Earnest Sweat 00:03
Welcome to Swimming with Allocators, the VC podcast from the LP perspective, with your hosts Alexa Binns and Ernest. Are you ready? Let’s dive in on today’s episode. We have two giants. We have Dario de Wet and Farhan Lalji. They’re co-founders and general partners at LTV Capital, focusing on investments in top-tier emerging managers globally. They had experience working together at Anthemis Group, co-leading fund and fintech investments. Today, they’re going to share with us their unique approach to evaluating emerging managers, what they see as the biggest opportunities for investing in VC in 2025, and why their LPs are choosing to work with LTV. So, I want to welcome Farhan and Dario. Thanks for being on.

Farhan Lalji 00:55
Thanks for having us.

Earnest Sweat 00:59
Soo Dariohow did you get here?

Dario de Wet 01:24
So, I mean, it’s pretty simple. I think for myself, I’ve originally got a corporate finance background, but I have always been interested in technology and venture capital. I started off essentially in institutional corporate finance at Goldman Sachs, realized it wasn’t for me, and moved to an operator role to get first-hand exposure. I think it’s so important that you want to be a good venture capital investor. I moved into early-stage investing together with Farhan and Anthemis. And then from that, because I’m such a product-focused person, I ended upseeing funds as an opportunity to invest in emerging managers together with Farhan, as our kind of ways of thinking aligned. Nowwe’ve co-founded LTV to invest in emerging fund management.

Earnest Sweat 02:07
Awesome, and Farhan, can you talk about your journey as an entrepreneur and operator?

Farhan Lalji 02:13
I’ll try to keep it brief. As a Canadian with a background in software development and product management, and having completed my MBA here at the London Business School, where I now teach, I realized that a career at a big tech company wasn’t for me. Then I did the startup thing several times over and built a few businesses along the way. One of those was fortunate enough to raise capital from Anthemis Group, and after that exit, I joined Anthemis, where I had the great luck to start literally a month after Dario, and our lives have never been the same since that crash course to destiny.

Earnest Sweat 03:01
Could you guys talk about that? You guys start a month apart, and then, how does it come up that?Anthem is a great investor in its own right, as you say, “Hey, we want to build something new on this platform.” How did you guys come to that?

Farhan Lalji 03:18
So I joined Anthem to build companies. And part of our venture-building activity is at the earliest stage. And Dar and I got to work quite closely on building companies. One of the things we realized is that there are so many gates to actually get the investment done within that structure.Wee had the LP side of things. Wee were doing basically a vehicle with BBVA, the Spanish bank within Anthem. We were co-investing with BBVA, or we were investing on behalf of BBVA, and so we were working closely with them on the companies, concepts, and how we were building these companies, among other things. And it was a lot of hard work, I think after we had deployed that capital, Dario was looking at a fund that was in a different thesis area, and I was actually thinking about going back to the operator side and maybe building something new, but I had this portfolio of companies to manage. And then, , a lot of times it’s just good fortune, So, we had a few distributions from funds that Anthem had invested in, and that kindmade us think well, hold on, we’re getting capital returns from funds that we had invested in for strategic reasons, We’re investing in these funds thinking that we’ll find good co investments and follow ons, but in fact, we’re actually making returns here. And that kind of got us starting to think about, hey, could this be a product, The other thing that was happening was this mass proliferation of new fund managers in this ecosystem, So we were seeing, over the last five years, just a ton of new fund managers, the companies we were investing in, were going out, and they were. Amazing capital, or they were meeting fund managers that weren’t household names, but when you looked under the hood, you found that actually the managers were really, really interesting, with interesting backgrounds that were really relevant to the companies we were helping to build.
Dario de Wet 05:44
for me, originallycoming into the firm, investing into early stage FinTech, was one thing, as Farhan mentioned, I’ve also got a nice passion for the media industry, and that’s also how we bonded separately, , and having that exposure and opportunity to co develop a thesis and understand funds as a product, as opposed to just deploying capital, which is traditionally where a lot of investors just want to, , they don’t really care where the money comes from, and say, , let’s just invest. I want to know, how do we raise the money? How do we think differently? How do we structure the fund? , how do we source, optimized deal flow and that experience, combined with the investment angle and the opportunity that was, , breaking down the barriers to allow for new emerging managers to enter the space the way Farhan and I were thinking about it together with more and more research that was coming out from software platforms and market researchers, adventure that demonstrated that emerging managers outperformed established managers, Yeah. Was this kind of idea of, hey, let’s explore

Earnest Sweat 06:45
further, yeah. Were there any before we got into the exact strategy and kind of spinning out at LTV capital? Were there any experiences, , at Anthem is or outside of it before you guys got there that have really shaped how you view venture capital.

