The Twenty Minute VCPeter Lacaillade: Why Now is the Best Time to Invest in Emerging Managers | E1096
EVERY SPOKEN WORD
150 min read · 30,060 words- 0:00 – 0:44
Intro
- PLPeter Lacaillade
You just have an unfair advantages over the public market. But the reality is- (digital beeping) ... when I joined SCS, we had $7 billion under management. I was investing maybe 200, 250 million a year. Now it's, like, about a billion and a half. It's amazing to me that the wealth management industry, it continues to be so fragmented, so under-served. If I do 10 funds, what I've found is three to five (bell dinging) exceed expectations, three to five (bell dinging) meet expectations, one to three underperform.
- HSHarry Stebbings
How quickly do you think you know the out-performers and the under-performers?
- PLPeter Lacaillade
Like (censored) .
- HSHarry Stebbings
Peter, I am so excited for this. We've been friends for a while. You've been an amazing partner to me. So thank you so much for joining me today.
- PLPeter Lacaillade
Harry, it's an honor. I, I'm big, big listener and, uh, great, great friendship, and thank you for having me.
- 0:44 – 3:00
Entry into SCS
- HSHarry Stebbings
Not at all. But you said to me before that you entered the world of LP and venture when you didn't really know what a multifamily office was. And so take me to your entry to SCS and how that came to be first.
- PLPeter Lacaillade
Yeah, I mean, I'll back up for a second. So when I was at Georgetown, I wanted to be in the investing side, you know. I thought I could go right to the buy side. And then I found out, oh, actually, no, you n- need to do investment banking. And I worked at a scrappy, really kind of, you know, second, third-tier investment bank, but it was during '04 to '06. There were a lot of deals getting done, and so at a very young age, I was running around Santo Road doing financings with CEOs. I was, uh, doing IPO, being at the printer, like, leading, like, a team of accountants and lawyers and a guy from Deutsche Bank and ... So it was a very scrappy ... I didn't maybe get the best training in some ways, but formal training, but, like, go out there and do stuff was incredible and, um, my boss, Jeff Barlow, who's actually currently the head of banking, uh, or i- actually no, CEO of Canaccord, um, was a great mentor to me there. Uh, but I wanted to complement that with, um, a private equity firm and y- and I ended up at Harborvest, which was kind of the opposite, where great process, great people, and, and I saw the entire private equity world, and it really was a great insight into the different, the different pockets. When I went to business school, I thought, um, I would go into either, you know, low- lower middle market investing, either kind of on a control buyout or growth equity side, and I was interviewing or calling a bunch of Tuck alumni, GPs, trying to get a job. And one of the guys I called was like, "Well, I don't have a job for you, but the guys who manage my money are looking for a private equity person. Given your background at Harborvest, y- you could be a good fit." So I, I was interviewing with, like, four or five direct shops and then this random thing and, but then when I looked at it, I said, "Wow, this is an opportunity." They had 7 billion under management at the time, zero private equity, and there was one client that was investing 200, 250 million a year in the space. The, the comp was, like, the same. Like, I had ... So I had a vice president job at one private equity firm where I'd be the eighth person on a 14-person team, or build this out from scratch, and I, I took that and it's been, it's been amazing. I mean, it's really surpassed all expectations.
- 3:00 – 13:38
Impact of 2011 Market Timing
- PLPeter Lacaillade
- HSHarry Stebbings
And this was 2011, correct?
- PLPeter Lacaillade
Yeah.
- HSHarry Stebbings
Okay. So you've said before in terms of timing that 2011 was quite a, a fortunate time to be kind of coming in.
- PLPeter Lacaillade
Totally.
- HSHarry Stebbings
Can you talk to me about the impact of market timing in that respect and then how that timing compares to today?
- PLPeter Lacaillade
In 2011, it was still, people were still reeling from the global financial crisis.
- HSHarry Stebbings
Yeah.
- PLPeter Lacaillade
Right? I had river guides, so to speak, but I would just r- reach out cold to many GPs and they would take, they would take my call. They would wanna meet. They'd ... Um, and that changed. I mean, I think probably in 2016, '17, like, a lot of funds were really oversubscribed quickly, but being in that moment where the power shifts, where there's a dearth of capital on the LP side, and there's, that, that is a, uh, ideal time to scale a program, to build a program, and that's, that's ... I was fortunate to be-
- HSHarry Stebbings
Can I just push back on you there? I'm just interested. Uh, yes, but you also backed the first funds of Thrive, of Andreessen, of Founders Fund, from what I know. And so actually, they weren't obvious bets then.
- PLPeter Lacaillade
Yeah, totally.
- HSHarry Stebbings
And so you saw ahead of time, so actually, is it not the same as today, you just see ahead of time?
- PLPeter Lacaillade
Uh, thank you. Yeah. No, i- i- you're totally right. So I had a choice to make. I could have invested in, you know, the B-plus, A-minus funds that were, you know, been around for 20 years on Santo Road, because I couldn't get into Sequoia, Excel, Greylock, and Benchmark.
- HSHarry Stebbings
Yep.
- PLPeter Lacaillade
But I could probably get into pretty much everyone else.
- HSHarry Stebbings
Yeah.
- PLPeter Lacaillade
And we managed money for the partners of, founding partner of Excel and Greylock, so I knew that it was tough to get into those funds-
- HSHarry Stebbings
(laughs)
- PLPeter Lacaillade
... because I had a, I had it in and it still wasn't like ... And so we had a choice to make. Do we want to go into ... I don't wanna pick on firm names, but, you know, someone that's not ... is very good, but not quite in that top tier, or pick the next-gen emerging winners.
- HSHarry Stebbings
Yeah.
- PLPeter Lacaillade
Right? And that's ... We opted to, to do the latter. I mean, Andreessen, I would say, was fairly obvious, that that was interesting, um, when we backed them in fund three. Founders Fund, Peter Thiel, um ... There's just a lot of controversy, and I, I know the Social Network movie, like-
- HSHarry Stebbings
Yeah.
- PLPeter Lacaillade
... inspired you a little bit, but there, you know, that was around the same time. Uh, but I'll tell you, like Stuart Stagliao, who is our president and CIO, who you know well-
- HSHarry Stebbings
Mm-hmm.
