You come from a direct investment background. How does that affect how you evaluate private equity firm track records?

Kramer:   Sure. So our focus at the end of the day is on top-performing funds, and   in order to find the top-performing funds, you have to sift through a lot of opportunities. First and foremost, you want to see top quartile. So a top-performing fund is going to outperform what you have in your database today, or it’s going to outperform the indices, you know, Prequin or Venture Economics. These are the indices that our clients are specifically going to be focused on, and we are looking for those top performers first  and foremost.

Additionally, you want to look for firms that can replicate that performance consistently over different macro cycles. Replicating is pretty challenging, because in order to replicate them, you have to be able to, you know, do something with those portfolios, you know, beyond just financial engineering of some sort. Consistency across macro cycles again is challenging, because what you’ll see is that a lot of investors will do pretty well when the market’s up, but they won’t do so well when the market comes down—and not every investment strategy, you know as well, is perfectly appropriate for every macro cycle.

Volatility is also one of the challenges that we see across portfolios, so a volatile portfolio might have, you know, have big losses. They have a 12X and then they have a, you know, they have a zero, and then they have a couple 1X. We’re looking for portfolios that are not going to be volatile at the end of the day—and then, you know, you can find great investment managers anywhere. I mean great investors. I think you can see an investor who has a 22X and, you know, a 13X, but what we prefer to see is a great investor along with a great portfolio manager. On the portfolio management side, you want folks that are going to have the ability to manage the return throughout the life of the portfolio—really from, you know, the initial stages, where there tends to be high, you know, potential for J curve issues throughout the portfolio implementation.

How carefully do you track performance among individual deal team members?

Kramer:  Great returns in this industry really have everything to do with people. So one of the things that we do first, we’re going to do an attribution analysis of the teams and of the portfolios. Our goal at the end of the day is to have a cohesive team so that we can generate those great returns, because again, without the people, you’re not going to get the returns.

So we reach out to the GPs early on in the process and try and collect as much attribution data as we can: “So give us all the deals that you’ve done, and show us, you know, which investors were the lead on those particular deals.” A lot of times the GPs balk at that, not surprisingly, and they will ask, you know, they’ll tell us that, “No, everybody in the firm takes attribution for the deals.” So we’ll just, “Okay, thank you.” Then we go to the portfolio companies, so we’ll literally—they have 40 different portfolio companies—we’ll talk to every CEO. So we’ll call the CEO on the phone, and we’ll say, you know, “Who did you work with? Who led the deal? Who sourced it? Who managed it? Who actually sat on your board?” And we ask them a litany of questions. And then, you know, that’s how we build our attribution analysis. It’s not… It’s very commonplace for us to spend, you know, time talking to 40 or 50 different CEOs for every fund that we’re looking [at], and I think that helps us to attribute the deals appropriately. What we find, not surprisingly, is that, you know, from fund to fund, GPs will tell us what the attribution data is, and we can verify it. We also track it. As I mentioned, we have proprietary systems and databases, so we track all the deal work that we’ve done, you know, deal to deal. And so what we find most often is that somebody who’s left the firm, you know, literally kind of opened the door, shoved the guy out, you know. Most commonly [what] we see is, you know, “Let’s drive the bus over him.” So a lot of times the dead deals or the deals that did horribly are, you know, “Hey, that was the guy who, you know, left.” So we can track that—and I tell GPs all the time, we’re going to see who it was that actually left, and we know which deals were done. And so for us, it’s critical to track that.

The other thing that I think in this industry is pretty important is, you know, that again, it’s a business of, you know, people, and we’re very much focused on how do they manage their team going forward? In other words, are they building the people behind them? This industry is led by, you know, some very senior people, and I think it’s, you know, one of the topics of the day, who have, you know, put a lot of money into the business themselves—and they’re great investors.

But what we find is that there are two kinds of investors. You know, there’s one who’s basically going to build the business for himself, and when he makes a ton of money, he’s going to take his ball and he’s going to go home.

What we like to see is an investor, that same investor, who’s going to kind of leave behind a legacy. So it’s not just going to be about himself; it’s going to be about building something that’s going to last beyond him. That takes a lot of work. It takes the ability to mentor people. I mean this, you know, for all intents and purposes is an apprenticeship business. So you have to apprentice the people beneath you, and you have to lead them and show them how to do this business. And so great investors and great firms are really built around mentoring and apprenticing those people beneath them. And that’s what we’re focused on, is finding, you know, good firms that are going to build that for the future.

You mentioned an investor’s consistency across cycles as a key metric. How do you assess that?

Kramer:   One of the other things that we see, it’s very important not just to, you know, buy right—to buy a portfolio position effectively. That’s critical, of course, because that, I think, determines whether you’re going to make great returns. But you also have to add value. You have to have some kind of operational expertise. And so we talk to GPs all the time, and one of the things that they relay to us is, “Hey, you know, we add value in the businesses.” I mean, we’re going to measure the actual value enhancement. So our expectation is either that the partners themselves have operating experience, or they’re going to work with, very closely, CEOs or, you know, over multiple portfolio companies where they’re going to have a team internally that’s going to work closely with them to enhance the value of the positions. And that’s how you generate consistent performance across macro cycles—and that’s, you know, how you can replicate great performance for the long term.