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The Definers Episode 11: Zombie Funds, Forensic Intelligence, and the Coming Transparency Reckoning in Private Markets

Trapped in aging vehicles, LPs are no longer relying solely on GP reporting to evaluate risk, valuation, and future outcomes. Investors are increasingly commissioning independent valuations, leveraging forensic intelligence tools, scrutinizing continuation fund transactions, evaluating fiduciary compliance, and working to approach GP negotiations with a new level of rigor. What began as an asset-performance issue is evolving into a broader conversation about transparency, governance, investor protection, and the future operating model of private markets.

At the same time, regulatory and legislative pressure is building. With alternative assets growing into a multi-trillion-dollar segment of the financial system and expanded access to private markets becoming a policy priority, questions surrounding valuation methodologies, portfolio smoothing, disclosure practices, and operational transparency are moving closer to the center of public policy discussions.

In this webinar, Michael Aronstein, Partner at Antiquity Capital, and Michael Halloran, founder of NES Financial and former CEO of JTC Americas, join Chris Gale, Co-Founder of Gale Strategies, for a timely discussion about how sophisticated investors are navigating zombie funds and why operational transparency may become one of the most important themes in private markets over the coming decade.

The discussion will connect three increasingly important questions: How are LPs independently evaluating aging private assets? How are technology and forensic intelligence reshaping private market oversight? What happens if transparency becomes an operational and regulatory expectation rather than a voluntary best practice? Disclaimer: For informational purposes only; not financial advice.

 

Chris Gale: Zombie Funds. Sounds like a horror movie title. Michael shared shared with me earlier that maybe zompires is is a better term. I think I saw some reporting from PitchBook recently. So these are vehicles, as we all know, that are functionally dead but still feeding off fees, and we might hear some better definitions to the course of of the minutes ahead.

So let’s use that at the doorway, and let’s get into the structural operational strategy questions, and we’re going to start with Michael Aronstein, and then as the course continues, you’re going to hear more from Michael Halloran, and if you don’t know Michael Aronstein, I really encourage you to look at Antiquity Capital. They do amazing work there, and you probably do know that he’s a veteran investor, former president CEO, chief investment officer at Market Field Asset Management. And Michael Halloran is founder of NES Financial, former CEO of JTC Americas, and develops has developed expertise that come from his Silicon Valley background that you’ll get to hear. Spends a fair amount of time in Washington DC even though he’s on the West Coast today getting up early for us, and has done quite a bit in developing technologies and processes for areas of investment like opportunity zones, EB-five, ten thirty one that can suffer from some degree of opacity and trying to bring them to the surface so you can see what’s going on, and you can imagine where this conversation is going to head today. Michael Aronstein, I don’t know if you would like to say some more about Antiquity Capital, but in addition to that, maybe you could set the stage for us about why are we talking about zombie funds in the first place today.

Michael Aronstein: Thank you, Chris. Just briefly on Antiquity Capital, we are more or less a forensic intelligence analysis and advisory firm that attempts to detangle the opacity and the other complexities that are inherent in the private markets. Both my partners, Scott Siemens, and I have fairly long histories of analytics. I’m much more on the macro side. Scott has been on the actual company analysis and funds analysis nitty gritty portion.

And so between the two of us, we… We’ve had a sneaking suspicion that something major has changed in the private markets for several years. And now I’ve been watching this for a long time. I knew David Spencer when he was first hired by Yale. I knew all the people at the investment committee there that actually hired him in, I think it was ’84.

And by then, I was I was well into my career on the strategy side at Merrill Lynch. Just hinting at how how old I am. I’m sure the video probably seconds that. But I have seen about seven or eight of these cycles, and they are all fairly similar in form, but the content varies, which is… That is what makes modeling them very, very difficult. You cannot look at the same sector time and time again and say this is where the problem is. It always moves, but the forms don’t really vary, and particularly when you get leverage involved.

And that’s kind of the key element here. You know, you have each cycle we’ve been through the last fifty years, there’s been some sector that’s really taken advantage of the availability of leverage. And it’s changed. You know, it was… When I got into business in the seventies, it was the energy sector.

If you had anything to do with energy, you could borrow any amount of money, and, you know, gold mining was was second in close pursuit. And then it went from there into the S and L land and development lending. And then you had the whole high yield era where if you were a friend of Drexel, you could borrow any conceivable amount of money. Then you went to Japan, etcetera. And I think for those of you who are younger than I am, which is a lot of the audience, Some of you might remember the whole cycle that unfolded, the big one between 2002 and 2008, which that was almost the apotheosis of a giant lending cycle.

And of course, the collateral was different. It was single family homes, which had never been tried as a generalized source of collateral. And this time, you know, it’s been since they got put in the penalty box for a long time, we weren’t gonna go through that whole subprime deal as long as the people who were there were still alive. We we had a new… When the Fed essentially made money free and began the helicopter money kind of episode, which I would say lasted from 2009, reached its absolute peak intensity in 2001 when you not only had the balance sheet of the Federal Reserve exploding, but rates were functionally zero.

And so all of that was a propellant behind this tremendous wave of private asset leveraged investing, which began in the 80s, had spectacular performance because so few people were doing it, and then became more and more popular. And then it was you know, the ’80s performance was not aided by the fact that you had zero interest rates. You had declining rates, but never got close to zero. So we had a very, very interesting conjunction of positives for that industry take place in the early 2000s. And you ask why now?

Why should we be concerned now? Well, you have two things. The sector became tremendously overpopulated. It was like most high fee, easily manipulated sector, very attractive to lots and lots of new participants who weren’t as skilled as the originals. And secondly, you had the perfect monetary environment, which three years later changed into something that was a lot less than perfect.

I was just revealing the Federal Reserve dot plot their expectations at the end of 2021. And for ‘twenty two, ‘twenty three, and ‘twenty four, rates were assumed to be between 1.82.5% with a long term ceiling of 2.5%. So surprise, surprise, that didn’t work out. And so in every one of these cycles, whenever you get a big rise in rates from the assumed level, you have to look around and say somebody’s going to get hurt by this. And you look and you try to point out, okay, what was the sector that benefited the most?

Where was the excess consumption of leverage and people who really took advantage of the opportunities? And again, it was clear in two thousand five, two six, seven you could just point to the mortgage market and single family homes. This time around, you, I think, have to point to the whole private asset complex. And the reason these things tend to last longer than anyone believes and tend to become more difficult is because it always occurs in a place that the general population isn’t familiar with. People didn’t know anything about subprime mortgages.

They didn’t know anything about that whole world of mortgage derivatives. People knew about single family homes. And today, very, very few people outside of professionals in the industry or advisors have any idea really of the whole matrix that involves private credit and private letter ratings and LDOs and buyouts and continuation funds. It’s very, very opaque. And you combine that with the fact that these are naturally opaque vehicles.

There’s very little in the way of a forcing mechanism that would make this resolve in the way that the public markets might have selling cascades, which is why the process of unwinding is so tedious. And it’s why it’s a topic that when people say, watch out for this, you could come back in two years and say, well, nothing much has happened. But under the surface, there’s quite a bit happening. And that, I think, I’ll stop talking now, which I will come back to that. But I’d like to give Michael a chance to comment a little bit about some of the structural aspects of the transition that’s taking place and why that’s maybe indicative of a stage that we’re reaching.

Chris Gale: And Michael, coming out of Silicon Valley, because there’s a lot of headlines about SaaS, its data centers, and and and Michael Aronstein, I think you’re you’re saying it’s something bigger, Michael Halloran. Not to jump in between the two of you, but, yeah, what what what would you say to the… To what Michael Aronstein was saying?

Michael Halloran: Well… So first of all, just on on the intro, I just wanna make sure everybody understands. I sold NES Financial in 2020. I worked for a couple… Two and a half years for The Buyer, And now I’m out of that.

And right now, I’m just fascinated with kind of the challenges of what’s going on in private markets. And I’ve been focused primarily in the area of, I believe, there is transparency debt in private markets. They’ve grown at such an incredible rate. You know, it’s $16,000,000,000,000 of capital today, forecast to grow to $30,000,000,000,000 of capital within the next five years. And there’s lots of signals that we’ve got an underlying problem.

And so you can look at everything from the annual reports of allocators, pension funds, foundations, endowments, identifying that opacity within private markets is creating a risk for them. You’ve got some where they’ve actually even stopped allocating capital to private markets over $10,000,000,000 with one particular allocator. You’ve got the Opis sending a letter to the SEC signed by 38 member companies identifying opacity as an issue. You got three consecutive SEC chairman identifying that this is a risk. And at the same time, you have the federal government opening up alts to 401s.

And the primary benefactors of alts within those major allocators are individuals like firemen, police officers, teachers. So big market growth, huge impact. But what we’ve got is an underlying structure that was built years ago. And while technology is advancing, and while the level of reporting is actually greater and at a faster velocity than it’s ever been in the past, the data is not coming out in comparable fashion. So you can have an allocator that has multiple funds therein, those funds will come back with NAVs.

And those NAVs are concluded entirely correctly, but using different methodologies. So the allocator looks at it, and it’s not comparable data. You’ve got portfolio companies that, because of what’s going on in the market, have to restructure their debt. When they do that, they’re compliant. They’re not out of compliance with that debt.