Farhan Lalji 07:06
I’ll go first. Yeah. I mean, I think just being around some exceptional managers and seeing how venture is a really hard business to scale, So, , the founders of Anthem were sitting on so many boards, And it’s really, really difficult when you’re on that many boards to really add value to every company that you’re working with. And at least for me, I was kind of looking at that and thinking, , is that the future that I’m looking for, Do I want to kind of be sitting on, , 40 to 50 boards, yeah, and not necessarily being able to give them, , everything they need from a board man. And I don’t think, , VC and or venture capital investors need to, , kind of really add value to every company they invest in, There’s like, a time and a stage that companies need more support from their investors than others, And there’s different investors who have different capacities and different capabilities, who can add value at different points in time. But, , I was seeing that and kind of thinking through like, actually, do I want to sit on that many boards? Do I want to kind of have that, , kind of feeling at the back of my, , back of my head around, Hey, am I really adding value on this board or not?Dario de Wet 09:20
For myself, they’re kind of three standouts. As an operator, I joined a firm called Jubo FinTech early in South Africa. Employee number 60 within a year and a half, 350 employees across seven countries, globally, direct exposure. They were Blitzscaling on purpose. I learned a lot about how politics affects operational structure and strategic decisions, Cap table management, product development. And , how a company that’s, , essentially, we were sharing 10 individuals per one desk at a time, it was, it was really invaluable. The second was at item us, which was. When we were investing into early stage FinTech, which is really around being part of a single LP vehicle and working with a corporate creates its own challenges, because corporates have this fine balance between wanting to be innovative and investing into early stage but at the same time, there are other influences that can affect the ability to get that investment over the line, as opposed to a multi LP, discretionary vehicle. And so whilst frustrating, it also was a very great learning opportunity

Earnest Sweat 11:25
One thing that I wanted to, I want, there’s one thread that I want to pull as far on is, , the question of, should venture even scale, Does it change? It can go into kind of the motivation for even starting LTV capital, but you clearly have a view on emerging managers. But, , I’ll let you try to take a bite of that huge question. Yeah, I’ll try to

Farhan Lalji 11:57
be succinct. And , like I joke when I’m teaching at labs, that the answer to all of life’s questions is one of two answers. One is to follow the money, And two is, it depends. Hey,

Earnest Sweat 12:13
I knew you were gonna say that’s, that’s what I heard from every business school professor. It depends. Absolutely,

Farhan Lalji 12:17
it depends. And follow the money, So, and I think both of those statements can be true for that point around, does venture scale, or does it need to scale, So in a lot of cases, it does scale, when you think about the Aum, right, and the fact that a small fund wants to manage way more capital to generate more fees, and that isn’t necessarily beneficial to its LPs, Because you might find that actually, from a DPI and all of the other factors that LPs are looking at, in terms of the return profile, you don’t always get those huge returns as funds start to scale and become larger in terms of their AUM, So that’s one thing. The other point is, sometimes a manager really needs that first small fund to show that they can actually run a portfolio and deliver returns, and then, yeah, they can manage what the optimal fund size should be, but it probably levels out at some point. So here in Europe, we have a great early stage fund manager called Seed camp, and seed camp, I think, has done a really good job, because Carlos and Reshma have been quite diligent in saying, Yes, we might be able to go out there and raise, , double our fund size, but that’s not necessarily going to ensure that we generate the best returns for our LPs, So some fund managers have doubled or tripled their AUM from fund to fund, or their fund size from fund size to from fund vintage to fund vintage. But others are like, actually, for our model, it makes sense to kind of capitalize at a certain level and to to kind of say that’s the optimal level.
Earnest Sweat 14:30
And Ariel for there’s one thing to have this, Hey, there’s something. There’s a there, there. But what’s kind of like, the final push of like, oh, yeah, we should do this. We should create LTP, capital.

