1/ Update: So many of the top public quant funds are exploring this. Most are failing.
The reasons they are trying have been laid out:
-publics more and more competitive
-LPs hungry for something unique
-fees fees fees
So why are their efforts failing?
The reasons they are trying have been laid out:
-publics more and more competitive
-LPs hungry for something unique
-fees fees fees
So why are their efforts failing?
2/ Reason 1 - Data- What the who? Ryan if Two Sigma wants to start a quant fund they have amazing data. Well kind of.
They have great data on public companies. Private companies are a different story.
They have great data on public companies. Private companies are a different story.
3/ They need both feature and training data. Getting feature data is possible – just takes a fairly large investment.
4/ Feature data: Identify the sources, collect them, build entity resolution to combine the sources. All of that a quant fund can do. But most sources cant be back collected. So need to collect over time. Now a new element gets introduced- *patience*.
We’ll come back to that.
We’ll come back to that.
5/ Training data: Here is where it gets tricky. To build the models necessary, you need training data. Actual performance on companies, over time. In the public markets that’s super easy. But in private markets? How do you get private financials across time on thousands of co's?
6/ Note that if its across industries then it is much harder (impossible?) to build models to effectively predict. The features that lead to success in healthcare are different than in restaurants. You need the same game of chess.
This is meaningful issue for public investors.
This is meaningful issue for public investors.
7/ Reason 2 - Culture: Quant funds are used to pressing a button. They don’t like the messiness of calling entrepreneur, structuring deal, helping post close. They don’t have skillset for it. so now they are hiring a new team…..of discretionary investors?
Rejected by the host
Rejected by the host
8/ Reason 3 – incentives. The investments mentioned above have cost $ – and that $ doesn’t come out of one of the quant firm’s funds. It comes from the balance sheet (the GP’s pockets).
9/ How many GPs do you know that will spend months writing big checks out of their pockets, to fund a new initiative, that *might* pay back in 5-7 years. They can just invest that same $ into their own quant fund and earn a steady return.
(Need for more patience.)
(Need for more patience.)
10/ So while they get excited about the idea of quant, the reality hits them that they are basically making a venture investment in order to get it off the ground. Oh boy they do not like that.
11/ SO……what are they doing? A few things:
12/ A few are plowing through and trying to make it work. I’ve talked with several. Haven't been impressed by any efforts.
To be clear, I wish I were. It would be great for us if they were successful and brought more investors into the market.
To be clear, I wish I were. It would be great for us if they were successful and brought more investors into the market.
13/ Today the efforts though seem very unclear on the problems they are solving either for entrepreneurs or LPs. Sourcing, execution, post close? Steadier returns than typical PE/VC? Higher returns? Something else.
14/ Maybe this resonates and maybe it doesn’t – but it has appeared to me as if the efforts have lacked a soul. Kind of like when you see a big company launch a new product….
15/ I’ve also seen some quant firms lose people -many people- who started to explore it, got excited and then realized they would rather try to build it on their own. In the next year you’ll read about someone big – from a top 5 firm- leaving to do exactly that.
16/ I also see 2-3 quant funds looking to partner with PE firms to try and build something. I’m less familiar with the details but my impression is those projects, like most JVs, have lacked clear direction and ownership.
17/ I don't think the efforts will stop. The profit pools in PE/VC are too big and the industry has been so stale for innovation- there are quant funds coming in the private markets.
I think the question is when, not if.
I think the question is when, not if.
