January 22, 2025 |

GP Staking and Emerging Manager Success with Xponance Alternative Solutions

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About The Episode

In this episode of the *Dakota Live!* Podcast, Robert Morier interviews Marquette Chester, Head of Alternatives, and Michael A.B. Orr, Chief Investment Officer at Xponance Alternative Solutions (XAlts), a subsidiary of Xponance focused on GP stakes investing and emerging manager research.

Based in Philadelphia, Xponance Alternative Solutions specializes in private equity, private credit, and real assets, with a mission to support diverse and lower-middle-market managers. Marquette and Michael have developed a platform that blends innovative portfolio construction with a commitment to partnership and transparency.

Xponance’s focus on GP stakes investing allows allocators to gain exposure to management fees, carried interest, and balance sheet growth by taking equity stakes in asset management firms. Marquette and Michael discuss their approach to nurturing emerging managers and creating long-term value for investors.

Join Robert as they explore GP stakes investing, the importance of people-first strategies, and the role of diversity and innovation in alternatives. Learn about Xponance's partnership with Investcorp, their vision for private markets, and how they identify and support emerging managers.

Whether you're an institutional investor or simply curious about alternatives, this episode offers a deep dive into a key investment segment.

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Transcript

Robert Morier: Welcome to the Dakota Live! Podcast. I'm your host, Robert Morier. The goal of this podcast is to help you better know the people behind investment decisions. We introduce you to chief investment officers, manager research professionals, and other industry leaders to help you sell in between the lines and better understand the investment sales ecosystem. If you're not familiar with Dakota and our Dakota Live! content, please check out our website at dakota.com. Before we get started, I need to read a brief disclosure. This content is provided for informational purposes and should not be relied upon as recommendations or advice about investing in securities. All investments involve risk and may lose money. Dakota does not guarantee the accuracy of any of the information provided by the speaker, who is not affiliated with Dakota. Not a solicitation, testimonial, or an endorsement by Dakota or its affiliates. Nothing herein is intended to indicate approval, support, or recommendation of the investment advisor or its supervised persons by Dakota. Today's episode is brought to you by Dakota Marketplace. Are you tired of constantly jumping between multiple databases and channels to find the right investment opportunities? Introducing Dakota Marketplace, the comprehensive institutional and intermediary database built by fundraisers for fundraisers. With Dakota Marketplace, you'll have access to all channels and asset classes in one place, saving you time and streamlining your fundraising process. Say goodbye to the frustration of searching through multiple databases and say hello to a seamless and efficient fundraising experience. Sign up now and see the difference Dakota Marketplace can make for you. Visit dakotamarketplace.com today.

Well, I am thrilled to introduce our audience today to Marquette Chester, and Michael AB Orr of Xponance Alts, a subsidiary of Xponance. Marquette, Michael, welcome to the show. Great to see you.

Michael A. B. Orr: Thank you, Rob.

Marquette Chester: Thank you.

Robert Morier: I'm going to call you AB through this episode, unless you prefer anything else.

Michael A. B. Orr: Yeah, AB works.

Robert Morier: I appreciate that. Thanks, AB. We have a lot of questions to ask you both. Before we do, I'm going to read your biographies for the audience. Marquette Chester is senior managing director of Xponance Alternative Solutions. He brings over 35 years of institutional experience with 20 years in private equity. Prior to...

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Robert Morier: Welcome to the Dakota Live! Podcast. I'm your host, Robert Morier. The goal of this podcast is to help you better know the people behind investment decisions. We introduce you to chief investment officers, manager research professionals, and other industry leaders to help you sell in between the lines and better understand the investment sales ecosystem. If you're not familiar with Dakota and our Dakota Live! content, please check out our website at dakota.com. Before we get started, I need to read a brief disclosure. This content is provided for informational purposes and should not be relied upon as recommendations or advice about investing in securities. All investments involve risk and may lose money. Dakota does not guarantee the accuracy of any of the information provided by the speaker, who is not affiliated with Dakota. Not a solicitation, testimonial, or an endorsement by Dakota or its affiliates. Nothing herein is intended to indicate approval, support, or recommendation of the investment advisor or its supervised persons by Dakota. Today's episode is brought to you by Dakota Marketplace. Are you tired of constantly jumping between multiple databases and channels to find the right investment opportunities? Introducing Dakota Marketplace, the comprehensive institutional and intermediary database built by fundraisers for fundraisers. With Dakota Marketplace, you'll have access to all channels and asset classes in one place, saving you time and streamlining your fundraising process. Say goodbye to the frustration of searching through multiple databases and say hello to a seamless and efficient fundraising experience. Sign up now and see the difference Dakota Marketplace can make for you. Visit dakotamarketplace.com today.

Well, I am thrilled to introduce our audience today to Marquette Chester, and Michael AB Orr of Xponance Alts, a subsidiary of Xponance. Marquette, Michael, welcome to the show. Great to see you.

Michael A. B. Orr: Thank you, Rob.

Marquette Chester: Thank you.

Robert Morier: I'm going to call you AB through this episode, unless you prefer anything else.

Michael A. B. Orr: Yeah, AB works.

Robert Morier: I appreciate that. Thanks, AB. We have a lot of questions to ask you both. Before we do, I'm going to read your biographies for the audience. Marquette Chester is senior managing director of Xponance Alternative Solutions. He brings over 35 years of institutional experience with 20 years in private equity. Prior to Xponance, he served as principal and managing director for the investor relations and product development, Investco Private Capital Group, and at WL Ross & Company. Marquette joined Investco in 2000 and was named the head of investor relations for the private capital platform in 2009. Prior to that role, he was managing director of institutional sales and service, responsible for relationship management and new business development with US public funds and other institutional investors. Marquette earned his AB in Economics from Duke University as a leading voice in the diverse investment community. Marquette was previously chairman of the National Association of Securities Professionals, NASP, and was chairman of the NASP Foundation. He serves on the advisory boards of Disciplina Capital, Provence Healthcare LLC, Vanguard Sports Group, and TriStar Global Real Estate.