Dario de Wet 14:46
Well, I mean, I think there’s one with a couple things. I mean, man, I consider powers. I think for starters, there is a combination. Of skills and experience that Farhan and I have, which we feel is, I wouldn’t say, lacking, but quite rare in the OP community that invests into venture particularly in Europe. As the mindset towards venture capital is very different to the United States, if that’s mature, And so as being ex operators, ex direct investors, having a fund investment track record, even having that corporate financial, institutional exposure, even teaching for both of us, It gives an element of being in the trenches, . And quite frankly, we’re derivatives of derivatives, right through emerging managers, investing into emerging managers. So I think that being in the trenches and being relatable and building rapport with those managers is particularly important because we understand what it means to provide value to founders, and we understand what it means to provide value to LPs, and we understand what it means to enable GPS to focus on actually getting on with the success side of their portfolios, while making it easier to connect GPS and LPS together, and most importantly, being positioned in London and having the global pipeline and access that we’ve been very intentional there because of the nations here, the industry in the UK, we’re able to prove that, hey, we can actually be the connective tissue between the United States, other regions and the UK and help to build industries, as opposed to neglecting or, ,

Earnest Sweat 16:34
Yeah, and I think whether it’s LPS or GPS in a world of more consolidation, as well as fragmentation and globalization and de globalization being connective tissue, that’s going to be the organizations that help their investments win, especially with all the automation. I think I said enough in words, but really, we have a lot going on in the market today, and if you’re able to connect with individuals and then connect them to where one plus one equals five, you’re going to see returns. Why so bullish on emerging managers, though.

Farhan Lalji 17:23
So I think , everybody throws that stat around of how many , kind of the best performing funds in the last few vintages, what percentage of those are emerging managers? But I think for us, it also came down to how many LPS just didn’t know how to assess emerging managers. And even, like the new fund managers that are trying to do emerging managers, they’re still trying to look at track record. Right for a lot of emerging managers, track record doesn’t exist. And to Dario another point about why we decided to start LTV, , we just thought of our backgrounds as having been entrepreneurs, having been operators, having been GPS ourselves. It’s quite a unique background for both of us to come together to say, Okay, we feel like we can really evaluate what good looks like on that front. So we saw that kind of opportunity because, , talking to a number of GPS, , whether that’s 900 or 1000 or more, now that we’ve probably got in our CRM, right, that we’ve we’ve spoken to, They see that actually, most of the LPS that they’re pitching to, they might be, , family offices with generational wealth, where, , the entrepreneurism in that family is there, but , the people who really had to hustle to create the business were generations ago, Or the institutional investors who are looking at fund vintages, four, five and six or beyond, where they can see, kind of the data points and all of that.
Earnest Sweat 19:48
What are key indicators you look for, for, , potential success?

Dario de Wet 20:20
So for me, it’s pretty simple, So it comes down to three things. One is understanding your why, why are you doing this? And two is how you think, are you proactive or reactive in terms of your thesis? What I mean by that is based on your skill set, your background and your exposure. How do you see industries and themes within industries evolving over the fund life, ie, seven to 10 years. And is it? I mean, it should be uncomfortable for some LPs, Because not every LP is going to agree. And the third really is down to your network on the back of that, because that’s inevitably where you’re getting optimized deal flow, which is your key differentiator, actually, because it’s being driven by your purpose, ie your mission and value, as well as how you think and the way you’ve developed your thesis. And there are too many funds that have come into this industry for the sake of jumping off the trains because it’s quick to raise money, and you can earn a 2% management fee, and life’s a dream, because you can invest in 3040, 50 companies, and if 80% of them fail, and , some win, then fantastic. It’s almost easier than starting a tech company now that there’s an AI boot. But it’s not so simple anymore, because we’ve seen a change in terms of the macro environment. But yes, it’s, it’s being crystal clear in terms of what differentiates you. And I’m so focused on, on, on, on that thesis development side of things, because it’s just so fundamentally important, and that’s why you see emerging managers from atypical backgrounds, as opposed to some who look for the ex banker type or whatever. That doesn’t necessarily mean you’re going to win in this market at all, just

Farhan Lalji 21:59
to maybe kind of extend that a little bit. I mean, Dario is great at asking, ” why do you exist? Type question, And really kind of poking at managers around their differentiation. And then, , because of our backgrounds, , diligence in networks is something that we try very hard to do in terms of, , kind of introducing GPS to other GPS, And kind of getting a sense of who they work really well with, Because the game is really a collaborative game, If you think about deal construction, if you think about follow- on investment, if you think about the CO investment, if you think about deal sourcing, getting deals done, whether it’s founders or whether it’s other GPS, who do they already have in their network, What’s the source of the intro and how, , kind of strong a network connection is the source of that as well, through to, , kind of, how many of our managers really enjoy working with that person. And then how many people in our network, as founders or operators, really enjoy working with that person? So I think the benefit of having been in the industry for some time, having worked at another venture fund, having been in the startup ecosystem for so long, right, means that our networks are pretty strong, and so we can validate that, and we can kind of see, actually, do these people have the connectivity that they’re promoting to promoting to have?