- PLPeter Lacaillade
... uh, uh, he was e- extremely supportive of Founders Fund. Like, I, that was one of my first meetings was in meeting with Peter in, you know, doing that, and, and that's worked out incredibly well, and we were one of the only institutions in it. I mean, there were not that many institutions. Now everyone wants to get into it. And also, like, Josh Kushner was 27 years old, but we thought New York was interesting as a venture market. We thought Josh was incredibly impressive.
- HSHarry Stebbings
Mm-hmm.
- PLPeter Lacaillade
It's just, it's funny. It, it, it ... We didn't really ... We weren't worried about it. We were high conviction on both those things, and, uh, credit to Steve, but also my CEO, Pete Matoon, partners like Tony Abbiati, like, eh, they really supported me from the get-go to do things on the fringe, and I would say, and w-... not to ramble, but on the buyout side, there's a group called Shore Capital, which Justin Ishbia at the time was 32 years old and he had three partners that were 27, 28. And we were the first check there, and I like to say that I got more pushba- I got as much or more pushback from the get-go doing Bain Capital as I did doing Shore Capital. And there was, there was an appetite for risk and an understanding of the, uh, the, you know, attractiveness of the lower middle market from the get-go and a really supportive culture, so it was really, I think, is my mindset but also being in the right place.
- HSHarry Stebbings
Listen, we said that we were gonna have a very natural conversation (laughs) and so I just wanna go with that, which is, bluntly, when you say about risk appetite, I think one of the broken elements of LP worlds is that there's no incentive for you to take a risk if you're in a large pension fund or if you're in a large... Why would you bet on a 27-year-old Kushner when you could just do a tier two, tier three, you're never gonna get fired for doing X brand name? Do you agree with me? And do you think that still exists today?
- PLPeter Lacaillade
Yeah, I mean, I think, I think that when we can, we can walk through the whole LP landscape, but, you know, I am incentivized around performance fees-
- HSHarry Stebbings
Yeah.
- 13:38 – 15:42
Quick Assessment of Manager Quality
- HSHarry Stebbings
I spoke to so many of your managers. I spoke to Neil Mehta, I spoke to Jack Ullman, I spoke to Kevin at, um, Heritage. Um, and I mean, the unifying theme with you was this unwavering ability to tell manager quality quicker than anyone else. It's like gut intuition. Where do you think that comes from and what signals give you such confidence so quickly?
- PLPeter Lacaillade
You know, i- i- I was thinking about this and, and I mean, I-
- HSHarry Stebbings
'Cause you do. You know what I mean? The thing is, I know you now.
- PLPeter Lacaillade
You kinda know it.
- HSHarry Stebbings
You do.
- PLPeter Lacaillade
It's hard to articulate, but I think if I had to say, it's like, who's a force of nature? Who's gonna like... And you're, you're one of those people, right?
- HSHarry Stebbings
(laughs)
- PLPeter Lacaillade
Who's g- who's gonna, like, run through-
- HSHarry Stebbings
My mother says the same. (laughs)
- PLPeter Lacaillade
Who's gonna run, who's gonna run through walls? You know, you combine, like, ambition, work ethic, passion for what they do in, in an attractive space, it's powerful. And y- uh, you know, it's... I think it's, um... So Justin Ishbia, he's one of my absolute favorite human beings. He, well, he... By the way, his brother built a huge mortgage business, like he's worth like $5 billion, billion. Like, it's crazy. But he works like he's an animal. Like he... And you can't... I talk to him often at, um... It's like before 7:00 AM East Coast, he's in Chicago, so it's like at like 5:30 or 6:00 when he is on the elliptical or after his dinner. And it's not about, it's not about the money, it's about the passion of building, you know, in the case of Shore, you know, the greatest lower middle market fund possible. But, you know, across my set of relationships, um, there's... And, and you would be that type of person too. I mean, we're often on WhatsApp.
- HSHarry Stebbings
Yeah.
- PLPeter Lacaillade
It's like 9:00 or 10:00 my time. And I'm like, "Harry-"
- HSHarry Stebbings
Go to bed. (laughs)
- PLPeter Lacaillade
"... it's like 3:00 in the morning, okay? Like you should..." But I think, I think that's also what makes me a good LP is that I'm kinda wired that way too, which is like, I love my job.
- HSHarry Stebbings
Huh.
- PLPeter Lacaillade
Like, I get to partner with the smartest people in the world and give them money and I'm... You know, don't, don't bother them when I don't need to. But like, kinda sit at that 10,000 feet, 30,000 feet, I, I just... I get so much positive energy from that. And
- 15:42 – 18:05
Insights into Peter's Role as an LP
- PLPeter Lacaillade
I think-
- HSHarry Stebbings
Have you, have you always approached it with that lens or has it been an approach that you've learned over time? Because it's more common that you're coming with a more studious, analytical approach and you build the intuition. Or did you always have the intuition?
- PLPeter Lacaillade
I think I always had the... I mean, by the way, first of all, I didn't know, and I could have been like a good GP I think.
- HSHarry Stebbings
I agree.
- PLPeter Lacaillade
L- look, I would've been, like, maybe very good, but I wouldn't have been great. I think I'm a great LP, right? And I didn't know... Like I said, it was luck. I stumbled into this, right? But from the get-go, I think I had an intuition on like, you know, great GPs. But I have learned thing, and I've gotten more confidence in my ability 'cause when you see 2,000 funds, now I know what great is. So when I see, when I see great, it's like, "Okay, it's not when I was..." I had seen 50 funds and, like, thinking that they were great. And, you know, I have evolved a little bit in, I think I've... So talking about the force of nature, like, I've always kinda been attracted to the force of nature people. If I look back at mistakes, I think, you know, probably number one thing is doing off-list references. Like don't, don't get in the echo chamber of talking to, like, the five people that are backing the fund and, like, "They all love it." Like, yeah, obviously, right?
- HSHarry Stebbings
(laughs)
- PLPeter Lacaillade
You know? Like, you talk to their, you know, their founder, their brother, like, "Yeah, they all... They love 'em." You know? Like, try to find the contrary view. But then the other one is I backed a lot of, um-
- HSHarry Stebbings
What do you ask them when you're trying to find that contrary view? 'Cause you're trying to extract knowledge that is tougher for people to share. It's kind of a negative.
- PLPeter Lacaillade
Well, you have to have a trusted relationship on the other side of the fund. And usually it's just me. I don't have, like, my team on that call. And you just kinda ask, "I know, I know, I know you, you love them and they're great, but like, what, what are some issues?"
- HSHarry Stebbings
Yeah.
