance suggests. And then just looking at DPI, you know, it's, I think it's just becoming a little more popular to do, and it kind of comes in and out of popularity depending on overarching market. But DPI, like DBI, doesn't buy, right, but that's the one thing where it's 100% round trip there. So digging through DPI numbers, understanding, I think, can give you a really good sense of what's real and what's not, right. Comparing what was an investment held at two quarters, one quarter, two quarters, four quarters before exit and exit, maybe that's a little more comparable for PE than venture per se, but kind of getting a sense of how much valuations move between the few quarters prior to exit and actual exit, I think can give you a sense of how aggressive or conservative GP is when it comes to valuations.

Alexa Benz
Why do you think DPI goes in and out of favor? Venture, you know, so in times like this, where valuations are maybe down for a few years ago, and it's a little bit unclear how accurate all the marks are, right. I think that's a really stable metric that it's really hard to fudge. You know, in other times we're evaluating to 2019 or 2021 where valuations that were kind of skyrocketing. I think it's, you know, double between 2018, 2019, you know, then, you know, then I think it's a lot easier to be like, well, like everything's treading for 15 times MTM revenue, so the fact that they're holding it at twelve, it's totally fine, you know, so.

Edward Comerford
And IRRs, most people are paid off IRR too, you know, and if you. If there isn't a reason to think the IRR isn't super accurate, it's really easy to be like, yeah, we're just going to go with the guys who pump IRR the hardest, just cause my bonus or whatever is tied, my comps tied into that a little bit today. When you're looking at the IRR and you're like, not 100% sure how accurate this is, you kind of fall back on something that's a little more stable as a valuation metric. That's fascinating is liquidity. Are you all patient capital?

Earnest Sweat
You'd rather everybody ride everything to the end, or are there some other strategies that you'd prefer some of your managers serving, engaging with now?

Edward Comerford
This answer is 100% changed with every LP you talk to. From our point of view, I think the bias is to write things out. That said, the details around each individual situation really matter what we can.

What's the best way to say this? If it's an investment in the manager strike zone that they know really well, where it's just a little bit of market headwinds and underlying performance is good. The underlying metrics are really good. Revenue is still growing. Well, you have an ability to become EBITda positive.

You know, if you do it with, if you like fiddle with or go to market a little bit. Yes, hang on to that thing and write it out. You know, if you're writing out everything because you can't raise your next fund and you're trying to hang on to your fee base, I mean, that's like a very much different situation. Right. And then there's a ton of situations kind of in between those extremes.

And so I would. This is a little bit of a soft answer, so maybe a little bit of a cop out, but generally we still write it out, like long term that is likely to create the most value. But if it's not, like, be realistic, you know, if this really isn't. Yeah, I think long term it'll become obvious like what the best moves are and, you know, as long as the process you apply to each situation where there's a role, you know, find that continuation vehicle, sell, shut things down. As long as a process you use to judge each is the same and you really like what the investment a case shine through, then I think LP's will be understanding.

Where I think tension comes up is when LP's start questioning whether the GP has the investment's best interest at heart and more thinking about what's best for the GP's pocket. Anti just made me think of at the recording. At the time of recording, Alexa wrote about kind of like shutting down of funds and zombie funds. So I'd love to hear both of your takes on this, but where do you. Is there a fear of more zombie funds occurring and how does a pension plan kind of stay on top of that?

Yeah, so I think the fear around zombie funds has definitely ticked up and I think for good reason. Right. We've all seen the fundraising data that shows second time funds are having a much harder time fundraising than before, you know, and that's, you know, if you don't have a really lengthy track record with a bunch of LP's that are willing to give you like a fund or two pass because of the environment, like it's a really tough spot to be in. It's. It's.

It's really difficult. You know, I'd say the structure that we set up that we talked about a little bit before with kind of like a early relationship feeder vehicle and then a main vehicle, I think helps buffer us a little bit by the time. Most of our relationships are probably not for our core portfolio, probably aren't first or second time funds. So that, I think, gives you some buffer. I would like to think we're good enough for seeing the warning signs that we're not going to re up, but that doesn't mean that there's always going to be a handful of things in there that are working towards zombie status, even if it's, you know, not a recent commitment.

You know, the commitments you made 1015 years ago are still floating around the red. That stuff's not gone. Yeah. You know, so, you know, this is where being on, you know, having those open conversations with LP's or between LP's and gps, I think is important. And, yeah, I've never.

No GP is going to come to you and say, yeah, I'm worried about being a zombie in two years because of x, Y and Z. But usually the signs are there, like, if you're not hanging on to your. Not even top talent, but sort of like the next gen talent, if that's turning, if you start seeing that wave of people, like, I'm never going to be in the carrier this, I'm gone. Like, bam. Like something to think about, right?

And then getting to those legal docs, you know, who can take it over what. It's a situation. Why really kind of being firm up on everyone's rights there, and they sit down and try to have that proactive conversation, you know, I'd say it's what we try. What we've done historically in the past is every now and again we'll try to go through and do like a secondary cleanup. And yeah, we're getting paid $0.40 on a dollar for a bunch of tail end stuff.

