,
25 tweets,
5 min read
Read on Twitter
1/ Quant/systematic asset managers – think Two Sigma, Man Group, RenTech – are dying to get into privates in a bigger way. Almost all of them have teams that are leading efforts to crack that nut.
2/ ...Silicon Valley just fell asleep. Wake up- this will get interesting for you in a minute. First let’s establish something- they manage about $1 trillion- far bigger than VC in Silicon Valley.
ft.com/content/ff7528…
ft.com/content/ff7528…
3/ The people running these quant funds are doing pretty well. Don’t believe me? Check out a list of the highest paid hedge fund managers- you’ll see a theme at the top (quant). A real jab to the ego for that $70m VC manager in Menlo Park, huh?
cnbc.com/2017/05/17/the…
cnbc.com/2017/05/17/the…
4/ So why do quant public hedge funds- (some call them “Masters of the Universe”) - care about privates? I’ll tell you what they tell me.
5/ First - their edge is getting commoditized away. There aren’t huge barriers to entry in the public markets. Let’s be clear, I (and they) don’t think the firms will die anytime soon. But competition increases every yr and their info advantage decreases.
6/ More money, fewer deals. Companies are going public later (or not at all), fewer opportunities in public markets than there were 15 years ago.
wsj.com/articles/fewer…
wsj.com/articles/fewer…
7/ Fees, fees, fees. While a firm may manage >$X0b, they often don’t get 2% mgmt fees and 20% carry on all of it. Much of it is a fraction of a percentage. Private equity/VC typically gets 2/20- and is attractive.
8/ Capabilities. A word that is thrown around a lot. Their LPs come to them for capabilities not funds. Think of their capabilities as shelves in a store. They have shelves that offer all sorts of capabilities in the public mkts- tons of diff strategies. But most bare in privates
9/ So effectively that a “shopper” (read: LP), has to go to a different “store” (read: another investor) to get that new flavour of cereal (read: capability).
The hedge fund managers don’t want their LPs to shop elsewhere.
The hedge fund managers don’t want their LPs to shop elsewhere.
10/ The problem is that the quant hedge funds hate human heuristics. Hate things that aren’t scalable/repeatable, which is why they have traditionally avoided PE/VC.
11/ But many are beginning to spend meaningful resources to test/build, & find a way to systematically invest into private companies. Lower human bias, leverage the massive data that exists (and that humans cant process), build a scalable, repeatable private investing capability
12/ I don’t think this (systematic privates) works in early stage tech. Early stage tech business model often very diff from each other and usually winner had no prior example on which to train the models. Also not enough data. More on that here:
13/ It will work in other industries. Consumer, retail, real estate. Music?
Here is a start- from a hedge fund based in the UK.
themusic.fund
Here is a start- from a hedge fund based in the UK.
themusic.fund
14/ The quant hedge funds are convinced there are industries where a) there is a problem to be solved (i.e. not overcapitalized like tech), b) there is enough data, c) standardized business models.
15/ Where they are scratching their head is how to deploy the capital. The quant funds are used to being able to “press a button” and trade a security. In privates, someone has to reach out to the CEO, structure/close deal. Perhaps even add value to a company? And exit.
16/ The smartest are recognizing that the bar shouldn’t/can’t be the trading efficiency of the public markets. And it doesn’t need to be. This is a new sport, not a derivative of the existing sport. You guys are focused on baseball, we've moved on to esports. God I hate baseball
17/ I think the solve will look something like this….
18/ Sourcing: leveraging tech to find companies proactively, then having b2b sales team reach out. Similar to a super charged TA Associates/Summit Partners, but paid much less (in order to afford $ necessary for tech).
19/ Execution: Some industries -such as consumer/retail, have largely standardized deal terms. If this fund has enough power in the market, they may be able to set the terms as well. Data is key here so that everyone gets a fair deal.
20/ Post-close: Add value by unleashing the analytics to drive real insights for the Co's. If the technology can help identify potential winners, can it do more to increase the probability of the success story with data insights? demonstrate that value to customers, suppliers etc
21/ Winning the deal: If the systematic PE/VC fund can be Better, Faster and Cheaper, I’m betting that the CEO will want that fund as an investor.
22/ I don’t mean some of the data driven VCs that still have investment committees that make decisions. I don’t mean a VC that has a website that asks for info and responds. I mean a fund that can proactively reach out based on data they can gather without ever asking for info
23/ This is the future of private investing. The future always looks crazy and unrealistic until it isn’t. If you dont think Jim Simons at RenTech got some pushback in 1982 for his vision, you’re wrong. We’ll get pushback for this vision....but what if this vision is right?
24/ If we’re right then you can build a scalable, repeatable PE/VC firm - likely without Key Person risk. You can help thousands - tens of thousands -of entrepreneurs to thrive, without the typical biases and problems that come with humans making VC decisions.
25/ If we’re right we’re redefining the private markets and how innovation is created within the industries that those funds would invest into. That’s why we will try.