Earnest Sweat 23:27
I love those criteria. And, , a lot of people who have been in this industry, who are either spinning out or coming from a typical experience, have been successful. And so it makes me think of, , when General Managers of sports, sports teams are identifying talent, they talk about, oh, he has all the attributes, but then it’s the intangibles. And, , I’ll do a quick kind of personal anecdote, as I have, like, as I talk to LPS now, and I have a very far out kind of perspective of, even when I’ll start fundraising, there are two things that raise people’s eyebrow, the amount that I’m looking to raise first fund, and the time period in which I’m looking to start that. And so I’m hearing like, that’s very intentional, intentional, and it’s like, is that a differentiator? It shouldn’t be. But I asked, What do you see as, intangibles that you’ve you’ve have really drawn you to fund managers, and then what are some intangibles that you haven’t seen in the market that you wish you see more of?

Farhan Lalji 24:35
I love storytelling, I love and it’s really hard to kind of nail down what the intangible is, But when you see it, it right, on that story that somebody can say around that atypical background, We’ve had managers who were managers themselves of famous artists, And kind of. Got into the angel investing game originally, then setting up funds and actually starting funds with people they invested in who had billion dollar outcomes, And so those kind of atypical stories where people don’t necessarily come from, like the Harvards or the Stanfords or the Oxfords or the Cambridges, right, but they hustled their way to be in the room, and then they took advantage when they were in the room, Those are the kind of stories that really resonate with me and make me feel like, okay, this is a manager who will not only get stuff done for their own firm, but they’ll get stuff done for the underlying assets and the manager and the entrepreneurs that they back. So I’m looking for, like, , that resilience factor that we really kind of look for in entrepreneurs, when you’re a GP, I’m looking for that in the emerging manager. It’s like, show me your grit, Show me how you’ve persevered, or what you’ve done to, kind of like, stay standing on that front

Dario de Wet 26:39
I think you send it up spot on. And I’m going to sum it up in one word: maybe the hustle. Two words: the hustle factor, I think there is this mindset in some geographies that in order to be a successful venture investor, you must have a banking background or be a chartered accountant or come from private equity. Sure, those are skills, but those are skills that can be taught at the early stage. , smart people pick these things up quickly. What they can’t do is build a network and differentiate themselves easily. And that’s why, like Farhan said, , and that’s why, again, going back to my points around ways of thinking. Because somebody who manages a musician or somebody, perhaps was an ex sports person, or, , worked at a tech company, or even was a quantity surveyor in the construction industry. They have a perspective and understanding of industries which others most likely won’t, or access to individuals that they don’t, and therefore, again, it boils down to creating opportunities for companies that are backable or entrepreneurs that are backable, which are atypical. And that’s essentially where there’s huge upside, Obviously a huge risk too. But, yeah,

Farhan Lalji 27:58
I think that that other point you made about Ernest, like intentionality around the fund side. So we can talk about intangibles on the individual involved, but there’s also the intangibles of the firm and the funds, So like, how they’re thinking about deal flow, how they’re thinking about validation, how they’re thinking about their fund portfolio construction, and those models and stuff like that, and just thinking about their intentionality. I do think that’s also like one of those intangibles as well, the fundamentals of the firm and how they’re thinking about that. Like we see a number of fund managers who, , are probably targeting too much capital, or fund managers who aren’t targeting enough right capital for a strategy that they’re trying to deploy, right So, so knowing that they’ve been thoughtful on that front, you’d be surprised how many fund managers haven’t actually been thoughtful in terms of fund size, What they’ve done is they’ve reverse engineered to say, oh, I want to earn this much salary, and so in order to earn this much salary, my fund size should be that. And that’s been the first question, Rather than, how many companies can we actually help to build? What are the outcomes that we’re engineering for and then structuring the firm?

Earnest Sweat 29:09
Or what have you experienced? What is your background suitable for? Is it pre seed? Seed series? I’m also not surprised at how unintentional VCs have been over the last period. We got a little crazy, and unfortunately, I think because of AI, we haven’t corrected all those things, but that leaves opportunity. Now we’re going to take a quick break to speak with our sponsor

Alexa Binns 29:38
today. We have industry experts ID on Netzer and Jason Krupp, partners at Sidley, fast growing emerging companies and venture capital practice. Is there specific regulation that you all are tracking closely for your VC clients, that our audience should also be tracking?

