Lane MacDonald – Teamwork, Alignment, and Investing at the Highest Levels at SCS (EP.483)

Summary

• Private Markets: Bullish on private equity due to persistent inefficiencies, with a focus on co-investments and smaller deal sizes for alpha.
• Oil & Gas: Positive view on energy, noting capital scarcity and institutional divestment have created attractive opportunities in oil and gas.
• Co-Investments: Emphasizes structural alpha from fee-free co-investments and the importance of alignment, domain expertise, deal size, and quick decision-making.
• Small-Cap Buyouts: Sees greater alpha in mid, small, and micro-cap buyouts versus large-cap deals, especially for co-investing.
• Venture Capital: Larger venture funds with access to leading companies (e.g., OpenAI, Anthropic) can still outperform, differentiating venture from buyouts.
• Public Equities: Prefers tax-managed passive exposure for consistency, using selective active where dispersion is higher.
• RIA Roll-ups: Highlights the RIA business as an attractive, low-capex, high free cash flow model with organic growth, consolidation, and strong operating leverage.

Transcript

Our job as allocators is to find people who have a proven ability to capture inefficiencies in increasingly efficient markets. How do you disentangle that? How do you figure out what their ability is to find those inefficiencies? Domain expertise to start, but what's their edge? Is it a sourcing edge, an operational edge, a strategic edge? What are those things that allow someone to capture those inefficiencies? In our sector, many people build track records that are not statistically significant. not meaningful. You have a few early wins. You think you're smart. How do you find those people who are truly gifted and differentiated what they do? They see things in a different way or they just have skills, capabilities that others don't. I'm Ted Sides and this is Capital Allocators. My guest on today's show is Lane McDonald, the chief investment officer of SCS Financial, a registered investment adviser and OCIO platform with approximately $46 billion in assets under management. Lane was a US Olympic hockey player and Hobie Baker award winner as the best player in college hockey in the late 80s. But his aspirations of following in his father's footsteps and playing in the NHL were derailed shortly thereafter by injuries. In the decades since, he spent a dozen years in private equity and the last 18 as an allocator at institutions ranging from the Harvard endowment to the family office for the owners of Fidelity and now SCS. Our conversation traces Lane's path from the rink to investing and from dealmaker to allocator, examining what separates great investors from good ones. We discussed the importance of domain expertise, sector selection, alignment, and identification of a durable edge and structural alpha in increasingly efficient markets. We close with Lane's outlook on private markets and the lessons from hockey endowments and family offices that inform the team building platform at SCS. Before we get going, have you noticed that airline travel takes a lot longer these days? Security lines go on as far as the eye can see, and that's even with pre-check clear or the pre-check clear combo. And flights seem to get delayed regularly for no apparent reason. Well, the next time you have even an inkling of a delay and long before you have to board, deboard, board again, and sit on the tarmac for an hour before you leave, might I suggest you fill that idle time with successive episodes of Capital Allocators? By the time your plane leaves, you'll have gotten through at least two or three amazing episodes, and probably made friends with your equally frustrated neighbor in the seat next to you, who may not have had the benefit of listening until you tell them to make a new friend, productively pass the time, and find your way around the world smarter than you started. Thanks for spreading the word. Please enjoy my conversation with Lane McDonald. Lane, thanks so much for doing this. >> My pleasure. Thanks, Ted. >> I want you to take me all the way back to your upbringing cuz I would love to hear where this all started on the ice. >> My father was a professional hockey player. Played for the Red Wings with Gordy How back when there were only six teams. He played with the Kings and most of his career with the Pittsburgh Penguins. I grew up as a rink rat. Skating before my dad's practices, skating after his practices with my brother. I didn't know it was any different than anyone else. He was my dad. Going to the rink was going to work with him. What was that like with your dad as a professional hockey player before pro sports became the big celebrities they are today? Definitely different because he was still a big deal. People treated my dad differently. When he'd go somewhere, everyone wanted to meet him and particularly in his hometown of Nova Scotia, he was a celebrity and even in Pittsburgh to some degree. It was at the point in time where they started to make enough money that he didn't need to do anything else. He did okay. These days it would be upper middle class but with a little bit of celebrity around it. The experiences were what I remember. One day my brother and I were on pregame skates Saturday morning when we were allowed to go to the rink. We skated before the Penguins had their pregame skate before the other team came out and this happened to be the Boston Bruins. We hop out. My brother and I are ripping around and having fun and all of a sudden one player on the other team comes out from the Boston Bruins. My dad comes out and like boys get off the ice. The player on the other team comes over to where we're getting off the ice. It was Bobby R. And my dad says, "Hey, Bobby, I'm so sorry." And Bobby, as gracious and humble as he is, made a joke which was, "Lol, don't worry about it. This will probably be the best competition I face all day." So, you grow up in that environment and knowing those people, you don't know any different. Once my dad retired, he went to school for 14 summers to get his undergraduate degree while he was playing in the NHL because he didn't have the benefit of playing college hockey. My parents moved to education. That was the transition to now being in a different environment. My father was an athletic director, coach, teacher. My mother was a school nurse as a registered nurse. And we then moved to Milwaukee where my parents were at a school called University School of Milwaukee, private school. Their next step in their career became one about how to get my brother and me the best education we could. We spent the next for me 6 years, 7th grade through high school in Milwaukee. My parents were there for 20 plus years. Where did you think hockey was going to take you? >> Like every young kid, you hope that you're going to end up playing in the National Hockey League. In my case, I grew up around it. It wasn't so aspirational. What was really wonderful about it was that it was also demystified. That was certainly the goal, but I also saw all of the negatives that come with a career like that. My father had six major operations on one knee. He's had both knees replaced. Even then, my mother could pack everything we owned in two trunks that if he got traded tomorrow, we were moving from Pittsburgh to wherever. There's a wonderful things about that and for a kid's dream about doing it because it's what they see. There's also another side of that which is it's not the end all be all in terms of what your life is about who you are. There's so much more that happens after hockey that it was wonderful to demystify that. Take me through the highlights of your hockey career. Oh gosh, I've been hit by the lucky stick many times, Ted. Including playing with you for the business school blades at HBS when I played in that one tournament with you. When I was playing in Pittsburgh as a kid, everyone expected you'd be great. I remember hearing so often, those McDonald kids, they're not that good. So, everyone expected. Then in high school, we went to the school in Milwaukee University School where my dad was a coach. That was where you start to really lean into it. My brother