Michael AB Orr serves as managing director and chief investment officer of Alternatives. He brings over 25 years of experience across the financial services industry. Most recently, AB was senior vice president and senior client investment officer in the not-for-profit, outsourced CIO practice of Northern Trust Asset Management. He previously was the executive director of Alternative Investments at Providence St Joseph Health, the third largest not-for-profit healthcare system in the United States. AB had lead authority for all alternative investments for Providence, inclusive of private equity, debt, venture capital, hedge funds, and real estate. He was credited with developing and building out the firm's private equity program. As part of this position, he was also a member of the Limited Partner Advisory Committee of more than 15 external private asset funds. In addition, he held several company leadership roles, serving as a member of both the executive investment committee and valuation committee for Providence Ventures, the organization's venture capital affiliate, and as a member of Providence's socially responsible investment committee. Prior to Providence, he gained more than 15 years of M&A advisory and financing experience via investment banking, including senior roles at JP Morgan, Bank of America, and HSBC. AB earned a Bachelor of Science Degree in Economics from the Wharton School at the University of Pennsylvania in Philadelphia, and an MBA from the Simon Business School at the University of Rochester via a full tuition, fellowship awarded by the Consortium for Graduate Study in Management. Additionally, AB is a member of the strategic advisory board of Investcorp Strategic Capital Group. He formerly served on the board of directors for JP Morgan's FCS Corporation, and on the client advisory board for Voya Investment Management.

I want to say to you both, congratulations on all your success and congratulations on XAlts to date. I know it was a big lift when you came on board, Marquette, so thank you for being here and sharing the progress that you've made.

Marquette Chester: We really appreciate being here.

Robert Morier: Thank you. Well, start with the beginning, if you don't mind. We always like to ask our guests. Marquette, I know you got to go a little further back, but that's OK. We'll start with you. What was that journey like if you think about your time at Duke University and then going into this field of finance? I teach now and have a lot of students who are interested in that career path.

Marquette Chester: It's been almost 40 years now, and so I'll give you the CliffsNotes version of it. I started out at Duke University as an economics major. I didn't know what I wanted to do with that. I got exposed to the Duke Management Company, which was then just a part of the undergraduate program at school. And then started doing some work with the career office and finally decided that financial services is where I wanted to be. Unfortunately, my first entry was through a Merrill Lynch program in which I was going to be a, quote unquote, "stockbroker." I did extremely well. People received me well. It wasn't until my manager asked me for 100 names of people that I knew that had $10,000 of disposable income that I ran into the inevitable wall. I gave the book back to him less than 20 minutes later, he said oh, that's great. You came up with these names pretty quickly. I said, no, I don't know 10 people with $10,000 of real income, no less, 100 with $10,000 of disposable. And therefore, I knew that the retail side of the business wasn't going to be for me because it really was about friends and family. And I got into the business largely through the insurance side. Fast forward, a decade or two, if you will, I decided that I really enjoy being around innovative and creative people. I've helped start a number of businesses along the way. NCM Capital was probably my first, which is where I got a chance to meet Tina Byles Williams, and we can talk about that later. I got married; we had a few kids. I decided that I wanted to take a different track. I then wound up at a very large institutional player. But all along the way, Rob, I was very much focused on, how do I differentiate what it is I'm doing to those that need it. And on an institutional basis, largely US public funds, it was about listening more than talking, and it was about creating creative solutions or creating solutions that allowed them to understand it. It wasn't just a black box but really providing a lot of transparency. It has served me well, and so I wound up spending 20 years of my career at Investco and helping them go from a very small private equity presence to eventually a fairly substantial one. And then I left in January of 2020 to pursue what I thought was my retirement. Unfortunately, COVID hit. So, talking to my friends and, again, Tina Byles Williams and I crossed paths talking about ideas and concepts. And I'm here now.

Robert Morier: AB, how about yourself? Tell us about your journey.

Michael A. B. Orr: Well, I guess the journey began for going back to school. I went to undergrad here in the wonderful city of Philadelphia at the Wharton School and was a finance major. So, it was really, really a quick path to where I wanted to go versus what I was studying. The beauty of it was I was able to begin in the world of investment banking. And investment banking as an analyst, I was able to go from an analyst to a managing director, going across various firms, small investment banks, large multinational investment banks, and the like. But the key really was getting the basics of understanding companies, M&A, a lot of M&A work, specifically within M&A groups, and really understanding, what is it and how is it that they make money and that they interact relative to the world of transactions. Relative to private equity, I spent time, we had a group called the transaction development group at JP Morgan. It was a specific piece of M&A where we focused on the private equity world, and we came up with solutions for them regardless to add-ons to their portfolio companies relative to assisting them in new investments and also selling and exiting portfolio companies. That was really just my foray into the world of private equity. Understanding it, why they were doing it, why particular deals were done. And it permitted me this wonderful opportunity, I'd say, by understanding private equity, by understanding venture capital, by understanding alternative assets, I was able to then transition to an allocator later in life. And I did this at Providence St. Joseph Health, which is based right outside of Seattle in Renton, Washington. As the third largest healthcare provider, not for profit healthcare provider in the United States, my role was to head all of the alternative investments. And that is where I received additional exposure to not only just the world of private equity and venture capital, but now I had the opportunity to gain exposure to GP investments. So, as an allocator, that's where I learned GP investments, made a number of investments there, or allocations to those who had the funds who were doing so. And it permitted me, really, to see the advantages of doing it. And I was at Providence, I left, I went to be an OCIO provider at Northern Trust. And there at Northern Trust, again, I had more exposure to the world of private assets in addition to traditional investments. But had the opportunity to become a board member or an advisory board member for a GP staking strategy at Investcorp, their strategic capital group. And I remain in that role. And it was during this time where I met Tina Byles Williams, who was the founder of Xponance. And she mentioned that she was going to start this strategy at Xponance. And so, one thing led to another, and a couple of years later, I found myself working with her.