However, ratings agencies will look at that and say, That is a nonconforming loan. And so you’ve got two different methodologies that are perfectly correct that are giving a different signal to the marketplace. I And think that gets to kind of some of the fundamental issues. And in the context of continuation vehicles, or here, we’ll call them zombie funds in the market, refers to them as zombie funds, the pain is particularly acute because it’s a compressed window. You’ve got, I would say, from creating a company and running a company, it’s a legitimate situation.

This is not somebody acting as a bad actor. You’ve got a company that didn’t fit within the legal construct of a ten year window, but it’s an economic result that you’re looking for. And so allowing an extra cycle, or right now it might have a thin acquisition potential universe of buyers out there. Allowing that to continue to develop and to continue to cycle is a legitimate way to provide return on capital. However, there are other…

There are some funds that are working specifically towards that. I say would there’s probably some instantiations where the funds are just trying to maintain the fee base, and they’re not necessarily working diligently at, you know, maximizing that return. And the problem in the market is you can’t really tell the difference. The information that comes to the limited partner, they have a finite window to evaluate it. And the person who produces the data, who sets the valuation and negotiates the deal, the same entity.

Is And so there’s kind of a natural conflict or concern. And what happens is the market then in turn prices that doubt, that lack of visibility across everybody. You’ve got somebody that’s really working towards doing the right thing. You’ve got somebody that may not be, and there’s no way for the market to really tell the difference. And looking at it from a…

The title in this is forensics. Well, forensics are looking at things after the fact. It’s expensive, it’s specialized, and it’s not the signal that an intelligent investor needs. An intelligent investor needs to be able to see the operating reality that’s preceding this particular event to make an informed decision. And the challenge is, most of the time, that’s not really provided.

So I have an actual example of how that played out in what… My company was a big provider in the EB5 visa sector, and I’m not going to explain all of the nuances of EB5. But one unique attribute of that sector was that capital flowed into funds, which was then allocated into a separate company, a separate entity that was… And most of this was commercial real estate development. So it was a developer that was producing some sort of project, and then it flowed into a job creating entity.

And the challenge in the structure in the sector, massive regulatory complexity and oversight because of how it flowed, and it was an immigration product, a financial product, a banking product with foreign capital. But you had in that structure very often related parties in all three transactions. And so the opportunity to do bad things was really prevalent. And so surfacing the information, using technology and process to make everything transparent, would evidence those risks and allow people to make informed decisions of what projects they wanted to throw their capital into. And that’s what we did at NES.

And eventually, it even had federal support. So instead of regulating the industry, all the regulators did is they just defined, here’s the guardrails. You can use anybody you want, but the guardrails are there needs to be process transparency. Investors need to be able to see where their capital is. It needs to be protected.

There needs to be audit trails that show how it moved through all these different entities. And that ended up allowing the sector to grow and to expand. And it was not the natural inclination of the sector out of the gate. They looked at it initially and said, This would be more work. This exposes potential issues along the way.

And so the inclination would be not to do that. But when they realized it allowed them to raise capital faster, it allowed them to manage processes better, they dealt with much less from an investor or limited partner servicing perspective, because they were constantly surfacing information versus doing it retroactively. And it just created an efficiency. And I think that that is particularly true, and it’s acute in the continuation vehicle environment. But I think from a bigger perspective, it’s true across private market capital altogether.

Chris Gale: I’m going to jump in the middle there for a second because I don’t think we pointed out there’s a Q and A button down there in the bottom and we very much welcome any questions you have. When you have them feel free to put them in, and then as we approach the end of the session, we’re going to see how many we can go through, and any that we can’t cover will be, we’ll see if our panelists will be able to come back to you off the webinar. Michael Halloran, thank you very much for that, and Michael Aronstein, coming back to your description of antiquity, are there certain triggers or things, in previous conversation I’m gonna date myself right along with everybody else maybe, but you know I’m a fan of all creatures great and small, and I kind of think of you as the vet who gets that call from the farmer saying something strange is happening with this flower horse. Can you come take a look at it? Because I really don’t want it at the next call to be the knacker.

But are there certain things that LPs are looking for? Are there certain things you think they should be looking for that that that that you’re involved with?

Michael Aronstein: Well, that… That’s a very interesting question and a good one. One of the difficulties, one of the reasons that this process is elongating and is really becoming more and more, I think, difficult is because if you look at the whole ecosystem and you try to identify the structure of incentives, which to me is the way you can look at any financial system and really understand it, what everybody’s incentive is. The problem is, and this is not specific to LPs, but there’s almost nobody within the entire private asset system that’s incented to increase the scrutiny of the actual valuations, provide granular bottom up analysis, or question some of the apparent conflicts in valuations, methodology, and ratings. I know this is quite a buffet, and everybody’s feeding off it.

There’s so much money involved. And the LPs, to the extent that they’re institutional professionals, get paid on the basis of the aggregate return statistics. Whether or not those returns are durable or they reflect an actual valuation, the same is, to a certain extent, exactly comparable with the general partners. I mean, clearly, you have more of a clear potential there for lack of incentive. But you have agency problems where you have people dealing with other people’s money who are looking for statistical confirmation.

Then you have the knowledge problem that people who might be the principals, just for example, say the administration of a university, They don’t really have the first idea about what is actually going on. And they certainly trust the investment team, which they should. But the incentives on the investment team side is to present a rosy picture of what the results have been. And that goes throughout the entire system. I would say that there’s no forcing mechanism for transparency other than I will say that the family office and the advisory side have an awful lot of people who really are concerned about the actual result and the actual valuations.

And that’s probably, to my mind, where the most of the discovery impulse is going to come from. The rest of the system is quite happy to be led along and say everything is great. And, you know, it’s something, to my experience, it’s been typical in every one of these cycles. Until you have a forcing mechanism that absolutely terminates the pretense of everything is terrific, even in a circumstance where everybody kind of knows that everything is not terrific. And I think back to the SNL crisis.

Know, SNLs or thrifts, as they were called, used to be really simple. You give them some savings deposits, they lend it out for twenty or thirty years to somebody for a mortgage. Well, that was all well and good until the seventies when the mortgage rates went from six, 7% to 16. All of a sudden, the loans they had made were way out of the water. They’re making 6% out of a whole lot of their portfolio, and now in order to pay the depositors, they’re paying them 10, 12, 13 competing for deposits.

So it was pretty clear that the die had been cast then, and there were all kinds of mechanisms put in place to try to forestall the reckoning. You you had Gaur and Saint Germain say, well, you guys now can do anything. So they got into development. They got into roll land, they got into building golf courses, so they could value assets wherever they wanted. But the actual forcing mechanism that put an end to it was when the SNLs in Texas, which were among the most aggressive, ran out of the cash to pay their depositors.

They couldn’t pay the interest on the deposits because they were operating at a negative cash flow, even though they kept showing everything is great. We have earnings here. The earnings are coming from the proposed value of the golf courses that we’re building. But the cash flow, the actual entity level cash flow was upside down. Their portfolio was just not producing the cash they needed to keep up with the liability costs.

And we have a similar thing that’s going on quietly, and you’ve seen it in some of the headlines with the private credit funds now. They can’t provide liquidity because the cash flows are really not adequate for them to create a reserve. You’ve got a real bid offer spread occurring now between the stated valuations and what the market considers to be the valuation of the loan that was perhaps originated when rates were zero and the company could afford it. So that’s created a liquidity seizure, you know, where almost nobody’s willing to pay the stated NAV. So you’ve got a real gulf between people wanting to get out, the ability of the providers to provide.

Now the structures are designed to be able to throw up gates, and I think people will argue, well, that’s what they’re meant to do, to stop a forced recognition of the valuation. But I would say that’s not exactly a virtue of the system when the actual valuation could be substantially below where it’s carried on the books. So you’re starting to see there are more and more headlines about this or that fund is only paying out 15% of your requested quarterly liquidity. Now it’s hitting it’s starting to hit the press and has been for the past year. And it’s another sign.

It’s kind of, I think, a harbinger of more acute problems. And the latest macro consideration is, you know, we’ve got a strong economy every… Everywhere else except in the… In a lot of the, private financial structures. We’ve got tremendous liquidity still left over from the Fed’s experiment.

You know, when they… Their balance sheet just exploded and to grow at rates that you’ve never seen before. Rates were zero. So you’re dealing with a residual of that, which is driving inflation higher, global markets on the equity side higher, activity higher, and now people are beginning to realize that, well, it doesn’t look like the Fed’s gonna go back to 2% ever, and in fact, they may raise rates. So you’re getting now to the, in my judgment, you’re at the kind of acute phase where more and more people, more and more creditors are going to be forced to reckon with the fact that the extend and pretend kind of path out is just not viable anymore.

So it’s gradually happening. These things tend to happen. They accumulate stress. And then there are generally events that precipitate a recognition. That’s, know, that’s happened in every cycle.

It’s like in 2007, New Century Financial was forced to recant and restate two years’ worth of their earnings. They went from being highly profitable to pretty much circling the drain. And all of a sudden, everybody who was in the subprime space looked more closely, and there were clawbacks, and there were people forcing more collateral up. And that really started the spiral down in the first quarter of two thousand and seven. So we haven’t really had anything like that yet, but my sense, and I can’t substantiate this with particular facts, is that we’re getting closer.