- PLPeter Lacaillade
Like what... Like, you kinda tease out, like, the negatives-
- HSHarry Stebbings
I always ask, like-
- PLPeter Lacaillade
... in a soft way. Yeah.
- HSHarry Stebbings
I, I always ask, like, you know, "If we were hiring someone underneath Peter to support him, what skills would they have?"
- PLPeter Lacaillade
Yeah.
- HSHarry Stebbings
And they go, "Oh, well, they'd be super organized. They'd be very rigorous and analytical."
- PLPeter Lacaillade
(laughs) Yeah. That's, that's, that's, that's right. Yeah.
- HSHarry Stebbings
A- a- and you're like, "Aha! Okay, you've just told me what we need."
- PLPeter Lacaillade
Exactly. Exactly. And, um...
- HSHarry Stebbings
I love that one. (laughs)
- PLPeter Lacaillade
It's, yeah.
- NANarrator
It's, it's, it's-
- HSHarry Stebbings
This evil feeling of like you've just won. (laughs)
- PLPeter Lacaillade
Yeah. No, totally. And, uh-
- HSHarry Stebbings
Dude, has your intuition ever been wrong on a person in terms of a manager that you've backed? And if so, what did that teach you?
- PLPeter Lacaillade
I don't think
- 18:05 – 20:13
Lessons from Mistaken Intuition
- PLPeter Lacaillade
I... I mean, this is a boring answer, but I don't think I've had bad intuition. There was a situation where I... And this turns into a positive, but my colleagues knew a person going back, like, 10 years. This is when they were based in Boston. Then they moved to Silicon Valley.... and this is the echo, this is the same example. I'm not gonna name names, but my senior colleagues knew this person really well when he was, like, 24, 25. Then he's like, now he's like 35, 36, right? Not the same person that he was. But I had that firsthand from my colleagues, like, "Yeah, like, we know this." And then I did a bunch of referencing. I, I had, out of the blue, the biggest, some of the biggest companies in the world, founders proactively calling me on references because they told me, you know. And I'm like, "Wow. Oh my God." Like, "This person wants to talk to me. Geez, that's really cool." And then I talked to some of the LPs that were backing them, and they're all like, "Yeah, this is great." And, and then when fund two came around, I was like, looked at the portfolios and kind of wondered, and we were out in San Francisco with them, and I was like, this is, this behavior is just, like, off, the way they were acting. And we were one of the only LPs that passed on that fund. And there was a really prominent, a few really prominent new LPs that came into fund two, and they were, like, pretty kind of unprofessional about our pasts and arrogant and whatnot. And then, you know, believe it or not, like, there's major, major issues with that firm. And so, I think that was a really kind of like a big learning for me.
- HSHarry Stebbings
Do you worry about the off-list reference? And what I mean by that is, there are many great managers, uh, that bluntly will have very negative things said about them.
- PLPeter Lacaillade
Yeah.
- HSHarry Stebbings
For many reasons.
- PLPeter Lacaillade
No, I take it with a grain of salt.
- HSHarry Stebbings
And it-
- PLPeter Lacaillade
I take everything with a grain of salt.
- HSHarry Stebbings
That's it. Do you know what I mean?
- PLPeter Lacaillade
Yeah. You just understand, like, you know, haters gonna hate, you know. They... Yeah. Totally agree.
- HSHarry Stebbings
Uh, in
- 20:13 – 23:35
Funding Diversification Strategies
- HSHarry Stebbings
terms of the managers that we back, I'm fascinated on the fund side, how do you think about the right level of diversification? Because you see a lot with very large portfolios, 30, 40 funds, and then you see some who take the completely alternative approach and are very concentrated. How do you think about the right level of diversification on the fund basis?
- PLPeter Lacaillade
Totally. This is one of my favorite topics.
- HSHarry Stebbings
Mine too, which is why we get on so well. (laughs)
- PLPeter Lacaillade
Yeah. What I do well, and it's a barbell approach, and I have some big groups, but the vast majority are very niche, targeted, focused funds, right? Say, say I buy a vintage. I might invest in 10 funds, right? 10 or 15 funds. You could also invest in, you know, three or four funds, but those underlying funds are diversified across different industries, sectors, so they might have a company count of 50 or 60, whereas I'm investing in, you know, 3X the number of funds, but the, the f- the, the funds have six to eight companies in there. So, it's not like you're taking that much more, um, portfolio div- like, company div- diversification, but it's, I think it's really important to have the manager count if you're gonna do things super targeted. And the other thing I would say, and this... If I do 10 funds, I'm really excited, every single one, 'cause I, by the way, I looked at 2,000 to choose my 10. So, it's the, the acceptance rate is very low, right? And I'm super excited about all 10. But what I found is three to five exceed expectations, three to five meet expectations, one to three underperform, and they, you still make money. It's really hard to lose money in private equity, in a, in a fund. If, let's say, a typical, like, large buyout's gonna do, like, 2X, that basket will do two and a half to 3X, and those outperformers might do 4X, right? And the, the underperformers do, like, one and a half. But you need... I don't know. I don't know. And it-
- HSHarry Stebbings
How quickly do you think you know the outperformers and the underperformers?
- PLPeter Lacaillade
It's, like, four years. It takes a while. Yeah. And that's the tricky thing with the velocity in, in, in venture, for example, because you have no idea, right? Buyouts, yeah.
- HSHarry Stebbings
Well, how do you, how do you feel about the compression in, in deployment timelines? You know, we saw people move from three years to 12.
- PLPeter Lacaillade
It's so obvious in retrospect, right? I mean, but I, I just want to know-
- HSHarry Stebbings
What does that mean?
- PLPeter Lacaillade
So Oren Zev, for example, who we, we both know and love, he's just very transparent about what he's gonna do, so I would size my commitments accordingly. So, it's like, if you tell me you're gonna put out your fund in 6 to 12 months, I'm just gonna size you at a half bite. Understand expectations in what you're doing, um, but a lot, I mean, the vast majority of my managers basically were putting out there, put out their funds in 2020, '21, in, like, a year. We now look back on that, and it's obvious. At the time, I said SPACS were gonna... I made the comment, like-
- HSHarry Stebbings
(laughs)
- PLPeter Lacaillade
I was like, "85, 90% of these SPACS are gonna be a disaster." And it turns out I was, I was wrong. I was too generous. (laughs)
- HSHarry Stebbings
(laughs)
- PLPeter Lacaillade
So, I'm not, but on the fund size, I mean, on the deployment piece, I think I was less, uh, perceptive of, you know, I mean, you kind of realize, like, "Wow, this is crazy. It's not gonna go on forever," but, like-
- HSHarry Stebbings
Do you think we just
- 23:35 – 26:19
Analyzing Recent Vintage Performance
- HSHarry Stebbings
have a shitty vintage on performance then when we look back at 2020, 2021, given high entry prices, given compression of deployment timelines?
