Peter Lacaillade - Backing The Best Managers In Private Markets - [Invest Like the Best, EP.437]

Summary

• The core return math: private markets have delivered “a consistent, call it, three to five percent alpha” over public equities for 25 years, and — unlike public markets — top managers persist, so picking them adds another 5%+. SCS underwrites its program to 16-18% net IRR and ~2.5x, with some vintages “north of 3X,” versus an asset-class average of 1.8-2.2x and 10-15% IRRs.
• SCS’s structural edge is a pooled vehicle raised every two years, giving its ~500-family platform (over $50B total, ~$100M average) endowment-grade access — the direct antidote to the adverse selection that makes bank wealth platforms, in Lacaillade’s blunt words, “pretty crappy.”
• The retail private-equity wave risks mediocrity, not catastrophe: evergreen and interval funds with cash to deploy bid mid-90s on a secondary where sophisticated buyers bid mid-80s — a 10% spread — and SCS sold its own ‘18-‘20 direct lending to one at par. Add fee friction and the outcome is “T-bills plus,” while quarterly liquidity is conditional: “you have to be prepared for a scenario where you’re actually locked up for five, six years.”
• The alpha lives in the lower middle market: buy small businesses at 5-8x EBITDA, professionalize them from $2M-$7M of EBITDA to $20M+, and sell at 12-18x to larger firms with lower cost of capital. The independent-sponsor wave is real — Jordan Dubin built Guild Garage Door to “well north of 30, maybe north of 40 in EBITDA” before graduating HBS — but B/B+ teams that couldn’t have raised seven years ago are now raising capital, an echo of AI-style hype.
• AI roll-ups divide into substance and narrative: Long Lake (ex-Oaktree’s Alex Taubman plus Ramp/Cognition co-founder Zach Frankel) cut a 10-hour HOA monthly report to under an hour, and Thrive/ZBS’s accounting platform is cutting transaction-coding work by over 90% — “it’s not sexy… it’s about going five layers deep, and that’s creating real moats.” The counterfeit version: two engineers raising $8M on $40M to do one deal.
• Venture is bifurcating: a16z, Sequoia, Lightspeed and General Catalyst now look like asset managers whose “ten on fifty” chip-placement rounds “could be bad for the company, probably bad for the seed stage firms,” while Green Oaks went the opposite way — Neil Mehta personally takes nearly every first meeting. SCS carved a third of its venture budget for solo capitalists sourced largely through Thrive.
• The endowment liquidity shock is real and Lacaillade admits “I did not fully see this coming” — one manager with $1B of interest for a $60M raise watched a prominent endowment that spent two years earning its spot pause at the last minute. His self-servingly honest hot take: fund of funds are underrated, and institutions going direct should route a third of commitments through them and build from there.

Deep dive

1. “Private equity is a force for good” — and worth high teens net

• Lacaillade’s opening math: privates earn 3-5% over public equities across 25 years, which is “probably appropriate given the illiquidity” — the real prize is that in privates you can pick top managers who persist, adding “another five percent plus on top,” which “basically equates to high teens, low twenties.” The structural reason: long-duration capital thinking three to seven-plus years while public managers “manage quarter to quarter.”
• He’s lived the thesis from the company side: SCS sold 25% to Stone Point, rode into Focus Financial, and is now 18 months past CD&R’s take-private (announced end of January 2023, delisted around Labor Day ‘23). Of Focus’s $400B, over half is now equity-aligned — including his own converted partner shares — “we’re all rowing, aligned, rowing in the same boat.”
• The alignment proof point: hires like Lane McDonald (ex-Johnson family office, Harvard Management Company before that) as CIO — “prior to the Focus take private by CD&R, there’s no way we get Lane.”

