E209: $70B AUM: How Cresset Delivers Alpha at Scale

Avi, I've been excited to chat.

Welcome to the How to Invest podcast.

Thank you.

Thank you for having me.

I'm excited to be here.

Avi, you started Crescent, which today has 70 billion.

And before you had a prolific career in private equity, let's start from the beginning.

How did you get into private equity?

It was a securitis route, to be sure, how I got into private equity.

I started out as a lawyer at Kirkland and Ellis and was actually very excited to be a lawyer, started out in litigation.

and then because I was also a CPA and had a business background, one of the senior partners, a guy by the name of Jack Levin, tapped me to start doing deals, and Kirkland opened up a Denver office.

I went out there and built a deal practice.

Pretty soon into that, what I realized was that I liked the side of the

doer of the deals versus the side of the person supporting the doer of the deals and

began talking to certain of my clients about potential opportunities.

One of my clients made me an offer I couldn't refuse to run his oil and gas exploration and production company and to do deals for the parent company.

It was a company called Cook International.

They owned Terminus pest control, a grain trading business, an insurance business, and a real estate development business.

So I got a very broad-based experience and got to operate and actually have my own PL in the oil and gas exploration and production side.

So it was an offer I couldn't refuse.

I did that.

And then I got the itch to be an entrepreneur, did a consolidation strategy in the security alarm and personal emergency space, sold that,

and then went to work for another client.

It all kind of ties back to my Kirkland and Ellis Roots, it seems, by the name of Harold Simmons, who today we would call an activist.

In those days, he was called a corporate raider.

Harold owned a number of businesses.

I was running one of the businesses as well as helping him try to take over Lockheed.

When that failed,

and I was newly married and spending my life on airplanes, I decided maybe I ought to reorient my career a little bit.

And I was offered the job of co-head of private equity of the Old Continental Banks of Illinois private equity business.

I ran it with a guy by the name of John Willis,

and that was 1989.

1994, Continental Bank

was bought by Bank of America.

So we spun out our private equity business into a series of funds called Willis Stein.

And that's really how I got into private equity, a bit of a securities route.

Back then, you were writing these massive at the time, $100 million checks, and private equity was still an emerging asset class, for lack of a better word.

What was different back then?

How was private equity different at that time?

Private equity in those days was a very entrepreneurial business.

You had a lot of entrepreneurially driven folks who were out trying to raise successively larger funds and make strategic investments, but they didn't have the

sector focus generally.

They didn't have the staff generally.

They weren't using consultants in the same way that they use consultants today.

Today, everything in private equity is, you know, Q of E by the name your favorite accounting firm, hire McKinsey, hire Bain, hire BCG to do all the research,

huge investment committees, you know, lots of layers.

In those days, it was a much more entrepreneurial business, and there weren't that many funds above $5 billion.

So it was really a much scrappier business.

Today, it is a far more institutional business.

I interviewed a former partner at Carlisle who was recruited by David Rubinstein, and he talked about how Carlisle really revolutionized having multiple funds within a franchise.

As somebody who was in the industry at that time, how did that affect how you were running your funds?

Well, one of the biggest regrets I have in the private equity business, and by the way, I'd still be likely in the private equity business, except in 2010, I was very sick, and so I retired.

That was before GP stakes and all these continuation things that you could do.

So when I retired, John had already retired.

So when I retired, he was pretty much winding the fund down, doing one annex fund.

But

one of my biggest regrets was in right around

2001, actually right around 9-11, we were going to launch a credit vehicle.

And

9-11 happened, and we kind of lost our nerve, thought we needed to be insular for a while.

And obviously, what Carlisle pioneered and others have pioneered, including Apollo and Aries and others, is the multi-strategy private funds group.

And that, you know, 59% of all the capital raised last year was raised by six groups like that.

And so that was the right idea.

And it didn't affect us because we didn't let it affect us because in 2001 and then we became very insular.

But it was definitely the right idea and one of my great regrets that I didn't follow through with that at the time.

And the argument is that if you're in the investment as a private equity investor, you're going to have a better vantage point on whether that business could return capital from a credit perspective.

So there's this synergy between the private equity and the private credit part of the business.

Well,

I think that's one argument and a very good one.

I think what's happened more from a business perspective for these funds is distribution is incredibly expensive and a big deal.

So if you're creating a group of folks, I think Carlisle today has over 100 people that are on their distribution team.

So

it's a lot to pay to be distributing one private equity fund.

It's a lot better if you have sector-specific funds, you have credit funds, you have other types of vehicles.

So yes, there is similar expertise in credit and private equity, although I would argue there are some specific skill sets for each.