and I loved hockey. We love playing. We're fortunate to have great parents and supporters, but also a great teacher and coach and my dad about hockey and what really matters. My parents philosophy was you're going to use hockey to get the best education you can, not the other way around to be able to accomplish what my father never could. Coming from a small town in Canada where we had to go play juniors. I think it was my sophomore year in high school. The coach at Brown came to see my brother and me play. We state tournament. Milwaukee hockey wasn't very good. Not many kids are going to go play college. It was a big deal. It was the state championship. My brother played great. I had a good game. Afterwards, the coach told my dad, "I really don't think they're going to be able to play division one hockey." Your bubble gets burst, but you have to keep working. You have failures, you have setbacks, and you just keep working. Ultimately, I was lucky enough to get the opportunity to go to Harvard and play hockey there. I was recruited, assumed I was going to make the team, but you don't know how you really stack up. There's always those doubts in your head. The second week of practice, the coach puts me in the line with a guy named Scotty Fusco, who was a returning Olympian, an all-American. It's a little like playing with Rain Gretzky. If you're playing with Scotty Scotty Fusco, you've got a real edge. I ended up being someone who fit well in his line. I could skate with him. Hopefully, I could think with him. We ended up playing together for two years. So, as a freshman, I got an extraordinary opportunity to play with one of the best players in the country. And that really then elevated me. Maybe there's a real potential here. At what point in time did you decide the potential didn't have the NHL path? >> I was drafted playing in the Olympics. When I graduated, I had a number of head injuries, concussions. I almost had to stop during the Olympic year and leave the team because of concussions. I almost had to stop playing hockey at Harvard my senior year. Very few people knew about what was happening and what was going on. My parents, my brother, were great about you don't need to playing, but I love the game. I love my teammates. During my senior year when I was playing, it wasn't in the back of my mind. This is near the end. This could be it. When I graduated from college, I was fortunate to have the Hartford Whalers, which no longer exists, had my rights. They offered me a great contract. It was a four-year contract, signing bonus, guaranteed money, 700 grand. It's very hard to say no to 700 grand. Even if you get hurt, you still have that money. But back to the lessons about life, and there's more to life than playing hockey. It's really about your future. In particular with concussions, you're playing a very dangerous game between doctors, coaches, Bill Clearary at Harvard, my parents. I understood that it wasn't worth it. That was where I changed focus. It took me a couple of years and a couple of twists and turns to figure it out because I did play for one year in Switzerland thinking it's a less physical style of play. I could play in one more Olympics, but that was the recognition that I shouldn't be playing hockey anymore. So, as you reflected back on your entire journey of hockey at that point in time, what were the most important lessons from the sport that you internalized both for your life and then in the future with your career? Teamwork. There's nothing more important. You learn so much about leadership. It's a we. It's not an I in how you lead. The teamwork piece to me is something that I've personified forever. It means so much more to have success as a team than individually. We all want to do well. We all want to contribute. Being part of a team and being willing to sacrifice as part of a team. So much of that has stayed with me in terms of what I've done in every part of life. That's the lesson that I'm so grateful for. Resilience for sure. You get knocked down, you need to get back up, get hurt, you got to be tough. Rejection. But the teamwork piece is the most important. In those couple years where your hockey career was probably ending, how did you think about what you wanted to do that ended up landing you in the investing world? I had no idea. You and me, liberal arts, education, my parents had done very different things. So there's no exposure growing up. Finance ended up being something that I saw a lot of people in particularly going to college, your friends, their parents. That was an eye openening. So I started thinking about finance. I had no idea what that meant, but I had some nice mentors. People were like, "If you want to get into business, investment banking is a good path." I remember getting a job at Robertson Stevens and Company right after I stopped playing hockey in San Francisco. I didn't even know what an income statement, a balance sheet, or a cash flow statement was. I'm flying out to California. I was going to work in San Francisco office and I'm reading an accounting book trying to figure out how all this stuff works. You jump in the deep end of the pool and you figure it out. What I tell a lot of young professionals these days, none of this is rocket science. If you're smart, you're thoughtful, you're a good person, you work hard, there's a path. I was so intimidated and had some great colleagues who taught me modeling. You go in with humility. You hopefully are appreciative. It's amazing how much people will give and share with you. I had some great teachers. Robert Stevens. >> What was your path after Robbie Stevens? >> I started a summer hockey camp with a good buddy of mine right after college. We built that camp and that was going on the side while I was working at Robertson. That business was running and we had camps in the Quincy NICT the vineyard and it was a great little business. We ended up selling that to US sports camps which is Nike sports camps that was going on the side but after Robbie Stevens I ended up going to Stanford for business school. Spent two years there which was a great transition. During the summer I was running our hockey camps trying to get that to a point where we could hand it off to other people to run it for us. Then I want to get into private equity. Whether that was venture, whether it was buyout, didn't know because I had started a business. I had a little bit of an entrepreneurial experience. It lent itself to buyouts. That led me in my second year to pursue that path. I thought about consulting and I thought about private equity. I ended up having the opportunity to go to private equity and I started joined a firm called Bank Boston Capital. I'm dating myself because every firm where I worked no longer exists. >> So you stayed in private equity for a long time. love to hear the most important things you took out of your various experiences in private equity. >> 13 years as a GP, three different private equity firms, worked with great people. I learned so many lessons. I learned about domain expertise and how important it is to really understand sectors both operationally and from an investment standpoint to really understand the risks that you're taking when you're investing. I also learned about deal sourcing. I learned about the discipline that goes with sourcing deals, the relationship building that goes with that. I learned about sectors, so many sectors. I spent time in a manufacturing service distribution focused firm. I then shifted to a firm that focused on consumer especially retail, education and healthcare. The last firm was media and telecom primarily an area like retail. What are the real economics that drive a retail business? The four-wall economics in terms of that really drive it in understanding that telecom understanding data centers and understanding wireless the exposure to all those different sectors. It was a circuitous route but provided such a great foundation of knowing a little bit about a lot of different sectors and industries. >> What aspects of being in private equity most resonated with you and your skill set? >> I love to learn from other people number one. But number two, I thought it