Robert Morier: Back in Philadelphia, what was that decision process like? It's a big move. You're at Northern Trust. You're working with their not-for-profit segment, which is interesting. A lot of those investors are heavily allocated towards alternatives. Tina and the team at Xponance have a wonderful reputation. And it sounds like you were calling each other. But when you ultimately decided to make the move, what were the criteria that you were looking for that made that possible?

Michael A. B. Orr: I think one was, I needed to understand the firm Xponance as a whole, and what and how they were going to approach the space. I had an extensive conversation with my colleague partner, Marquette Chester, in addition to Tina, at that time. And was convinced that their strategy was one which was differentiated in regard to doing GP stakes or GP investments in a lower middle market, as opposed to competing with some of the larger firms. And what I mean by that is that the lower middle market was underserved. And really, there's great opportunity there. And understanding that was key. I think the other part of not only just understanding the strategy and advantages that Xponance had, was really understanding the overall industry. And so, what do I mean by that is very simple. The GP investment industry or GP staking industry is one where there's great advantage. And to see the growth of the industry from when I first invested as an allocator to where it was at the time when I joined Xponance was something which was very, not only just rewarding, but very telling in regard to the future prospects of the industry. So, the industry continues to grow, continues to grow largely as in alignment with the overall private asset industry, but also continues to grow because there continues to be more receptivity. And that means that as it's growing as a percentage and growing even faster than the private asset industry overall. So long story short, my time to come over and the decision was based first on Xponance as a firm, their strategy, the actual GP investment industry, the growth and opportunities there. And realistically, I had to have courage. Anytime that you are making a move in your career, it is something which you have to stop. I spoke to the missus, as a man of faith, I prayed about it and decided that it was the best thing.

Robert Morier: This is required listening for my students. So unfortunately, whether they like it or not, they have to listen to me in the classroom as well as on this podcast. Most of them aren't going to be familiar with GP stake investing, and even though it has grown substantially, it is still being introduced to a lot of LPs for the first time. Would you mind taking a step back and just explaining to us what the premise of the investment opportunity is, and why LPs should be looking at this as an opportunity for investment?

Michael A. B. Orr: GP stakes or GP stake investments are investments where you are… Xponance, in this case, as an outsider is investing in the firm and the GP, the general partnership, of another asset manager. As such, we receive a percentage of equity ownership or percentage of cash flows, which results in management fees, percentage of ownership management fees, carried interest, and a balance sheet of these firms. We are not investing in the funds directly, but because we're investing in the firms and because those funds generate cash flow for the firms, we receive the benefit of that. It is a great way to really share in the overall profits and growth of the private equity industry, and specifically the managers in which you're investing, and it really provides, I would say if you're looking from an LP perspective, there's a couple of things. The first thing is the differentiated cash flow stream or revenue stream. And what I mean by that is because you are getting both management fees and carried interest, in addition to the balance sheet or GP commitment, that provides you with the opportunity, one, as an LP to assist in mitigating the j-curve. And so, you're getting fees almost immediately via your share of management fees. In addition to that, you are receiving yield. And yield, when the portfolio is mature, would be roughly around 10% yield, which you are going to receive on an annual basis. And so, this also lessens the risk of the investment because you are receiving capital, you are receiving a yield as you're moving forward. And if you're thinking of a downside case, this really puts a floor in a downside case, which is higher than that without this cash flow streams. In addition to that, you are receiving the reality of diversification, diversification relative to different strategies. So, we invest across the strategies of private equity, private credit, real estate, and infrastructure. And so, you have different strategies. And then lastly, I would just add, you also have vintage year mitigation. So, the risk of investing now and whatever interest rates are, valuations are, inflation may be, is mitigated because you receive cash flows because these firms have funds which have invested over the last, say, decade historically. And you are going to look 7, 8, 10 years forward. So that really is helpful relative to mitigating vintage year risk in your portfolio.

And then just one other thing, I know I said lastly, but one other thing is that we plan an exit for all of our investments. And that is key. And so, in the lower middle market where we go in and negotiate and structure our investments, there is an exit. So that permits an LP to understand that it is not permanent capital, that they will receive the return that is desired. We've articulated and we underwrite everything for three times MOIC that they will receive that upon conclusion of our liquidation of our funds.

Robert Morier: Thank you for that masterclass. I will absolutely clip that and send it to my students. That was an excellent description. How large is the asset class and what are you expecting in terms of growth? GP staking, kind of private credit is. it feels like it's everywhere. A lot of people are talking about… whether they're doing it or not is a different story, but it seems like there's a lot of talk on the conference circuits, in those discussions between LPs about the benefits of the asset class. But how large is it?

Marquette Chester: One of the things about the industry, about the allocators, GP investing has kind of had a bit of a spectrum. LPs in private markets, one alignment of interests. They want you to eat from the same trough that they're eating from. So, they're okay with you owning investments called GP interest in a fund. And many times, when they first heard about it, they were concerned like, what is this somebody buying some piece of your business? We want you to be focused on, and we want everybody in the business to be focused on delivering alpha to us in this fund structure. So, I think, initially, there was some apprehension about GP stakes, and there continues to be. In some allocators' mind, it's not the alignment of interest that they want. But then part of the reason why we got so excited about working with AB was he told a story about he was an allocator, and he had all these private equity managers, and he kept getting these notices about the very large firms. We're doing these GP stakes, and these are the same firms he trusted to make investments on behalf of Providence St Joe's. So, he started to look into, why are these folks doing this? What is it that they find is advantageous for them? And I think that's probably a good point for me to turn it back to him to tell you a little bit about the marketplace, but it has changed over the last 4 or 5 years. It's changing very quickly. We now have limited partners that are very interested in not only investing in the space but promoting it as a way in which to increase operating efficiency and subsequently grow enterprise value of their managers.

