Private Detective to Private Investments: Life Lessons from Caprock's Chris Schelling

This episode dives into the journey and insights of Chris Schelling, Director of Private Investments at Caprock, detailing his unique approach to private market investments and the influence of behavioral finance.

1. Venture capital is attractive due to its role in innovation but poses challenges due to its long-duration commitments.
2. Behavioral finance is crucial for understanding market behaviors and investment decisions.
3. The rise of independent advisors and wealth transitions marks a significant trend in private investments.
4. Effective investment in alternatives requires a deep understanding of market behaviors and individual biases.
5. The scale and expertise of firms like Caprock enable tailored investment strategies that address diverse client needs.

1: Introduction

Hosts introduce Chris Schelling and discuss Caprock’s focus on private investments. Chris Schelling: "Private equity is the tip of the spear of creative destruction in capitalism."

2: Venture Capital Insights

Schelling discusses his preference for venture capital and its challenges. Chris Schelling: "Venture capital is innovative, focusing on technology and disrupting incumbents."

3: Transition to Caprock

Details on Schelling’s career transition and the strategic focus at Caprock. Chris Schelling: "At Caprock, we’re not trying to convert non-believers but preaching to the choir."

4: Behavioral Finance

Discussion on behavioral finance and its impact on investment strategies. Chris Schelling: "Behavioral finance shows how market behaviors are fundamentally human behaviors."

• Understand Risk and Return: Recognize the higher risks and potential rewards in private markets compared to public markets.
• Learn Behavioral Biases: Gain awareness of common psychological biases to improve investment decisions.
• Diversify Investment Strategies: Consider diversifying across different asset classes and investment strategies to balance risk.
• Seek Professional Advice: Utilize experienced advisors to navigate complex investment landscapes.
• Stay Informed: Keep abreast of market trends and shifts in financial regulations and opportunities.

Caprock, founded in 2005, provides aligned management of complex wealth for ultra-high-net-worth individuals and families. Caprock goes beyond investment execution, managing each client’s entire balance sheet for true alignment with their objectives. The firm is a privately held, multi-family office with more than $8.6 billion in assets under advisement. Caprock specializes in non-public markets, managing more than $4 billion in private market investments. Furthermore, Caprock adheres to a longstanding and principled approach to integrated impact investing. The firm serves as a full-service outsourced Chief Financial Officer and Chief Investment Officer, offering clients unique portfolios that secure their financial legacy, free from Wall Street’s constraints and conflicts. The firm is an SEC-registered investment advisor and a founding B-Corporation with locations in Boise, Seattle, San Jose, Newport Beach, Park City, New York, and Austin. This site is intended to provide general information about Caprock and is not a solicitation or offer to sell investment advisory services except in states where we are registered or where an exemption or exclusion from such registration exists. All content is for informational purposes only and may not constitute a complete description of available investment services. Registration with the SEC does not imply a certain level of skill or training.

Armstrong International is a specialist financial services executive search firm with 30 years'​ experience across Public and Private Markets. Our consultants possess deep subject matter expertise within; Fixed Income, Equities, Private Equity, Private Debt, Digital (Data Science & Technology), Private Wealth, Corporate Finance, Real Estate, Infrastructure, Emerging Markets, Credit, FX, Emerging Markets & Commodities We are trusted by some of the world's leading financial institutions, who use us for 3 primary reasons: industry expertise, speed of hire, and ease of doing business. We like to innovate and have been at the forefront of some of the most profitable and exciting changes in the industry, including the technology revolution and the ever-expanding world of Private Markets.

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

Chris Schelling, Earnest Sweat, Alexa Benz

Companies

Caprock

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Guest Name(s):

Chris Schelling

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Ernest Sweat
Welcome to swimming with allocators. I'm Ernest Sweat and each episode, Alexa Benz and I give you a VC podcast from the LP perspective. You ready? Let's dive in. Today we are speaking with Chris Schelling, director of private investments at Caprock.