Idan Netser 29:57
Ooh, so there’s one again that gets me excited. It relates to some. How to tax, surprisingly, but , the tax treatment of carried interest is capital gain versus ordinary income has been in discussions for many, many years now, and there’s always a lot of pressure on, , whether or not carried interest will continue to be taxed as capital. Again, that is a major, major issue and a huge incentive for funds to be structured the way they are. The rules have changed a number of years ago, and there are new requirements, well, that that are slightly getting older, but there are a few years in the, , in the play now, , which means that folks needs to hold their interest for a number of years before they can benefit from long term capital gain treatment. I would say, , keep on track. Keep track. Keep tracking those developments. Because, , there’s, again, there are lobbies out there trying to get that eliminated. We like that. Obviously, we think it’s a good incentive for funds and funds activities. So that’s one. And the second one is, as we mentioned, qualified Small Business stocks, which is a huge benefit from a federal tax standpoint, as well as some states, which are, , which conform with federal and you can get, , essentially, tax free distributions on earnings from small businesses and most of the startups that we deal with, at least at the beginning of their lives, qualify, So one is understanding qsbs is absolutely crucial. And if you don’t know what that means or exactly how that plays, you should go and read some of the materials. There’s plenty of stuff out there. Read through it. So and is one of not all companies qualify as qsbs, and that’s another thing to understand. So depending on the type of investments, I would urge GPS to try to steer their investments towards businesses that do qualify, just because that tax advantage is meaningful, but if they don’t, that’s okay, as long as it, as long as you understand that you’re getting into an investment that will not qualify in the future.

Alexa Binns 31:52
Yeah, I’ve definitely been put in that position where the founders legal team won’t tell you if it qualifies or not, and you’re like, well, that you did just tell me Thank you. If you’re not writing something down in an email to confirm this, then I know the answer. So

Idan Netser 32:10
The market practice on this is for companies to make the determination and provide the assurance to their investors and, in fact, to their stockholders. Generally speaking, that includes employees as well, by a way of issuing what we call a determination letter that says, hey, you should know that, assuming nothing else happens, and you hold the shares for five years, those shares qualify for qsps, because that’s the only tax record that folks would have when they take the position on their individual tax returns. That is absolutely the market standard by now. It’s not an expensive thing for the company to do. It’s good service to its stockholders, and there’s no there’s absolutely no reason not to do it, especially if you’re

Jason Kropp 32:51
qualified on my end. what? I do a fair bit of Life Sciences, biotech and med device work. And so the changes at FDA over the last few months have been particularly notable for for a number of the clients that I work with, and the investors in those clients, , there’s a there’s a, first of all, there’s a tremendous amount of expertise here at Sidley with respect to that world, and it’s one of the reasons that I came here recently. But, setting aside that expertise, it’s just notable that there’s a lot of uncertainty around drug pricing, around the ability to get through FDA processes and the like. What I’ve been hearing from colleagues here is that fundamentally, the FDA is still open for business. The FDA is doing its job. Responses are coming back, but having an understanding of how the FDA thinks about things, and how the FDA will deal with certain questions, and how companies ought to be dealing with inquiries from the FDA, is more important than ever.

Alexa Binns 33:49
Thank you for joining us on the show. If you are an LP GP or founder interested in seeking Sidley’s expert advice, you can find each partner’s contact on Sidley’s website. And now back to our LP interview.

Earnest Sweat 34:04
You both have spoken about a word I love: resilience, and it’s something that you need emerging managers to have, and not just emergencies you need fund managers to have. And I’ve gotten a sense from talking to you in the pre conversation, and this one that you all are hands on LPs, what are some of the obstacles that you try to help emerging managers on whether it’s like before you commit, after you commit, and then, just like, , as you re up as well.

Dario de Wet 34:38
So, I mean, I think even just before we commit. It’s really around storytelling and narrative. , portfolio construction and size. It’s that balance of how much value can you actually provide to your portfolio companies. And, for example, if you’re a solar GP and you want to invest into 50 companies, how much value I mean, can you really be attentive to all 50? , we. Whether it be around fundraising strategies, optimization for thesis, and even when it comes to working with those fund managers, it’s about being able to be easily reachable as almost kind of, a shoulder to cry on. It’s about building a relationship. Because I think the thing is, you’ve got to understand is, how many GPs are out there to build a fund versus building a firm, And that goes beyond just fund one or fund two or fund three, because we define emerging managers as sub 100 more fund one, two and three. So, , we were in this for the medium to long run, right, in the sense of, depending how you define what that is. But what I mean is, , building an established firm that’s impactful to an ecosystem within their respective regions, and that’s particularly important.