combined the best of banking because you get a little bit of banker similar with consulting. You're a little bit of a consultant with banking. Oh, by the way, you're also an investor because you're writing a check. And when you invest in smaller companies, you're also as close to being an entrepreneur as you could be. What business do you know where you can learn and combine all of those different aspects into a business that economically when it works is very rewarding? >> At three different firms, what did you learn about what it takes for a GP to be successful? >> One of the keys is domain expertise. I also learned that sector matters. The last firm where I worked was focusing on media and telecom. Media had been a great sector for many years buying TV and radio stations. Monopolies, stick value, great assets. But when an industry that is facing a cyclical and secular decline, which was happening in the late 2000s, no matter how good of an investor you are, it doesn't matter. I learned you got to be picking the right sector. technology, healthcare, the importance of leaning into those sectors. I also learned that not every investor is a great investor. I certainly learned this more when I moved to the allocator side. There's a real bifurcation. It's very easy to be an investor. All you need is money. If the question is you want to be a great investor, now that's a very high bar. >> What led you to pivot from the GP side to the LP side? >> More happen stance being lucky in terms of relationships. I was planning to stay in the GP side, but I worried about the firm where I was. Great people, wonderful mentors, but was going to face these cyclical and secular declines, but I didn't believe there was a future. Our largest LP was Harvard management company. I went to tell the folks at HMC, who remained very good friends of mine, that I was going to leave, but I'm going to stay involved with portfolio companies and sit on a couple of boards. They said, "Hey, would you ever think about joining us? We're going to rebuild the co-invest platform at Harvard. the Charlesbank team had spun out already. We think you'd be a good addition to the team. That pivoted me from I'm a GP, I'm a GP to then thinking about being an LP. The other piece for me in that situation, Ted, I received financial aid when I went to Harvard. The missionbased aspect of that spoke to me of being able to give back in some way while doing something I really enjoyed. >> What did you find when you got there that was different than what you might have expected? I didn't realize when I got there how little I actually knew about private equity. You think you're a GP and you know so much, but you know so much about so little. You're so deep. When you get to Harvard management company and you have the benefit of the history of that whole private equity platform, then you have the ecosystem of LPs that you're spending time with. Then from a GP standpoint, I got to spend my six years at HMC meeting with the best managers in the world every single day, multiple times a day. through that you learn so much about where the bar is really to be great. That was the piece when I got to HMC. I was like how little I really knew about the sector versus what I learned while I was at HMC. As you started to calibrate what you thought was really great from good, were there particular things before you developed your intuition and judgment that you hung your hat on that was a signpost for you of something that had the potential to be really great? We live in a world that's become from an investment standpoint very efficient. Our job as allocators is to find people who have a proven ability to capture inefficiencies in increasingly efficient markets. How do you disentangle that? How do you figure out what their ability is to find those inefficiencies? Do they expertise to start? But what's their edge? Is it a sourcing edge, an operational edge, a strategic edge? What are those things that allow someone to capture those inefficiencies not only on a historical basis, but on a prospective basis? People talk about modes. In the allocator world, it becomes who has that proven ability that something is unique and differentiated and can demonstrate that over and over again. In our sector, many people build track records that are not statistically significant, not meaningful. You have a few early wins. You think you're smart. How do you find those people who are truly gifted and differentiated what they do? They see things in a different way or they just have skills, capabilities that others don't. When you have a platform as powerful as Harvard's, how did you think about doing something different? >> I really thought once I got to HMC, I was staying there. I was given an extraordinary opportunity then move from the private equity side which included the oil and gas and energy stuff to in the private equity realm. But to move to public equities, Jane Mandela was the head of HMC and she was a great mentor. Gave me that opportunity. Then I had just gone back to run private equity. I love the platform. I love the access. I was learning every day. Also finding a way to be a great partner sitting on the LP side. How do you be a great partner to the GPS to figure out how to build relationships that are enduring and you can do many, many things with GPS. I thought I'd be there forever. And the phone rang. The first time the phone rang, I said no. The second time I listened. Someone said, "You should take this meeting." With some real hesitation or reservation because I love the mission. I love the platform. I love the focus on trying to generate the best riskadjusted returns for the endowment. I love that that's true north. Now, there are flaws to the endowment model, but I never thought I was going to leave and then it was just a unique and interesting opportunity. >> What did you come to learn were ways that you as an LP could be a great partner to your GPS? >> We're all biased by our own experiences. Being a GP was helpful. It could be as simple as it's a GP who you really like. You want to be supportive. Looking at their marketing materials before they go out to raise their next fund. Being a confidant. Here's what I think you're doing well. Here's what you're not doing well. Shooting straight in being honest as opposed to telling them what they want to hear is really important. Number two is if you really want to build a mutually beneficial partnership is to be a great partner. When times are a little bit tough, you lean in and you understand things, but you also show up with a real check. You have to be a meaningful investor. If you're a $5 million investor, it's hard to be meaningful. Fortunately, reputationally in dollar-wise at Harvard, we were able to craft relationships where we were the first seat in the back of the bus. But therefore, people wanted our opinion and we could share best practices. Everything that we're seeing across the entire universe to help our GPS in terms of how they're think about strategy, firm transition, next generation, which I think were important. A lot of people think of a seat like that at a top endowment as the pinnacle of a seat in the LP. You mentioned that in addition to some of those great strengths, there are some drawbacks of the endowment seat. I'd love to hear your thoughts on what some of those drawbacks were. >> There are challenges to being part of these institutions. I love Harvard. I'm forever grateful for the experience I had and I wouldn't be where I am without Harvard. But the institutional biases and I'll give you an example. There was such a big push that people at Harvard were making too much money. This was before I joined. The only reason they were making too much money is because they were performing at such a high level. Those folks were generally making roughly 4 to 8% carry the alpha that they were generating while they were at HMC. All these initiatives at Harvard lead to spinning out these firms. You think about addage, high fields, convexity, Charles Bank. Now you go from them being internal paying them that to them being external and paying them 1 and a half and 20 and some of that for beta. That is so illogical from an