Michael A. B. Orr: I think… a couple of things just to highlight. One is the industry indeed has changed from its infancy to now. In its infancy, we had a lot more exposure to hedge funds and vehicles where, because they weren't closed end funds, the money could disappear. As a whole, the industry learned from the experiences of the early investments. And it has become a lot more buttoned-up and the track record of the industry has grown. There have been a great amount of exits through various means within the industry. There has been a lot more entrants in the industry. And that by itself should tell any outsider that it has to be a welcoming opportunity as more firms and funds specific for GP investments have risen. The other point you mentioned relative to size. I mean, there's estimates in the marketplace. The marketplace has been growing steadily at around a compounded annual growth rate of 10% to 12%. And there are those who have estimated that the market will reach roughly $750 billion by 2025, at the end of 2025. So, it continues to grow. And as I mentioned before, it grows because of the overall private assets continue to grow as a whole. And just how that investors are receiving GP investments or the growth of GP investments, the viewpoint relative to GDP investments. That continues to grow and so it becomes more received within the general investment arena.

Robert Morier: Marquette, I hear why Tina and Xponance were excited about this particular area of the market, but why Investcorp? So, when you think about those conversations early on when you were transitioning to Xponance, why that specific partnership?

Marquette Chester: Well, Xponance as you well know, Rob, has a legacy. I call it a DNA of supporting diverse and emerging firms. I hate to use this vernacular, but it's true. Size matters. So, the concept of doing private markets and doing private markets in such a way that would be consistent with the DNA of Xponance became a discussion around what is the parallel to what we're doing in the public markets that we can leverage with the right resources and the right people. And so, GP investing became one of them, because we recognize phenomenal growth rate in diverse and women-led businesses in financial services. Tremendous growth of successful firms in the lower middle market. But when we started looking around and thinking about it, those managers didn't have the same resources accessible as some of the larger firms were. And we understand why. If you're going to provide GP staking, you want to provide it to the larger firms. Plus, there's no level of connectivity for most of those managers in the lower middle market. So, for Tina and me, and ultimately for AB, it was about how do we want to be the most responsible to those limited partners that invest in us? And the best way to do it was to find someone that had an attitude, a philosophy, and a culture that was more in line with us. Now, Investcorp had been in the game for a minute, but they had decided having nothing to do with us, that they were going to focus on the lower middle market. Well, by definition, their scope of opportunities included a lot of diverse and women-led businesses because that's where they are. So, we decided that we wanted to focus in that space, and we started to look at how we could both engineer a return consistent with what AB said before, but three times MOIC, and 18% to 20% IRR in a partnership with them that created them as a subadvisor to us, that we control 100% of the capital in our portfolio. They were OK with that. They understood that we were trying to grow a business, not just do some type of transaction. We found that having access to firms that have somewhere between, let's call it, 3/4 of a billion to about $4 or $5 billion of AUM was how we got the yield that AB was talking about before. So, what caused us to work with Investcorp was the people, the philosophy that we shared, the culture that we have. We didn't have to ask them, show us your diverse manager list. We simply looked at where they were talking about investing, and we found diverse managers in that process, and some of them in which we decided to co-invest in. I think the final point about the relationship with Investcorp for us was very simply this. We knew we had to grow our own business. And in order to do that, we need to make sure that we put performance and transparency at the forefront of everything we were doing. And that's what we found in Investcorp, was a good partner to do that with initially as we look to grow the platform out and bring additional resources to bear.

Robert Morier: When you look at the competitive landscape in this particular area of the market today, what is it about Xponance's history in multi-manager selection and strategies, as well as that partnership that differentiates you?

Marquette Chester: This is about to become a commercial about Tina Byles Williams. So just press the… let's press the pause button here. Listen, Tina and I mentioned earlier in my comments, Tina was the Chief Investment Officer for the city of Philadelphia. And in that role many years ago, she was an innovator. In looking at firms candidly, we talk about it that they were emerging and, well, everybody was emerging then. Because we were coming out of a system in… I'm sorry, Tina… in the early '80s and late '80s, where institutional investment advisory was coming out of the banking system. But she went a step further and she said, let me find solutions that are going to be consistent with my expectations as an allocator. And some of those people looked very different than what was coming out of the banks, or people that were coming out of the banks to replicate that in separate businesses. And so, we wanted to try to find a way to continue that attitude she's had now for more than 27 years of finding the next new talent. You can't find the new talent if you're fishing in a pool with all of the existing talent that has been around doing the same thing the same way for a very long time, probably doing it very effectively. There are some rules about understanding the integrity of the people. It's number one with us. If you can have the greatest product in the world, but if we can't relate to you, if we can't talk to you about your business and about the market in such a way that we are comfortable, it becomes a challenge for us. That's very consistent with what Xponance has been doing for a very, very long time. We also want to make sure that we're being fair and open and consistent. And again, in the public markets, that's what they've done. Now, what does that buy AB and I to your point? It buys us the ability to leverage our own personal relationships, our own personal integrity. But it also lets people understand that this is an organization for more than a quarter century, has been about listening to people that otherwise didn't have an audience. Now, some people shouldn't have an audience. But there's a way in which you even deal with them that causes some of them to come back to you later when they've given more thought, put more work in, and candidly see you not as a threat but as a partner. So that's what we're leveraging. We're leveraging off the legacy of a woman that opened the doors years ago to new ideas and different people, because she had a job to do. Our job is to do the same thing almost 30 years later.

Robert Morier: My kids can't believe I have an audience, so I recognize and understand that very, very, very completely. So now, the business is in place, the partnership is there. For the audience who's listening, AB has a blank sheet of paper in front of him. So, when you had that blank sheet of paper in front of you then you had to build the team. So, let's start with the investment side. So, the folks that are responsible for sourcing those managers, finding the talent because you're right, if they get a microphone, it might be a little easier to find them. But emerging manager selection, it's a challenge. It's having to go to places that maybe others aren't ready or have the experience to do it. So, if you wouldn't mind taking us back to that blank sheet of paper, how is the team structured today?