Alexa Benz
Caprock is a multifamily office with more than 8 billion assets under management with a focus on private market investments and impact investing. To date, Chris has met with over 4000 managers across hedge funds, real estate, private equity, you name it, and allocated roughly 7 billion. That's all generating top tier returns. What's especially interesting about Chris is he has a degree in psychology and business and so he's an expert at incorporating insights from behavioral finance into investment decision making. We're very much looking forward to hearing your unique perspective.

Thank you, Chris. Well, thank you. I appreciate the very kind introduction. Looking forward to chatting. Well, given that you have run the gamut investing across all these asset classes, what do you like about venture in particular?

Chris Schelling
Well, I actually think it's kind of similar to the things that I like about alternatives in general. So kind of like my ethos, what I look for in alternative investment strategies. Private equity is kind of like this tip of the spear of like creative destruction of capitalism, right? It's like innovation. It's like disrupting incumbents, you know, new things that actually have a reason to exist.

And obviously, if you see that's what it is, I mean, it is the innovation kind of economy. It's very focused in technology and biotechnology and things like that. But you're coming up with things that have a reason to exist that are disrupting, you know, often legacy incumbents that maybe shouldn't exist anymore. And so that's probably what I would highlight is the thing that I like most about it. But it's not completely different than hedge fund strategies that do things that are esoteric and off the run and create value, make unique markets more efficient.

That's what kind of gets me excited. Is there anything you don't like about venture? Well, it's longer duration than other private markets. I mean, that's, you know, that increases risk and that increases concern for clients that see it sitting there for longer and wish that they could have their money back. That's probably one of the big downsides.

Ernest Sweat
Just taking a step back. What drew you to this role at Caprock? So I spent almost ten years in the institutional world, which is where those big numbers came from. And there was a lot of great stuff from that. I mean, you did good things, you worked with good people, you helped solve societal problems.

Chris Schelling
But there was a scale that was kind of necessary to participate in alternatives the way that my experience led me to. So it's something that I wanted to kind of find in the wealth channel. There's lots of trends in individual investing and the rise of the independent advisor, generational transition of wealth, just the growth of alternatives. So that was like big things that I wanted to be a part of. But I've experienced where you're subscale as a firm and it's harder to deploy.

And frankly, Caprock being in private markets for the better part of 1819 years, they're big adopters of it. It's at scale because we're eight and a half billion, and we got 3 billion in nav in private markets. But clients, advisors, they're just used to it. And so while I like talking about it and sort of, you know, being an advocate for private markets, I didn't want to have to be in a position where I was trying to convert non believers, but I was rather preaching to the choir. And so I think Caprock has all these tailwinds for success and have, you know, a really great position kind of in the market.

We're with the right clients kind of this, we're multifamily office, but we target kind of $20 to $50 million clients that I think are the most underserved and that can benefit from aggregated scale, kind of with disaggregated portfolios, if that makes sense. Curious on just like the family multifamily offices and the composition historically, kind of what kind of demographics, all in the US, all in one region. Just curious on if you can give us detail on that. Yeah, I mean, predominantly us. Think about our clients as, like I said, that kind of 30 to 50, but obviously bigger and some smaller.

They're generally first generation wealth creators. They may actually have a family office set up. Some of our clients are legitimate family offices. Some are just families that are big enough that they have complicated balance sheets, so they'll have multiple estates, multiple trusts, multiple different llcs. Oftentimes they're gps themselves.

So we have a good amount of clients from that demographic. We have clients from the entertainment industry, athletes, some corporate executives. And so we can, we can actually help them to manage around concentrated stock positions. And we're in, I think, the right markets. I mean, Austin is where I'm located.

It's a, it's a great place to be, but we have offices in Newport Beach, Seattle, Boise, Park City, San Jose, New York City, and looking at other kind of similar markets. What's the advice to allocators? Maybe we've got high net worth individuals listening on how sort of how to appropriately participate in alts. It's such a shiny, sexy object. On the flip side, you could say takes a lot of time.

Alexa Benz
You're paying managers. Maybe just set it and forget it.