investment standpoint. The other one I'd say is too institutional bias, oil and gas. We all want the world to be green for our kids. That being said, that was an institutional push that happened at Harvard to eliminate all oil and gas investing. When you take a capital inensive sector where many people are running and not deploying capital, that becomes a very attractive sector. The loss to Harvard by not investing in sector like oil and gas over the last 8 10 years is very meaningful because it was a target-rich environment for returns that go to support the financial aid for students. Those are some of the challenges that people don't think about when they look at these endowments. There are great people running these places and they try to optimize within those parameters but there are some constraints that exist because of the institutional biases. >> So we circle back that phone call comes in. What was the phone call? The phone call was from the family that owns Fidelity Investments. One call becomes meetings. They're a wonderful family. It was a unique seat in terms of leading their family office, which is for their family, but also broadly for some other owners of Fidelity and the other employees. It was a unique opportunity to be the chief investment officer of a platform like that in Boston with a family that has done so much for the city of Boston philanthropically and otherwise. That was a compelling opportunity. >> So you go from an endowment to a large family office. What was the breadth of investment activities that you were involved with for the Johnson's? >> If you think about the endowment model, basically the asset classes were the same. public equities, private equity, net resources, real estate, the expression was different as it is in most family offices. Once again, with the Johnson family, they had the ultimate advantage as well of duration of capital. In their case, you have some flexibility within that mandate, reputational benefits with that family and how unique as they are in scale. Very few families really have enough scale to really optimize the platforms. They did. >> What was the expression of those asset classes inside the office? >> It really was more about a willingness to accept concentration. In certain asset classes, there were very high concentration. Different families have different priorities. Some families go the endowment model. They want to partner. Some families like to do things more directly. the Johnson family as entrepreneurs lean more directly as opposed to investing through managers. That was obviously in hindsight wonderfully complimentary to what I did with Harvard but very very different. >> What did you see as the strengths and drawbacks of investing directly across asset classes in a seat like that compared to Harvard portfolio of managers? >> It comes back to where I kind of true north in terms of domain expertise. My view is be the best or partner with the best, but have the humility to know which bucket you're in. If you're going to invest directly, you better be the best. It's so competitive out there. The flaws in many family offices, they don't hire the teams. If you're going to focus on direct investing in an area like private equity, in a sector like manufacturing, you better hire a world-class team who's got a real edge, experience, top quartortile track record, have the team that can execute and deliver really outstanding returns. Otherwise, you're a tourist investor or worse and you're showing up, you're looking at things different sectors and you're taking risks you don't really understand. many family offices who do direct. Some do it well. Some rely on less capable teams to do a direct investing. That's where you set yourself up to fail. >> Now you have another seat where by all intents and purposes you could imagine you thought you were going to be there forever too. What led you to end up coming over to SCS? >> Back to my teamwork that to me is so central. I've never been someone who felt like I have all the answers in the family office construct. I felt we weren't prepared to partner with the best. In many family offices, there aren't enough checks and balances on the decision-m process. The family calls the shot. That leads to sub-optimal decision-making. Back to the view of I want a team to make the best decisions. Those who have the most expertise on my team, I want them leaning in helping to drive that. Oftized view on those things. In some cases may want to invest directly, but in many cases, you really want to partner. When you were thinking about bringing together the best of what you saw at a place like Harvard, the best of what you saw at a big family office, what were the most important principles that you encapsulated that you wanted to bring to the table at SCS? The opportunity to truly partner with leading investors playing hockey. I like to play with the best. It makes you a lot better. Oh, you partner with the best. Alignment is really important to me. I want to be aligned with everyone around me in terms of from a team standpoint, but also from a capital standpoint. I'm not trying to pitch you something that I do well, you don't do well. I also think if you're going to try to optimize a platform, you need enough scale to matter where you can write real checks to drive terms in some cases, drive structure in some cases, lead to co-invest in some cases. It's important to me to not be so big that you can't do the small, nimble, nichy things. We're all victims of our past or beneficiaries of our past. Being in platforms like HMC which was 30 40 billion was there 30 to 100 is the sweet spot where you can have enough capital matter but if a5 or $10 million opportunity comes up that's compelling you still the ability to do that. It was really around those things. The last piece which is perhaps the most important piece team. You need a great team. If you want to be a leading investor and you want to try to do something that you are proud of, it helps to be surrounded by a great team. >> As you came into SCS, we take a step back and talk about the history of the firm and where it was to the point where you joined a couple years ago. >> Like so many things in life, I could take zero credit for the success of this firm, but I'm good at picking partners and teams. The firm had started over 20 years ago. P Matun, Tony Abiotti, Doug Etalie, great group of folks had come from the traditional model, Goldman, Morgan Stanley, and just didn't believe in the model. They thought if this was my money, working with ultra high net worth folks, families, how would I do it? They built a model based on alignment. We're not trying to pitch a stuff. We're going to think in your best interest. We're going to provide the scaffolding for a family office real reporting balance sheet reporting everything all the estate trust tax management getting beyond or wealth planning education around for your kids. What many people failed to do and really didn't invest in was the investment side of that. So how do you build a compelling investment platform for these families? You have three legs of the stool. You've got the scaffolding of family office. You've got the estate planning and wealth management and the investment side. That was the vision. They started with one client and then over time built it to when I joined I believe we were 35 billion and have grown since then. That was the foundation of the firm alignment and to try to deliver all three legs of the stool to families in a aligned way. And what did you see as your role as you were coming in >> to take a platform that I liked and I was an investor before I became an employee. I worked on a number of investment candies. One of those we chose SCS that was when I was working for the Johnson's three and a half years before where I saw what was here and was impressed coming in was to take what was here. Pier Lockley built the private thing. He's done a great job building this private platform. Steve Perry runs Publix. He is a gifted investor and I love working with him. My view was what I bring is the best of family offices, the best of endowments to bring some of that learning to help continue to evolve