Farhan Lalji 36:10
Yeah, I’ll add a little bit. I think initially what we’re. I think one of our differentiating factors in how we work with our GPS is also, like, we’re quite transparent, And I think, , if we, if we’re not going to deploy capital, we try to be upfront about why they wouldn’t be a good fit for us, and we try to help them still, if we can. I mean, , the number of GPS, who we stay in touch with where we’ve said, actually you’re not going to be a fit for what we’re trying to do, but yet we’ve still managed to add some value, Whether that might be helping them with an SPV of a follow on round, or whether that might be introducing them to other managers or other LPs in our ecosystem that we think would be a better fit for them, So trying, at that initial stage, to be transparent, telling people where we are in the journey and why, , our thesis might not match up quite well with the fund that’s presenting to us, and trying to give them that feedback around it, and then where we can adding value on that front And I think when that comes initially, as Dario mentioned, all the things around the firm, but then subsequently, it’s the underlying assets, , especially if they’re doing stuff in FinTech where we can, , really kind of add value because of our background and our networks, or if they’re doing things in other areas where we have, , we’ve been fortunate enough in terms of Working with people who are at open AI or people who are at large organizations. So there’s a lot of connectivity for the underlying assets as well that we can try to support portfolios of the managers we have in our ecosystem as well.

Earnest Sweat 37:55
I have a quick question for you, Farhan, and I heard another LP use this term, and I never thought about it, so I’m going to ask you guys the first question, first time. But um, would you see yourselves as first close LPs, last close LPS or or it depends

Speaker 1 38:12
what’s, what’s the answer to all of those questions. I knew this was your last you.

Farhan Lalji 38:17
a lot of times it is transparent. We’ve seen managers when we didn’t have capital to allocate, So, , depending on where they are in their cycle and where we are in our cycle, yeah, right. So there’s been times where we’ve wanted to get into a fund at the first close. There’s been times where we were the first to commit to a fund manager. But there’s also a number of times where we’ve been the last right, and they’ve left room for us to kind of make sure that we did get some allocation as well. And we’re happy either way, So there’s not, like, a hard and fast rule that we have to do first close or we have to only do final close, Some fund sizes. And , the momentum that fund managers have, , others, others move slowly, and actually want to be quite thoughtful and want to start very slow and very small. And so it really, really depends on the fund size, where they are in the fund cycle, and when we’ve come into contact, I mean, we meet people, and it’s obvious, that they’ve got a month before they’re going to hit final close, And sometimes you’re like, yeah, we’re just not going to be able to do that as much as we move faster than we might have in a larger institution, We’re still unable, in some cases, because we’ve been diligencing other managers that we’ve known for six months, And so we have to prioritize where those relationships lie and and we want to be quite thoughtful in terms of how we diligence managers, and how we evaluate networks, and how we progress with these managers. So sometimes we’re going to miss out on that front And I think that’s okay as

Earnest Sweat 39:54
well. Dario, who are your LPs? What? How would you characterize them? What’s the difference? Graphics?

Dario de Wet 40:00
Yeah, sure. So I obviously can’t disclose specific names, but I think absolutely what’s important to understand is this diversity on LP base, so from institutions right through to high net worth individuals, portfolio company founders, geographically. , it’s a combination of both non core markets. What do I mean by non-core? I mean I’m South African, , ie non US, non UK, aka emerging markets, as well as it selects you from more established markets. I think if you look at our venturing forward report that we put out in July last year, we took a sample of our 800 plus GPS, you’d get a good understanding about how LP sentiment affects the appetite to invest in GPS between emerging markets, UK, Europe and the US. And that applies to us as well, , because we too are raising and we too are emerging managers, ? So it’s, it’s a great way to build a rapport, But I hope that gives you some scope.