If you're thinking about your own personal. Wealth, I think the argument for allocating to private markets, let's just stay with that instead of alternatives, is that you should be earning an excess to public markets, period. We talked about venture locking up your capital for longer periods. Well, you should be doing that for three x five x returns in excess of what you can get from public stocks. So that's the reason.

Chris Schelling
And I think the evidence is pretty compelling that you can, but you definitely need to be able to do it well, because then you shouldn't do it at all. So the long term trends are real clear. Institutions have done more and more of it, like endowments and foundations, pensions, etcetera. Even the big scale family offices like Milken, Emcore, Cascade will it. They're run like an asset management firm with half of their money in private markets, and because they're earning excess returns there.

So my advice to individuals thinking about shiny alternatives is if you can't do it right, don't do it. That's a totally reasonable conclusion. Stay liquid, stay simple. But if you can find an advisor or a partner that's got demonstrated experience, competency, consistent excess returns that they can generate, that that's a very attractive addition to your portfolio. I mean, I have an outsized position of my liquid net worth invested in private markets very close to all of it.

Ernest Sweat
Same here. I really loved your point on if you're not going to do it right, you shouldn't do it. And it reminds me of data that it escapes me where it came from, but seeing just all the private asset classes and their kind of standard deviation of where the range is of where they landed. And you see like private equity is a little bit more bracketed, and then real estate was here, and then Publix and then venture would just be off the screen right on where it was. So I think you're totally right on that.

Now, when people have ideas of like what they kind of want to invest in, or maybe they've read up on some things or saw some articles, does it change in how you all advise those families? So I'd say yes and no. Like, I'm going to be a little controversial here. Like there's the, you know, when you've seen one family office, you've seen one family office, and that's kind of true. But the flip side is like, we're not all snowflakes.

Chris Schelling
Like, I'm not that special myself. Everyone's dealing with the same things, right? You have the same set of challenges. It's, it's like you need income, you need capital appreciation, you have taxes, you have multi generations, you have different pools of capital, you have liquidity constraints, risk constraints. And so to a certain extent, there's like five, six levers.

Now where you make all those levers is a unique point, but, like, they're all the same levers. Everyone's dealing with the same problems. And so I think the benefit of a multifamily office is that you have the scale to kind of solve for those different levers, but then you can give those tools to clients. That's really the pitch. It's like, okay, let us help you understand these big, important things, translate real world goals to investment objectives, and then go deploy that portfolio in a consistent and repeatable manner.

Alexa Benz
Any considerations for managers who are looking to work with multifamily office? You know, multifamily offices are not also one thing. And I mean, it's really a spectrum. You've got sort of mass affluent rias. You have wealth managers, high net worth, ultra high net worth, multifamily office, where you fall kind of.

Chris Schelling
I mean, it's determined by the type of clients that you have and the service you have and the resources you deploy towards private markets. For GPS, wanting to work with us in particular, I mean, we have an open door policy. Like, we try to look at everything. We have to be prudent with our limited investment team resources, so we can't meet with everybody. But, I mean, I'm getting, you know, 50 probably inbound emails a day trying to look at as many decks as I can and take, you know, 200 meetings to 250 meetings annually.

So we're in the market, we're looking at everything. We don't have time to respond with a real fulsome reply to everyone if you're not a fit, and so don't expect that, but, you know, try to do some homework ahead of time and figure out, like, what does the clients look like? You know, where do you fit in? What's the portfolio kind of deployed into? And, yeah, so do some homework, I would say, ahead of time, and then they're not all the same.

Some people have, you know, a lot of line items, more concentrated portfolios will invest out of funda funds will invest directly on balance sheet. Yeah, everyone's got kind of a little different implementation model. Have you ever gotten a lead of a fund manager from one of your clients? We have gps that are clients. So in a lot of cases, we will have met the GP, we will have underwritten them, invested into their fund, and then over time, they'll come to see the level of work that we do and our other services, and then they'll become a client.