this platform. So the things that I could do in the family office world in partner with other family offices that are only for the multi-billion dollar families that I can now access. I love this platform. hopefully I can make it better and bring all the mistakes I've made and all the learning I've had to help evolve it. >> So we pull the thread on the investment side. How did you think about the building blocks of vast allocation model and how you wanted to implement? >> This was my last chapter. I spent a lot of time on this making sure we were like-minded because the last thing you want to come into organization and be like okay we're ripping this thing up. I wouldn't have joined if I didn't believe in it. two examples of things that were really important that are probably the two most important building blocks public equities here we are largely tax managed passive I worked for the Johnson family so I know active very well was lucky to lead the public markets team at HMC2 so I've been around the sector I have become increasingly concerned about the consistency and the opportunity to generate alpha fundamentally in low dispersion asset classes like public equity is the beta is very attractive I'd still believe there's alpha out there but We're 70% tax managed passive. And if you can generate 100 to 200 basis points of tax alpha and there are now extension strategies that build upon that, if you're thoughtful about it and don't put too much leverage on it, there's effectively some tax alpha that you get for free. The consistency of that is a foundational piece in public equities around the margin. Are there some gift to public investors? There sure are. Generally, in less efficient parts of the market, it could be small midcap. It could be Europe. It could be Asia. That really became foundational. Where there's dispersion, you go active. Where there's low dispersion, like public equity, you go passive. Contrast that. Private equity, high dispersion. And given my history with HMC and being a private equity, they are your active. You lean in trying to find the alpha in the best managers in the world because what you get as we all know for being top cortile in the outperformance that exists there is worth it. When you think about the implementation here and you think about the two biggest asset classes of public equity and private equity couldn't be more different in terms of the implementation that was important to me as a foundational piece >> on the public side that 30% that's an active given the high bar because you can generate that tax alpha on the passive side. How do you think about the duration of time where you're trying to measure sufficient alpha that you're willing to pay the fees for an active manager? >> It's clearly a multi-year period. We're very lucky being able to access world-class managers. We write big enough checks to matter. So, you get mind share, you get opportunity. Then underwriting ends up being back to this piece about just spending the time understanding what is unique about that manager track record team their process. The investment process is what you're underwriting. So many times though people change and evolve the process whether it's public or privates. And when that happens you're reunderwiting a whole new strategy or a whole new manager. Having managers who stick to what they do really well, inner discipline around that and have a humility around it too is really important. >> On the private side, I'd love to pick your brain on co-investing. You started as a direct investor. You saw some of that as a rebuild at Harvard and Fidelity. what works and what doesn't in a co-investment program particularly in private equity >> foundationally at Harvard you had the benefit of all the history all the co-investments that had been done within Harvard's history and across multi-asset classes the track record was compelling that led us to do a lot more work as we were rebuilding it lean into it if you take the mean return in most vintage years from a Cambridge associates and you back out fen carry as top cartel I'd term that structural alpha If you are smart and thoughtful, partner with mean GPS, do mean co-investments. Absent fee and carry your top cortile. That's the foundational piece number one. The math is working for you. Then you get into the selection within that. I have a 10-point checklist around co-investing starts with the GP, who the GP is, and is a sector where they have true domain expertise. Some GPS are in four sectors. They're great in one or two, but not always great in three or four. Then it gets to the partner. Is the partner a true alpha generator? Not every partner in every private equity firm is created equal. Some are truly gifted investors and some are more beta investors. Trying to align yourself with those truly gifted investors who are leading the transactions in the sector where they have tr too much expertise. You want the sector in the industry to be wind at your back. But then you continue to roll through. Not far down that list further is alignment. You've got to be aligned. If a co-invest comes to us and the GP's putting in a small check and looking for us to put in a bigger check on them, that's not happening. If it doesn't work, I want it to be a lot more painful for them than it is for us. That's not rocket science. But the tool of all these sectors investing, you want to be aligned with smart people. It could be a great deal, but if I'm not the expert, I'm insecure about not knowing what I don't know. Then if I don't have alignment, I'm worried about if this doesn't work, who's going to be working this deal? That part is really important. The next part is giving people a quick answer. If it's going to be a no, give them a quick no. Don't drag things out. >> What are some of the other more subtle points on your checklist? >> The structure is important. The size of the deal is more subtle in the size of the opportunity. If you think back when covesting became big in the late 2000s, all of a sudden it became anchored with a lot of big deals. Big GPS doing big deals and leading to co-invest. The bigger the deal, the less excitement about co-investing. Is it a beta deal? Number one. Two, with that finding those managers who are doing smaller deals, who give you the opportunity to co-invest. That generally means it's a smaller fund. Then it becomes manipulating that what's a meaningful check to them and what's going to be the check to us. Deal size is underappreciated. I'm a believer that the alpha is in the smaller end of the market. Midcap, small cap, micro cap funds. If you're going to try to pursue alpha in co-investing, that's where your co-investment should sit. >> How do you think about the co-investment opportunity as a factor in underwriting a manager that you want to partner with? >> It is one of the gifts of co-investing. Having been a GP as well, I've seen so many GPS and how they underwrite deals. You learn so much about who's really gifted in terms of what they see, what they think, the optionality that may be embedded, the catalysts for outsiz returns. That part of it is incredibly informative of getting in the trenches. The point of coin investing is not to rewrite the deal. It's to benefit from what they're doing, but what they've done and how they share is incredibly informative to let you know about how deep they are, how knowledgeable, what their edges. >> How do you think through the chicken and an egg of do you use a co-investment opportunity to get to know the manager or do you have the relationship with the manager so that you can understand them better through the co-investment opportunity? >> Now, we'll look at co-investments where we're not an investor in the GP. Historically, we had been limited to the GP. We've broadened that aperture because you can see deals outside of your existing GP universe that it becomes too limiting. That being said, the bar is the same. It is a GP that you would love to partner with and that GP it could be a family office. Someone who's got true domain expertise that your conviction in them is very high as a lead investor and they are really compelling. That is still the bar. Both tax efficient passive investing in the public markets and then co-invest in the private markets. you describe a form of structural alpha or getting at excess return. I'm wondering if there are other aspects of structural alpha that you've identified in your investing. Be a great LP. Pick great managers. Not easy, but hopefully you do it really well. You can be top cortile. Number two, the co-investing that I described structural alpha. Number three, we do a bunch of this, which is seating emerging managers, helping to launch emerging managers. 