Earnest Sweat 41:08
Yeah, and why do you think they come to you? Is it for, I would assume, exposure to emerging managers globally that to get in their venture book,

Farhan Lalji 41:18
I would say there’s, there’s a number of different reasons for a number of different types of investors. For some it’s because they can’t allocate to all the managers. So we provide them like an index, We see that actually some of our connections, or some of our prospective, prospective LPs, or some of our existing LP and investors, , they’re, we’re going to be the only fund they allocate to, And there’s others who want kind of the access and will be making LP commitments themselves. And there’s even others who are like, I won’t do any funds, but I’d love to see the deal flow from the underlying portfolios, and try to co-invest on that front as well. And then, to Dario point, there’s some from a geographic spread, or some from a sector specific, whether they want to dig into a particular sector. I mean, we talked a little bit about AI, but there’s so many fund managers who are really kind of labeling themselves as an AI fund manager. And , a lot of our investors don’t have the capacity or the capability to actually evaluate emerging managers, just because there’s so many of them, It’s a full time job for the two of us, right, to meet and evaluate and understand managers. And for a lot of LPs, , they’ve got their hands full going through the data rooms of the reops, And the CO invests and the other assets that they manage, in some cases with families and multi families. They’ve got a number of other assets that they’re already looking after, and so they don’t have the capacity to evaluate hundreds, if not 1000s, of emerging managers.

Earnest Sweat 42:56
I’ve been thinking about this the last couple of years as the market has, , shown some, some shifts, We’ve, we’ve had more and more seed and pre seed fund managers come come about. It’s looking like we’re going to have more spin outs and kind of the early growth trying to, , become those, those firms, and then we have our largest firms competing with YC all the way to Merrill Lynch. And so during that entire period of time, we’ve also seen a lot of people, like allocators complain about fund to funds, but with that and where everything is. It seems like there, there are places to get venture beta. But the question is, like, is that, , if you compare that to alpha and large private equity firms, I don’t know which one are you? Which should you choose?

Dario de Wet 44:19
So there’s two trains of thoughts here. There’s the fund economics and the fundamental side of it, and then there’s the kind of ego side of it. So let’s address the ego side of it first, , depending on the LP type, because there’s so much activity happening in a venture space, and now with the AI boom, that’s the next big thing to jump on. The climate used to be the web, three family offices, etc. Think that they can do this themselves. And so they feel like there’s enough to go around, ? So we really have to prove ourselves, like, hey, we have differentiated deal flow, and here’s why, So there’s that. There’s also. The other side of it. On the contrary, a lot of post 2021, scarring the dump evaluation. So some are moving away from the likes of tech and venture and sticking to their core, which is what’s made them money, whether it be real estate, public equities. I mean, look at markets this week. Haven’t been great, but whatever. But in terms of fund economics, you’ve got to understand that a fund of funds, essentially, is charging fees on fees. So while 1% is low, right at the end of the day, you are paying 1% on top of the fees that are charged by the underlying fund managers you’re investing in. So you’ve got to be crystal clear in articulating your value in terms of the direct opportunities you are providing. I co invest, what are their fees on those co invest, what strategic value you’re providing, what differentiated access you’re providing in terms of that pipeline. And therefore, , it’s got a it’s not going to suit every LP type, but nonetheless, , it’s an emerging asset.

Farhan Lalji 46:31
I think there is a lot of hubris in a lot of different institutions around being able to do this themselves. I mean, the number of families, or the number of prospective LPS that we talk to who’ve lost money, . And the other fact is, like, , the distributions haven’t been there, The returns haven’t been there for a lot of vintages when. And it’s funny that no matter how much we talk about, , actually, when there’s downturns, that’s the time to actually deploy. , there’s still a lack of that, I guess, kind of that belief that actually this is the time to actually deploy, because you’re so worried about the things you’ve already committed to, And seeing that, and so, so we find that a challenge, In terms of LPs, who, , I think that it’s funny, because, like, the where we’ve seen, I think the most successful is people who’ve actually allocated to a large number of venture funds, and so they realize how difficult it is, And then there’s the other side, where they haven’t done it at all, because they realize how difficult it is, It’s the ones in the middle, the big bell curve, right, for those, that big bump in the middle, where they’ve either started to invest in VC funds, or they’ve got a portfolio, or they think they can do it themselves, where that’s the challenge, right, to get them to a point where they come to that realization that, , managers, and in venture and emerging managers, particularly, it’s, it’s hard to, kind of, like, see everybody and see the ones that are actually going to be the top

Earnest Sweat 48:15
performers. Dario, what are you all excited about for this year?

Dario de Wet 48:19
I mean, for me, it’s a legacy industry. As far on, certainly beat this drum. I think everyone is so, , AI is the sexy thing now, climates, , it was climate such as web three. It was, , freaking FinTech a few years ago, payments. Now, it’s a legacy industry. It’s the unsexy stuff. That’s what matters, because it’s less ego driven. There’s a lot of specialized knowledge. There is a lot of opportunity for change, whether it be inventory, supply chain management on cruise ships or optimizing for dry cleaning.

