Mastering Venture Capital in Public Pensions

With Tony Meadows,
Private Equity Portfolio Manager
This week on Swimming with Allocators, Earnest Sweat and Alexa Binns welcome Tony Meadows, a portfolio manager formerly for the private equity team at the Pennsylvania Public School Employees Retirement System (PSERS). During the episode, Tony shares his journey into institutional investing, his experience leading co-investments, misconceptions about investing in Asia, and the math behind manager selection in a $70 billion pension plan and process and portfolio construction. He also discusses the future of venture capital, the importance of track record, challenges of being a fund manager, the potential of emerging managers, solutions to streamline fundraising, and more. The episode also features Tyler Kirtley, partner at Gunderson Dettmer, speaking to what emerging managers can learn from more established VC firms.

Highlights from this week’s conversation include:

  • Tony’s background and entry into institutional investing (1:26)
  • Approaching co-investments and the process at PSERS (3:16)
  • Manager selection process and portfolio construction (6:07)
  • Constructing the private equity portfolio (10:45)
  • Timing and relationship with new managers (12:52)
  • Insider Segment: How could emerging managers benefit from general counsel? (15:27)
  • The importance of track record for LPs (16:48)
  • The first female-owned private equity fund (18:22)
  • The GP Selection Process (18:58)
  • Importance of Deal Flow and Proprietary Deal Flow (23:08)
  • LP to LP Relationships (24:42)
  • Consolidation in Distressed Markets (28:59)
  • Final thoughts and takeaways (00:29:42)

Tony Meadows, a seasoned Portfolio Manager with over 17 years of experience in investment accounting, research, and management, most recently worked as Portfolio Manager for the Private Equity team at PSERS, one of the world’s largest state-sponsored benefit pension funds. In this role, he oversees a substantial portfolio comprising over $7 billion in commitments and a net asset value of $4 billion, strategically diversified across geographies, strategies, and sectors. Tony’s impressive professional qualifications include holding the CPA and CAIA credentials, exemplifying his commitment to financial excellence. His core competencies encompass sourcing, evaluating, recommending, and diligently monitoring private equity fund investments and co-investments, complemented by his adeptness in market analysis, due diligence, and risk assessment. Tony’s remarkable achievements include pioneering investments in the Japanese and Korean private equity markets, as well as facilitating PSERS’ first foray into a female-owned private equity fund. Furthermore, he has played a pivotal role in institutionalizing the co-investment underwriting process, resulting in over 35 co-investment commitments totaling more than $800 million.

Gunderson Dettmer is a law firm specializing in providing legal services to the startup and venture capital communities. With a primary focus on technology and life sciences sectors, the firm is known for its expertise in guiding emerging companies through various stages of growth, from formation to financing and beyond. Gunderson Dettmer’s comprehensive legal support includes advice on corporate governance, intellectual property, mergers and acquisitions, and venture capital transactions, making it a trusted partner for innovative enterprises navigating the complex legal landscape.

Swimming with Allocators is a podcast that dives into the intriguing world of Venture Capital from an LP (Limited Partner) perspective. Hosts Alexa Binns and Earnest Sweat are seasoned professionals who have donned various hats in the VC ecosystem. Each episode, we explore where the future opportunities lie in the VC landscape with insights from top LPs on their investment strategies and industry experts shedding light on emerging trends and technologies. Follow along and subscribe at swimmingwithallocators.com.

The information provided on this podcast does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this podcast are for general informational purposes only.