20% of each of our platforms that we raise every two years are emerging managers. If you're going to lean in and do that, why not own a piece of it? You can't do that with a $10 million check. But if you have a manager who's going to spin out of somewhere, you can derisk it and we and an endowment, maybe another family office, show up with 150 million bucks and they're going to raise 250 or 300 and we're going to help them with introductions. In that point, can you own a piece of the GP for that value ad? I'm hesitant to make that a strategy where we're going to do eight seeds or we're going to do eight of these because I think that's more bespoke. If an opportunity comes up, many talented emerging GPS don't need that. They can raise the money on their own. You don't want to have the adverse selection. But where those things align, you can derisk it and you can own a piece of the GP going forward. That is where you can find more structural alpha. Under the lens of partnering with the best, what are some of the things that you found that help you identify the best compared to someone that is good or maybe even great? The math piece, which is statistically significant sample size, you better be doing this for a period of time and at very hard venture. There are many Mike Moritzas out there. You start there with a great track record, but then you come down to the other pieces. Integrity to me is so important. These are partnerships that are going to be longterm. It's a little bit like getting married. It's a long-term relationship in private equity or hopefully within public markets. You're going to be investor for 15, 20 years. The integrity of the firm, the quality of the people of the firm, the culture of the firm are all those things that are part of the mosaic that you need to build. But at the end of the day comes back to domain expertise, proven ability to capture inefficiencies, understanding investment process-wise, how you get to that. One of the challenges for me had been, okay, GP has a $5 million fund. They do great and they're focusing on two sectors. Now they're in hot demand. Next thing you know, it's a billion250. Now you're underwriting something very different. Fishing in a differentiz pond, writing bigger checks. They're going to add a sector. They're going to add more people. Now what you're underwriting is something very different than when you underwrote before with GPS who rationalize raising more money without being intellectually honest about it is a first indication that you should be thinking about heading for the exit. when you put that lens on how to organize the team to your operations here, I'd love to hear based on all of what you've seen in managers and the organizations you've worked with, how you thought about optimally organizing the investment effort at SCS. >> I tell a lot of the young men and women who I mentor, you need to think about your career like an investment. It's the most important investment you're going to make. Be thoughtful about every step along your career. Create optionality. I did a lot of work before joining so I knew the team but I am a believer in domain expertise. You can't tell the GP you want domain expertise and then not walk the walk. Domain expertise really matters from a structure here. We have 11 folks on our private investment team. We have 10 on our public markets team within privates. We have folks who focus on venture. We have folks who focus on buyouts. We have folks who focus on more of an opportunistic bucket and then real assets. Public equity is very similar. Domain expertise wins. So structurally here we are focused around that pattern recognition wise when a new equity long short manager comes in I want our team who has seen every equity long short manager for the last 15 years to be looking at that now we all need to evolve because things change times change you need to be thoughtful about that but I want that depth of knowledge and expertise I want to be like the GPS we back where we have an edge we can capture the inefficiency that structurally how we're organized to make sure that we're making the best decisions we can make. It doesn't mean they're all going to be right, but the best decisions we can make with the most information. When you have someone on your team that's the most knowledgeable about long short equity or venture capital, how do you bring in enough insight so that it is a team and you're getting the best of the insights that everybody has and not just that one person marching orders say yeah they want that manager because they know the most and that's the manager should make in the portfolio. >> It's such a great balance. You need to have a culture of people who want other opinions. the most knowledgeable person may have the strongest voice. That's the flaw in family offices where the system of checks and balances isn't there to try to optimize the decision. There has to be healthy debate around all of it. If people aren't pushing me on things that I'm supporting, I start worrying about wait a second, what are we missing? The senior members of the team have a bigger voice, but you need to have the checks and balances. I'm a big believer in investment committee and not an investment committee have won. Finding the environment where you can really encourage debate is important to making the best decisions. >> Over the course of a week, month, quarter, whatever the right cadence is, how have you set up the team specifically and what meetings you have that lead from initial research on an opportunity to a decision? >> The way our private team works is that we have two meetings a week. there the flow is so significant looking at funded sponsors search funds trying to canvas that part of the universe as well there's a lot of flow in addition to the larger and existing managers then the co-invest piece we've got to be connected we have two meetings a week those meetings are an hour an hour and a half in that way you stay connected the public's team meets once a week from a process standpoint that is where the flow happens oh had a good meeting last week with soand so we should put them on our list. They go on our list of something that we're serious about. Who drops off that list because what you want is a capacity constrained environment for investing. I want it with my GPS. I want it for us where you're having to make hard decisions about what GPS you're backing in the equity long short space, private space, co-investment space. The only way to do that is with constant communication in the meetings, vetting this. But at the same time, it's important that the team is out there meeting everybody. That's where it all starts. Sourcing to me, whether you're GP or an LP, too few LPs, take the GP mindset. As an LP, you better have a GP mindset and you better source. You better be out there finding opportunities. Peter Lacate, that's what he's done. He's gifted at building relationships. He's built relationships with some of the best investors in private equity because he's gifted at sourcing. He's gifted in relationships. He loves these people in many ways. That's his gift. For each of the team, you take 11 people on a private team and they're all out there networking, sourcing, you're going to see a lot of really interesting things. So, when you have a team that sees a lot that they like, how do you roll it up into your portfolio? >> It's an enjoyable process because it just ends up being best ideas. There are times where you do think about sizing, where you really love something, but you don't have much space. So, you may size it down back to having enough capital and not so much that you can't do small