And I don’t have a specific candidate in mind, but it feels like with the passage of time, this is not getting any better. So I will leave you on that cheery note and see if there are any questions that have come forward here.

Chris Gale: Not yet though. You have scared me more than I was anticipating for this. It sounds like to me at least… So there’s option one, which is a crash and things go badly. There’s option two coming back to something that Michael said which is if I heard correctly in his illustrative example, the government steps in and addresses things, and then a third one could be at least some participants in the market attempt to implement solutions so that they’re doing as little retroactively and as much proactively as possible if those three or at least three different options.

Michael, before we get to number three, which is what can market participants do and how technology can play a role, Anything you can share from the government side in terms of where the government is on this as far as you’re aware?

Michael Halloran: Yeah. So first of all, Michael, I agree with everything you’re saying. And I think one thing that I would really focus on as an operator and somebody who built up the company and everything, I totally agree with the incentives aren’t aligned. You have players in the market, and each one has a different objective and incentive, right? So the challenge is the actual work, the actual operations is done at a portfolio company level.

The idea of reporting up to their GPs, I’m sure anybody who’s on this call who’s a GP has been chasing portfolio companies for data for years. Mean, it’s just the challenge that… PwC did a survey recently. I’m trying to remember the numbers. I think it was 54 of the portfolio companies reported financial data and the information that GPs needed, but with an attachment on an email.

30 some percent, I think it was like 36%, actually just put it in the body of an email. And 40% of them said, If we could automate this and have nothing that drained our internal resources on this ongoing frequency, that would be fantastic. We’d provide whatever data they wanted. So I think at the portfolio company level, there’s no benefit to them to provide the data. Operationally, they just look at it as a bird.

You go up to the general partner level, the general partner does not want their data being exposed in a way that their secret sauce is exposed to the market, or it can be weaponized against them by a competitive fund. And so they want to cap the amount of information that’s released, and they want to be able to maintain their privacy and their secrecy. The limited partners look at it and say, I need as much data as I can possibly get, and I need it in a comparable format that minimizes the cycles I have to go through to try and determine how are these valuations created. I need more information to make better decisions, better allocations, minimize risk. The federal government looks at it, and their priorities and their incentives are entirely different.

And to your point, it’s usually some sort of market dislocation that happens that drives a blunt instrument response from the federal government. They come up with a well intentioned legislative initiative that in reality has this cascading effect on the markets to where the only real benefactors end up being the accounting firms and the lawyers. And they make out great every time there’s a big legislative change, but the markets have to adapt and efficiencies are sapped away. Maybe ultimately it gets to something that’s better. And to your point, we’re getting to one of those tipping points because the market has gotten so big.

And so finding a way to align the incentives, so the actual signals, the data, the operating data is flowing up from the bottom of that pyramid through the entities along the way, and privacy respecting secure ways where there’s some sort of standard of how we get the information we need to accurately assess and manage risk, maximize capital. And in doing that, the benefit to everybody is not having the big market dislocation, but it also opens the market up for more capital. The idea that suddenly there’s a level of transparency and accountability within the sector that allows more private capital through 401s or through better allocations out of large LPs, that’s a win for everybody. But to your point, you got to align all the incentives, and it’s a big ask.

Chris Gale: So jumping into that, because I think we’re talking about solution mode. There’s sort of a big solution across the market, and then there’s what individual… Let me focus maybe on GPs. Well, Michael Aronstein, I didn’t mention… You and I have messaged back and forth.

What’s the proper pronunciation of second? Yeah.

Michael Aronstein: Okay. Good. K O N D, second. Yes.

Chris Gale: Are there some solutions out there? I mean, there’s stuff you can do. And then there’s also we live in the AI age. Are are there other solutions out there that that you’ve explored? Any any tactical advice?

Then Michael, I’ll come… Michael Halloran, and I’ll come back to you.

Michael Aronstein: Well, yeah. As you mentioned, we have a very close affiliation with Second, which is a data provider and analytic platform that is, I would say, the most granular, the most robust that we have found at the fund level. We have utilized it and I think we’ll continue as it builds out to really compare structures across various components and see if there are outliers, really, and to double check the accounting and the flows that are being reported by the general partners and see whether or not there is consistency. The amount of data required to do it is overwhelming. Think the CEO of Second, who’s an affiliate and advisor to us, Rasmus Kausker, has I think he pointed out last week to us that for each fund over a year’s period, there’s something like 1,300 or 1,400 separate data series that feed into the proper analysis of the fund.

And there are tens of thousands of funds. So the data management problem is extraordinary. But I completely agree with Michael that before this progresses to the stage where you’re distributing all these assets to the policeman’s beneficial fund and to mom and pop in their 401s, I think that some kind of structure, reporting structure, and some sort of valuation parameters that are really consistent across the industry are going to be necessary. And unfortunately, kinds of solutions, as Michael pointed out, tend to arise after an event when somebody has a real issue that starts spreading, and then the emergency alarm goes off in Washington or at the state level. And yeah, the solutions tend to be very blunt and maybe not, in the long run, conducive to the actual results that they’re seeking.

But now our feeling is that these markets will settle into a sustainable and properly organized form as we go through this transition stage from vehicles that were never intended to be mass market or widely distributed. When David Svensson started putting money into private equity in the mid-80s, there were about a dozen or two dozen firms, serious firms that were operating. And the agreements were all perfectly, I think, aligned with both parties’ incentives. He stipulated that he was going to get access to granular data on an update basis and that the incentives for the managers were going to be on performance. They weren’t going to take fees for originating investments and fees on fees, and they weren’t going to take consulting fees and all of that.

And, no, they they were very, very carefully raw limited partnership documents. That was never intended to accommodate thousands and thousands and thousands of investors, in the same way that the business development corporations that began in the early ’80s as a way to get capital into a starving sector. Nobody was left to lend to small businesses. Now, they’ve been used as the conduit for these gigantic private credit funds. And the reason is because now they fall under the ‘forty Act.

There’s tremendous flexibility with fees, tremendous flexibility with leverage, enormous discretion for the general partner to set their own values, mark their own homework, and really dictate their own compensation. When you look closely at the private credit universe, annual fee burden on these funds is typically between 39%, which on a credit product is almost unheard of, and I would say is really insurmountable. And the way people have tried to surround it is by leveraging them and taking the carry spread between what you can borrow as a fund manager and what the aggregate portfolio yield is. But now that’s a risk additive process without, I think, adequate compensation. But it does permit the addition of a tremendous fee burden.

But again, there’s the people on the receiving end don’t quite understand this. They look at the coupon level. It’s like, oh, here’s a fund that pays 9 percent. What’s wrong with that? And and there’s very, very little incentive to go deeply and explore.

And some of these funds have 500 page annual reports with 30 to 50 pages effectively of footnotes. So the universe of people willing to go through those closely, either using AI or by the end is quite limited.

Chris Gale: Imagining a battle between AIs producing it and AIs attempting to interpret it and staying on top of each other. Though on that point, Michael Halloran. And we have we have a question, so I wanna get to that question before we do. Michael Halloran, any tactics, technology, or things that you’re looking at approaches that can help attendees, especially the the GPs, but also LPs in the audience?

Michael Halloran: So I think… Well, I mean, technologically, as has always been, as it continues to shift and change, enables all sorts of new capabilities. I think you got to start with the fundamental premise, and it kind of fits with what Michael’s been describing, it’s opacity is the enemy of efficient markets, right? All of those things create risk, and it shrinks the market, it minimizes values, And you have to get the whole sector to start to understand that it is collectively a benefit to be transparent. And that needs to start all the way at the bottom with operating companies through the GPs, up to the LPs and to the federal government, and ultimately to beneficiaries of those pension funds or individual investors.

And technology certainly gives us an ability to do that. To me, this is not a technology challenge. To me, this is a cultural challenge. It’s the willingness to embrace a different way of doing things and aligning the interests within the complete sector to create standards, to report those standards, to do it for the collective benefit. If you look in, there’s corollaries.

A good corollary would be in the credit data provisioning space. The major credit providers, because they had really high charge off rates, and those liabilities were really substantial. And they agreed, We’ll share credit data together. We’ll contribute it to a pool. We’ll share that data so we can make better provisioning decisions, reduce charge offs, and manage risk more efficiently.

And that’s how we have TransUnion, Equifax and Experian. And if you look at somebody like Equifax, for them, I’m pretty sure, I spent some time working with them years ago, their consumer credit file represents over 14,000 different providers that are providing consumer credit behavior data. That was the benefit of everybody. It’s the benefit of individuals now who can manage their credit better. It’s better to the credit providers who could go out and free capital up for markets.

And I think this is a good analogy to this, is that if we can find ways to align the incentives so it benefits everybody, then you can get to that result. And one thing I would throw into the continuation vehicle side of it, which I don’t think gets accurately represented, or the need’s certainly not being met, is portfolio companies should provide the data and be aggressive about it just as much as they did when they originally sought the capital. Because this is about perpetuating their business in a successful fashion and working with their existing investors. Their responsibility is to provide the information and do it in a comprehensive fashion. And this is where their investor is at an inflection point, where they need LPs to make decisions.

They want to reflect the best interest of those LPs, and so they should embrace it. Now technology can allow that to happen. Technology now can go in with agentic processing, and we can pull data out of ERP systems. We can surface that data, and we can do it in a consistent common taxonomy. We can do it in near real time.