- PLPeter Lacaillade
Yeah, I think, I think, I mean, it's not gonna be the best vintage.
- HSHarry Stebbings
Yeah.
- PLPeter Lacaillade
But that's why it's really important to partner with the best people, like, so if I look back and I did a bunch of co-investments, like, in what I believe to be, like, great, in some cases, great companies, right? But they're gonna have to grow into their multiples. So, rather than making four to six X, we'll make two or three X.
- HSHarry Stebbings
Are you seeing managers re-mark their books? You mentioned
- PLPeter Lacaillade
... Totally. In my core relationships, uh, founders' funds are the most extreme, because Peter Thiel is very contrarian, um, and he wants to reset the mindset of his team, which I think is great, um, but Andreessen Horowitz, Greenoaks, um, Thrive, they've all proactively marked down their, their companies. But there's a huge dis-, uh, dispersion between where things are marked, right? Accountants will sign off on-... pretty much put the GP tells them to do. And so a lot of people hold things at last round, which is ridiculous.
- HSHarry Stebbings
My question to you is that I, I, I get you. The challenge is you have fund of funds who say, "No, no, no, Peter, keep it high because we need to go out and raise in Q1. And so just keep it high, Peter, for us."
- PLPeter Lacaillade
Right.
- HSHarry Stebbings
You ha- you have others that say, "Hey, we're, we're paid on TVPI." Well, they probably don't tell you that, but they are paid on TVPI, and they don't want you to mark down your bets either.
- PLPeter Lacaillade
I know, I know.
- HSHarry Stebbings
And I, I almost feel for the GP in a way-
- PLPeter Lacaillade
Totally.
- HSHarry Stebbings
... because they have all of these competing incentives.
- PLPeter Lacaillade
By the way, there's not a right answer. What matters is DPI at the end of the day, but we're all judged on interim performance. If fund of funds are doing that, that's, like, perverse and, you know, whatever. But I mean, there are endowments that pay their staff on marks, right? It's weird.
- HSHarry Stebbings
Sure. Many.
- PLPeter Lacaillade
For example, for me, I'm incentivized by, like, European, like, long-dated carry is, I mean, that's, you have to have the distributions to get that, right? So I think the incentives are correct there. I mean, I don't want to look at a mirage, so, but I also don't want people to be, like, too crazy. Like, you know, there's a middle ground. But yeah, I think there's, there's definitely incentives, like, that, well, you're talking about with fund of funds, or think of the way some of the endowments are compensated. I mean, endowments also, I mean, there's some that are great. But I, uh, I find, in general, there's a lot of group think in that world, you know.
- HSHarry Stebbings
(laughs) That's very unfair of you, Peter. (laughs) How could you?
- PLPeter Lacaillade
Yeah, you know, they, they, I just, I, I think they hustle.
- HSHarry Stebbings
It's like, yeah, we're doing it or we won't do it. (laughs)
- PLPeter Lacaillade
I, I do think fund of funds get painted with a bad brush, but I think there's, people do really good work.
- HSHarry Stebbings
Oh, do you not think, though, that actually, just to be fair on endowments, they're just under-resourced?
- 26:19 – 27:19
Evaluating Resources at Founders Fund
- HSHarry Stebbings
They're under-resourced in terms of, bluntly, they have shit comp, that bluntly incentives on the upside are not really there, and they're under-resourced in terms of team for the segments that they need to cover. And so they're kind of left going, "Ugh, we can't know the early-stage venture market in the US as well as we'd like. Sod it. SES and Peter are fantastic players. Let's just follow them."
- PLPeter Lacaillade
Yeah, I think that's where... I mean, I also think they, they... there's often a generalist model-
- HSHarry Stebbings
Mm-hmm.
- PLPeter Lacaillade
... in the endowment world. I mean, I sit on our investment committee, and I look at what the public team does, but, like, it is beyond a full-time job trying to cover private equity. Like, yeah, some do it better, better than others. I mean, a lot of the endowments, by the way, are also just, like, with the denominator, your Sequoia and Benchmark, the numbers became so big, it's like you don't have any room for early-stage stuff. So it, I'll circle back to my earlier comment, it's a really good time to start a program. If you wanna get into badass, like, really good managers right now, you can do it.
- 27:19 – 35:18
Ideal Timing for Onboarding New Managers
- PLPeter Lacaillade
And that probably, and th- that will probably be the case for the next few years.
- HSHarry Stebbings
When you say you can do it, where would you start? 'Cause you have the big established brands, you have the up-and-comers, and you have the completely-
- PLPeter Lacaillade
I would do both. I'd, uh, do what I do, which is a barbell approach. So you can get into some of the fanciest firms in the world.
- HSHarry Stebbings
Do you think you can? Like, uh, I mean, you can't get into SCORE unless you move a huge amount, and you can't get into Founders Fund, especially with the kind of fund size reductions. I mean, Andreessen is, I'm sure you can in some of their vehicles.
- PLPeter Lacaillade
You can, you, you, you broaden it, yeah.
- HSHarry Stebbings
Um, but it-
- PLPeter Lacaillade
They're great.
- HSHarry Stebbings
But-
- PLPeter Lacaillade
I mean, I love Andreessen, but, uh-
- HSHarry Stebbings
Do you see what I mean? It's not that easy.
- PLPeter Lacaillade
Well, you need to, you need to be... Yeah, I, I, I hear you. I hear, I hear you in some... I mean, I think I also have, like, advantaged relationships where I can get-
- HSHarry Stebbings
Totally, yeah.
- PLPeter Lacaillade
... you know, um-
- HSHarry Stebbings
But I'm saying for, like, random, uh, family office, multi-asset manager, whatever that is, if you're kind of knocking at the door of Founders Fund and Lauren, she's gonna say, "No, I..."
- PLPeter Lacaillade
Yeah, you gotta be kind of like what, what I was doing, which was like-
- HSHarry Stebbings
You gotta be an early bird. Yeah.