things. ends up being one of getting the best expression that you can in the portfolio. Those discussions I find are some of the most enjoyable discussions. You've got good manager A and really good manager B. How do they fit? Now, sometimes there's an exposure piece because we're very conscious about how much tech do we have, how much healthcare, where are we in terms of buyout, growth, equity, venture in our independent return bucket, how much equity long short do we have. That ends up being foundational. the ultimate ends up being the expression of trying to find the best managers. >> Using the lens you mentioned earlier of the importance of sector getting the trends right, I'd love to ask you about your opinion of where we are on the private markets. How are you looking at the opportunity set in private equity today? >> I am still a private equity bull. Inefficiencies continue to exist there that are much harder to find in the public markets. From a math standpoint, if you look back over any 10-year rolling period, privates outperformed publiclix by 580 basis points. Over three-ear rolling periods, 500 basis points. This last 3 years is one of the rare three-ear cycles that hasn't. It's been an extraordinary period. When you look at private equity, all the managers that we get to meet, the funded sponsors, the emerging managers, there are lots of inefficiencies out there. There are hundreds of thousands of companies that exist in various parts of this economy. in that inefficiencies exist. That is where the alpha is in private markets and the question is how do you access it on the bigger side there's some real challenges as a sector private needs to give money back to folks the DPI is not great one other byproduct of co-investing is from a Jer standpoint and velocity of capital standpoint co-investing is more attractive you don't have to go through a fund investment cycle private equity at the higher end there's just some real challenges in terms of getting capital back overall. I don't think there are as many efficiencies there. There's now this democratization of alts that I have real questions about in certain asset classes, particularly private equity and the expression of it in public markets. I'm a believer that inefficiencies will continue to exist in the lower end of the market. Now, I think venture is slightly different in that there are those handful of larger funds, crossover funds who continue to access many of the leading companies. With that becomes more franchise value. I believe in venture than in the biode space. Some of those firms that are bigger I still believe have an opportunity to perform given their access to the leading companies whether it's open AI anthropic cognition there's more opportunity for the larger venture funds frankly to continue perform than on the bio side. >> So as opposed to Harvard or Johnson family office you come to SCES is part of a business. The private wealth business has become really dynamic. would just love to get your sense of how you think from a competitive perspective both on the investment side and on the business side where you fit in with the dynamics that are playing out. It's been fascinating. I spent the first 13 years where we needed investors then HMC and working for Fidelity where you didn't need money. Now being back in an environment where you're raising money has been an interesting change and I've really enjoyed it. This is a great business, the RAIA business in itself. We're slightly different here at SCS because we focus on family offices. Our average client is a hund00 million. With that, they have the ultimate advantage of duration of capital. So, we can lean into alts. Not many folks are in our category. So, let's separate us for a moment where we do something very different from an investment standpoint. The broader market in some ways is similar to Fidelity. You start at the beginning of the year with a business that with just market growth on average, you're going to be up four to 5% per year, assuming fixed income is part of that equation. Maybe it's five or six. So your organic growth is just five 6% before you do anything. There'll be corrections over long periods of time. Number two, you add clients. That's highly accreative. Number three, you go inorganic and do M&A. Now you got a business that you can grow without doing anything too heroic. Call it 10 to 20% depending on how you're doing topline. Very attractive. Now you get the operating leverage in the business which is a low capital intensity high free cash flowing business. you're converting a lot of those growth dollars into free cash flow dollars. Hence, private equity was late to this game. Now, there are over I think 60 private equity backed roll-ups in the RIA space. It's a great business. People have figured out then the question becomes within that morass, how do you differentiate? >> How do you think about differentiating? >> For us, it's easy because we differentiate in the alts, in private equity, in the expression of publics, but even independent return. We view it as a fixed income replacement because it's not particularly tax efficient nor is fixed income. Therefore, we try and construct a portfolio that has a low beta to public equities of 0 2.3. There's multistrat in that. There's equity long short but certain flavors to rightly construct something that is highly uncorrelated. That is where you can really differentiate. If you're doing 6040 7030 the democrization of alts is what you're delivering to the masses. that is hard to differentiate from an investment standpoint. You have to have good relationships and stick your relationship with clients. At this end of the market, you can differentiate much more from an overall relationship standpoint, the value you can bring to families, and certainly from an investment standpoint. >> When you put the whole package together, the investment side, the other two pieces of the stool, how do SCES's loyal clients describe SCS? >> They start with aligned. It's the foundation of the firm. They also really value the relationships with the client-f facing folks. Number three is the investment platform. We're so lucky here. Many of our clients are GPS, public, private. I love the conversations I get to have with those folks around investing. I learn every time I have the conversation. Those are the pieces that for our clients they would highlight. as you came in to be the CIO as you said the last chapter of your career as part of a succession from the original founders what have you learned about succession that you use as a lens to evaluate money managers Steveagio who's a CIO before me extraordinary person he did a great job and I'm so grateful for all the things he did then when I joined the Johnson family Ned Johnson had done a lot stepping into a platform that he built was daunting he was one of the greatest entre entrepreneurs of the generation. Fidel is one of the greatest businesses created. They're a wonderful family. So that was daunting. This was less daunting, but very enjoyable. Once you become a big machine, the big Apollo, Blackston, Goldman's, those are machines. More in the boutique area, which I describe as it's more important. Certainly in the private equity realm, the succession of the leadership and ownership. I've seen that handled really well and really poorly. The most important thing for succession to be handled well is having founders who along the way share more than they should. Too many founders think it's them. It's ego. It's frankly hubris at times and they think it's all about them. I have the relationship with the LPS. I'm the one who raises money. I'm the one who built the track record. No. If you want to have an enduring business, you evolve from being an investment shop to a franchise. You better build a culture, a team, and a capability. But it starts with attracting, retaining the best talent, and that is by sharing more than you probably need to. >> As you joined in an asset size that feels like it's within that sweet spot for what you found, how do you think about the growth of the business over the next bunch of years? >> It's something our clients ask us about a lot and certainly