Now, Priyanna, you’re going to put gates on it, but you can create differential privacy mechanisms, you can have hardware enclaves that ensure that nobody’s data is being used or is being able to be weaponized against them. And so technologically, the capabilities are there. It’s does the industry have the will and the foresight to see that this will prevent market dislocations if they can get ahead of it? I think we’re at that point where if they don’t, federal government’s going to come in and they’re either going to restrict the flows of capital into the market, or they’re going to put mechanisms in place that load it up with cost and actually create inefficiencies to try and accomplish a good objective, but doing it in a probably less than optimal way.

Chris Gale: I’m going to hold myself back from asking some following questions. And so we we have a question here. Do either of the panelists have a view on the NAVs being put out by fund administrators for private funds versus the prices being transacted in the secondaries market? Is there a solution for the large discounts that are seen?

Michael Aronstein: I tend to be a person that trusts the markets quite well. I think the argument that the secondary markets are revealing distressed levels of exchange are incorrect. I certainly think, and I believe this is an accounting standard that is being compromised now, that every fund has the obligation, or at least their auditors, to see whether there have been actual arm’s length marketplace transactions in secondary markets and use that as a valuation benchmark. Now, to date, the argument has been, well, these are so low compared to our NAV because the seller is distressed. The seller obviously shouldn’t be in here because they need the money and they’re selling it at an artificially depressed price.

Well, that’s a funny argument to make, where now you have the two largest sellers in the PE market, I think, are the Harvard Endowment and the Yale Endowment. So they may be under pressure for the money, but they’re not likely to take a rock bottom distressed bid. And the same is true in the credit markets that there are so many people who can evaluate loans and whose business it is to find mispriced loans. And I really do think that the again, this is really a regulatory issue that probably is not going to be addressed until after something occurs. I think one of the things that can be insisted on when a potential LP or buyer of a fund is doing the due diligence is that the manager of credit funds does not get paid.

And the same would hold true for private equity funds on unrealized gains, that the payments should be at realization and the marks to market that create immediate incentive payments, should not be permitted. The other thing I would say also is that the incentive structure in private credit funds should really be re examined, because in most private credit funds or in many, the manager is entitled to an incentive bonus if they exceed some extremely modest target rate. And in some cases, the target rate is the same as the current single or double A bond yield. So if you’re making private triple C or B minus loans and you can’t exceed that, I think the telling point is I think 98% of the incentive fee payments to private credit managers actually get made. In other words, almost none of them are in a position where they fail the hurdle test.

So, I think that’s something that would really encourage more accurate NAV marks across the board. But again, the incentives, you have to take into account the fact that the fee flows in this industry are basically unprecedented. The amount of money involved here is, really beyond imagination in a lot of ways. And you can really see that when you look at the compensation structures, how many individual managers’ returns from certain funds. So it’s a very, very difficult problem.

And again, there’s almost nobody in the system who is incentive to stand up and say, wait a minute, we should stop this. Everybody who’s even remotely attached to the process is making a great deal of money now in one way or the other. So the difficulty is that it usually takes something traumatic before people step back and say, wait, that was out there all the time. We should have known that. So that’s just…

I mean, it’s human nature. It’s just all of us try to act in our own self interest and, you know, the the industry… I think Michael’s earlier point is that it’s really in the interest of the people who are doing their best to be the best stewards and to be actually on the side of their LPs and their investors. They really have a strong interest in trying to promote transparency and really eliminate some of the capacity that enables some people to kind of play at the very edge of sort of what we would call good behavior. So I think it’s coming.

And clearly I’d like to see it come sooner rather than later. And, you know, I’m I’m hopeful that, as Lloyd Blankfein recently said publicly, he said, haven’t most of these guys made enough money? He was he was commenting on, some of the behavior problems, but, I thought that was a very, very apropos comment from somebody who who actually really knows.

Chris Gale: Thank you. And we’re at the four minute mark. Michael, I don’t know if you, also have a response.

Michael Halloran: Okay, yeah, I have a quick response. Actually, it’s just from what I experienced and what we did. So at NES Financial, we started in ten thirty one tax deferred exchange sector. The incentive in that sector was for the providers, the qualified intermediaries, to aggregate capital and chase yield. They were doing it in a way that wasn’t evident to the exchangers.

And they made tons of money doing it. And the way it was written in the tax code, they weren’t doing anything wrong. And so I’m not saying these were bad actors. They weren’t thieves. They weren’t doing anything wrong.

They were working within the structure that had already been created. We came into the sector and felt like we could do something different. We established a set of best practices, a process of transparency and restrictions on how capital could be used and deployed. And then we audited everything with third parties, so everybody knew we were above board. We entered the sector, and within five years, we were processing over $85,000,000,000 of ten thirty one assets.

A year. We were the largest vendor in asset volume by far. And we did it by just trying to do the right thing. And doing the right thing is actually a really good business model. And that’s kind of what when I look at all of this, it’s if people can realize that they can grow their businesses, they can be massively successful by serving the interests of everybody that’s involved in what they do.

I think that’s the solution to it, because otherwise it is the blunt instruments. Instruments. It is the massive market dislocations that happen. And as much money as you’re making here, you’re going to suffer reputationally and you’re going to suffer economically at some point. So what do you do to get ahead of it?

Chris Gale: Thank you very much.

Categories
AI Finance Media Relations

Remember the 2023 Banking Crisis?

As we gear up for an August 1st launch of what’s currently being called our Quarterly, we’ve been revisiting a 2023 webcast hosted by MUFG Capital Analytics’ Scott Ramsey: MUFG Webcast, Episode 3.

Why now? Because the themes — trust, technology, and crisis — feel even more relevant today. And not just in banking and finance. They extend across industries, including healthcare, and critically, into marketing and communications.

A Systems Problem, Not a Workforce Problem

Nearly 40% of clinicians already describe their workload as structurally unsustainable. As organizations lean further into algorithmic scheduling and cost controls, the margin for human error continues to shrink.

This goes beyond a workforce issue. It suggests a breakdown of system flows and a lack of systems thinking.

When people are exhausted and unheard, mistakes happen. In healthcare, those mistakes carry profound consequences — clinical, legal, and human.

And marketers should pay attention. In fact, if you read our Definers Monthly newsletter, you will have noted that journalists are tracking this.

The Emergence of Marketing Paralysis

Inside organizations experiencing this kind of strain, marketing is often asked to do more, faster. More messaging, more campaigns, more positioning — precisely when clarity is at its lowest. The result is what we are calling marketing paralysis. Everyone has a point, every stakeholder is partially right, and the system floods itself with conflicting inputs.

Instead of clarity, you get noise. Instead of action, you get stalled execution.

Lessons from the 2023 Banking Crisis

Coming back to MUFG Capital Analytics’ webcast, we saw similar dynamics in the 2023 banking crisis.

While public attention focused on interest rates and balance sheets, the reported structural failures at Silicon Valley Bank and within supervisory systems were also human. Between 2019 and 2021, SVB’s assets more than doubled — from roughly $71 billion to over $211 billion. Human systems didn’t scale with that growth.

Employees were overwhelmed by micro-compliance, endless assessments, and administrative noise. Risk professionals were buried in daily processing, missing macro-level threats — like unhedged long-term bond exposure.

At the same time, internal cohesion eroded. Hybrid structures fractured communication, reduced productivity, and weakened institutional alignment.

Marketing organizations today are experiencing a version of that same problem: too many signals, not enough synthesis. Too much motion, not enough direction. Everyone is “right,” which makes it nearly impossible to move.

Deliberate Calm: A Better Way

There is a better way, but it requires slowing down. And that’s hard — if you read our upcoming post on bot-sitting.

At the same time as the banking crisis, leaders began applying what McKinsey called “deliberate calm” — structured, paced decision-making that creates clarity without sacrificing responsiveness.

That idea matters just as much for marketing as it does for operations or risk. In moments of overload and fragmentation, effective marketing is not about increasing output. It is about restoring coherence, sequencing, and market contact:

  • Clear narrative over constant messaging
  • Defined decision rights over endless consensus loops
  • Structured cadence over reactive bursts
  • Frontline insight over top-down broadcasting

In the banking crisis, organizations that applied this approach contained damage. They created stability at the top while empowering judgment at the front lines.

The lesson translates directly to today’s workplace — and again to marketing specifically:

  • Speed without structure creates fragility
  • Control without agency creates disengagement
  • Marketing without systems thinking amplifies confusion instead of reducing it

What Leaders Should Do Now

This summer is not just a seasonal slowdown (and for many, there may be no slowdown) — it is a stress test. And marketing is at the center of it, whether organizations realize it or not.

Leaders can ask:

  • Are our scheduling and resourcing systems creating predictability, or chaos?
  • Do our people understand how decisions are made — including marketing and public relations decisions — and where they have agency?
  • Are we aligning around a clear narrative, or reacting to every internal voice and external signal?
  • Are we solving problems systemically, or layering on more messaging to compensate for deeper misalignment?
  • Are we listening to how teams interpret our mission, or broadcasting in ways that risk contradiction and loss of trust?

Because when public relations and marketing becomes reactive inside a strained system, it exposes fractures. Mixed signals, inconsistent positioning, and overproduction don’t just confuse markets — they erode trust internally and externally.