- PLPeter Lacaillade
... the, the new Founders Fund, right? Or, you know, someone who's edgy, uh-
- HSHarry Stebbings
100%.
- PLPeter Lacaillade
... who might... And, and I look back actually, and the mistakes I made in some ways is, it's the buyout side where I backed some alphas that, like, were not great, but, like, backing Peter Thiel, that was, it kind of, like, makes up for-
- HSHarry Stebbings
Everything else.
- PLPeter Lacaillade
... some of the, the other mistakes, so, like, I, I'm not gonna be too critical of myself doing that.
- HSHarry Stebbings
Can I ask you a tough one? How do you think about, like, how long to have unwavering support for? Um, often LPs are cited as having three fund commitments.
- PLPeter Lacaillade
Well, I'm often, like, one of the first people to go into a fund, like, uh, for, or back a first-time fund or whatever, and the, one of the first people to get out. If I-
- HSHarry Stebbings
What's the reason to get out?
- PLPeter Lacaillade
It's usually, it's, it's the fund size is getting too big, or the team composition has changed, or, or the person, you know, people are phasing, phasing out. Or you just kind of like, it's just force ranking.
- HSHarry Stebbings
Well, uh, do you not just accept, though, that given your incredible selection on emerging managers, which you have now with Thrive, with Founders Fund, with Andreessen, the best generally-
- PLPeter Lacaillade
Yeah, and the buyout.
- HSHarry Stebbings
... the best-
- PLPeter Lacaillade
I, I do more in buyouts actually.
- HSHarry Stebbings
But if you think-
- 35:18 – 39:59
The Role of Direct Investing
- PLPeter Lacaillade
- HSHarry Stebbings
You mentioned the direct investing now being such an important part. Why do you think it is such an important part? People often take binary approaches. We don't, we don't do it at all. They're massively active in it. You've done Andrew, I haven't been able to say, but you've done Andrews, done-
- PLPeter Lacaillade
Andrews Big-
- HSHarry Stebbings
... Rippling. You're in some of the best.
- PLPeter Lacaillade
Yeah, we are. Yeah.
- HSHarry Stebbings
Well, yeah. (laughs) Uh, I'm telling you as a neutral observer. So, uh, why is it such an important part of the program for you and what have been lessons for you from doing the direct current mass program?
- PLPeter Lacaillade
Yeah, sure. Uh, great question. Um, well, first of all, like from a fee perspective, and we have like over 100, uh, it's maybe 130 or so direct investments, I think. I mean, essentially no management fee, like 10 basis points blended and the, carries like seven or 8%, which is there's a bunch of deals at zero and then some at 10 and then it'll be tiered. And by the way, like I'm totally fine with paying carry on co-investments, but in general it's a massive savings. But more importantly, I think you get to know, you get to know the portfolio better, right? I mean, I know the co-investments I do, like I know those companies a lot better, but you get to, you get to see how managers underwrite deals and you get to, you know, get to know the people on the team too. You get to know the, you know, the analysts, the, so there's, it just, it just deepens the relationship. Um, but I think what's really important is, uh, to build, again, harping on my...... you build a portfolio of co-investments because, by the way, like, we've made a bunch of mistakes, like, you know?
- HSHarry Stebbings
What have you learned from the mistakes?
- PLPeter Lacaillade
Well, uh, this is obvious, like, management is, like, super important. Having the right management team in place, like, if you don't, that, they can be problematic. Um, I would say diversification, like, we invest in this company called Smart Tours that did, like, different, like, tour operate and, like, COVID smoked it.
- HSHarry Stebbings
(laughs)
- PLPeter Lacaillade
Okay?
- HSHarry Stebbings
Harsh.
- PLPeter Lacaillade
It's fine.
- HSHarry Stebbings
Yeah.
- PLPeter Lacaillade
Right?
- HSHarry Stebbings
How do you think about position sizing with that in mind?
- PLPeter Lacaillade
If you think of, like, our vehicle, right, it's about 20-25% co-investments. Um, so at the full ... And we raise these vehicles every 18, 24 months. But at the high level, it's like, a co-investment would be, it will max out around 2% exposure. But it's probably gonna be typically, you know, 50 to, you know, 1%. And, and the, and the co-investment sleeve, we wanna build probably a portfolio of 20, 25. But we'll have some, like Anduril, that we'll, like, lean into and make that, you know, a 10% position in the co-investment sleeve, which then equates to, you know, 2% in the overall vehicle. So definitely, there's a big range and I would say that having a range of investment size is one of the things that's, like, the best for me. So I'll write co-investment checks, my typical co-investments somewhere between kind of 10 to 25. I'll go up to 50, I'll go down to five. Funds, I will write checks between 20 to, like, 100 million. And actually, in the seed venture, it's, like, kind of, like, five to 15. You, you showed me an opportunity, like, a mil- ... I was like, "Okay, whatever." Like, we just d- like a million, but, like, but having that flexibility 'cause I, and I don't even remember-
- HSHarry Stebbings
I remember calling you about 20 growth, 20 sales (laughs) and you're like, "How much?" I went, "A million." (laughs)
- PLPeter Lacaillade
Yeah, and I was just, "Whatever." Because I view it as a relationship and, and not to be, like, flip it with managers, but, like, I don't, at a certain point, I don't remember what we put into each fund. I just view it as, like, it's a relationship with Greenoaks. It's a relationship with Har- it's, you know, and these are ... And now I'm 12 years in and it's, like, you know, I feel like we're just getting started. I mean, time flies.
- HSHarry Stebbings
Can I ask? On the direct canvas, I feel there's also a binary approach to the diligence processes attached. People are either like-
- PLPeter Lacaillade
Oh, yeah, yeah.
- HSHarry Stebbings
... "We're gonna do a huge amount of work-"
- PLPeter Lacaillade
Yeah.