Transcript

Earnest Sweat 00:02
Welcome to Swimming with Allocators. I’m Earnest Sweat and each episode Alexa Binns and I give you a VC podcast from the LP perspective. You ready? Let’s dive in. Today we’re speaking with Tony Meadows, the portfolio manager for the private equity team at Pennsylvania Public School Employees Retirement System (PSERS). It was an awesome conversation where Tony provided thoughts on things like how GPs should develop relationships with pension plans, and how he uses LP to LP conversations, to get a leg up with diligence and sourcing, and find opportunities. With that, let’s dive in. We have a great one today. We’re speaking today with Tony Meadows, the portfolio manager for the private equity team at the Pennsylvania Public School Employees Retirement System. PSERS is one of the world’s largest state sponsored benefit pension funds, with a total AUM of 70 billion, over 12 billion of which is private equity. We’re grateful to have Tony on today for his reputation, not just for the exceptional returns, but also his ethical standards. He’s speaking with us candidly, you can please note his comments today are not representative of pieces, but rather his own. So Tony, with that. We’re glad to have you today.

Tony Meadows 01:25
Oh, thanks for having me. I appreciate the time.

Earnest Sweat 01:30
So I want to first start off, Tony, can you start by telling our listeners about how you found yourself in the world of institutional investing at PSERSs sure started

Tony Meadows 01:39
in the investment accounting office at PSERS and worked my way up to what can be thought of as a controller position. So I oversaw the general ledger and the employer accounting was responsible for all the contributions coming into pieces from employers, as well as public market accounting. So there was a lot of reporting and things of that nature and an opportunity came up where the Investment Office was looking for an analyst for the private market side. So I had the opportunity to, to move from reporting on activities to actually, you know, helping drive some of the returns and activity. So. So I took that opportunity and started off as a generalist, so I was an analyst for all the alternative asset classes. So real estate, private credit, infrastructure, absolute return, as well as private equity, I worked on a lot of CO investments at the time. So I got to see co investments across all those strategies as well. And then, you know, a couple years into a year, you know, I was able to specialize in private equity. So that’s where I reside now. And so a lot of my time is not only monitoring our current investments, but to research and find new managers for us to invest with as well. And

Alexa Binns 03:15
How do you approach investments? Or how would you recommend approaching co investments for our audience?

Tony Meadows 03:21
So it’s interesting from our perspective, so at PSERSs the mandate is that they, you know, co investments can only be done with current general partners. So it does limit the opportunity set, it does help and in that you’ve already performed operational due diligence, and you’re familiar with the general partner. So you take that out of the equation, you understand, you know, what generally their value drivers are, and the quality of the team thinks that I nature and you get to focus just on the portfolio company itself. So, there is a distinction between, you know, a pension plan opportunity set for CO investments versus the other side, definitely want to make sure it’s understood there. Kudos to a lot of fun funds out there that, you know, see 500 opportunities in a year and only transact on 50 or 100. You know, they have a different level. But, understanding the, you know, again, the value drivers make sure that the general partners are staying with their lane. A lot of a lot of antiquated thoughts about, you know, adverse selection and things of that nature, quickly kind of went out the window and the more I dug into it understood how cool investments are, are really good driven in the industry, a lot of news items that that people have in their mind is like, you know, again, adverse selection I take for, for example, that’s really something that was, you know, pre 2010, pre GFC, that you would have those issues. Now, it’s just part of the process. And for us, you know, it’s just making sure that we’re a responsive limited partner, that we’re able to transact within, you know, one or two weeks at times, and, and just having faith in, in the process, but I would say most times, you want to do the call investment, you really have to not be comfortable with the call investment to to turn it down.

Alexa Binns 05:51
No, that’s interesting that that’s within the the DPS are already working with, what is that managers selection process, like? Curious just how you approach portfolio construction, where Vc fits in there, and how you select those managers? Yeah,

