Dec 18, 2023, 6:41 AM ETInterview, Fireside Chat

Peter Lacaillade: Why Now is the Best Time to Invest in Emerging Managers | E1096

SCS grew from $7 billion to $30 billion in assets under management, expanding its client base from roughly 90 families to 200.
Annual private equity deployment increased from approximately $250 million to $1.5 billion over the last 12 years.
Harry Peter Mattoon entered the industry in 2011, capitalizing on a post-GFC environment where capital scarcity on the LP side created ideal conditions to scale a program.
The firm avoided "B-plus/A-minus" established funds in favor of emerging managers, successfully backing early funds for Andreessen Horowitz (Fund 3), Founders Fund, and Thrive.
Mattoon notes that while many institutional LPs face structural impediments (e.g., 10% cap per fund, minimum $100 million checks) preventing them from accessing top-tier or smaller emerging managers.

The firm utilizes a "barbell approach," splitting allocations roughly 50-50 between emerging venture managers and established franchise buyout firms.
Portfolios are constructed with 10 to 15 niche funds to ensure manager diversification while the underlying companies within those funds provide the investment count (typically 6-8 companies per fund).
Performance distribution follows a predictable pattern: 3 to 5 funds exceed expectations, 3 to 5 meet expectations, and 1 to 3 underperform.
Mattoon estimates it takes approximately four years to reliably distinguish outperformers from underperformers in a private equity portfolio.
Direct co-investments represent roughly 20-25% of the vehicle, with individual positions capped at 2% of the overall portfolio to manage idiosyncratic risk.

The primary signal for manager selection is "force of nature" intensity, defined by extreme work ethic, passion, and the ability to "run through walls," rather than just track record.
Track records are ranked as the fourth or fifth most important factor, with a specific focus on team alignment and competitive advantage in the current cycle.
Reference checks prioritize "off-list" conversations to avoid echo chambers, actively seeking contrary views from sources like competitors, former employees, or non-recommended LPs.
Mattoon admits to one major intuition error where he passed on a fund that later faced significant issues; he attributes this to "echo chamber" reference checks and a failure to detect behavioral shifts in the general partners.
The firm avoids "track record chasers" in favor of managers who demonstrate a clear, attractive opportunity with right-sized fund sizes.

Direct co-investments offer significant cost advantages, paying only ~7-8% carry (vs. standard 20%) and negligible management fees (~10 bps).
The investment committee for co-investments operates on an "opt-out" basis with a 48-hour response window to ensure speed, as the firm rejects almost no co-investments from top-tier managers.
Mattoon emphasizes the need for scale to run a direct program effectively, stating that $7 billion AUM and $1.5 billion annual investment are near the minimum viable thresholds.
Hit rates on co-investments average around 35%, with a target to improve this by focusing on high-conviction deals where managers are deeply aligned.
The firm actively manages liquidity, selling secondary stakes (e.g., at 94 cents on the dollar) when managers are "phasing out" or when the firm's own cash allocation requires reallocation.

Mattoon criticizes the fragmented wealth management industry, noting that large banks often distribute funds that are already oversubscribed or struggling, whereas boutique multi-family offices have access to underserved, high-quality managers.
The 2020-2021 venture vintages are viewed as challenging due to compressed deployment timelines and high entry prices; Mattoon predicts these will underperform relative to previous vintages.
He argues that fund-of-funds and endowments are often under-resourced and incentivized incorrectly (e.g., paying staff based on interim marks rather than DPI), leading to perverse behaviors like resisting necessary portfolio write-downs.
The secondary market is identified as an emerging opportunity, particularly for venture assets, though most secondary players currently skew heavily toward buyouts due to underwriting complexity.
Mattoon advises emerging managers to avoid using placement agents for venture funds, viewing it as a negative signal that suggests a lack of organic network traction.

Single-family offices (SFOs) face significant volatility risk if a primary wealth creator exits or faces health issues; multi-family offices provide necessary scale and institutional stability to mitigate this.
A typical family office with $100 million should not allocate the full amount to private equity in a single year; instead, they should commit 1/3 annually over three years to maintain liquidity.
Mattoon suggests that families with $100 million should either partner with a multi-family office or invest in a fund of funds rather than attempting to directly back multiple emerging managers.
He warns against over-concentration of LPs in a single fund, ideally capping any single LP's commitment at 20% to ensure capital stability without creating bureaucratic friction.
The "best" LPs are characterized by responsive, creative decision-making and the ability to avoid "box-checking" bureaucracy, which often stifles GP performance.

Mattoon views "force of nature" entrepreneurs as the most critical asset, often investing in them despite high conviction levels because the upside of a single outlier (e.g., Coinbase in an a16z fund) can drive the entire portfolio.
He plans to continue his LP role into his seventies, leveraging the "30,000-foot" view of the industry which requires less day-to-day operational involvement than being a GP.
For 2033, Mattoon expects to continue his current work with more flexibility for travel and family, maintaining a portfolio of 60-70 active manager relationships.
He advises managers to prioritize long-term partnership integrity and "intellectual honesty" over quick capital raises, emphasizing that stable, growing capital is preferable to large but volatile commitments.
Mattoon identifies the compression of deployment timelines and the subsequent need for better liquidity management as the two biggest industry challenges currently facing the private equity ecosystem.