- HSHarry Stebbings
... "and take four weeks," as you said, or we're just completely blindly following our managers, which isn't necessarily-
- PLPeter Lacaillade
No, I'm in the middle, I'm in the middle. Yeah, no, no, it's a great question. This is really important. You have to know you're an LP, you're not a GP, right? I mean, I think there are family offices that actually, uh, operate like GPs, but ... So we only do co-investments right now, I think we'll probably evolve over time, but we only do co-investments with our highest convection managers in their areas of expertise, like deep areas of expertise where they're fully aligned. So when you put, when you put that filter on it, you know, I would say you should want, like, your hit rate should be really high, right? Um, and so I'm not trying to re-underate, if, if a deal, if a manager is putting 10% of their fund into a deal and they think it's one
- 39:59 – 44:18
Understanding GP and LP Differences
- PLPeter Lacaillade
of their best ideas, I'm not there to, like, re-underate everything. First of all, the deal has to make sense for our returns, and that typically is at least two and a half X, like, two and a half to three and a half X base case net return, um, with a right tail. And with a right tail where I can s- I mean, where I hope I can make five X plus, and my goal is generally not to lose money. I, I've lost money.
- HSHarry Stebbings
(laughs)
- PLPeter Lacaillade
But you feel like you have one X downside protection. That's kind of the parameters w- way we do co-investments. If you go at it that way, then what I'm gonna do and what's gonna make me good, where I have an advantage is, I have this huge network of GPs and stuff. For example, in the biot world, like, if there was an auction and they won the auction, I can probably talk to the firm that was number two and see what they think, or talk to another firm that's got, like, the competitor to the company. You have to be really careful and I'm always very transparent with, like, GPs, like, there's situations where they're like, "Do not talk to anyone about this." And I'm like, "Okay." Because the worst thing I could do would be to blow, blow up a deal. I've never, I'm, uh, I've never done that. I, I know it's happened, um, because, uh, I remember a GP wondering who blew up their deal, it was another LP that did it, but that's really important, but once you have the sign off or, or the implicit ability to tap into your network, I can get really interesting insight really quickly. The second-best thing you can do besides a, say yes to a co-investment is quick no and so we just, we move quickly, you know? Um, on, on it and try to get an answer to a GP within, um, you know, it's either like, no within a day or we're very interested, like, let's get back to you in, like, a day or two.
- HSHarry Stebbings
Yeah.
- PLPeter Lacaillade
And we can execute a deal in a week or less. And often, I mean, two weeks is great if we can, if we have two weeks, but, like, that's just, that is, like, super important. And so we had to change our process actually with the investment committee because we do standing investment committee, um, every other Monday, right? But n- for co-investments, there's no, we don't need to convene an investment committee. We send out a memo and the investment committee has 48 hours to reply.
- HSHarry Stebbings
Wow.
- PLPeter Lacaillade
Because that actually was, like, really important. Now, things are slowing down.
- HSHarry Stebbings
What, what percent are rejected?
- PLPeter Lacaillade
Oh, very few get reje- w- what percent from, by the investment committee?
- HSHarry Stebbings
Yeah.
- PLPeter Lacaillade
It, I mean, almost never. It, the, the investment committee, I mean, I can count on one hand the amount of funds or co-investments that have been declined in my 12 years. And I remember them-
- HSHarry Stebbings
(laughs)
- PLPeter Lacaillade
... well.
- HSHarry Stebbings
Is there a point in having it?
- PLPeter Lacaillade
Uh, yeah. Yeah, yeah, I think so.
- HSHarry Stebbings
Which is oversight?
- PLPeter Lacaillade
Yeah.
- HSHarry Stebbings
I'm just saying, if there's like three in 12 years and there is a non- I don't know, a 5% chance-
- PLPeter Lacaillade
Well, it makes us do better work, right?
- HSHarry Stebbings
So it's like a b- like an accountability mechanism?
- PLPeter Lacaillade
Yeah, I think so. I mean, you're being a little cynical but yeah, I mean-
- HSHarry Stebbings
No, no, I mean it in a nice way, like, it's, it's good to hold that bar high. It's good from a governance standpoint as well.
- PLPeter Lacaillade
Yeah, there was one circumstance where something was declined, um, for exposure reasons and it was right, but the other ones probably were not. But it's educational too for the rest, 'cause the senior members of the firm, so-
- HSHarry Stebbings
It's good to bring everyone else with you.
- PLPeter Lacaillade
Yeah.
- HSHarry Stebbings
Yeah.
- PLPeter Lacaillade
Your question about like our hit rate on co-investments is generally, it's like, I don't know, it's like 35% maybe. It might be a little lower right now 'cause it's tight, but I've, I, I say to my team, I push, I'm like, "Why isn't it, why isn't it 50? Why isn't it 60?" Like these are, if we, if we have those parameters... Yeah, we'll see, but it's super scale. I mean, it's, it's, it's important, it's scalable. I think what I was, if you'd asked me two years ago, what I was worried about was the flow in lower middle market buyouts on the co-invest side, and that's, we've been very active there and love, so I'm feeling... That was one of the only things I was kind of insecure about and now,
- 44:18 – 48:32
Capital Needs for Co-Investment Programs
- PLPeter Lacaillade
now I'm feeling really good about that.
- HSHarry Stebbings
Can I ask, how much cash do you need to do a direct co-investments program and do it effectively?
- PLPeter Lacaillade
Well, I feel, I feel really strongly about the need for scale. So this is, we could pivot a little bit-
- HSHarry Stebbings
Yeah.
- PLPeter Lacaillade
... in this conversation and like when I joined SCS, we had $7 billion under management. I think that's around kind of the low end that you need if you're gonna, when you, when you back into what the, what that equates to from a private equity allocation, um, but I think in, I was investing maybe 200, 250 million a year, um, at that point in time. Now it's like about a billion and a half. There's a minimum scale. Like if you're investing $30 million a year, like that's not enough money. I- unless you wanna do something like really concentrated but I, I don't believe-
- HSHarry Stebbings
Recommend that. (laughs)
- PLPeter Lacaillade
I don't recommend that. So to have a co-investment program is like, well, what, what, what check size do you want? Like it kind of all solves into like how diversified do you wanna be, how much is co-investments relative to your budget, but I think that, uh, you need to have a diversified portfolio and I think you need to be allocating hundreds of millions of dollars a year.
- HSHarry Stebbings
Can I ask, do you think the incentives are aligned in terms of wealth managers today, in terms of private banks today, and how that plays out in the ecosystem?
- PLPeter Lacaillade
Yeah, uh, no.