2. The pooled vehicle: institutional access

• Every two years — deliberately not annual, not every three to four — SCS raises a vehicle allocated across buyout, growth, venture funds and co-investments. Two years captures the right mix and matches venture fundraising cycles, so Thrive or Founders Fund land in every vintage. Clients pay one flat asset-management fee whether the money goes to privates or passive tax-efficient indexing — “we’re not biased to put them in privates first.”
• The client math, as he ran it: a $100M client targeting 35% PE commits ~$10-12M a year — $20M to Private Equity 10, ratcheting up through PE 11 and 12 — reaching ~$40M NAV at target by year six with roughly 15% unfunded managed against it. Lacaillade personally runs 60-70% in privates.
• The discipline this buys: in 2011 he found legacy client portfolios “chockfull of large cap buyout firms from ‘05 to ‘07” — a bad vintage — after which those investors paused and missed ‘09-‘12, the best ones. “It’s really important to be consistent in your allocation so that you capture the really good vintages.”

3. The retail wave risks mediocrity, not catastrophe

• The risk as he frames it: mass-market products are run by large-cap shops with low cost of capital targeting 10-12% — undershoot that and, as Patrick interjected, you’ve earned “T-bills plus” while locked up in private equity, with fee friction dragging further.
• The evidence is live: on a high-profile secondary sale, sophisticated buyers bid mid-80s pricing; interval funds bid mid-90s — “a 10% spread” from vehicles that “raise capital and need to put it to work so they don’t have a cash drag.” SCS sold its own ‘18-‘20 direct lending — not the best underlying vintages — at par and the tightest spreads to an interval-fund buyer.
• On liquidity, his “Bre” example: quarterly liquidity dates exist until everyone rushes for the exit at once. “In normal situation, you’re very likely to get quarterly liquid after a two-year lock, but you have to be prepared for a scenario where you’re actually locked up for five, six years.”

4. Wealth management is a ~$160T industry that’s “pretty crappy”

• His most direct assessment: ~$160T globally, $90T+ in the US, and “generally, I think it’s pretty crappy.” The banks demand fee shares — effectively a 50-100bps placement-agent toll — so the best funds, oversubscribed and one-and-done, simply don’t take wealth-management dollars. What gets on platform is what needs to raise: “You’re like, ‘Why am I being shown this?’” Often it’s a good firm’s upstart sector fund, not the flagship.
• The alpha-rich categories — small buyouts, venture capital — are “nonexistent really” on bank platforms. His advice to friends: plain-vanilla credit funds won’t hurt you; don’t expect more.
• Scale is the moat: “to have a really attractive program in the alternative space, it’s difficult to do that sub five billion dollars” — fewer than ten firms nationally have both real investment scale and family-office sophistication. If he were starting fresh, he’d want to launch with $5B going to $20B; the first couple billion is “the chicken and the egg issue.” He’s candid that timing and luck mattered: “GPs were really open to taking my call in twenty eleven.”

5. Big buyout became investment banking; the trade is buying at 7x and selling at 15x

• Blackstone, KKR, Carlyle, Apollo are “not private equity investment firms, they’re asset managers” — and at the deal level, “more like investment banks”: “you’re really just cranking through models… it’s more about financial engineering than business building.” That’s rational at their cost of capital — and SCS deliberately doesn’t play there.
• The lower-middle-market arb, spelled out: a typical small business trades at 5-6x EBITDA (5-8x if great); professionalize it — financial reporting, acquisitions, sales force, less customer concentration so banks lend more — and grow EBITDA from $2M-$7M to $20M+, and “that is valued by the market somewhere between 12 to 16, 18 times.” A tale as old as time, and repeatable. He’s rooting for the buyers up the food chain: “I wanna have those people be willing to pay 12 or 15 times EBITDA for a business that our managers create at seven times.”
• The cultural shift feeding it: the cool HBS move is no longer returning to Blackstone but becoming an independent sponsor — Royce Yudkoff’s class, the Garnett Station alumni tree. Exhibit A: Jordan Dubin, who hasn’t yet graduated HBS but built Guild Garage Door with two ex-L Catterton partners to “well north of 30, maybe north of 40 in EBITDA.” What separates the wheat: “not a chip on his shoulder… a boulder on his shoulder,” velocity of acquisitions, “constant getting on planes, going to God knows where to find the next garage door roll.” And this is not a fallback career for people who couldn’t get the PE job.
• His hype caveat cuts the other way too: teams SCS grades “B, B-pluses, maybe A-minuses that would’ve struggled to raise capital seven years ago” now raise capital, and capital-heavy LPs push GPs to $400M when $150M is right — “for a GP, if you make a lower return on a bigger amount of capital, that can be more money on the carry.”