But basic housekeeping can also help with those sorts of situations. You know, if you're kind of on top of basic housekeeping and cleaning up some of the other things in the portfolio, I think that reduces the risk as well. But it's definitely something I don't. A little bit of a rambly answer, so I apologize for that, but definitely something we're keeping more of an eye on. And this is where that relationship, part of the GPL dynamic and those open conversations are really important because if you've been with somebody for 15 years and they kind of know who you are and where you're from, they're much more willing to be open about, hey, what's going on?

Alexa Benz
Yeah, you want to, you want to get that heads up earlier. You don't want to find out through LinkedIn. Yeah. My follow up to that, to Ed was if you do, if you do have a manager who is going to move on and is interested in doing something else, these are such creative, talented people. They all have a million ideas of what they could be spending their time on.

Earnest Sweat
So my experience has been friends coming to me saying I could go out to market, I could do this other thing. They're just driven. They're going to be driven to either go hit the ground running to go raise fund two or three, or they're excited about something else from the LP seat. Is there a preference in how that's managed? If somebody does want to step away, is there a way that they can do that in a sense that still gives you confidence in what they're leaving behind?

Edward Comerford
So this is where if, you know, if a fund fiduciary is going to move on, and this is even if, even if it doesn't trigger a key person. Right. If it's got three partners, two or three need to be there, third one's moving on. But you know, that they're taking, but, you know, they were in charge of, say, roughly a third of the portfolio. Yeah.

You know, how do they approach, and that's like, life happens, you know, we're all human. Like, no one's a machine here. How do they go about doing that in a way that best positions the assets for success going down the line. Right. Are they.

One is a reason for leaving thoughtful and understandable and good, not just like it's getting hard. I'm on to the next thing.

I don't think that's super common. Most of the people or VC's out there really couldn't embrace, like, the challenge, but there's definitely been instances in history where I guess it's getting hard to be easier just raising the capital that you kind of just leave it. One of them. Yeah, I'm a, I'm an LP and a fund where one of the partners now manages one of the portfolio companies, you know, it's like it's still creating value for us, but much more hands on. Yeah.

So what's, what is a succession plan? Who's going to be brought in? You know, how are, how is, how are the people that either remain or the new people you're bringing in to manage it out? How are they going to be, how are they set up? Are you putting them in a good position to have success?

You know, and that's I think really what we care about how you approach a situation, not that it happens, these things happen. Are you approaching it thoughtfully? Are you trying to uphold that fiduciary duty that like, at least for us, is really important? Are you trying to do what's best for the LP's, what's best for the assets, what's best for the investments? Because for people that are less focused on that, and I don't think it happens often, but every now and again you'll have a contentious breakup and a bunch of, you know, that's where it probably gets more challenging here.

Even if that's sort of that contention, like really try to do what's best for the assets LP's will. Remember that you want to be able to raise funds down the line. Like the industry is small and people talk, man, the world will get around. If you treated everything on the open up and really tried to help things out and position the fund to be managed out as successfully as possible, as opposed to kind of just like up and left, people will remember that industry is small and careers are long. People remember this stuff.

Alexa Benz
Ed, from your seat you're looking at a lot of different asset classes in the private markets. Is it a good time to still be in venture or is there something else that's peaking your interests right now? I think it's a good time to still be in venture. I'm going to maybe top down. Every different asset class has a role in the portfolio and each asset class is generally trying to accomplish something different.

Edward Comerford
Right. So what you're trying to do in the credit markets is vastly different than, you know, what we're trying to do in the equity markets, you know, and the way you're trying to create value across the different. If you can consider equity markets over simplification like public equity, PE and venture, right, the way that they're trying to create value is a little bit different and the tools they have at their disposal.

You know, I, it's interesting. I don't think I would have gotten that question, Ernest, you know, two, three, four years ago. And so from our point of view, and it's understandable for that question, not today, right. It's a reasonable one. But from where we sit, has our long term view on growth and innovation materially changed over the last 1040 years?

And from where I sit, no, it hasn't. You know, if you still believe in growth and innovation as key drivers of the US economy and of investment returns, then I think venture capital still makes sense. Now, if you have the ability to handle liquidity and a long term master classes and are comfortable with the volatility that comes with it, then 100% venture, I think, should be a part of your portfolio. And any final thoughts or things to share with this audience for other allocators. Out there, especially like ventures volatile, you know, in, like, I have enough gray in my beard to remember.

Yeah. You know, like, the time between.com and GFC was kind of like a dead period for venture. It wasn't, you know, and like that, that will happen. I'm sure it will happen again. Like, I have no idea if it will happen now or happen 50 years from now.

But, you know, long term VC is an important growth driver. If your organization has the ability to handle liquidity and the conviction to handle volatility, then I think this is massively, it can be a massively additive asset class to any portfolio out there. Ed, as always, I appreciate your measured, thoughtful approach with such complex concepts and also for repping Kellogg so well. So thanks for being on swimming with allocators. I really appreciate you having me.

Ernest Alexa, thank you so much. This is a blast. See you later. Allocator after portfolio tile investing with a smile.

Earnest Sweat
Allocator after portfolio tile investing with a smile.

Alexa Benz
Allocator after portfolio tile investing with a smile.