Michael A. B. Orr: I'll answer the structure question in alignment with the question of sourcing. And I think, first of all, that sourcing is not any one person's responsibility at Xponance. We get leads and opportunities are brought to us by literally almost everyone across the firm, whether they know someone from personal life going to school with them, having worked with them, whether they are aware of situations that they have read about or researched, to those opportunities where someone gives them a call, inbounds. Everyone plays a role in regard to sourcing and has played a role in regard to sourcing. We, as a firm, when there are particular conferences or there are any speeches and the like where we attend, we figure out who was going and make sure that those who are going come back with the report. Very big relative to CRM. And so, everyone is aware of opportunities and all the connectivity that we can have with a particular person or firm is at its highest. And so, I just wanted to say that. So, the blank piece of paper, when we were building out the team and the firm, really started from the top, and it started with just the commitment from Tina Byles Williams, the commitment from Marquette, that we were going to have a collective effort to going out and seeking opportunities within the marketplace. Marquette mentioned that the lower middle market generally is overlooked and underserved. One of the best things that we did relative to that was to, first, from a sourcing standpoint, was to build our database. And our database in and of itself is hundreds of names which have been collected over time. And what I mean by over time is now, close to 4 years almost that we have been in existence, on average each year, there's roughly even if you say, 10 a month. So anywhere from 100 to 150 a year of individuals or firms, which we see. And when I say we, again, it's not just Marquette and me. It is across Xponance and these referrals are sent in. We have a very robust marketing distribution team, and they see a lot of opportunities as well. So, when you're thinking of the team from a sourcing standpoint, it includes literally everyone. From an investment standpoint, as Marquette mentioned, we work with our subadvisor, Investcorp, and they have provided us with resources to augment our team. And that has really led to one best practice that has been very important relative to how we operate across the industry. And also, when you're thinking about our investment team, we didn't start from zero. And what I mean by that is, although this page is blank, or the page which was given was blank, we had the opportunity to lean in with our subadvisor to understand how they approach the marketplace, to take a lot of the lessons learned from them, and thus not having to really start from a blank sheet, but more so from a sheet where collectively, Marquette bring his past experiences, I bring my past experiences, Tina, the rest of the firm in addition to our subadvisor. So that permitted us to really have a sheet, which we were looking at a lot of different opportunities, a lot of different backgrounds, a lot of different ways to do it, and then deciding what was the best one to move forward with.

Marquette Chester: I think it's also important to note that structurally, we've done two things that are very important and very differentiated, I think, in the marketplace. First and foremost, Tina and I and AB have agreed that whatever we invest in, we have to all agree to it. It's got to be unanimous consent. So, if one of us has a problem, then we all have a problem. Now, we challenge AB to cover some of those problems throughout the process. But if he has a concern or we have a concern, we won't do it. And therefore, we think it creates the right type of balance in our organization. Secondly, we've recognized that because we're in a unique part of the marketplace, we cannot attempt to, for lack of better terms, reach beyond our resources. And so, we've decided we want to have a diversified portfolio of somewhere between 8 and 10 names. And so, if you narrow your focus that way and you commit to having everybody be on the same page about making a decision, then you tend to build a very well-diversified portfolio of high-achieving managers with very specific goals that we can help them to achieve. And so, it's not 200 managers we've got to try to find money for. It's not even 25 or 30. It's somewhere around a dozen at the most. And they must all make sense. They must… we cannot have duplication. We cannot have an unintentional risk in the portfolio by having 2 or 3 firms doing the exact same thing. So that narrow focus and that sense of everybody having a voice, we think that is something, again, that differentiates us.

Robert Morier: AB, Marquette mentioned the importance of people earlier on in that conversation. So, when you're thinking about those 8 to 10 investments in addition to the people, what are some of the other key criteria that you're looking for during that sourcing process?

Michael A. B. Orr: We lead with people first. We believe that we are investing in individuals. Yes, these individuals have a strategy. Yes, these individuals have a desired return for their portfolio. But we invest in people. And so, if you're thinking about particular strategies across the spectrum, what sets one apart from the other, well, you can look at track record. You can look at growth, of the funds over funds. But you have to begin with people. And so, I just want to say that because that's very important. So, starting with individuals, we usually have a process which takes some getting-to-know-you process for about a year to a year and a half before an investment is actually made. And that's very important because it allows us to have a lot of proof points relative to our initial analysis. And so, we start off with people, like the people we believe in, the people and of themselves. We like the strategy that they are articulating. And we think that strategy, they're able to execute it to get the returns that they have shared. Got it. And now we start putting the rungs on the ladder. And over that, as I mentioned, a year and a half, now we're looking at how they are executing, where we stop, we work with them on their 10-year business plan. Is it one which we can agree with? Where is there disagreement? Why are they doing X versus Y? Understanding their 10-year business plan, how they plan to grow their business, and how we can add value. We don't want to, and we don't view ourselves as a capital provider. If we were only providing capital, my partner says often, there are places to get it where it will be cheaper. We look at ourselves as, yes, we're providing capital, but we're also providing advisory services, assisting you in the goals and objectives that you have for your business. So that means that we have to understand them. And so that's the first and agree with them. And so, once we understand and agree with them, we'll fine tune a little. We will assist them with what we see in the industry, where other strategies like them have faltered, and where those strategies which have done particularly well and why. And we will provide those tidbits. We'll provide them with that guidance relative how to move forward. But the key is that we have to now see it. So, you can put anything on paper. And because we're not investing right away, we don't have to believe right away. But as they start to prove themselves, as they start to see. So, for instance, if they're going to expand their team and they talk about a hire and they sometimes will include us within their hiring process. We will be part of that. Other times not. But when you see the person come in and you see the caliber of individuals and how they're able to attract people to the firm, how they're able to integrate them, say, OK, noted. When they're starting a strategy and you're able to see they can grow the strategy over that year or year and a half. Understood. And obviously when they're fundraising and they're going out within the marketplace. And we take that time. It's a lot of due diligence that we do where we get to know not only them and the team, but also the viewpoints of other stakeholders. So, we'll speak to their LPs, we'll speak to other vendors and people who we know who know them. And that part of differentiating and understanding the particular, not just, again, the individuals, but the business, the operations, and seeing the growth of the firm, is very important for us. And so, once we have our initial proof points, it gets us… well, I'll speak for myself… gets me more excited in regard to the opportunity. Now, I see the opportunity moving along in a path which I thought it would be. And it's one where now I can continue to get behind and continue to pound the table at our IC meeting because everything is moving according to plan.