And so we have a lot of inbound references from existing relationships. I mean, if I were to just say sourcing, there's really like three legs to that stool. There's just unsolicited inbound, high volume, honestly, low quality. Then there's referrals, and referrals are medium volume, kind of medium quality. And then there's probably the best, which are targeted outbound or direct relationships where we already know them, we've invested, or it's another investor that we know really well that says, like, oh, these guys are the best.

Like, we're exchanging notes. You need an intro. I'm happy to make an intro. Those are lower volume, but generally very high quality. It would be remiss not to get to ask you about behavioral finance.

Alexa Benz
You've written a ton on this topic.

It's hard to even pick. There's so many interesting arguments you've made. But when you think about where we're headed into right now, 2024, are there anything's top of mind from your thought leadership on behavioral finance? So, behavioral, fine. It's super important, honestly.

Chris Schelling
Market behavior is participant behavior, which is just people. We kind of apply this overly quantitative lens to a lot of stuff in finance. A lot of it's driven from physical science, which is, you know, physics, which is chemistry, right? Where things are fixed relationships, and they hold all the time. That's not the case in finance, which we see.

We see in the data, like, you'll see relationships that are lead and lag, and they might flip sometimes. And so something that was a leading indicator no longer leads. It begins to trail. Relationships between variables change because the market learns and adapts. Professor Low wrote a book called adaptive Market hypothesis, and I find, I mean, George Soros calls it reflexivity, which is just a different word, but it's that the market learns and adapts, and some things become self fulfilling prophecies.

So I think that's a huge insight to gain on how markets work is that things aren't always fixed. You just deal with tendencies. So you learn to stop making, like, projections, and you start thinking in ranges and like, what's likely to happen? Well, maybe it won't. That could have just been a random draw, or maybe you were wrong, but you have to start thinking through things in probabilities.

So I think there's a lot of applications to that for manager due diligence, which is really where, like, I've spent a lot of my time understanding how to expect or set expectations around GP behavior. And then there's just market behavior, which I've come to realize, like, I have no particular insights in understanding that JP Morgan, James Pierpont Morgan thought JP Morgan, like one of his best quotes. He's asked, what do you think the market's going to do? And he says, markets fluctuate. And I kind of think, like, that's, that's kind of where we're at, right?

You should have a core strategic allocation in public markets, and you should have a core strategic allocation in private markets. You can maybe be, you know, opportunistic around the edges, but in VC and PE, in private credit, like you should just be deploying. I mean, if I were to put on my macro hat again, speak out the other side of my mouth, I think right now is probably a decent time to be looking at private credit, right? Because you've got spreads relatively wide, your base rates have moved up substantially, maybe off the highs a little bit, but you're still talking about sofa plus five and a quarter, which is a lot more than it was just a few years ago. And the flip side is equity valuations in private markets have come down, VC valuations have come down.

And so if you're lending into those companies, you're doing it at higher rate on lower valuations, higher yields, lower ltvs. So I think new money put into private credit, and there's a whole bunch of strategies like direct lending. I mean, you've got venture debt, you've got special situations, specialty finance, all kinds of things. So we're spending some time, we're spending some time in that right now. I think that's a big opportunity, Chris.

Ernest Sweat
That the concepts of behavioral finance, first of all, are very sobering and make a lot of sense and make this job as an allocator or a fund manager both exciting and frustrating too. But with your kind of behavioral finance hat on, what does that say to you? Like, how does that guide your due diligence on fund managers? And what does that say to pattern recognition? Yeah, it's back to tendencies, probabilities, statistics.

Chris Schelling
What we do is probabilistic. There's no future facts is trying to set a realistic set of expectations. I had a friend once tell me success in manager selection is ensuring that outcomes meet expectations, which, okay, kind of seems maybe trite, but it's a little bit more profound if you start thinking about it. There's two elements to that. There's the outcome, but they're setting your expectations.

And so if they don't meet each other, either manager didn't do what it was supposed to do, or you set expectations wrong. So I think one of the first things is, all right, what do we have a tendency to do? We overestimate good things. We underestimate bad things. We're optimistic.