Maybe the consequences don’t show up immediately. But when they show up later, they look like:

  • Declining credibility
  • Disengaged teams
  • Missed risks
  • Reputational and legal exposure (follow us on LinkedIn for more on NAVEX’s findings)

Trust Is Built Through Clarity, Not Volume

Across industries — from healthcare to finance to technology — the pattern is the same.

Trust is not rebuilt through volume. Rather, it’s clarity, consistency, and systems that actually support the people inside them.

And above all, leaders must establish visible, transparent patterns of integrity — operational, cultural, and narrative — that give people agency, and that they and we can actually trust.

Categories
Finance

The Definers Episode 2: Mike Trinkaus and Co-Sourcing

Mike Trinkaus and his team have defined what “co-sourcing” means in fund services. Category creators and those on their way to being one are joining us March 26th to find out what makes 4Pines Fund Services so successful in what they do. We’ll ask Mike why other fund administrators are reluctant to take up co-sourcing in the same way his team does, why it’s a winning formula for 4Pines, and what the innovation stack they’re building looks like to better serve their clients.

Chris Gale  00:02

This is the second episode of our series here at Gale Strategies, the Definers. I’m super excited to have Mike Trinkaus here, our client at 4Pines Fund Services. We call the series the Definers because we love to work for companies and individuals that are actively defining the future of their particular industry or an aspect of their industry. What we mean by that is: pursuing a business model – disruption is an old and maybe tired word – that’s changing the industry. Then, because we’re marketing and communications folks, leading the industry actively in the thought leadership of not just doing the thing, but also helping to articulate and explain it and bring together a movement.

Mike here is an embodiment of what we get excited about. We find ourselves often talking to folks in our network or other clients and saying, “You should look at this guy, Mike Trinkaus, and the team at 4Pines. They’re doing something particularly interesting.” We’re going to ask Mike about that. And we’re going to zero in on one thing in particular that folks in our network have been excited about and asked us about. We’ve pointed to Mike so many times that we thought he might come on in person and explain himself instead of us being the filter.

Talking about something that your competition is unwilling to say or can’t say – fans of Hamilton Helmer may be familiar with counter positioning – there are elements of that.

Mike, I just realized. Can you do a quick intro about 4Pines?

Mike Trinkaus  02:04

Thanks for having me. I appreciate the opportunity to speak to you. I’ll first say that I’ve never thought of, certainly myself and us at 4Pines as definers or anything along those lines. But it has been a really interesting journey to watch what we’ve been able to do with you guys around certain aspects of the message that we want to get out there, and how that’s currently making its way through the market. So that is pretty exciting and I can’t wait to dig into that a little bit.

But who we are: we’re a fund administrator. We do back, middle, and front office work for venture capital firms, buyout firms in the private equity space, and secondary shops-funded funds. We do a little bit of credit in real estate, and real estate space as well. But we’re essentially a managed services firm with a little bit of a hint of a technology angle as well because we’re very, very big on and using technology in efficient and effective ways. Very big picture, that’s kind of who we are. We care about people first and foremost. And we couple that with the technology piece.

Chris Gale  03:20

Before 4Pines, you are a former CFO, and one of your cofounders, Celeste Barone, is a former CFO of portfolio advisors. Celeste, I think, came from Commonfund.

Mike Trinkaus  03:35

That’s exactly right. Essentially, we’re a group of executives who came together through a variety of different careers. Celeste and I both came from the PE industry. We both spent a number of years as CFOs in the space. Our CFO has an engineering background, did a lot of contract manufacturing, and ran global teams in his career. Our CTO is an expert in automation who came from IBM. Our head of product is a longtime fintech guy. We brought together those collective experiences to end up where we are today with this philosophy, vision, and strategy that we have at 4Pines.

Chris Gale  04:25

You are a fund administrator with a CTO, which is fascinating. Maybe I’ll come back to that in a second. The thing that you talk about that other fund administrators sometimes talk about, but not with the clarity and with the sort of bravery that 4Pines does, that’s co-sourcing. Can you explain what is co-sourcing?

Mike Trinkaus  04:55

Absolutely. Happy to do so. I do get asked that question a lot – exactly what co-sourcing means. You know, over time, I’ve started to parse this into two places. There’s this holistic definition, which is a bigger picture, a broader concept that I’ll talk about in a second. And then there’s the everyday operational piece. So let me start with the bigger picture, the holistic piece. Co-sourcing is part of a broader vision that we have around the industry in and of itself, and where we think the industry needs to go and shift towards as the market changes and as the industry changes. As you start focusing on partnering with your clients – truly collaborating with your clients and doing things that incentivizes each other to work together in the same direction – as opposed to what we’ve historically done in this space, which is, “I go behind the curtain on this side. I do the stuff I’m supposed to do. You sit on this side. You hope that I’m doing the stuff that I’m supposed to be doing. You hope that it’s right. And you hope that I meet the deadlines, without any visibility into what we’re doing at all.” We want to redefine what all of that means. As part of the redefining, of what we think the fund advisor business should be doing going forward, we’ve landed on co-sourcing.

On the operational level, the definition of co-sourcing is quite simple. We want to partner with our clients. We want to collaborate with our clients. So, one of the best ways that we think to do that is to jump into the software, the tech stack of our clients, and, in particular, their accounting technology platform. That opens up the power dynamic a bit in the relationship. Historically, firms would outsource. We would have all of their data, and it put them in a tough spot if we weren’t delivering. One of the things I said when I first got into this space was “My background is as a CFO and as an operator. How do I protect myself against that?” If you go back 10 or 11 years, we were only 30 to 35 percent outsourced as in industry. One of the things that I used to hear a lot was, “You have my data. I don’t want to do a data migration.” My initial thought was, “Okay, let’s take that off the table. Let’s talk about what co-sourcing is, and how co-sourcing can address your biggest concern that you’re giving me for not wanting to outsource.” That really started the journey of what co-sourcing means and how you define it. Very simply put, we operate on our clients’ platforms.

Chris Gale  07:58

On one hand, it’s a simple concept. But the impact of it once you go down that road – it opens up a lot of different possibilities of what you could be doing, which I want to get to further on.

To recap, the traditional model would be outsourcing. If I was the front administrator, and you were a private equity CFO, I would have the general ledger on my side. Then you have a deadline coming up, you wonder where the work is. It’s coming. But you can’t really see it. If you aren’t happy with my work because my team is changing or I’m missing deadlines, you’ve got to extract all that data. You might actually have a set of books on your side that you’re checking against the GL that’s on my side. What you’re saying is, “Now I’m going to be honest.” With co-sourcing, I’m going to be doing the work on your side. All of the value that I’m creating, all the workflow, is going to be visible to you. You know exactly where I am.

Mike Trinkaus  09:29

In a nutshell, that’s it exactly. We’re opening up what used to be a black box to our clients, the GPs, and we are saying, “Hey, the model has to change. We want to partner. We want to collaborate. We want to provide transparency to our clients because the market is changing. The needs are changing. The strategies around information and access to that information are changing the tech analogy is changing.” Ten years ago, you couldn’t do a lot of these things efficiently and effectively. Today, a lot of GPs are resetting their internal operating model around data, how they’re using it, and how they’re connecting across different platforms. In our view, we don’t want to be a problem in that process. We want to facilitate that process. We want to help move data if we need to so that you can get it to the places without downloading and uploading and using a manual process to get to where you need to be. I think you described it quite well.

Chris Gale  10:45

Why are you virtually the only one of the fund administrators talking about co-sourcing so enthusiastically? I’ve seen others quoted where it’s like, “If clients want to do it, we can do it.” But you’re an evangelizer.

Mike Trinkaus  11:01

Yes – 100 percent. One, we’ve spent a lot of time thinking about the operating model, and what it means to be a co-sourcer. I can talk about some of the challenges around it because it’s a trade-off with everything we do. Our operating model has been built and designed with the vision of this from the beginning. When we started in January 2020, what we put in place lends itself a lot more easily to a co-sourcing model. There are reasons for that. That’s why we’re so gung-ho about it.

There are two things. One, because we focused on it from day one, we can put forward an operating model that allows us to not succumb to some of the challenges of co-sourcing like the incumbents because of how their operating model is built. You know, they’re challenged on the legacy side because they’re not built for this. They are built for the old model that is closed off, that isn’t collaborative, that isn’t integrated. It doesn’t mean everybody is against co-sourcing. Some folks are reluctantly talking about it because it does make a lot of business sense and creates some business opportunities because there is a lot of interest and enthusiasm in the market for it. So, you are seeing some folks ignore their operating model to take advantage of certain business situations. But the reality is that many firms in the market – whether their legacy tech or their legacy operating model isn’t built for a co-sourcing model that is scalable – have zero incentive to push this model. Again, we’re just the opposite. We’re trying to build something from the beginning. That allows us to scale this in a meaningful way. Because that’s what our strategy has been from day one. We can do it because that’s what we’re building to do.

Chris Gale  13:13

About this idea of saying something your competition is unwilling or can’t say – if you were to say, “We’re transparent,” if Gale Strategies was working for the competition, we could say “No, we’re more transparent.” We might cough up some numbers to show that if I were working for your competition. Why would the competition say “No, we’re not talking about co-sourcing?” Can you share a little bit more about why the marketing and sales team of the competition is going to be held back? Why would they be reluctant to say something like you’re saying? Can you share more from their perspective? I realize I’m asking you to speak in your competition’s voice.