Tony Meadows 06:07
so it’s, it’s evolved over time, as you can imagine, being a $70 billion pension plan, we receive a lot of inbound. And so you can, you can have a full time job, just managing all the inbound calls. But very quickly understood, that it’s not necessarily the inbound managers that you want to invest with your managers that don’t need your capital, and you want to knock on their door, and you want to reach out. And so that in excuse me, that investment manager selection process has changed over time, where not only are we doing inbound and and we’re certainly happy to meet with anybody and or introductions that are made all the time. And certainly appreciate that. And it will be very rare that I would say no, I’m not interested in speaking to them, because I want to talk to everybody. There’s always that there’s always that element of, you know, why did I invest with them? How did I not know about them, I’d rather know about everybody and, you know, hopefully have a reason why not to invest with somebody. So that being said, it depends on the market and the strategy, but it’s creating a funnel for each of these. And so being a public pension plan for private equity, you’re going to, we’re mostly going to be allocated to bio. But we also want to allocate, you know, a certain portion to venture as well as growth equity. And then it’s just a matter of how you want to construct that portfolio. And of course, with venture, and it’s very similar to say, small buyout. So So $1 billion buyout, there are a lot of managers, and there’s a lot of risk. So venture, you can have a, you know, a great returning fun, you could also lose all your money. Same thing happens with small buyouts. So when you’re taking a look at it, the smaller the GPs, as well as venture, you want to be able to diversify that risk. So you often have to deploy smaller checks to more managers, whereas with larger managers, you’re gonna have higher conviction, and you’ll be a little bit more concentrated. So hopefully I can answer that.

Earnest Sweat 08:34
Yeah. And to that point, I mean, I think, well, my assumption has always been that public pension plans only write big bigger checks. And so, you know, how does that play into working with new managers? You said, you know, what is a small check, I guess, for pension plans, typically? And how does that play with like, for GP to get to know a pension plan? Like to understand, hey, get it developing that relationship, but when’s the right time that they can actually be an actual candidate to be in the portfolio?

Tony Meadows 09:11
Well, yeah, that’s an interesting question. Because to me, and and, again, going along with the point of one investment manager that doesn’t need my capital, I need to have this conversation sooner rather than later. So if you’re a $50 million, fund one VC, I do want to have that conversation. I wouldn’t be with you. But I would, you know, I try to tell those GPS and say, Listen, this is a long term conversation, this is not something that we’re likely going to be able to invest in because our minimum check size is likely going to be the size of your entire race. So please slap me in a position that, you know, I’m not getting in the way of someone that You can actually, you know, bring on board as an LP. But that being said, I want to talk to you, because hopefully by the time you get to a certain fun size, we’ve already had that conversation. We’ve had a familiarity with each other. And then and then it’s just a matter of, you know, sizing at that point. So, so it’s difficult because I can understand, you know, fun one, they certainly want to be efficient with their time

Alexa Binns 10:32
as well. And on that train, given sort of where the market is right now. You’re talking about timing based on a fund manager’s graduation rate up to you know, now they’re big enough to handle you. Is this a time to be investing in some of those new teams? Or is this a time to be focusing on the managers you’ve already been working with? Historically, I’m curious about the kind of expansion versus contraction versus staying the course.

Tony Meadows 11:10
Yeah, every limited partner is going to be different. There’s so much at play, you know, whether you’re on target with your allocation, and things of that nature. Now we’re

Earnest Sweat 11:24
gonna take a quick break to speak with our sponsor.

Alexa Binns 11:27
With us today is Tyler, currently a partner at Gunderson Dettmer. PitchBook has named Gundersen, the number one law firm globally for investors five years in a row. Our guest Tyler is a dear friend from college, his practice focuses specifically on structuring, forming and operating VC funds. Tyler is that our loveliest lawyer to work with out there? Thank you, Tyler, so much for your advice and expertise. You work with a number of leading venture capital firms as well as first time fund managers. Is there anything that the big guys do really well that new managers listening could benefit to hear?

Tyler Kirtley 12:03
Yeah, so the big guys, or the big firms, or they have people who focus on operations, on compliance, and on addressing investor requests. And so those people are very detail oriented. They understand their contractual and regulatory obligations. And I think it gives institutional investors a lot of comfort when they’re evaluating a fund and deciding whether to invest, to know that there are those types of people in place at the firm, who are ensuring all the internal controls are being followed. I think newer fund managers underestimate the complexity of managing a venture fund, whether it’s just the day to day operations of the fund, or then you add on the regulatory overlay. And I think many of those new emerging managers try to bootstrap it with an outsourced fund admin or legal counsel. But those service providers, you know, they don’t want to reach out to them too often for cost reasons. And so I think for newer managers, unless they’re willing to get into the weeds, and really understand all the contractual and regulatory obligations, they’d be very well served by having a full time or part time CEO or CFO or general counsel to help them manage those details.