You can look at this across everything in finance. You can see people underestimate drawdown risk. People overestimate earnings expectations. CEO's overestimate revenue growth. In pension land, which is where I come from, returns are overestimated.

Actuarial payroll growth is overestimated. How soon employees will retire is underestimated. They retire sooner, and how long they live. Mortality that's generally underestimated. So all the expenses are underestimated.

All the pros or return streams are overestimated. So, like, that's the first thing that you should realize, which just then means be conservative in how you underwrite. So I like looking at, let's just use a VC firm that's on fund two, right? Fund one was three x. Pre fund track record was also three x.

Just assume less, right? Like, it sounds kind of simple and still meets your cost of capital, and you have a good chance of them actually beating that going forward. So I think that's one of the first things. Just be very conservative. Build in margins of safety everywhere, and realize that you have biases.

I mean, there's innumerable biases. I mean, we can walk through them all, but they've been written to death. Just being aware of them doesn't, like, offset them. So you have to take intentional acts to kind of mitigate them and check yourself. Be rigorously, like, intellectually honest.

One of my favorite colleagues was a person I worked with at a pension who's consistently been the one individual to point out where I'm wrong, and he's always been right. So it's like, I love that. I love when someone says, hey, I think you got this math wrong, or your spreadsheet isn't working right. Because I want that. I want to catch the mistakes.

So I think, like, I've tried to do that consistently, and I would advise people, like, just be aware of all your blind spots. And that effort of trying to overcome them, not going to be perfect, but it will like, improve your results. Now we're going to take a quick break to speak with our sponsor. On the show today we have industry expert and sponsor, Martin Armstrong, founder of Armstrong International, the global executive search firm specializing in financial services. Thank you, Martin, for partnering on the show with your incredible network.

Alexa Benz
You also connect great managers with limited partners. How do you think about matching team talent to capital? Listen, I think it's the most important thing. You know, I think it's everything. And, you know, I think it obviously depends upon the capital.

Martin Armstrong
You know, if I was looking at venture, one of the things that I find a lot within venture companies is that there's not enough focus spent upon the quality of the management team. If you think about any startup or any growth business, you're talking about 100 or 200 decisions a month that somebody's making on the fly all the time and money is going behind those decisions and those judgments. It would help to have people making those decisions who you really have done your homework on. And sometimes I talk to investors and they seem to be too focused on the idea and not focused enough on the management team. I think that that's something that we try to encourage our clients to do, is to really, really think about what the qualities are that they want for this particular business and whether the people who are in that business have those qualities.

Alexa Benz
Oh, that's fascinating. They are definitely parallels when we're vetting individual companies as well, that I think a lot of people are obsessed with product and haven't really ironed out their ops and they're just not frankly, suited to be a particularly successful business person, even though they are building something quite exceptional. Yeah, that's interesting. Yeah, I think so. And the other thing I would say is that in a lot of startups that we come across, there's a creative person and there's an organized person.

Martin Armstrong
Right? So if you take something like Airbnb, you had a creative guy and you had an organized finance guy, and we see that a lot. And when there's a problem, very often the venture firm fires the creative person because they're not speaking the same language that the finance or business person is speaking. And very often it's the creative person who's, who's coming up with the angles to make the business more, to create opportunities for the business. So again, when we talk to LP's and VC's, we're trying to tell them to think more deeply about what qualities both parties or all parties are bringing to the table and what it is you want from those people in terms of delivering on the strategy that you're investing in.

Alexa Benz
And from your bird's eye view, anything else that you think would be helpful for this audience to hear or better understand? Listen, I care about one thing and one thing only. It's the meaning of my life is talent. Okay? I'm interested in who is talented and who is not talented and how talent can be brought to bear to deliver exceptional returns.

Martin Armstrong
That's what I'm into and that's all I care about. And I find that when I come across people who care about that too, they end up making a lot of money. But there are too many people in the investment business who don't care deeply enough about talent. And that is really how I feel. And I would like to get to a place where people recognize the power of the human condition and what it can deliver.