Robert Morier: Marquette, this sounds very reminiscent of the long only business, so that underwriting process, which can take 12 to 18 months.

Marquette Chester: Yes.

Robert Morier: Part of that underwriting process also supplements the needs of the asset managers, the needs of the GP, particularly back-office needs. Are you doing that same type of advisory work? Once you've identified the team, the strategy, you know that the right people, they can make the right investment decisions, but there needs to be a stronger foundation. What does that process look like for the strategy?

Marquette Chester: On the public side of our business, oftentimes, Xponance is the first or second or third institutional investor in that firm. And therefore, the infrastructure that you're going to put that institutional weight on needs to be good. Oftentimes, AB and I, in the private side, we're dealing with firms been around for 7, 8, 9, 10 years. So, they already have a structure in place. So, it's not as much about making sure that structure that they have already is good for the business that they're already in. We're not trying to fix broken companies, but we are curious to know, what is the infrastructure projections for how you plan on growing the business going forward. Some of these firms are making that transition from where they used to use a lot of outsourcing, and now they're trying to build a culture, and they need to bring some of that work back in-house house so they can produce an outcome that they can't get using a third party. So great history here and great to have you know a lot about us. But I think that what we're doing in the private market side is we'll look at emerging firms. We'll look at first time funds. That's something that most people in our space won't do. And so, we do have to look at things like what is the structure look like. But the opportunity for us has been with seasoned professionals who are coming out of very large institutions. And when they set their shops up, they know what it needs. Then it just becomes a process of let's make sure what is this infrastructure need to be longer term, and can we agree on how to build that together.

Robert Morier: That's an important distinction. Thank you for sharing that. Also, an interesting point, I think something that gets overlooked often is that inflection point when an asset manager does start bringing things back in-house. And there's a checklist. OK, we need a COO, we need a human resources officer, we need a salesperson. Very difficult hires to get right.

Marquette Chester: To get right.

Robert Morier: Easy to get them in. But to keep them and sustain one person, or maybe just a few over time, very challenging.

Marquette Chester: One of the most significant ones piece of free advice, be careful. Think about how much you paid for it. One of the most significant growth elements for us is what do you do with that chief compliance officer designation that's currently normally being assigned directly to the CEO of the firm, with some third parties kind of providing the back-office support. Well, as investors in the future of the business, we're like, we don't need you trying to figure out what the current SEC provisions are. We need you thinking about with us how to grow the business. So, who's going to be our chief compliance officer? And I can just tell you, historically, particularly in the last 10 to 12 years, who that person is and how you service that resource can have a dynamic impact on how well your business grows or not.

Robert Morier: I've seen over my career, chief compliance officers that have come from client backgrounds, that have come from legal backgrounds. So, knowing exactly what the role/responsibilities are and the type of person you want in that role is very important. Good advice. Thank you for sharing that. So, when you think about must-haves, we've talked about people, we've talked about transparency. What are those red flags? So, something that comes up and you just say, let's pass on this one. Let's not take the time because time is so important, particularly when you are in this position where you're trying to make investments on behalf of LPs, on behalf of other investors.

Marquette Chester: Time and trust, I mean, AB has more. For me, it's time and trust. If it takes too much time or you're not willing to commit enough time to it, and then I started to sense that we're talking about things, but we're really talking at each other instead of to each other, I don't have a big enough palate to try to figure you out. We need to be talking about what it is we're figuring out together.

Michael A. B. Orr: You have to be able to convince me that there is something there. And what do I mean by that? FOMO is real. And when you get to that point when you believe that, hey, this is going to be a great entity and they have their stuff together, then you want to be a part of it. Just as much as they want you to be a part of it, you want to be a part of it as well. And when that occurs, I think it's like magic. So, for things to look out for. Those who don't really understand exactly what they're getting into, who conceptually have an understanding of business but haven't really done it before but haven't done the work such that they can convince you that they're going to be successful. Because when you are partnering, coming alongside anyone in GP investments, first of all, it's anywhere from 7 to 10 years. So that's a pretty long time. And you have to make sure that they are going to be successful in doing it, that they can operate this business, that they can understand regulations, that they know how to bring people on, as you mentioned. So, changing from outsourcing to now bringing it in-house, that they understand what that entails. So, it's a very big thing. And as you're going through their plan, that in their head, and previously with others, they have discussed the details that you're bringing up. You don't want to uncover for the first time when they're looking for a partner for investment that they didn't know something. So just for them to be well-researched. And don't get me wrong, there are those who necessarily didn't show well initially and came back a year later, and it was a whole different enterprise. So, we've seen that. But I think that preparedness, that readiness is key, and to be able to convince that this is something formidable going forward.

Robert Morier: One of the luxuries of being the host is that I get to play devil's advocate. So, these are, I'm sure, some of the questions that you get when you are talking about your business to potential investors. And one of them is people. We've talked a lot about people, and we've had a lot of guests on the show and allocators, outsource CIOs, consultants, and it usually starts with people as well. So how do you distinguish the way that you approach an investor? How do you do that assessment? Do you take it as far as behavioral assessments? Do you do background checks? Or is it really a need to know the person, its reference checks, it's checking all of those kinds of qualitative boxes? How do you figure out the person is right?