Alexa Binns 13:31
No, that’s great advice that there’s the investing side, and then there’s everything else. Yes.

Tyler Kirtley 13:38
Yeah. And you see it to investors as funds grow, and have more institutional relationships. You see those requests from investors saying, When are you going to offload some of this portion of your plate to someone who can focus on that full time? Because we want you out there making investments and helping your portfolio companies?

Alexa Binns 14:00
Yeah. No, it’s I think, a fair or it’s an opportunity to if you are somebody who’s listening, who is very detail oriented, who has that COO, mind X consultant excetera that there’s a lot of opportunities in venture apart from just being on the investing team. Yeah, absolutely. To get in touch with Tyler currently, or any of the other fabulous lawyers that Gunderson Dettmer on the fun formation team you can find their profiles at gunder.com. G-U-N-D-E-R.com. And now back to our LP interview.

Earnest Sweat 14:39
So, Tony, there are many individuals that are listening and are part of two groups, in my opinion, that are really going to shape the future of the venture. That first group is emerging managers, which was kind of mentioned before those folks started fun ones, then the second group are young GPs at established mature funds that will begin to lead fundraising in the near term, right? Can you share any valuable insights or anecdotes from your experiences of interacting with these groups? And what can they do for the future of really developing relationships with large, institutional LPs? Like, like PSERS?

Tony Meadows 15:27
Yeah, emerging managers are interesting. Because there’s data to show that they’re going to outperform and venture, there’s value to name brand recognition as well. So they’re really two different opportunity sets. I would, I would, I would guess that fundraising for a, a, a, an established VC firm, and that you’re moving up to partner roles, you’re probably going to have an easier time fundraising because you have that need bad name brand recognition, not only from the LP side, but also from, you know, potential investments, entrepreneurs and things of that nature, emerging managers. It depends on where they’re coming from, you know, if they were operator background, or if they’re, they’re coming out from an established firm and starting their own role as well. I liked that opportunity set. There. There’s a lot of interest in emerging managers. What ends up happening is that I would, it all goes back to track record, you know, as, as us as LPs, were allocators for a reason, right? I mean, if we were getting investors, we would, we would be investing. So we have to, we have to fall back on things that are comfortable to us. And track record is one of those things. So having attribution is important. Having an established track record having a name recognition, where, you know, we’re performing reference calls and things of that nature. But I, you know, I see a lot of fun in funds that are more and more wanting to allocate to emergency managers. And I think, the more that happens, the more that you have. Going back to the earlier question about being able to write a check size, you know, there is no source solution where, you know, maybe we, you know, large pension plan where to have a fund to fund relationship, where then we can construct a portfolio of smaller funds to be able to do that as well. So that’s a way around it. So, in a world sometimes where you think, you know, does the world need another fund to fund? They probably do, because there’s enough capital to go around that

Alexa Binns 18:02
actually, that makes a few people listening, quite happy to hear. You facilitated the first foray into a female owned private equity fund? Is that a story you could share? I’d love to hear it if it’s kosher.