Humanity is a river and society is being moved by that river and it's an incredible thing. And the finance world has the ability to fund and support that river in a way that is going to change the world. And that's what I love about talent and that's what I hope happens in the future. Oh, thank you so much, Martin. Martin, you are such a wealth of knowledge and super connector in the ecosystem.

Alexa Benz
Thank you. For folks who are interested in getting in touch with Armstrong International, feel free to email hubiermstrongint.com. That's hubstrongint.com. And now back to our LP interview. You've joined the advisory board, your advisory board member of the Alternative Investment Management association, which is an organization that has such a valuable advocate for VC's and allocators alike.

Ernest Sweat
I'm just curious, what inspired you to get involved in that organization now? I was actually fortunate to be invited to the global investor board by Ed van Geldren, who's the chairman of the board. He's also the CEO of PSP Public Sector Pension Canada. Edward read my book and actually reached out to me and said, you know, I'd love to have you participate and we'd love to have your kind of insights on this board. So, yeah, I was excited about joining.

Chris Schelling
If you look at the composition of the board, there's sort of, you know, one of these things is not like the others and there's, there's people like Edward and there's people from Temasek and Gik and Adia and, you know, CPIB and massive state plans that are allocating massive amounts of dollars and so what I get from it is I'm able to hear the insights of some of the biggest and best allocators across alternatives globally, and hopefully contribute a little bit of value to my own. I think it's interesting. AMA is really an advocate for, like you said, VC's gps, hedge funds, private equity people. And what Gibb is there too, is to help ensure that the kind of LP perspective is incorporated to what they do. And so I definitely want to be an LP advocate.

I'm active in the Kaya association, which is purely LP focused, and it's a very strong advocate for investor rights. I think by being involved in AMA, I can kind of bring that perspective to the gps who then, of course, go advocate for their views to regulatory bodies and industry bodies, etcetera. But they can at least hear our inputs on those topics. What are some of those topics that the board at AMA is addressing for LP's? I mean, it is everything.

The board meets monthly and it is all over the calendar because we try to accommodate time zones from, like I said, the Far east to San Francisco. And we will talk about just whatever is kind of the topic de jour. Private credit has been a recent one. A lot of the times it's alignment of interest, it's the rise of private equity secondaries and continuation vehicles. Are those things?

Are those things in alignment of interest? Are they a conflict or are they a little bit of both. So we'll talk about those types of topics and it's really one big conversation per month. So usually there's a survey and then those results are presented to aim of leadership so that they can have the input of, you know, leading global LP's on how they think about designing things. So I found it to be super, I mean, super helpful.

Like, you're dealing with literally some of the best alts allocators in the world. Chris, we. A number of our audience are allocators, whether they're experienced or early in their career. Could you speak to why getting involved in these organizations, as well as networking with other allocators is. Has been valuable in your career?

Yeah, I mean, it's. It's about learning, building your brand and building your network. What I've kind of come to realize is that there's. We do a lot, but it's distills down to three things. You connect ideas with ideas, you connect people with people, and then you connect people with ideas.

Right. And as I think you get more experienced in your career, what you start to do is connect people with ideas more. Right. So not just necessarily people with people, which is kind of more of like a sales job and it's explicit networking or ideas. With ideas, it's always interesting to learn something else.

And wow, there's an application over here. But as you get more advanced in your career, what you want to do is find the right idea for the right people, and that's how you can really bring a ton of value. So, like Kaya, big supporter of Kaya. I think they've done a great job and educated investors and alternatives and again, being an advocate for investor rights, but I've met a lot of great people through the kaya. And it's not just in the institutional side anymore.

A lot of those people are moving, like myself, to the kind of wealth management, multifamily office community. And they're looking at the same things, right? They're thinking about the same things. They're literally investing in the same funds, reading the same sets of docs and trying to figure out the same kind of problems. And so to the extent that many people out there have done and seen more than you and done and seen more than me, I want to try to leverage that knowledge and would definitely encourage people to go participate in those types of communities.