Marquette Chester: Given the fact that we're focusing on a very small system pool of candidates of people, we need to spend time with them. We can take tests. We can hire somebody to go figure out what they want to do. But for Tina, AB, and I to sit down and say, hey, is this somebody we want to be in business with? That takes time. You can't… you can't… because again, this is not a financial… this is not a, I'm putting money in, and I want to return. So, once I put my money in, I'm just going to sit and wait on return. As I'm very prone to telling people, they've heard me say this a lot. AB promises a lot of my time before we even make an investment. We got to help them to do this. We need to figure out this. All those interactions back and forth are opportunities for us to understand who they are and more importantly, as important, it's an opportunity for them to know who we are. So, number one on the list, you got to spend the time together. Number two, you must… and I'm sorry… trust but verify. So, once you think you've got everything you need, go prove it. Because this is not my money or AB's money or Tina's money, these are our limited partners money. And we do a fairly extensive work with third parties to validate what we think is there. But we don't spend time, energy, and money on things we're not sure about. By the time we start doing that, we've spent a significant amount of time, probably no less than 6 months, probably more than a year. And then that last 6 to 8 months of the process is the due diligence it takes to get from an agreement to a contract.

Robert Morier: Can we talk a little bit about portfolio construction? So, once you've identified a manager that you want to make an investment in, what does that sizing process look like?

Michael A. B. Orr: We believe our portfolio will mimic that of the private asset world where we will have over 50% in the world of buyout. And again, we have our 4 strategies, well, the other 3 will comprise the remaining. Of that, we think private credit will be a greater piece, especially recently. And the rest is real assets split between real estate and infrastructure. The key when we're thinking about construction, I say, it's really two things. One, as I mentioned, it's going to mimic or be very similar to what the industry as a whole is. But at the same time, we are not going to neglect opportunities because we have something in our portfolio. So, for instance, if there's a great buyout shop and we don't have that exact strategy that they have, so maybe there's a different focus relative to sector or size within the industry or geography. But we say, oh, we already have 50% of the portfolio’s buyouts, we're not going to neglect that. We will take full advantage or great advantages that come across our desk. So that's one. So, for instance, recently we have seen a lot more opportunities, whether we wanted to or not, in the world of private credit. And private credit, it's been marvelous. It's been hot. Everyone wants more and more of it. Well, that doesn't necessarily mean that we're going to increase our overall exposure to private credit, but at the same time, it doesn't mean we won't because we're at a percentage of our portfolio within our construction that we say, well, that's it, no more. We will look for differentiating managers within private credit, those who, again, do not mimic the strategies that we have directly within our portfolio. So, an example of that is we have exposure currently to distressed special situations within our portfolio. Well, our most recent private manager, that is not what they did at all. They did more impact credit, private credit, and lower middle market private credit. And so, the two are complementary. It's not as if you're in the bucket of private credit, it expanded, but it didn't expand. There's no overlap relative to or we're not bumping heads relative to the strategies. So that's important. The other factor is as we are going through our portfolio, there are times when we, because something is not there, we will proactively look for it. And so, there are opportunities where the marketplace today, so within our portfolio, we're looking for some gaps to fill. And so that is something which we do on a proactive basis and will continue to do so. And to really even out some of the strategies that we have, and others to fill particular gaps, which we believe would be great, interesting, and add value to overall strategy of the portfolio.

Robert Morier: Can you elaborate on those gaps? We have a lot of hungry asset managers who are listening in to every word.

Michael A. B. Orr: Well, I'll give you one. So, within our portfolio today, and it's really, it's an all-encompassing strategy. And that is of secondaries. And so, the world of secondaries is not limited to any one particular strategy in and of itself. And so, we believe that the value of secondaries manager and strategy within our portfolio will add value and will be differentiated versus what we currently have.

Robert Morier: Just thoughts. Curious on early-stage venture.

Michael A. B. Orr: Early-stage venture is too early for us.

Robert Morier: That is fair.

Michael A. B. Orr: Yeah. No fair. So, I… background, I was on the investment committee for Providence Ventures. And Providence Ventures was the affiliate for Providence St Joseph Health, their in-house venture capital offering. And I had great exposure to venture. And when I was an allocator, I invested in venture. And when I was in OCIO, I had clients who want to venture within their portfolio. And the reality is, I believe that the time is not yet come for Venture Capital on a wide scale within the GP investment world. Now, others have disagreed there. There are at least one or two GP funds, I believe, who are seeking Venture Capital specifically, but it is the relative hit and miss of Venture Capital right now where we are not against looking. So let me just state that we are not against looking. We have not… there's nothing on the mantra that says, we will not look, we will definitely not do it. But for those opportunities that we have seen, we haven't seen an opportunity yet, which has compelled us to get out of our comfort lane of private equity.

Marquette Chester: I think one of the challenges we have in venture, generally speaking, is because of what we're seeking to achieve, is a return for our investors. Most venture capitalists come to us trying to sell us on the fact, oh, I can achieve that in the fund. And the first thing we have to say to them is that we're not primarily fund investors. Indirectly we are, because we're investing in the business. So, let's talk about your business and how that grows over time. I will say this. There have been several ideas that have popped up about how you create a broader, more diversified portfolio around the venture capital space that we found to be interesting and intriguing. But I think for fund, one, we probably will not have a venture capital or a venture investment in the first fund. But the moment I say that we'll get a phone call when I get back to the office and we'll—

Michael A. B. Orr: We have to edit this part out.

Marquette Chester: We have to edit this part out. But I think that it's important to make sure that you honor the trust you built with the GPs, too. So, you cannot afford to have 2 or 3… no matter how much you like the people, no matter how much the numbers work, you can't have 2 or 3 people doing the same thing. Because now your ability to affect them dynamically isn't multiplied, it's being divided. And so while we may have 2 or 3 buyout shops, we may have 2 or 3 credit strategies, we may have a couple of different approaches to real estate, we've tried to make sure that in building this portfolio, before we talk to any of the GPs, let's make sure we understand what you do and why, because it's got to fit. It's got to fit into what we're doing.