6. AI roll-ups: five layers deep beats a shiny website

• Long Lake is his embodiment of doing it right: founded by Alex Taubman (ex-Oaktree) and Zach Frankel, “co-founder of Ramp and co-founder of Cognition… one of the smartest human beings either of us have probably come across,” seeded by General Catalyst. Eight senior PE professionals plus ex-Scale AI/Palantir engineers, attacking homeowners associations — a large, fragmented category trading at a high multiple. Their demo: a manager’s 10-hour monthly report now takes under an hour — “you just saved 90% plus and made a better experience for everyone involved,” and that tooling becomes an acquisition weapon against regular-way HOA roll-ups.
• The counterfeit version he’s watching: “a couple of engineers from a top company might get $8 million on a $40 million valuation to go do a roll-up” — no PE experience, enough capital for one deal. Same on accounting, where Thrive and ZBS’s platform (name unclear in the captions) is cutting transaction-coding work by over 90%: “It’s not sexy. It’s really about going five layers deep, and that’s creating real moats.” He remembers the 2011-14 “real estate online” websites — “there was no substance.”
• On holdco versus drawdown structures: he’s flexible but wants exit rights — Long Lake plausibly IPOs “in year six, seven, eight” and could trade north of a teens multiple on the AI story, versus a typical fund where “you’re 20, you might still be holding some of this stuff.” Darren Farber’s Albion River earns the structure honestly: defense-adjacent cash flows recycled into acquisitions, with TransDigm/L3Harris proving the public market for such conglomerates. Patrick’s distillation, which Lacaillade endorsed: don’t expand because you can — expand where the new thing benefits the old.

7. Venture: solo capitalists rise, mega-funds become asset managers, Green Oaks goes the other way

• The SCS arc: early checks into Thrive, Founders Fund, Andreessen Horowitz, then Green Oaks, back when Sequoia/Kleiner/Greylock/Accel were the establishment. As those winners scaled toward growth, SCS carved out about a third of its venture budget for solo capitalists — Elad Gil, Oren Zev, Jack Altman, Nico Winneborne, Locky Groom, Josh Buckley — mostly operators, largely sourced through Thrive: “deals beget deals.”
• His worry about the giants — Andreessen Horowitz, Sequoia, Lightspeed and General Catalyst: “the army of people, of GPs at some of these firms… there’s so many new faces there. I don’t know them, and I think the entrepreneurs feel that way too.” Their game of “doing ten on fifty to put a chip down” when a company needed $3-4M “could be bad for the company, probably bad for the seed stage firms that don’t have enough money to play. Not everyone’s aligned, they’re playing different games.”
• Green Oaks as the counter-model: Neil Mehta has gone the opposite direction from delegation — “short of having himself or one of his wife or kid in surgery, he’ll be there for the first meeting,” prepared, able to negotiate on the spot. No bait-and-switch from principal to junior partner. His bottom line, hedged as stated: “we still really believe in venture… and it’s changing real time” — though he concedes he’s disappointed there hasn’t been more of a correction: number-five-through-ten businesses are “being somewhat zombies,” and seed “hasn’t really corrected, even though public multiples are way down.”
• A next-generation group likely rendered in the captions as David Tishapock’s group has also emerged as a real player.