Ernest Sweat
Chris is there with that trend that you just mentioned of kind of family offices and multifamily offices becoming more and more institutionalized because they're getting talent from the kind of institutional, kind of old guard of employees? What do you see that? Like, how is that going to impact private investments and venture in the next ten years? There's. The simple answer is there's trillions of dollars that's going to come into the asset classes and it's going to be huge.

Chris Schelling
What happened 20 years ago in hedge funds and even PE is probably going to happen again. So institutions came into hedge funds and they went from trillion dollars to three or $4 trillion at the same time. Returns kind of went away to at least the classical sort of arbitrage, hedge fund strategies. And all you had to do was just look at the spreads, you just had to look at the returns, you just look at the assets under management. It was very clear.

Massive pensions put trillions to work and the landscape changed. Competitive dynamics changed. Private markets are a little different in that they're multiples the size of listed capital markets. So there's something like 4000 publicly traded companies, it's 55 trillion worth of capitalization in private markets. US Census Bureau says there's 7.7 million companies in the US with at least one employee.

And there's hundreds of thousands with at least 10 million worth of revenue. And so you've got just a bigger and deeper pool that can absorb this capital. But the capital is going to come and it will have changes. I think one of the big changes is just this continued bifurcation of the markets. The bigger are going to get bigger and you're going to have a lot of small boutiques kind of keep spinning up, spinning up a lot of funds, one, two and three.

And so there's an opportunity to find, you know, the new VC that was trained up at a prior shop has a track record. You can diligence, it knows what they're doing. It's not a new team, right? It's a new firm maybe coming together, but it's not a new team. And that's a place of the market that I like to participate.

I think where it's going to get hard for GPS is just kind of that no man's land in between. You know, you're just a generalist fund kind of trying to be a billion or in PE side trying to be three, 4 billion. That's where you're going to see. And you are seeing like consolidation and people kind of deciding do we want to get scale and become a platform with lots of products or do we want to kind of stay niche and remain that sort of boutique, you know, kind of artisan approach or artisan approach to investing. And what's your argument?

Alexa Benz
What's behind your strategy of looking at those fund two, three? Well, there's not a one size fits all. There's reasons why both are winning. Again, I've been in the bigger allocator seat and I had to cut 50 million minimum check sizes and we had a billion dollar strategic relationship with a big platform firm because we were able to access a bunch and get a lot of work together at a really good cost of capital, at really attractive fees. So that's why those platforms are winning.

Chris Schelling
We may be a scaled provider, but we can still do $5 million checks, we can do $25 million checks, and for certain managers we can scale to hundred million dollar position sizes. So we have the flexibility to kind of participate where it makes sense. And I'd say when you want highest returns, right back to that illiquidity premium, you find it generally in those newer managers, smaller managers. Nichier strategies funds one, two and three. I think the data is pretty clear about that.

You still, you have to be able to pick right, because again, back to the dispersion of return, if you get it right, you can get it really right. If you can get it wrong, you get it really wrong. But that in and of itself is evidence of return to superior decision making. And so that's where I want to spend my time, trying to make decisions. Are some of those term negotiations from your life in the pension world coming in handy now?

Yes and no. Right? Some are inapplicable. Like, I don't have a hundred million dollar hammer that I can hit them with right in the door and say, these are our terms. But absolutely knowing what to look for, understanding, you know, fee offsets and digging in through the data and seeing, you know, what's included in expenses that they can expense to the fund, what's not, and all sorts of those things.

I would say we're pretty rigorous on that. And I think GPS, you know, respect that. They respect an lp that's not really a pushover. So, but, you know, I've said this before internally, and, like, we start with finding the best managers first and then trying to get an attractive price at that end of the market. You don't want to focus on discounters first because then you're getting adverse selection.