Tony Meadows 18:22
Yeah. Actually, I had gotten permission. And it’s, it’s public record. So you can certainly find out who they are. But the firm is Oak, HC ft. They’re based out of Connecticut. Annie Lamott, Tricia camp and Andrew Adams, lead up that firm, they were spun out of oak investment partners. And, and really, the story is that we needed allocation, we were looking for VC growth, equity exposure, we happened to be doing a strategic plan with our private equity consultant at the time. And they just listed a half dozen 10 names, and said these are people that you should, you know, possibly talk to. They’re very careful about not driving, you know, to a particular GP. But as I was taking a look through the list, and I have the list in front of me now, there are only two names that I didn’t recognize. And I’m like, How do I not know who these people are? And so I reached out, I sent an email to Michelle over at Oak and I said, Hey, I’d like to, you know, meet you guys and learn. But I wasn’t looking for a female driven you know, venture firm, I was just looking for the best firm period. And as I learned more about them. Again, looking back at their track record, they already had three funds in the ground we were looking for fun for. And very quickly the question became, you know, not, should we it’s why should we, I mean, it’s, it was, it was phenomenal fun, I kicked myself every day for missing out on the first three. Because they’ve done phenomenally. And so yeah, we don’t have, you know, pieces that do not have a diverse mandate, and there’s not an emerging manager mandate, we’re just looking for the best funds period. And, and again, they were and they are one of the best funds out there. And I’m thankful to be able to, to be a limited partner, again, there are one or two as VCs that don’t need to do a lot of outreach, they don’t have, you know, a placement agent, because their success defines them. And so it’s, it’s really, us wanting to have exposure to them rather than the other way around.

Earnest Sweat 21:07
That’s awesome. I have a few friends that work at their firms, they have nothing but great things. Kinda to that point, when you’re evaluating potential investment managers, you’ve mentioned track record, but kind of double clicking on that, what specific criteria or data points do you consider essential for the portfolio? Or what do you know, what do you think mostly, pension funds are looking for, as a criteria? When selecting new managers?

Tony Meadows 21:38
Yeah, so if, if we’re focusing on VC because VCs are a little bit new to watch, because there’s, you know, I, again, unless it’s a really long established firm, where you have a proven track record, a lot of it is a need to believe. And so it’s not just a track record, although it’s important, but it’s looking at the fundraising process at the portfolio company level, to see how many races they’ve had since their initial investment. And, you know, just seeing that progression. And hopefully, you know, getting those realizations, as well, that takes a little bit longer on the VC side versus, you know, buying out which your, you know, your hope to see realizations and you know, four or five years, it could be a little bit longer. But speaking to the general partner community, speaking to consultants speaking to the entrepreneurs, all that is important and, and underwriting VC,

Earnest Sweat 22:45
How much does differentiation really play in the selection of managers? Whether they have a proprietary, you know, deal flow, their thesis driven, or they’re generalists with, with specific kind of all star investors? Does that come into play in how you select managers?

Tony Meadows 23:09
Yeah, going back to, you know, a comment I made earlier is that their success across the board? So? So, to me, it’s not a, it’s not a broad brush saying that, you know, generalists outperform or specialist. But deal flow is definitely important. And there is, you know, as part of the equation, I mean, deal flow is is, you know, just like with us, I would, I would kind of correlate it with how, you know, going back to an earlier comment as well, if I’m only looking at a certain group. I don’t know what I don’t know. So I could be missing all this. So deal flow is important to them, as well. So it depends on the specific general partner. But if they have a proven deal flow, it’s not really up to me to decide, you know, whether it’s good or bad if they have a proven track record, and they have a process in place to make those selections and evaluate those portfolio companies. That’s really what I’m looking for. But if they can differentiate themselves from their peer group by having a proprietary deal flow, then yeah, I mean, that’s a huge positive as well.

Alexa Binns 24:32
We chatted offline about how LPS work together. Can you share a little bit about what that LP LP relationship is like?

Tony Meadows 24:41
Yeah, um, so very similar to, you know, how I view the VC community is that there’s a lot of interaction among VCs, you know, and there’s just a lot of discussion about, you know, who should I be talking to you whether it’s, again, trying to get an LP relationship or You know, different opportunity sets and things of that nature. I tried to do that as well from my side. So I’m trying to talk to as many other limited partners as possible, again, whether they’re pension plans, whether their endowments, foundations, their family offices, if there’s consultants, if they’re fun to fund, I want to know, everybody’s opinion, because there’s something I don’t know. And I’m just trying to get as many perspectives as possible. So there are some LPS that are probably a little bit more, you know, hold things close to their chest. And that’s fine. But from my perspective, again, I’m, I want to talk to as many people as possible, because there’s always something that I can learn,

Earnest Sweat 25:47
What do you think is missing in the market right now, specifically, with resources built for new managers?