Mike Trinkaus  14:11

If I were them, I would push the conversation away from co-sourcing. They’re not built for it. Everything they’ve done – if they’ve created efficiencies, if they’ve created automation on their side – it all goes out the window in a co-sourcing relationship. That’s one of the challenges with it.

I’ll give you a perfect example. If we have an accounting platform that we’re using, we invite our clients in. We’ve created some integration with some other platforms that we’re using – LP portals, waterfall tools, etcetera, etcetera. It’s really easy to put 20 clients on that platform, and then push that data out to those different platforms that we’re using for each one of those 20 clients in a co-sourcing relationship. If I have 20 clients and they’re all co-sourcing, I now need to figure out the most efficient way to connect to those same systems through 20 different instances of that platform. The teams, in most cases with many folks in the industry, just are built and prepared for that level of work and sophistication. Concerning automation and integration, we’re constantly thinking about the best way to do that and integrate. It’s not easy, but we can do it. So that is one example of why somebody who’s an incumbent will push their marketing firms to not go all in on this co-sourcing. Again, it’s disruptive to the operating model of many folks in the industry, given they’ve been around for 10, 20, 30 years. There are legacy people. There’s legacy technology. It is turning that operating model upside down when going into a co-sourcing relationship.

Chris Gale  16:09

So, there’s a cost to be paid to do my work on your side if I’m the fund administrator. I’m more exposed. There’s a lot of systems investment, workflow investment, which like I said, I think we’ll get into. If I’ve got all this existing business that’s easier and doesn’t expose me to those things, then I’d rather try to compete against Mike on something else.

Mike Trinkaus  16:37

The reality is that there are a lot of downsides to co-sourcing when you initially look at it. But to me, that’s a short-term view of how to look at what co-sourcing can do for you and your clients. We don’t want just clients. We’re looking to form partnerships, with real collaboration. with our clients. The way we do that is, we expose ourselves a little bit. We have to say, “Hey, if we’re not doing the job we’re supposed to do if we’re not transparent about what we’re doing, how we’re doing it, and who’s doing it, isn’t that a bit unfair to our clients?” We need to stand up a little bit and sit up a little bit straighter in our chair. The reality is, if we do the job that we’re supposed to do, whether we’re co-sourcing or not co-sourcing, we’re going to have a great client. When we’re in a co-sourcing relationship, it just opens up the possibility for a stronger partnership to be strategic with how we help our clients out. It’s really up to them in many ways to drive it. But it puts us in a position to help them achieve what they’re trying to achieve. Because the finance departments continue to become more important for the GP, they need some partners on the operation side that can help them be more strategic, help them execute a better plan around data on their side. It’s really what we’re trying to do. If we do that, we’re going to end up okay, and I think we’re going to execute on our vision and our strategy of what this industry should look like.

 

Chris Gale  18:26

On that basis, maybe there’s a pre-agreed set of questions that I’m working through. I want to take the last question and move it next in the sequence because I think we’ve kind of danced around the workflows and the investment and all the stuff that has to be in place to make this work. That’s important, which is to say, we’re talking about it at a theoretical level.

What have you done and what needs to be done to make co-sourcing work? It sounds like the alternative could be, again, if I’m the fund manager, I could be working on your side on your software. All I can do is screw it up. It sounds like I need to have some workflows and some familiarity that I’m not going to be able to do on day one.

Mike Trinkaus  19:23

It’s certainly a journey because, in many, many instances with co-sourcing, we’ll jump into existing systems. The first thing you have to do is go in and understand what’s there to begin with. Then you need to assess what you need to fix because, oftentimes, what we see is a process that’s been developed over time for a specific firm. Yes, it works for that specific firm. But what you see is you may not have broader expertise because you do the same things over and over. We like to come in with a much more well-rounded experience within the platform. We usually can find some easy fixes in areas that can make our job easier, help the clients in the long run, create some reporting, and different ways of doing things. In terms of workflows, yes, we really like to outline the relationship, and document all of what that looks like – building some workflows, some controls, build other tools that we have at our disposal, that work alongside or on top of many of the different software technologies that we have to use. It becomes an operating infrastructure that we leverage that integrates and incorporates into all the different aspects of the relationship that we have with our clients. That takes time. It’s not a one-quarter or two-quarter process. It’s a continuous process that you go through because the business changes. We need to understand what you’re doing, what are some of the gaps that we’re seeing, then we have to address the gaps, and then it’s, “Okay, here’s our operating model today, but your business is evolving. You’ve raised another fund. Maybe you’ve added another investment vehicle.” Whatever the case may be. All of that information, that process, that cadence, over time, becomes a living and breathing document. How do you change that on a go-forward basis? How do you implement it, integrate it, etcetera? That’s part of what we do regularly with clients.

 

Chris Gale  21:48

Are you talking about doing that on a one-off basis? Or is working with 4Pines different because you are implementing it across all clients? You have a CTO. Is it all people processes? Are you also looking at automation on the 4Pines side?

Mike Trinkaus  22:06

Oh, absolutely. Automation is a big part of it. We’ve talked a lot over the last couple of years about the shortage of accountants. They’re not studying at the same rate in college. We’ve focused a lot on automation, being able to do things in an automated way that historically we’ve used people for. We spend a lot of time on automation. That’s not a one-off. That is across our clients. That’s a process that is core to our operating model. I think that’s probably a bit different than what you see in the industry, our commitment to continuous improvement, project management, etcetera, etcetera. We are committed. We meet every quarter, every month, to talk about a variety of these topics.

Chris Gale  22:59

I know the value you place in great people and disciplined execution, quality. I’m going to come back to the CTO. Let me explain why I’m coming back to the CTO. When we talk to companies about not just making a claim and then trying to provide evidence and why you do it better than your competition, and you get into this he-said-she said, finding something that you can say that others can’t, and it sounds like sometimes it can involve something where you give something up. You give more transparency to your clients because it’s really hard for your competition to do that.

But that also seems to mean that it can’t just be marketing. Traffic can’t just be something that you can say to someone else, “You have to build a product that underlies that.” What I’m wondering is, in this world of software, do people need to think through not just the people processes, but the project management and the workflows, how to do this with the kind of regularity that software offers? Is there more secret sauce under the 4Pines’ hood, in addition to the excellent people?

Mike Trinkaus  24:29

I’ll first say, you know too much about 4Pines. We’ve built some of our technology to do exactly many of these things that I’ve talked about related to collaboration, integration, and transparency. We have a platform that our entire tech team has built alongside the input from really almost everybody at the firm because we take input on a pretty regular basis. We use technology to help us with many of those pieces of the vision around the operating model in the industry focused, again, on three areas –  collaboration, integration, and transparency. You can do that both at a people level as well as a technology level. The people, internal, external, etcetera, we think, again, are a nice overlay to the co-sourcing model because it achieves and addresses the same things that we’re trying to address in co-sourcing in a different aspect of the relationship. I could sit here and talk all day about it. Once you see it, it then makes sense. Because technology is one of those things where, until you see it, you only have a sense as to what exactly it’s doing. You could talk on an app, but you start to lose people after a while. So have a platform.

Chris Gale  26:12

We’re a marketing and PR firm. Oftentimes we come to an existing product. We’re asked to amplify what you have started. From the beginning, it seems 4Pines was built to do something that other folks didn’t want to talk about or did not want to propagate. This is going to be a horrible analogy. But I used to work in state government. We got a lot of great media attention for this analysis we were doing on a fish species. Another state agency said, “Hey, we’d like to do one of those. You got so much media attention.” It was like, “Well, the reason why we did that is because we had this antenna; it took a lot of work.” What I’m getting at is, it’s not just messaging. It’s the messaging and the product development that are intertwined.

 

My last question: we spoke to Richard Chang, who is a founder of his company. We’re speaking to you. You’re a founder. Some folks are going to watch this who maybe don’t want to be founders. Maybe they want to enable it because they are operating partners or they are marketers on behalf of business units, or maybe they don’t necessarily want something on their own. Can you talk about how you can build something that’s defining the industry and talk about things that others are unwilling to say regarding a portfolio that somebody else owns or within a large company? Can it be done? Or what would you recommend the folks who start modeling to become founders themselves?

Mike Trinkaus  28:12

You have to look in the mirror and ask yourself and see what you’re comfortable with. I’ve been around the industry a long time. I think we have a vision and strategy that will work. Now, taking that strategy and executing is hard. You have to be a little courageous to do that. Or stupid. Maybe a little bit of both. I’ve been accused of both. And I’m okay with that. Can you do it as part of a larger organization? I suppose you could do it. To me, it wouldn’t be the same. I think there are lots of guardrails that you run up against, but maybe a version of it. If you’re a bit less risk-averse, that might be the spot for you. But I think, for us, we are completely committed to this vision that we have because we think it’s the vision for the future. Some version of this is what our industry is going to look like. We’re very good at what we do. We have a strong belief in our ability to deliver. Because of that, maybe rightly justified, maybe foolishly justified, I don’t know. Time will tell over the next five to 10 years to see how we do, but I think we’re off to a pretty good start. We have something we’re committed to. We’re going to continue to build it regardless of what people say, regardless of whether or not the industry agrees with us. What I do know is, our clients see the vision. Our clients are responding to the vision in a way that we expected, in a way that we anticipated, and whether or not we win a particular prospect or not doesn’t always tell the full story. You can’t be deterred, whether you are successful all of the time, because there are lots of reasons why folks make the decisions they do. It’s the feedback loop that we get regularly, that makes us incredibly excited about what’s in front of us. It validates our strategy, and our vision, every single day. I wouldn’t want it any other way than to do it the way we’re doing it as a bootstrap company with a vision, a vision, and a scrappy scrappiness needed to build something that could profoundly impact the industry. That’s really what we’re trying to do.