Robert Morier: So interesting. And I think important advice for people who are listening in is that you're actually leading with the business.

Marquette Chester: Yes.

Robert Morier: And not the fund. So, thank you for sharing that. You touched on exit strategies and liquidity a little bit. When you think about liquidity in your portfolio, how are you having that conversation with LPs?

Marquette Chester: It's kind of interesting. We've seen the interest in our space evolve over the last 2 or 3 years. We've got AB talked about a 10% type of yield position. Well, 6.5, 7 years, assuming you return that yield to them, you've given them their capital back that they committed to you. And so, we have some investors who are like, oh, OK, we like to see this coming back to us. Recently, we had a transaction in our portfolio that caused us to communicate with our LPs about their attitudes about return of capital, DPI. You hear it all the time. Oh, we want… I'm over… I need more. You guys aren't sending me any money back. And we started having… we asked the question, how important is it to you? Well, first answer, it was important to everybody. But the most important question they asked us is, how are you doing it. Because if you're doing it in a way in which I think is counterintuitive to why I made the commitment, then I could wind up with something that I don't want in the end. And so, we've been very thoughtful about how we structure our investments, and we commit to those structures so that return of capital is a part of the process. It doesn't become its own category. There’re some high bars out there for a lot of different ways in which GPs are now being creative about returning capital. I think that for the most part, across the board, we've made 6 investments now. All of our managers are focused on return of capital, all of them, but they're doing it within the construct of the discipline of how they go about investing. They're not creating any unique vehicles just in order to create a return at this point in time.

Robert Morier: Thank you for sharing that. I'm thinking about it because there has been such growth in alternatives among retail investors. One of the biggest differences in my career between retail and institutional was just that, it was liquidity. Institutions were willing to lock up longer. So, when you think about the advent of alternatives in retail portfolios, I'm just curious. I know it's not your day-to-day business, but your thoughts on it. Just because you're in the day-to-day business.

Marquette Chester: I think it's inevitable that there will be more private markets exposure in the retail space because, institutionally, the marketplace has matured a lot. But the first part of private markets is private. And so, it's got to be done in a way in which retail customers who are not doing this on a full-time basis can benefit from the lack of knowledge that we have to have in order to make a return in the private markets. So, it doesn't surprise me the largest private equity managers in the world want to have a retail presence. But I think, again, in our world, we've got a tremendous amount of trust that we've been granted, and we must own it up. And trying to figure out a way to court that into something that is transparent enough for someone that doesn't do it in a full-time basis, not impossible, but a significant challenge. Not to even mention the extreme amount of cost related to that part of the marketplace for a manager. So, I'm very cautious when I say to secondary managers, yeah, there's a lot of opportunity out there in the retail space. Don't think about the regulatory process as something that is insignificant. It is very significant because you have to build it the right way. They don't give you a chance to come back and fix it after you've built it. You have to be very consistent with your regulatory position from day one.

Robert Morier: Over the last several months, hosting this show and being out on the market, I've heard a lot of people talk about pendulums. Pendulum swinging one side to the other. And part of that pendulum conversation has included diversity. So, I'm curious, hearing from you both directly, why is diversity still critically important to you both personally as well as the strategy in which you're offering?

Michael A. B. Orr: Xponance, but also third-party research, has found the value-add for diversity of thought, cognitive diversity, diversity relative to backgrounds and approach, and research has proven time and again that diverse managers, diverse firms, diverse investment teams perform as well or better, in most cases, than non-diverse. And so, it is really the return that we are seeking for our LPs that causes us to look for diversity because we want the best for our LPs. The main color there is green, and so from a business and investment side of the equation, it has proven itself to be important and remains important to us. And the color green has nothing to do with the pendulum and is unaffected and just returning, having good returns, having satisfied LPs. That's always our goal.

Marquette Chester: I think diversity is hard, Rob. It's extremely hard. Think about it. You are willing to open yourself up to ideas and concepts that are not familiar to you. Experiences, people, ideas. Xponance is probably one of the more diverse firms in the marketplace. We have lunch on occasion, and it looks like the UN. But it's hard to be able to put yourself in a position where you can receive all these different ideas. And yet for Tina, delivered in such a way that it provides performance, transparency, and trust to the end user. So, for those people that want to say there's a pendulum, the swinging back, OK. For those people, let it swing back. Because not being diverse is a hell of a lot easier than trying to be diverse. And the last time I checked, outperformance isn't easy. You've got to do something different. You've got to be someplace somebody else is not being. And you've got to be willing to take the right kind of risk. If for some people, with their pendulum swinging back the other way means that diversity is less, it's easier to do. And I'm OK. Do the easy. At Xponance, we have always done the hard and will continue to do so going forward.

Robert Morier: Well said. Thank you. Thank you both. I told my daughters that I speak to allocators all day and now they think I speak to alligators. So, they hear what they want—

Michael A. B. Orr: In some cases.

Robert Morier: Xponance some cases, I do. AB, thank you for sharing that. I appreciate it, Marquette. Thank you so much.

Marquette Chester: Thank you, Rob.

Robert Morier: Congratulations on all your success. We wish you nothing but future success as well. We appreciate the time, the insights, the advice that you gave to our asset managers who tune in, and we look forward to hearing from you again.

Michael A. B. Orr: Thank you.

Robert Morier: If you want to learn more about Xponance Alternative Solutions, please visit their website at www.xponance.com. You can find this episode and past episodes on Spotify, Apple, or your favorite podcast platform. We are also available on YouTube if you prefer to watch while you listen. If you'd like to catch up on past episodes, check out our website at dakota.com. Finally, if like you what you're seeing and hearing, please be sure to like, follow, share these episodes. We welcome your feedback as well. Marquette and AB, thank you again for being here. And to our audience, thank you for investing your time with Dakota.