- HSHarry Stebbings
(laughs)
- PLPeter Lacaillade
Um, so this is amaz- it's amazing to me, so if we go back to the founding of SCS, our founder CEO, Pete Moothoon, our now executive chairman, he's a force of nature, he was at th- this firm called Scudder, Stevens & Clark. He opened offices all over the world, um, like Latin America, I think Asia, you know, and at like the age of like 42 or 43 or 44, he made like 30 or 40 million bucks, something like that. It, he had a nice like wealth create- and he was like trying to figure out like what he wanted to do with his money and also like what he wanted to do like for his life, like his next act. And he loo- he's like, "There is a gap in the market. There's all these like, you know, investment banks that sound smart but like they're totally conflicted and are pushing product, and then there's these like really aligned, um, you know, small boutique, you know, people that are really good at like trust and estate stuff and like, but they're not, they don't know much about investments. What if we do something in the middle?" That was his thesis and I think the thesis basically, it's one of those things like the pitch deck, like, you know, it could be refined but like it's still, still-
- HSHarry Stebbings
It's solid.
- PLPeter Lacaillade
It's still totally there. It's amazing to me that the wealth management industry, multifamily, that it continues to be, you know, so fragmented, so underserved. But if you think of like, if you're a Goldman Sachs or Morgan Stanley or whatever, like the funds they put on their platform are large cap funds that are having trouble distributing, that, that need, like we invest in Advent, in the large cap buyout, we invest in Advent and CVC. They would never have their fund, uh, their, their funds are like 2x oversubscribed before they start. They would never go onto an investment bank's distribution platform.
- HSHarry Stebbings
And you talked about Venture, by the way. I mean, I, I won't name names but some of the big players.
- PLPeter Lacaillade
Oh my god, if you're, if you see, I mean, if you see a venture fund on a bank, holy shit. Like that is not a good sign.
- HSHarry Stebbings
(laughs)
- PLPeter Lacaillade
And, you know, I, I, I wanna be careful.
- HSHarry Stebbings
But what worries me though is like, it, and it makes me sad is there's a generation of European family offices and institutions who did just follow that and then go, "Ugh, venture's shit," because they look back at those numbers now and they look back at those funds and go, "Pff." And so it's like these-
- PLPeter Lacaillade
Well, that's, yeah, I mean that's-
- HSHarry Stebbings
It's just hard.
- PLPeter Lacaillade
Well, if they're smart, they'll realize that they were not going about it in the right way and that, and there are a lot of people right now who are licking their wounds. Like a lot of people, going back to the start of our conversation, but like in '06 and '07, like a lot of people poured a bunch of money into like large cap buyout stuff and then, you know, didn't commit after the go- for like '09, '10, '11, '12 and they missed some of the best vintages. Like obviously when like market's correct, that is when you want to be investing, so you have to have that mindset.
- 48:32 – 52:36
Current LP Investment Attitudes
- PLPeter Lacaillade
- HSHarry Stebbings
Do you believe that LPs are pulling back today to the extent that people are saying? If you go on Twitter everyone's like, "Ah, the LP pullback's real. The LP pullback's real."
- PLPeter Lacaillade
Look, and I, and I'm, I'm just super transparent with people, I'm like, "Look, it's like we, we're very tight." But we make exceptions for exceptional managers, but, um-... it is causing a forced ranking of things-
- HSHarry Stebbings
Yeah.
- PLPeter Lacaillade
... right now. And I think that some LPs are upside down, and there's gonna be really interesting opportunity, I think.
- HSHarry Stebbings
What, what are those opportunities like? Strip sells, like buyouts? How do you think about those?
- PLPeter Lacaillade
No, on the secondary side, like so, uh, it's been announced, um, Square Heritage and Brookfield have created a company called Pine Grove that's gonna be dealing with the kind of like liquidity in the LQ- LP ecosystem. But also, if you thought you were going public this year, and it's gonna be like three or five years, like there's probably with employees, there's an- there's... And it can be a win-win, right? You know, you start... If you're, if you're at a company, and it's goes... Let's just go for round numbers, like it's worth $20 billion, right? You had no idea, and you're, you own whatever, you know. Now you have like 60 million of stock. When you joined, you didn't, you didn't know it was gonna go like that. And if you're selling at 30 billion... If, if y- you, you sell 10 or 20% of your stake at half that to buy a house, you still own 80% of your shares, and your wife's happy, and whatever. You know, like this can be a win-win. Like it doesn't need to be a negative. I mean, and I've seen that actually, that like scenario actually play out. The other thing that's interesting about the secondary market is that most of the secondary people are not really comfortable in venture.
- HSHarry Stebbings
What do you mean by that?
- PLPeter Lacaillade
They like buyouts.
- HSHarry Stebbings
Yeah.
- PLPeter Lacaillade
They, it's hard to, it's hard to underwrite. So-
- HSHarry Stebbings
Wh- what does that mean for how they deploy or how they invest?
- PLPeter Lacaillade
Well, I think all the big secondary players skew towards, heavily towards buyout portfolios. So there's a, there's a gap in the market.
- HSHarry Stebbings
I think also the level of cynicism they bring towards this, right? I've spoken to someone like, "We will only engage at 80% discounts." And it's like, that's unreasonable for assets that are actually very premium assets.
- PLPeter Lacaillade
There are a lot of the players out there who will do venture, and there's only a few. I think Lexington will as well. But they, they will not do it at scale, so what Pine Grove's gonna try to do is, you know, be a solution provider at 50 million plus. And it's not to say there's not like other people that will do it. Like I'm sure there's ... but there's a, it, it, it, it is a great market opportunity. I'm really excited about that one. I, I think it's gonna take time to play out. But when things were going nuts in 2021, it was like I would see pitch books, like I'm gonna back to like buyouts a little bit, but every mid-market, it was just like levered beta, right? Every mid-market fund was putting up 50, 60, 40, 50% IRRs. You couldn't tell. Like people who had no skill, number, everything looked great, and then we ca- of course in venture land, it was like just beyond silly. And I feel like we were doing very like nuanced, thoughtful work, but you couldn't tell the difference between that and not. And so, in this new environment, I think that, you know, the tide is going out. It's gonna expose people, and, you know, I think our, our relative returns will be, even if the absolute returns are not quite as high, the relative returns will be better, and I feel like we've taken a lot of our lumps. Like we talked about the venture marks earlier. Like I feel like we've written down our portfolio in the venture. When I say we, our managers. I don't know. It's like 25%, 30%, after having years of 100% IRRs. So it's still good. It still looks good. It's, I think it's a 29% net IRR after all that, and the buyout's like 25. So, venture has paid off for us, but it, it was, it would have been, two years ago, that number would probably would have been like in the 40s, right? And I don't think we've taken all our pain. I think there's more to come, but I think we've taken like
- 52:36 – 1:15:45
Liquidity Management Strategies
- PLPeter Lacaillade
78% of it.