Chris Gale  31:01

That is excellent. It’s also, I think, a challenge, maybe to others who want to enable or empower innovation within their organizations. You have to enable commitment and be willing to, if I hear you correctly, admit that this is not going be the right solution necessarily for everyone immediately, but it may be the right solution for everyone eventually. But you adhere to it because the results are going to speak for themselves, which they do seem to be doing, and we’re talking to you because 4Pines has done tremendously well.

We are at time. Thank you very much, Mike. Thanks to everybody who joined us.

Mike Trinkaus  31:58

Right. Appreciate it. Thank you.

Categories
Finance

The Definers Episode 1: Richard Change and GP Solutions

Richard Change and his team have defined what “GP solutions” mean in the private capital software market. If you’re a category creator, or you aspire to be one, join us March 5th and come armed with the questions you’d like to ask someone who’s been there and is doing that today. For our part, we’ll ask Richard how he uncovered an unmet need no-one else was willing to tackle, how his team are solving the problems holding others back and how PFA Solutions is enabling a movement of and by their customers, for their customers.

Chris Gale  00:02

Richard, it’s fantastic to have you on. I’m personally super excited because we serve a lot of founders and CEOs who basically want to do what you’re doing at PFA Solutions, which is defining an unmet need and then defining how that is going to be addressed together with your clients. We wanted to have this webcast so that you could share what you’re doing with clients of ours and folks in our network across multiple different industries. Can we first give folks an overview of PFA Solutions and your market?

Richard Change  00:55

PFA solutions started back in 2013. We’re focused on general partner solutions, general partners being the investment management arm in private equity. They’re the people who are responsible for doing the investment when it comes to private equity. We focus on solutions that meet their needs. Those solutions evolve around carried interest management. That’s how GPs are compensated. It’s simply the profit of investments that they make, as well as timing and compensation – your basic bonus and salary information, bringing it all together. That’s one-half of our application.

The other half gives GPs a better view of the performance of their portfolio and ties that information into transactional systems plus what they store offline in Excel. That’s the picture that we paint on the performance side. It’s a SaaS-based platform helping general partners manage carry and compensation and performance.

Chris Gale  01:58

To give folks some perspective, what kind of growth have you seen? There was an announcement of $1 trillion in total assets across your clients’ firms. Can you tell us more about the scale of the market you’re serving and the growth that you’ve seen?

Richard Change  02:15

We did exceed $1 trillion of assets under management by our clients, which brings us to close to 50 general partners that are using our SaaS platform at this point – internationally, as well. From a growth standpoint, the last three to four years have seen steady growth for us. We continue to focus on making sure we service existing clients and new clients equally. That’s first and foremost for us. Because in this industry, it’s a small, tight-knit community. You know, your reputation goes a long way in gaining new business.

Chris Gale  02:58

You’ve mentioned GP solutions. Until recently, nobody was talking about GP solutions. For audience members who are not as deep into the private capital sphere, LPs are limited partners. They are the investors. The GP is the private capital firm, the private equity, or VC firm. There are software companies that do accounting and operations software for private capital, but everybody focused on the LP experience, primarily.

Richard Change  03:36

That’s the first need that an investment firm has, meaning that you have to collect capital from your investors; you have to have a platform that manages notifications, distribution notices, and tax statements. For most GPs, the first thing they get going, from a technology standpoint, is making sure they’re servicing their investors or their LPs properly. That takes precedence over anything else. Because if you don’t do that, first, the GP portion may not necessarily matter. So, a lot of the technology is focused on the LP side. On the fund accounting side, there are big traditional software vendors in the space that help with the accounting as well as the distribution of information to the investors themselves. We always felt like that was well spoken for. For us, we saw the need on the GP side, the gaps, and the lack of modern technology. Excel still drives so much of what they do. Those were the things that we look to solve for – helping the GP automate and start to scale as they grow bigger.

Chris Gale  04:48

Serving the client base that you just described and the total assets across those clients. How come nobody else has done it or has done it in the focused manner that PFA Solutions has?

Richard Change  05:05

Probably because it’s a bit bespoke. Coming up with a model that fits 80 percent or so was a bit of a challenge. We passed that point, having a software platform that will essentially solve 80 percent of what we would see from a new GP out of the box. It took us a while to get there. We’ve now crested over that path. It’s the outliers and nuances that we may run into but, out of the box, we’re able to set things up, get the data into our platform, and get them operating based off what knowledge and experiences we’ve gained over the years, and push that back into the platform. Long story short, it’s not as easy.

Chris Gale  05:53

There are two things we’ve noticed about our most successful clients, especially in the last year when interest rates went up and companies out struggled. One is a main focus of this conversation: establishing peer-to-peer customer networks. The second is saying something that your competition doesn’t say or even is unwilling to say. That’s what you’re describing about the difficulty of the bespoke solution that’s required.

Are traditional SaaS providers that focus on the LP experience potentially afraid about talking too much about GP solutions, or is it more that they don’t have a solution? They don’t want to talk about it because it’s not an area that they can focus their engineering talent towards, for instance. You’re the only ones talking about GP solutions.

Richard Change  06:55

You’re starting to see some smaller players coming into the market. Thinking about that market, GPs of a certain size start to experience the pain points here. The other driver for us, and a true catalyst, was the pandemic. We addressed essentially everything that a GP operationally thought about – it needs to be electronic, it couldn’t require that face-to-face meeting with someone. To have a digital platform where employees and investment partners of the firm can go in and pull down their carried interest or pull down their compensation statements was another driver for us as well.

Exasperation with the competition for talent within the market. That’s a huge driver. If we think about GPs in general, their focus is always on doing great deals. You need people to help to make those great deals. The competition for talent continuously makes attaining, keeping, and retaining those talented individuals is something that they have to prioritize. There are a lot of GPs and a lot of investment firms out there now that like to keep talent. What better way to make sure that they stay with this firm than explaining their relationship to them exactly from a compensation standpoint? That has been the other driver for us over these last three to four years. It’s really about compensation for the talent. Firms want to digitize their employees’ experience.

Chris Gale  08:40

Excellent, thank you. I want to come back to that point about the pandemic. But before we do, I’m now thinking about the sequence of your biography. If we go back to the origins of PFA, you were in a role inside a large, well-known firm. You could have continued at that firm, potentially, or at a different firm, but instead, you decided to go out on your own. Can you tell us about that decision? What drove you to do that? Because it can be kind of scary.

Richard Change  09:34

Yes. Tons of fear and trepidation for sure. You know, I would say one of the big drivers was just talking to other GPS at other firms and seeing that they suffered from the same sort of situation that my firm did, meaning a lack of technology on the GP side to help automate and systematize a lot of the data and processes that were in place. That was a big driver for us. Here’s a big gap in the industry, from a technology standpoint. There are solutions that we’re familiar with and know how to build, audit, and think about them at scale. Let’s build out a platform where we can help GPs manage this because it does become a bit of a pain for a lot of our GPs as they continue to grow. Complexity continues to grow with the size, quite honestly.

Chris Gale  10:25

Why PFA? Was there not a software company or consultancy out there doing that? Why not try and advance that from within the GP?

Richard Change  10:38

We didn’t see a software company doing it and addressing GPs. We just looked around high and low. We saw some looking to shoehorn GP operations into what they’re doing for the LP into those systems. It’s not a natural fit. Because, if you think about the users you take care of for a second – I hate to dive into the nuance here – but it’s not the model. Your investor goes and says, ‘Hey, you know, I’m going to commit X amount of dollars to this fund.’ That is the basis of our distributions and contributions that will be called. For that investor, you should show how the math actually works out. It’s pretty simple. It was complicated outside looking in. But, basically, your commitment drives all the downstream calculations for calls and distributions. On the GP side, when we think about carried interest in the profits that are shared, there is no commitment necessarily. It’s arbitrary. It’s all based on my feelings for you as a team player. I’m going to get X amount of percentage points on this particular deal or shares on this particular fund. That’s how those calculations are done. It’s a bit arbitrary on the GP side. And it’s not arbitrary on the LP side. I have a basis for commitment that I’m going to use to calculate and call capital and distribute returns to you. Showing the math is easy on the LP side. It’s much harder on the GP side because it’s all arbitrary.

Chris Gale  12:13

When PSA Solutions started, though, you were not a software company. You were doing consulting and professional services. What exactly was PFA doing at that point?

Richard Change  12:25

We were doing technology consulting back to the industry. Part of what we wanted to do those first couple of years was pay the mortgage and fill the book of business – footprint and foundation. We started doing what we knew best: custom application development, enterprise reporting, and back to the same industry. In the first six to nine months, we thought would be industry agnostic. But you end up sticking to what you know. GPs that we were familiar with reached out and needed help. That really got the ball rolling for us in the industry.

