Chapter 1: What role does TIFF play in the independent sponsor market?
Give me a sense for where TIFF is today as a business. To give you a sense of where TIFF is as a business today, David, I really do think it's impactful to start with a little refresher of where we came from and what we do to give your listeners a better idea of the value add that we bring to the table here at TIFF. TIFF was founded over 30 years ago.
really to provide investment solutions primarily to nonprofit institutions at the time where we specialized in outsourced CIO solutions and private market solutions. We have two distinct business lines. We have our OCIO or Outsourced Chief Investment Officer business that manages the full wallet share of our client portfolios. That's what we've been doing since inception, since 1991.
always had a strong focus on alternatives and private markets. And then that second business line that we have since 1997, we've been offering standalone private equity and venture capital strategies, which is where I focus today.
And those strategies combined, we've grown to a roughly $9 billion organization with over $3 billion of that in privates, where we continue to serve our historic nonprofit ENF base and also expanding our footprint into the wealth management and family office community, where we've seen a lot of demand for the types of strategies and customization that we can bring to the marketplace.
deliver what we view as high quality investment returns consistently and over long periods of time for them. So many of these large institutions, they're just overpowered with so many resources and so many people on staff that these smaller and mid-sized firms just don't have. And they viewed that as such an inequality and wanted to help out any ways they could to that community.
We were just chatting offline and you mentioned that you were at the McGuire Woods Conference and there was over a thousand independent sponsors at this conference. Tell me about that conference and what does that tell you about the space today?
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Chapter 2: How has the independent sponsor landscape evolved in recent years?
Yeah. So TIFF has really several avenues of sourcing great sponsors and making sure we consistently fill our pipeline of top investors to keep that deal funnel full of new ideas. One of those sourcing advantages or avenues is through industry events and conferences like McGuire Woods, which we've been attending for several years now. And for anyone who hasn't been there before,
really picture a giant conference hall full of a few thousand people at an individual tables, essentially speed dating with a 30 minute timer. Then you move on to your next table and so on and so forth for two to three straight days. Uh, David, I lost my voice within the first three minutes, which, which was fun to battle through. Um,
And it's important to note this event has grown drastically over the last five, 10 years since we've been going, in part because McGuire Woods as a firm has really done a terrific job, but also because this segment of the market has been experiencing really massive increase in size.
So give me some numbers. How big has this independent sponsor market gotten in the last few years?
The independent sponsor model has existed in various forms for decades. Its success over the past several years, both in terms of deal by deal returns and in serving as a pathway to raising a committed fund. it is starting to attract more seasoned investors who have left established PE firms to launch their own independent platforms or hang a shingle, as we like to say.
This shift has really raised the overall quality of professionals in the market that was previously populated largely by younger investors without an attributable track record or
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Chapter 3: What are the sourcing advantages for independent sponsors?
Ex-bankers or consultants who are seeking to transition into investing or even operators pursuing deals in their niche areas of focus. Even as recently as a decade ago, when we started in this segment of the market, David, we started back in 2014 at TIFF. encountering an independent sponsor at the time was a relatively rare occurrence. But today, this universe has grown.
It encompasses a huge, wide range of independent sponsor types and profiles. There's even a large ecosystem of lawyers, lenders, intermediaries, and investors who are catering to these sponsors. And that's expanded as well, which really highlights the maturation of this place.
How do you know you're not being adversely selected when it comes to these independent sponsors? Aren't they just... funds that couldn't raise.
Some people even ask us a different question is, are we worried by how much this market segment has grown? The easy answer to that question is no. And I'll take a minute to explain why. As this market has expanded, sure, by definition, more low quality or undifferentiated managers are entering the market. But at the same time,
Chapter 4: What defines a high-quality independent sponsor?
There's more experience in high potential managers are launching as independent sponsors, which is really great for us. In our view, having a clear view of what defines an exceptional sponsor is essential for long-term market success.
Success begins with having a long-term tenure team with what we feel needs to be at least eight to 10 team members who all have the ability to source sponsors and at the same time evaluate each underlying deal and then build long-term relationships with what we feel are exceptional investors.
And at TIFF, we've been able to check all of those boxes as one of the earliest institutional investors in this space. And we're continually looking to improve and adapt moving forward to the marketplace.
Maybe if you go upstream to why there's so many high quality independent sponsors today, what's changed in the last five years?
The avenue of every sponsor out there is totally different. So it's hard to paint a broad picture here. We've invested alongside several sponsors who have stayed as independent sponsors for a long time. So let's talk about what drives that decision for someone to remain a sponsor instead of going on to raise a fund. Clearly, there are some benefits of this space.
First and foremost, you have way more flexibility in the sponsor model. So you don't have to build out the infrastructure of a full firm. You don't have to build an entire team, and you don't have to go through certain industry registrations depending on your size. Second, the economics of the sponsor model can really be very attractive.
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Chapter 5: How do independent sponsors structure their fees and economics?
You can earn carry on a deal-by-deal basis instead of cross-collateralizing carry seen in a typical PE fund model. And third, you can really be as thoughtful and selective as you'd like to be because you're not on the clock with committed capital from LPs like you would be with a blind pool fund.
Now, with all of that said, for everything that I just listed as a benefit, those can also be viewed as negatives over time, pros versus cons. As you start to make more and more investments, at some point, you might eventually like the idea of hiring more team members so you're not in the weeds on every single deal model and presentation.