Earnest Sweat 49:30
I started my career at night at a corporate VC, and focused on a lot of tech, enabled services, vertical software applied AI, and it was not in vogue. And most of the time, people would tell me, I don’t know about that tan. And now all you hear is like AIS for services, and services are all the rage when I never liked a SaaS company, that the golden SaaS company was Salesforce, as it got big. It became a services company, because that’s what happens, Where do you guys see venture exits going?

Farhan Lalji 50:43
I wish I had the crystal ball. I think we’re going to continue to see this bifurcation, And so companies stay private longer. I don’t know if the IPO market will come back. And, , it’s funny. I was talking to a friend who is an LP in a lot of funds, and works for a large Canadian bank, actually, just earlier today, and we were talking about this particular kind of point, and how Amazon’s market cap, when they piped, was 300 million, And it’s kind of like you like the public market side of things for like and so when we talk about liquidity, when we talk about returns, the world’s changed dramatically, and we haven’t seen the same kind of innovation and the same kind of like thinking around how the world’s evolved on that IPO market. And so I think there will be something I just don’t know what it is like. I’ve seen strategies for roll ups. I’ve seen strategies for secondaries. We’re seeing all of these kinds of innovations, or new fund portfolios constructions coming to market. I don’t know if any of them have it absolutely right. And I think for the large allocators, it makes sense, right, that they should be looking for the billions of dollars worth of value in terms of the exit value of the companies that their portfolio managers have invested in. But , if a company exits for half a billion dollars, you should still be able to return a good amount of capital to your LPs. There should be a lot of entrepreneurs and executives who get rich in an exit of half a billion dollars as well, And so how do we kind of encourage innovation to exist? Because, I mean, if you think about AI and all of these other technologies that are existing, , it’s kind of like the wave that the cloud had, And Cloud infrastructure, where to actually set up a company became so much cheaper, And so now we’re seeing that actually companies like lovable and others, are enabling you to build applications, , really, really swiftly and for not much, , and getting up there, and, , millions of dollars of AR, really, really quickly. And so, , if you can have a one person driven, , 100 million dollar exit, , somebody should be financing that and making a really good return off the back of that. I just don’t know if enough people are thinking about that on the smaller liquidity side

Dario de Wet 53:23
Yeah, M and A is still the dominant exit route. You got it. P driven acquisitions, corporate buyouts, I think. , at the end of the day, funds need to generate dpi. And if you can do that, then sure you have a position. Do you want to recycle that capital? Do you want to return it to LPs? Do valuation. I mean, we started to see valuations recover, which is great, but , nonetheless, we have been in a pretty tricky minefield the past two years. It’s great to see that things are recovering and rebounding at least. But again, the jury’s out. There’s a bit of a hype factor. Are we going to see a repeat of that kind of post, 2021, hangover, 2022 hangover. I don’t know if activity on the ground suggests otherwise, but as Farhan said, no one has a crystal ball. Can’t call me ODA, but it can be optimistic.

Earnest Sweat 54:17
On that note, any parting thoughts to our audience of GPS and LPs. I’ll let you go first far on,

Farhan Lalji 54:27
keep doing the good work, right, like it’s we need, , people with entrepreneurial spirit building funds. We want to keep seeing interesting managers and and this, this idea of atypical kind of backgrounds, I think the world needs more atypical managers, and so I hope we will continue to see more atypical managers. So people with atypical backgrounds, I hope they consider this as a career path and a way to make an impact.

Dario de Wet 54:59
For me. Don’t be afraid to think differently. , in securities, when trading, people say this, in the money, out the money, out the money. Don’t be afraid to lose money. Don’t be afraid to hear LPs. Not understanding your thesis. It happened to me. It’s happened to us, and you’ve heard the complete

Idan Netser 55:15
opposite.

Dario de Wet 55:16
I think, yes, the market is frothy. It’s a red ocean. But at the end of the day, every market is competitive. That doesn’t mean you shouldn’t try. So there are LPS that are open minded like us. , there are LPS that are trying to make a difference in the ecosystem. We’re trying to educate the ecosystem, whether it be on this platform, whether it be in our respective individual capacities, teaching or through online courses. So, yeah, I think don’t ride the hype train and be introspective on your network, because you’d be very surprised when you think about it, what people you do know and what difference that makes in terms of your value proposition as emerging fund manager,

Earnest Sweat 55:57
I love that. Farhan Dario, thanks so much for being on the podcast, thanks. I appreciate your insight. Thanks. Thanks. All right. Cheers. You later. Alligator, after portfolio tile, investing with a smile.