8. Picking partners for 15 years: go off-list, find outliers

• These are 10-plus-3-year commitments — “longer than the average marriage.” Character compounds: greedy alphas with controversy around them find that when they falter, “people are ready to kick them when they’re down.” His diligence craft: largely avoid the on-list echo chamber — “I’m generally just assuming they’re all good and focusing on going off list.” The specimen anecdote: a fund that looked great on paper until a trusted friend inside said “Don’t walk away, run” — while the person’s own boss was simultaneously saying “the most amazing things about them.” “Yeah, well, that’s the company line.”
• What an outlier looks like: ZBS’s Jake Sloan and Frank are the yin-yang — Jake “a neurotic tornado of energy” who takes 95% of the air in a meeting, Frank “the quiet guy at the poker table who’s gonna be more risk on than Jake.” Frank’s backstory, as told: his parents bought a house in Irvine, dropped him off in eighth grade, and flew back to China — he raised himself through high school, then raised his teenage brother while working 100-hour weeks at Blackstone. “It’s finding those outliers, embracing them, trying to make them the best people they can be.” He flags the honest risk too: ZBS is a two-man partnership with “real key man risk with both of them.”
• His advice to GPs courting LPs: buyout firms should hire a targeted boutique fundraiser and pursue “the 10 to 25 you wanna talk to with a 30% to 60% hit rate,” not a spray shot across 100 LPs. His current irritation: GPs who raised $550M from existing LPs spending six to nine months pushing to a $700M hard cap — “what is the point of this? They’re distracting themselves from investing.”

9. Shore Capital is the exception that proves the asset-manager rule

• Normally, expansion into new products is done “‘cause you can, and you want more assets… God bless capitalism.” Shore is his one counterexample: Justin Ishbia kept microcap healthcare deliberately small — roughly $100-110M fund one, then $220M against ~$2B of demand, then only the $300-400M range — staying in the $1M-$5M EBITDA startup-platform zone while building a 180-200-person organization across food & beverage, industrials, business services and real estate. “It’s bringing a gun to a knife fight.”
• The evolution is disciplined even on continuation vehicles, a space he says gets “arguably abused by some managers where you’re like, ‘Wow, you’re selling everything to yourself’”: Shore rolled Southern Veterinary Partners into a continuation vehicle and later merged it into a larger vet platform (Mission), but sold the majority of its assets to other sponsors. Ishbia, post-fourth child, has promised his LPAC he’s “fully engaged for at least the next eighteen, 19 years till the baby goes to college.”
• Adjacent favorite: bootstrapped growth equity — ex-Summit/TA/Accel talent writing $5-25M checks the big firms outgrew. Elephant Partners (fund-one investment; KnowBe4 “outstanding returns”), Radian, Telescope — whose founder Mickey was at Sequoia when a 3x deal drew zero congratulations (“Sequoia is not trying to get three Xs”) — and under-the-radar Growth Street Partners, “maybe some of our best risk-adjusted returns”: find the Kansas City founder at $5M ARR, take it to $15-20M, might sell half at ~2.5x in two years and roll the rest — “returns that can be in the range of six to ten times your money” with minority-preferred downside protection in break-even businesses.

10. The LP landscape cracks — and the Thrive story that built the franchise

• The endowment shock: funding pullback plus tax uncertainty has affected even hard-won relationships. A manager raising $60M against $1B of interest had a prominent endowment that “worked for like two years to get that spot” pause at the last minute — “that is just a real story that happened ten days ago… I think that’s probably happening a lot.” His candor: “This liquidity shock, I did not fully see this coming.” The lesson he’s pushed for years: GPs need diversity of LPs — endowments rethink programs when teams change, entrepreneurs behind family offices “can die,” nobody’s perfect.
• His self-aware hot take: “fund of funds are probably underrated.” Institutions trying to go direct “don’t really know what they’re doing” — his unsolicited advice is to put a third of annual commitments through small-buyout and venture fund of funds and build from there. Asked how many LPs like himself he’d give his own money to: “probably less than five” (Kevin Kelly at Sequoia made the list).
• The kindest-thing story doubles as a key early story in SCS’s venture franchise: summer 2012, Thrive raising Fund Three at $150M, and a family supplying two-thirds of SCS’s commitment backed out at the last minute. Rather than retreat from “this twenty-seven-year-old unproven person,” SCS pulled $10M from its public equity sleeve and $5M from its tiny private vehicle to make good. “There was never like, ‘Wait, why are we backing this Josh Kushner guy?’ It was just, ‘How can we solve this issue?’” SCS has since invested $400-500M across Thrive funds, and Thrive became its top source of introductions — seven or eight backed groups, from Jack Altman to Kirsten Green.

Verification Notes

• The raw captions render the accounting-platform name as “Cree”; the digest avoids resolving it.
• The raw captions render the next-generation group name as “David Tishapock”; the digest preserves that uncertainty.