- HSHarry Stebbings
Can I ask, from investing in some of the best over the last 12, 13 ... What is it? 12 years, um, with SCS, are there any lessons or observations when it comes to liquidity management on how the best get out? I think your generation has been told about lean in, lean in.
- PLPeter Lacaillade
Mm-hmm.
- HSHarry Stebbings
And actually, liquidity management and liquidity planning-
- PLPeter Lacaillade
Mm-hmm.
- HSHarry Stebbings
... um, is crucial.
- PLPeter Lacaillade
Yeah.
- HSHarry Stebbings
Are there any lessons from the generation of managers you've seen and backed?
- PLPeter Lacaillade
I mean-
- HSHarry Stebbings
The best do get out. (laughs)
- PLPeter Lacaillade
Yeah. Uh, well, I don't- I don't know if anyone did a good job at it-
- HSHarry Stebbings
(clears throat)
- PLPeter Lacaillade
... really. I mean, there're-
- HSHarry Stebbings
(coughs)
- PLPeter Lacaillade
... a few exceptions. That was my biggest mistake. There was a company that we invested in at a $200 million valuation that had gotten bid up to six billion, and I had people like li- legitimately like trying to buy my shares. But I was told it was gonna IPO at 10 to 12 billion in like six to 12 months. And the people I was in it with were not sellers. So I, you know, they were, they were longing. You fast-forward, I mean, I would sell that at a billion-dollar valuation today, and I'm worried. I think it's a little binary right now. I think it could be worth three billion, and it could be worth zero.
- HSHarry Stebbings
Would you do anything differently now having had that experience?
- PLPeter Lacaillade
Yeah, yeah, yeah. No, I will, I will s- I will... And, and n- now to, to tack and, and maybe pat, pat myself on the back a little bit. By the way, that deal hurts more than some of the stupid deals I did on like frothy pricing 'cause of like it wasn't like I like needed to seek out like a buyer. Like they were coming to me. But eh, the secondary thing is it's obvious like when you wanna be a seller and a buyer like eh- and so we sold. We were able to, um, execute a secondary sale of like a bunch of like tail end stuff with managers we weren't continuing to back at like 94 cents in the fall of '21, and it was bought by another multi-family office who was trying to build a secondary, uh, portfolio. They were like trying to like build a product. And like I am- I was very happy to be a seller- (laughs)
- HSHarry Stebbings
(laughs)
- PLPeter Lacaillade
... of that. I also sold-... a manager that we got out of because of some ethical situation, um, at 104. Yeah. I mean, so there was, th- there were, I did execute a number, a couple of, and I have relationships with Evercore as well as some boutiques, and we are now getting every three to six months kind of pricing because th- the bankers will work for free.
- HSHarry Stebbings
Right.
- PLPeter Lacaillade
They're pricing the portfolio and right now, I think if we wanted to sell some of our venture stuff, it'd be very unattractive. So it's, yeah, we'd be a buyer. Right now, I'm a buyer, not a seller. But I wanna continually... that, we were doing it, but I wanna, like, that muscle is going to be built.
- HSHarry Stebbings
How do you think about liquidity planning and like forecasting when you think about kind of open IPO markets being where they are, and when you think about when, you know, the Mueller and the Kueller, so to speak, comes back? ... that you are insatiable at finding the best talent, I think, and, and winning it and getting-
- PLPeter Lacaillade
Well, I think that's where I, if you, like, the lessons learned where I think I can be better is actively managing liquidity. And there's a company, again, I don't wanna name names, but it's a great company. We did a co-investment with their manager, and it's been marked up 4X, and it feels fully valued. I think the person's a complete assassin, who runs the company, and so it could easily have a 2X plus from here. But like, am I a buyer or seller? Like, I'd be a seller. But like, you can't necessarily... like, I talked to this person, the, the GP about, it's like, "Hey," um, "could we think, like, w- how are you feeling about this?" Like, "Should we try to sell?" Because I think I would, like, there's a premium on getting liquidity right now.
- HSHarry Stebbings
Yeah.
- PLPeter Lacaillade
And that's one where I'm like, it feels full. It has felt full every step of the way. But, yeah. And, and so I don't know, I doubt we're gonna get liquidity, but ev- I'm proud of us for at least, like, asking the question and managing it. But to tack a little bit, I would say, as it relates to, like, the private equity market generally, I th- I think second, and you know, I worked, at Harvard Vest, I was in the secondary group, and I, and I've seen that evolution, and I think it's awesome. Private equity in general is like, you just have a, in- unfair advantages over the public market. You're able to plan, you know, three to seven-year plans, not manage quarter to quarter. You can optimize your capital structure. You can innovate and venture, whatever. The reality is, these funds, like, if not, like, cleaned up, will last like 12 to 20 years. Like, it- and so the more kind of tools in the toolkit that institutionalize and give different off-ramps for liquidity, I think is amazing. And so people talk about all the capital that's been raised and this and that. I'm like, yeah, I, it's still the penetration of, of private equity in, say, the US, UK, is like, it's, what is it, like, five, 10%? I mean, it could be, it could probably double. In markets like Germany, it could, Germany's a third of the penetration of-
- HSHarry Stebbings
Wow.
- PLPeter Lacaillade
... of, uh, the US and UK and Nordics. Nordics are, Nordics might have the highest penetration of private equity. Um-
- HSHarry Stebbings
Good old Nordics, always leading the way. (laughs)
- PLPeter Lacaillade
Yeah. They've done really well, right?
- HSHarry Stebbings
Yeah.
- 1:15:45 – 1:16:11
Quick-Fire Round
- PLPeter Lacaillade
- HSHarry Stebbings
No, I, I totally agree (laughs) and get you there. Uh, listen, I wanna do a quick fire, Peter. So I say a short statement and you give me your immediate thoughts. Does that sound okay?
- PLPeter Lacaillade
It sounds great. Let's do it.
- HSHarry Stebbings
Okay. Let's do, what do others not know that you know to be true?
- PLPeter Lacaillade
I think it's, it's the diversification piece in, in, uh, private equity, the way to build an optimal portfolio, which I think is I have 60, 70 active relationships in private equity. I think there's a lot of people out there that say it should be like 20 to 30. And I've-
Episode duration: 1:22:16
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