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Top private managers continue to be top performers - making it important to back the right managers.
Key Takeaways
- Joe Lonsdale, co-founder of Palantir, Addepar, OpenGov and founder and partner at 8VC, discusses why top managers in private markets tend to produce more consistent returns than public market managers.
- Structural factors, such as network, reputation/brand, and operational expertise help private markets' managers identify new opportunities, secure deals, and properly execute operational strategy.
- As a result, top fund managers continue to outperform - particularly in venture capital (where network effects/reputation are strongest), but also in private equity and to a lesser degree, private credit.
- Betting that a top manager will continue to outperform in private markets is a winning strategy on average, so selecting the right managers up front is particularly important for investors.
Transcript
I'm Joe Lonsdale. I'm an entrepreneur and investor. I founded several companies including Palantir, Addepar, OpenGov, Affinity Resilience Bio, and I run a firm called 8VC. We manage about five billion dollars of committed capital, backing the best entrepreneurs, figuring out what's newly possible in the world.
You'll see a lot more persistence of returns in the private markets vs. private markets. You'll have managers who are the top 10 percent, top twenty five percent for the vast majority of their careers in venture capital and distressed debt in other areas of private markets. You almost never see that in the public markets. And it is just a lot harder to be a very top public market manager because the advantages you build up, you might have a huge advantage one year we understand something that people don't, but then every year you have to recreate those advantages pretty much. Obviously, you could be a really smart public manager - there are exceptions in the public markets, but it's much, much rarer.
You see a lot of managers are able to outperform in the private markets because they have much more sustainable advantages, much bigger gaps. So you take a top venture fund, for example. There's very high what we call autocorrelation of returns, but that means that people doing well continue to do well on average. There's a lot of reasons for this high autocorrelation. One, if you've backed the best companies, a lot of times those companies have attracted the top talent. You've got to know that talent. If there's someone you admire, you're able to bet on them the next time you're able to keep betting on the top people by having by virtue of knowing who they are. Two in private markets. You build up a brand. If you've done really well, who will want to be exposed to that brand? They want to be part of it. Three, when you're in private markets, there's all sorts of ways you're selling into the top companies. You get to know the leaders in finance, in logistics, in other industries. You can now work with those leaders in your next companies as well as your next companies. And so more people want to work with you in those industries you know really well. For if you're already betting on the top companies, people know who you are, then you're able to see what's going on in these places. You have to learn about these industries. You're able to figure out what's coming next. And it's similar in private equity and lots of other areas. Private equity is not as high autocorrelation as venture to private equity, but even it has lots of sustained high returns - whether this talent seems to matter a lot more, you're doing a lot more in private equity to actually build companies. You're learning about how to build them. You're taking a much more operational role, usually for the top firms. The top firms also has other advantages with network, with able to see the deals that are going on with getting the first calls.
There are two things that have the highest autocorrelation of return in private markets. One is venture capital, which we spoke about, the other is distressed debt distressed. That's very, very messy, similar to venture capital. You go into distressed situation, you can lose all your money if you don't know what you're doing or if you're a good builder, you know what you're doing. You could take something and make it work. And so there's huge importance in scale there.
That's private market investments - you actually have more ability to deploy scale. There's more ways you can take competence and talents and network and create returns in those areas. And that's why you see people who've built up that skill over time, they tend to show off that skill multiple times in a row with their returns. It really matters a lot more in private markets to back the top managers.
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