And if you want to hire a team, most people want to see a future and a career path that can best be illustrated and brought to life through the vision of launching a fund in a real platform. Talk to me about...
the fees that independent sponsors charge both management fee and carry today? What's the market look like?
So one of the key benefits of investing alongside independent sponsors is that there's a great opportunity for aligned economics and fee structures. And here's what I mean by that. Similar to the broader private equity universe, terms in the independent sponsor market continue to balance manager and investor interests.
So in our view, terms for independent sponsor deals are more clearly structured to align interest between investors and sponsors. So for example, Tiered carry structures and monitoring fees that are based on EBITDA are now relatively standard across deals we see in the market.
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Chapter 6: What are the benefits of deal-by-deal investing for independent sponsors?
That ultimately creates stronger incentives for equity value creation compared to most private equity investments that you see. So rather than charging a flat fee and significant carried interest for minimum performance, independent sponsors must actually grow EBITDA in return high multiples of money to generate their significant wealth.
On occasion, we see an independent sponsor try to negotiate a premium carry. These negotiations are typically not successful and would only apply in really, truly outsized return scenarios. So before reaching out to TIFF, I want sponsors to know that we are in this together. We're on the same team.
Plain and simple, our end goal is to partner with high caliber investors over the long term and generate strong performance along the way. We don't want this to be a one deal and done relationship.
Again, I mentioned this earlier in one of our other questions, but our work with independent sponsors can and often does lead to fund commitments down the line if and when a sponsor is ready for a blind pool commitment. And it has successfully done that many times.
This opportunity set creates a great chance not only for us to find and make excellent investments, but also serves as an exceptional underwriting tool for a future potential fund partner, for an emerging manager, which is another key tenant of the TIFF investment philosophy. This is something that's very differentiated about TIFF's approach with independent sponsors.
Another topic that's important to reiterate that many independent sponsors do already know is that we've been doing this for a long time. Since TIFF's first direct investment alongside an independent sponsor in 2014, we've learned really many lessons over the years, and we have a lot that we can bring to the table in helping these sponsors through their lifecycle, whatever that may look like.
It reminds me of that old joke, the best way to diligence a manager is to make an investment.
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Chapter 7: How does TIFF assess the quality of independent sponsors?
this is kind of what you guys are doing, which is you're not actually investing in the fund. You're investing in a deal with the manager, which it gives you a much deeper ability to diligence the manager and figure out whether you want to be in with him or her for three to five years on deal or in a marriage across fund cycles.
Tell me about what you're trying to ascertain in those one or two deals that gives you a better sense in terms of underwriting the manager that you wouldn't be able to otherwise do in a traditional fund investment. Introducing Genius Bank, the award-winning bank that does things differently for our kind of genius, spelled with a J.
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So that's exactly correct. One of the best ways to diligence a manager is to do a deal with them, especially at TIFF when a big one of our key pillars is finding and investing alongside emerging managers in fund one, two or three, where historically performance is at its highest compared to when they get into their later fund vintages.
Being able to have done an investment alongside someone is one of the best ways to determine if it's worth going into fund one as an emerging manager or fund two. Some of the key things that we're looking for is, do we like them as investors? Do we like them as people? Is there a transparent relationship that's built around trust and trust?
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Chapter 8: What future trends are expected in the independent sponsor market?
and long-term trust especially, we need to know we're not in this for the short term. We're not in this for just one deal. We ideally want to be partnering with sponsors for the long term. If you think about some of our first two sponsors that we partnered with back in 2014, Two of them we're actually still invested with today in their funds since they launched an institutional strategy.
That's not the case for all of them, but it's been about a 50% ratio of managers that we've backed and done deals with as an independent sponsor to those who have gone on to become a funded manager where we've been one of their first institutional investors.
Those are all key things that we think we can glean and get this real deep insight into that others aren't able to if they're not backing them as sponsors.
Perhaps a very basic question, but when you look at diligencing fund managers, whether through by doing independent sponsor deals first or directly in the fund, one of those components obviously is trust, trying to ascertain how truthful and trustworthy the manager is.
What are some of the other components they're trying to gain either by doing independent sponsor deals or directly by diligencing funds?
So a lot of people's diligence process, what I've gleaned over the years from working at various firms and talking with peers, so much of it focuses around people process and philosophy, right? How do they function as a team? What does the long term roadmap look like? Is there a plan in place for key person risk when one person moves on and retires? Who's going to fill their shoes?
Those are the key basic things that most firms look at. And of course, we look at it, too. But there's always a lot of other things that we're looking at the hood as well. Is there an attributable track record that we can point to? Are there references, warm references from others in the industry who have worked with them before or peers who have looked at them? We spend a lot of time on that.
If you give us five references, we'll likely make 20 calls. We go above and beyond in that sense because this is, again, a long-term relationship. We don't want this to be a one, two, three-year thing. Private market investments is a long-term commitment. Other factors that we look at, what's extremely important to us because we put so much time into it on our end is sourcing.
Everybody says they have a differentiated sourcing process, but let's dig into the weeds. What does that really mean and what are you doing that's different than the hundreds or thousands of other firms that we could be investing in? And finally, one important question is, how do they deal with adversity? What have they learned from any potential mistakes or bad investments?
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