Tony Meadows 25:55
I, I put it back to, you know, to the emerging managers, as well. And if there’s something that can be provided, you know, some sort of solution, you know, not using, you know, not necessarily using a placement agent, but you know, something that can make fundraising a little bit more streamlined for emergency managers to make those dialogues a little bit more helpful. Again, sometimes I reach out to buy, you know, a $10 million dollar fund one, and it’s just not understanding that, I’m not going to be able to make that investment. But I, you know, I try to ask my new relationships all the time, you know, what would be helpful, and the needs are all over the place, because if they’re coming out of an established VC firm, they may have best practices that they already had. So back office solutions, or things of that nature, that that that is not necessarily something that is intuitive to them. But from what I see, I mean, what I would want for my emergency managers is, how can you find a solution that takes everything off your plate, other than just investing? I want you to, you know, focus 90% of your time on investing not 20% of your time on investing. So that’s, that’s, that’s just my experience. And sometimes, every, you know, every general partner has a different experience. But it seems to me that one of the more common themes is just having a solution to help them be able to focus on just investing.

Earnest Sweat 27:53
Yeah, that also speaks to just the challenges of being a fund manager overall, because not only do you LPS want you to be great investors, and that’s the core part. But also, they want you to be great investors for a long time. So that being a great company, builder of your own and franchise builder of your own, is needed. So that yeah, that’s, that talks to the complexities of the role

Alexa Binns 28:19
now. And it’s interesting to think about the placement agent, for sure. I have trouble getting excited about a potential startup investment that’s been brought to me by a baker.

Earnest Sweat 28:31
We’ve discussed a lot today. Yeah,

Alexa Binns 28:34
I guess another question, I always think is when you think about the next decade of venture, what right now is top of mind for you, when you’re like, oh, what’s what you’re like, Oh, this is a VC podcast. From the allocator perspective. What am I thinking when I hear VC these days?

Tony Meadows 28:59
Well, what’s interesting, specifically in this time period, is that in these times of, you know, distressed markets, and I believe, I believe this happened you know, during the GFC, as well, there, there is kind of a, I don’t want to say thinning out the herd, but there is consolidation. You know, there are VCs that will emerge, stronger, post, post COVID And there are others that may end up having to consolidate with larger venture firms.

Alexa Binns 29:41
This little interview has been so fun. Thank you, Tony.

Earnest Sweat 29:45
Thanks, Tony for spending time with us today Swimming with Allocatorsa. Really appreciate it. Thanks for the insights.

Tony Meadows 29:51
I was Thank you are interested in election are really great to speak with you guys and appreciate the time.

Alexa Binns 29:59
See you later, Allocator!

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The Hosts

Earnest Sweat

Earnest Sweat is the Founding Partner of Public School Ventures, a dynamic syndicate of over 600 technical operators, go-to-market specialists, and LPs. Previously, Earnest built new venture capital practices at Prologis and GreatPoint Ventures. His focus is on investing in value chaintech, specifically vertical SaaS, applied AI, middleware, and B2B marketplaces, which are poised to revolutionize foundational industries like real estate, insurance and supply chain. Earnest has sourced and led investments in companies such as Flexport, Flexe, KlearNow, and Lula Insurance.

Alexa Binns

Alexa Binns is an angel investor and LP. An experienced investor and operator, she has climbed the ranks from associate to partner at Maven, Halogen, and Spacecadet Ventures and built digital and physical products for Kaiser, Disney, and Target. Alexa has worn every hat in venture from fundraising to sitting on boards. She invests in companies with mass consumer appeal, focusing on the future of shopping, health/wellness, and media/entertainment. Key angel investments include The Flex Co, Sana Health, and Chipper Cash.

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