very mindful of the growth because you want enough capital matter, but not so much you can't do the nimble, nichy things. We're not going to be doing a lot of M&A within our platform, but we will grow organically. I feel we've got a bunch of room to run. In some cases, there are benefits and there are concerns. On the concern side, it is, can you keep doing the small managers? Can you still write a $10 check into a great funded sponsor who came out of Summit Partners who you think is world class and has a great deal. You want to be able to do that and not get so big. You can't. On the good news side, things like seating GPS. If you blame someone, you'd write a check as an LP. If you write a bigger check and can own a piece of the GP, you have the option to do that. You also have the opportunity to lean into some deals that you really believe in. An area like oil and gas can be chunkier where you can write more meaningful co-investments. It allows you more flexibility. Writing a little bit bigger check in some cases creates a little bit better access, but you need to balance those two. So, it's imperfect. We can rationalize everything. You need to be intellectually honest about that. There are trade-offs to getting bigger and hopefully we'll do it at a pace that is consistent with allowing us to make really good decisions. But if we're $200 billion in three years, that would be a shock to me. In the time you've been here, what have been the biggest upside surprises and the biggest challenges that you might not have foreseen? >> Biggest upside surprise is access. I came from HMC. I had breakfast with Charlie Munger at his home in LA SCS. I knew about the platform. I knew about portfolio. I knew about the managers, but the access to co-investments in particular has so vastly exceeded my expectations. That's been fun. I think it's interesting when you have clients who have a lot of money, how responsive they are to the public market. Now, one of the benefits of having a diversified portfolio is you're not 7030. You're not 70% and so the market's down 20 on a certain day in April. It is fascinating that when you have the benefit of duration of capital, people still worry very much about the short term. Part of my job is to continue to provide guidance and comfort to people that we're thinking about the long term here. We're not traders. We're investors. We're not macro driven. We're macro aare trying to optimize for the long term. It's important to think about that. Don't react to short-term swings. If anything, marginally lean into that. What we do is bring one trunch forward if you're dollar cost averaging into Publix. It's not trying to turn too many dials or be too tactical. Is really to be more strategic. >> Lane, before I let you go, I want to make sure I get a chance to ask you a couple fun closing questions. >> Before we get to the closing questions, I want to tell you about one of our strategic investments. We've made a few and each are working on a product or service we think will be valuable to our community. One is Oldwell Labs or Owl. Owl is the very best software I've seen for allocators to find and track managers. And I've seen a lot of them. Trust me, it'll be worth the look. There's a link in the show notes so you can learn more. And here are those closing questions. What is your favorite hobby or activity outside of work and family? >> I love working out because I love pushing myself. If my daughter and I are going for a bike ride, which we do every Sunday in the summer in the Cape, we're going from where we live in West Fmouth to Woods Hole and we time. All my kids are wired the same way. If I get on Pelaton, I can't help but chase the leaderboard. I love to play hockey. I get to play hockey with people who are my age and these days with people who are younger, which is quite humbling. I love the competition. I love working hard. I love pushing myself. These days when I play with the young guys, I may only make one good play during the course of the skate, but it's fun. >> What was your first paid job and what did you learn from it? >> My first real paid job was catting. My parents are from Nova Scotia, Canada. Very small town. My dad loved to golf, so grew up golfing. They did have a caddy program. This is like a public course. For tournaments, we'd all caddy. You know, I got put on a bag of someone who everyone scared me to death. They were like, he's mean last year. Didn't even pay the person who cattied for him. I caddied for him. Turns out he was nice person. Number one, reputation doesn't always hold. Number two, if you're polite, thoughtful, respectful, and work hard, it generally works out. My parents instilled like great values. I came away from that. He ended up giving me a good tip and I end up staying connected with him and see him around the course thereafter. I went from being afraid of him to like really looking forward. That was a great lesson where I learned don't judge a book by its cover. Don't listen to everybody. What's the best advice you've ever received? >> My parents instilled in this and lived it. Education is the greatest gift you can give a child. That was number one. And they lived it. My dad went to school for 14 summers, get his undergraduate degree. My mom was a registered nurse, did not have the opportunity to have pursue a traditional education. They almost overvalued education, but viewed as the greatest gift. Hence, when I had the opportunity to go to Harvard, they leaned in. The second thing was humility. One comment has always stayed with me. If you need to tell someone how good you are, you're probably not that good. That's something that resonated. People want to give you your your resume all the time. >> How's your life turned out differently from how you expected it to? I never thought I'd have a career in finance. I feel so lucky every day professionally. I do something that I really enjoy and love, my family, and friends. It's been a great ride. I feel blessed that I've lived a life that I never thought was possible. >> Lane, last one. If the next 5 years are a chapter in your life, what's that chapter about? It >> starts with the kids as always. I've got two kids are still playing college sports. One who's launched, but continuing for the next 5 years, I like to stay engaged with them, get to every game I can. Seeing them get launched is number one. Number two is for this last chapter, having the opportunity to build something that I'm really proud of. I didn't really feel like I could do it Harvard or in the family office space. something that I feel is back to one of those enduring foundational platforms. That is going to be important. The last piece for me in the next five is making sure we have time for friends. We get so busy in life. You focus on family, career, but making sure we have time for friends. As time goes by, my parents are getting older. You're seeing death happen. It goes by fast. So, trying to enjoy that time on all fronts. >> Elaine, thanks so much for sharing your wisdom across these incredible experiences you've had. >> Ted, such a pleasure to be with you today. Thank you. Thanks for listening to the show. If you like what you heard, hop on our website at capitalallocators.com where you can access past shows, join our mailing list, and sign up for premium content. Have a good one and see you next time. All opinions expressed by TED and podcast guests are solely their own opinions and do not reflect the opinion of capital allocators or their firms. This podcast is forformational purposes only and should not be relied upon as a basis for investment decisions. Clients of capital allocators or podcast guests may maintain positions in securities discussed on this podcast. All investments include various risks including loss of capital. This recording also contains certain forward-looking statements that reflect the participants current views with respect to certain current and future events. These forward-looking statements are and will be subject to many risks, which may cause future events to be materially different from those forward-looking statements or anything implied therein. 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