Ernest Sweat
Bias, I assume from all of our discussion today. Chris, I'll know your answer, but just curious, over this last kind of ten years and run, have you made any adjustments as your criteria for fund managers changed? It definitely changes. You know, one of my theories is that you have to be constantly learning. Like I said, you have to be reflective and sort of because the market's adapting.

Chris Schelling
And so I like to try to build, like, a learning process around due diligence. What are other people doing that I could incorporate? What's working, what's not working? Do pre mortems and post mortems. So I'd say just big picture.

In general, it's just gotten harder, it's gotten longer. DDQs don't get shorter because everything that was added is still in there. And then they put new stuff in. And so every year it's just getting longer and longer. I think that I've focused more on behavior and ways to sort of put data around it.

One of my early insights after meeting a lot of funds was, you just have a tendency to like people more after you meet them face to face. So, you know, you maybe make ten funds and you're like, oh, I like, I kind of like them. They're smart. Oh, I kind of like. And then you walk away and you go, wait a minute, it's maybe not a pattern there.

It's probably a pattern here. And so what can I do to put in place to kind of offset that. That bias? And it was like, all right, ways to quantify behavior, ways to quantify decision making, ways to quantify aptitude and things like that. So, yeah, there's some tools that I think I've put in and learned over time that helped to do that.

And, yeah, we'll continue to kind of beef it up, because that's the whole name of the game. I had a GP who says I have to get better faster than the market gets more competitive. And I kind of think that that's my job, too, just on the other side of the table. Anything else we should ask you that you were thinking, oh, this. This audience, this is something that would be fun to share with them.

Fun to share. Boy, I don't know. Or depressing to share. Well, maybe. Okay, so here's a fun fact.

I guess. I started. I started my undergrad was in behavioral psychology. Wanted to go into law enforcement, right? And started my career as a private security officer and actually a private, registered private detective in the state of Illinois.

Not a private investigator. PiS can carry guns. That's a much more rigorous process. But I was a private detective, and part of what I did was to serve documents to people who had court cases. Just find them, serve them.

And you had to actually affirmatively identify that it was, you know, Joe. So, hey, Joe. Okay, here's your documents. And once you did that, you could collect a six dollar fee. This was a long time ago.

If you didn't, you couldn't. You didn't get paid. So I was out there being what I thought was really, you know, really disciplined, really committed to doing a good job. And half the time they say, oh, I'm not Joe, I'm Bill. And you're like, okay, come on, man.

But, but, okay. I can't count it as a serve. After, like, doing this and beat my head against a brick wall for, you know, a couple of weeks, I'm like, how do you make any money? I'm, you know, it's a tank of gas, and 12 hours a day, I made $18. I talked to the guy at the firm who was cranking out, like, 20 a day.

I'm like, all right, learn, right? He's doing a better job. Turns out he didn't do anything. He just went to the first address on the thing and just threw it on the ground. He was done.

So I'm like, ah. Mm hmm. Incentives really matter. I get this. Perverse incentives can be a big problem.

So, yeah. I don't know if it's a fun fact or a lesson learned, but, yeah. Something that stuck with me. Yeah, absolutely. No.

Alexa Benz
Who got served that day? Who knows? Who knows? But that I also learned, like, you remember the show cops, right? They're always grabbing these guys, and they're like, well, you got a warrant or you got this?

Chris Schelling
And, like, I didn't know about that. I'm like, well, that's why. Because nobody's getting served. Like, the only people that stay doing this job, they're just thrown into the garbage, and then they're collecting their money. Yeah.

So I opted out of that and said, let's go better. Let's go find some of this better aligned. That's amazing. It's also, I'm sure those skills of, like, trying to find people, it gives you, like, you have to use that same skill. There is a little skip tracing.

There's a little digging into people's backgrounds. Yeah, that's right. Absolutely. Absolutely. Well, such a pleasure, Chris.

Alexa Benz
Thank you for spending so much time with us. No, thank you again for having me. Really enjoy the conversation, guys. Thanks, Chris. Thank you.

See you later. Alligator after portfolio tile. Investing with a smile.

Ernest Sweat
Investing with a smile.