Chris Gale  13:05

Were you always thinking about developing a software solution? Or were you at that point from the very beginning, and the consultancy was in a way, like you said, to pay the mortgage? It sounds like you were scoping out where the most useful problems to solve were exactly. In engineering and software development, you have a very strong background. When did you decide, “Okay, this is it. Let’s start building something.” What triggered that?

Richard Change  13:49

One of the main triggers was working with a GP at the time and realizing that everything that they needed to do by quarter and reporting when it came to carry as well as performance, all started with Excel. It wasn’t a system that they ran through first to grab this information and press a button to click a report. The basis for what they did started in Excel. They reviewed that information in Excel and then put that information in the system to essentially act as a data storage mechanism. It didn’t provide the calculations. Everything’s done offline. It dawned on me that this is still a huge problem within the industry. Excel is still the gatekeeper for data. We also didn’t see a carried interest management solution out there. For a lot of our clients, when they sign on to work with us and to leverage FirmView, we’re pretty much converting every single client from Excel. There’s still a huge gap. Excel still runs the roost when it comes to data within the industry was one driver. The lack of technology products available to GPs was the other. I always felt like this industry was underserved from a general technology standpoint. That underserved group is even higher on the GP side.

Chris Gale  15:36

This is interesting. You see a need, from the GP side, that you don’t see others addressing. You decide then to scope out the needs in the consulting process and develop software because there’s really not a software solution out there. You’re working with your former self from a certain perspective, right? You brought your former selves together to sort of talk to each other.

Why the decision to bring customers to customers together on a peer-to-peer peer basis? You held a roundtable at the beginning of this year and one last year. Tell me about that aspect of it. I’ve noticed that our most successful clients and folks in our network who define a market make peer-to-peer conversations happen that you seem to be quite dexterous at facilitating.

Richard Change  17:10

The private in private capital markets and private equity isn’t a misnomer. Naturally, the industry keeps a lot of what they do close to the vest. A lot of it’s due to just competition for new deals or talent that’s understandable from a competitive edge standpoint, but also creates these islands, right? How do I think about compensating or developing a carried interest plan for this particular fund? Or what are the tax ramifications? We structure up phantom equity this way, or these hours that end up getting created, a lot of times don’t get the benefit of an industry standard, the benefit of hindsight, or lessons learned from other GPs. What we wanted to focus on for our roundtable was not a solution or our platform. It’s first and foremost about connecting GPs to each other. It’s making sure that they’re not alone. The challenges that they’re facing are being felt by others in the industry. They can look around that room. Now they have 40 to 50 other people that they can reach out to and ask questions. Yes, you know, there’s our platform that can help with that process. But there are things that our platform can’t do depending upon the decisions that the GP makes. To me, essentially, that’s knowledge, that’s information that’s just as valuable as a software platform. Thinking about some of the decisions good or bad that have been made, how do you push that back to the same community so someone doesn’t repeat the same mistakes that someone else made? That’s the most valuable thing that we get out of our client roundtables. It’s that information sharing.

So, we started the roundtable. Last year was our first year. It was connecting people with each other. This year, we took it another step further and brought in tech specialists to also help the group think about and answer questions about structuring plans and tax implications that need to be considered because of new changes in tax laws. It’s not just the blocking and tackling of having a system that does X. It’s all the upstream decisions that affect our system that we want to help our clients with. It’s not just about what they do in our system, but the decisions that will eventually affect how they use any system.

Chris Gale  20:01

It’s an area where there is sensitive information, there are islands of expertise developing, and therefore there is an opportunity. Folks are coming to you and saying, “Can we create a connection and another island over here?” But that provides an opportunity for you to bring folks together in a way that is meaningful to them serving a need, not just you pushing out a message. The reason why I’m checking in with you on this is because we have other clients who, for instance, might be in the healthcare space. There are physicians out there and health system leaders out there who may say, “Our stuff is incredibly sensitive.” They may not necessarily be in such a competitive situation, though, unless you have two hospitals in a similar catchment area. They may feel competitive. But I think what you’re saying is, whenever you see islands that are underserved, and whenever you see difficult challenges, that are not being addressed, there stands an opportunity, that’s where the software provider in your case can step up, because, and go beyond just providing software.

Richard Change  21:21

Right. At the end of the day, something I’ve always strongly believed in was that, yes, we can provide software that does X and could get your dry cleaning, even. But it’s the other things that aren’t software-related that we like to provide as well. It is a relationship that we’re building with that potential client to understand and help them utilize our platform and think about the decisions that they’re making, thinking about the plans or structures, thinking about what’s going on in the market. That’s one of the most helpful things that we provide – backing. Yes, the software is great. It does X, Y, and Z. You’re able to automate push-button imports. That’s fantastic. But can we help someone think through the structure for a new carry plan and their tax implications? That’s the value I think that we also provide back to our clients – helping them think through not only implementing the software but also how they think about their plans. What are some other reasons other firms do this instead of the way you’re doing it? What are some of the pitfalls? That’s our secret sauce, I guess.

Chris Gale  22:36

It’s interesting you say that because there are firms out there that provide consulting on carry and comp and there are accounting firms and fund administration firms. PFA is very careful with talking about who’s at your roundtables. But folks at those roundtables know that it’s an amazing group. You don’t necessarily see consulting firms necessarily able to pull them together. I’ve wondered, is there something about the fact that you’re a software firm that allows you to have conversations that maybe consultants haven’t discussed before? You seem to be able to bring folks together around what is needed in the market, in a way that seems to be relatively unique.

Richard Change  23:45

It’s probably the company that we keep, quite honestly. We have a client that utilizes a platform. That client is going public. They’re interested in how other publicly traded private equity firms on our platform handle this situation. That’s outside of carry. But we served as a conduit between those two firms. They’re looking to see how they should handle this new SEC regulation. “How did you guys think about it?” We were able to connect those two firms. That’s one of the things that we kept seeing. We’re becoming the conduit between a lot of firms. Sometimes it’s just knowledge that we already had based on experiences with all of these different clients of different sizes as well. Other times it’s the company that we keep. Being able to share some of those lessons learned or how we’re going to approach X is one of the things that our clients look to us for a lot.

Chris Gale  24:49

A follow-up question is about your software company. We’ve been to our share of software company user conferences. Are there things that you take from the two roundtables? Are there things that you take from those conversations that you put into the product? Roadmaps? You have my last question. We’ll be coming back to the pandemic. But you have individual one-on-one conversations. Is there anything in the roundtable environment that facilitates the product roadmap process?

 

Richard Change  25:33

The piece that we pushed into the platform in the previous year was based on feedback we got from the roundtable. They wanted more ad hoc reporting capabilities within the tool. So that’s something that we focused on for the last 18 months. We’re continuously pushing that capability out to all of our clients. It definitely informs where we should go in our roadmap. It also helps us think about potential new modules that we should look at. When we first started FirmView, it was carried interest that we were going to help clients manage. It quickly evolved to compensation. So now I have my carry and my compensation all stitched together. Then clients came back and said, “Well, as you’re managing those pieces, what about our internal core investment that our employees are also investing in within the firm, too?” Taking a step back, this year it dawned upon us that we’re focused on everything that’s GP-related.

So, just based on our client feedback, we’ve rolled out the compensation module, the core investment module, and now, our most recent one is our compensation planning recommendation module where clients can facilitate their year-end process through our application. I would say the majority of our roadmap comes from our clients’ feedback. Each and every year, we do a survey and collect that information. We start to make decisions about where we’re going from a platform standpoint. I will say, this year, though, the demand was less about new features and more about new ways to collaborate with each other. That was one of our biggest takeaways – that wealth of knowledge, how do we tap into that? How do we get to a point where we can, you know, communicate, and talk about how we’re utilizing your platform with others? User groups were the new feature. An enhancement that we’re going to make is allowing others to communicate with each other, how they use the platform, and how they think about their compensation plans in general.

Chris Gale  27:52

Here’s my crazy question building on what you said about the pandemic. For marketing media relations teams during that period, everything had to do with the pandemic and how it was going to change work. That’s definitely been true. Our webcast series was partially an outgrowth of the pandemic. I’m not sure how much this connects with the B2B SaaS space, but we’ve heard stories about companies that had enormous success with the digitizing and virtualizing of work that came out of a tragic event. Then there was a cliff that was gone over. It seems PFA’s trajectory, even through the doldrums of higher interest rates, has continued to be up and to the right in the progression from the pandemic into the current environment. I connect that with what you’re describing about people and wanting a network effect for your customers. Is that a way that you’re sustaining that initial hit of growth? It seems like you’ve built off of this networking effect.

Richard Change  29:33

I think it helped. That provides validation, for one, that you have market fit, and you have a product that’s meeting the needs of specific competitors that they view in the market against themselves. I think that helps. Don’t get me wrong. If you’re able to get over X number of clients, that at least validates to everyone that you have a great product, you have something that they should be utilizing or thinking about utilizing. That’s helped tremendously, I would say. The other thing is that this need hasn’t gone away. Right. I do think that, you know, more and more firms as they continue to scale and grow, this need becomes even more relevant for them.

Chris Gale  30:24

Thank you so much. Thank you, everybody. We’ll let folks know about the next webcast, which will be coming up later in March.

Richard Change  30:36

Thank you.