But I think it's more about the business of being in the private markets and the fact that distribution is so important and yet so expensive.

And to be able to spread that distribution over a group of vehicles makes a lot more sense.

Distribution being getting investors, getting endowments, pension funds, but also today retail.

Well, yes, I might not use the word retail.

I think what I would say more is that the wealth multifamily office channels today are about the same size, almost the same size, maybe a tiny bit smaller than the wirehouse channel.

So you have the wirehouse channel, which is about

$10 trillion.

You have the same thing

on the RIA side, which is about $10 trillion.

So there's $20 trillion between RIAs and wirehouses.

$20 trillion

is a very big area and underpenetrated as compared to the institutional side, which would be pension funds, life insurance companies, endowments, and foundations.

That's one of the largest kind of non-wirehouse pools of capital in the country.

You guys have grown from, I think, a couple billion assets to $70 billion.

Extremely quickly.

Yeah, $70 billion.

And you now get the choice of whether you want to allocate to the Carlisle or the Blackstones, which has all these advantages, brands.

There's an old saying, you don't get fired for hiring IBM versus maybe more of these entrepreneurial private equity funds or these smaller ones are focusing on the lower middle market.

Talk to me about the trade-offs.

Is there ever a reason to go with the large private equity funds?

And if so, when?

It's such a great question.

It's such an interesting topic that we could talk about for the rest of this interview.

But it doesn't make sense to me to say that we're going to be closed to some of the largest players.

But it does make sense to me to say that we want to do things that are differentiated with them, whether it's the way in which we might co-invest with them for being a limited partner, or the way in which we might seed new vehicles that they're putting together.

But we don't want to be closed to them.

In general, I think that firms like ours believe believe three things are better.

They believe that earlier funds are better than later funds.

They believe that sector-specific funds perform better than generalist funds.

And they believe that smaller funds in general perform better than larger funds.

But those are general rules.

So we do do a lot of middle-market and lower-middle market investing and fund investing.

But like I said, we don't want to be closed to the mega funds.

We want to find find out ways to use our capital, like a sovereign wealth fund would, to create unique access points and differentiated investment opportunities for our clients.

I often tell the story of when we were raising our third Willis-Stein Fund, and I got a call from a Middle Eastern sovereign wealth fund, and they said, We want to invest $100 million in your fund.

$100 million is a lot of money at that time.

I said, Well, that's great.

What do you need?

And they said, Well, we need a co-investment.

I said, Okay, well, of course, you'll get co-investment rights with

an investment of that size.

And the person on the other end of the fund said, no, you don't understand.

I need to co-invest in something you've already done.

So, okay,

what else do you need?

And he said, well, I need you to come over here to the Middle East and present the co-investment and your fund over the next 60 days.

And then

we'll see if we're going to do this.

But we're highly inclined to do it, given your reputation.

I said, great.

In 30 days, I was over there, and I had convinced one of the entrepreneurs that we had invested in to allow us to add some capital to it so I could create a co-invest.

And I would have done, you know, I would have jumped through all the hoops I needed to jump through, including going to the Middle East at the drop of a hat, in order to get that $100 million investment.

So today, the large RIAs like us, especially those that are focused on the ultra-high net worth and family offices and allocate $100 billion of capital, are a target for large funds and small funds.

What kind of terms are you able to get being such a large investor on the co-invest?

Is this typically some guarantee for some number?

Is it some first strikes?

And what's kind of the best in class terms that you're able to negotiate?

There isn't one simple answer to that because every

asset class, every manager

is different, just to give you some goalposts, for example.

In venture capital, it's about access.

It's about getting into those top decile performers that are largely closed to anything that isn't a foundation or an institution.

And we've been able to crack that,

you know, a lot of hard work and a lot of relationships, but also by showing them the consistency and who our clients are

very desirable for them.

Because a lot of our clients are wealth creators and people who are creating businesses that they want to invest in.

So we've been able to crack that.

So, it's all about access there, and it's about co-invest access.

And sometimes you get co-invests for free in venture capital, and sometimes you're still paying one in 10% or something that looks like 1% fee and 10%, or sometimes just an access fee, and that's all over the place.

With a larger private equity fund, what you're trying to do is to be a seed investor in something that they want to launch that might be differentiated for them, something that's a new vehicle, where we might get a little bit of GP economics and some co-investment rights.

It's very unusual that you're negotiating fee breaks, but that does happen once in a while as well.

More so in places like real estate,

maybe credit.

On the credit side, you can often get that.

I had Professor Steve Kaplan from the University of Chicago, and he calculated just what co-invest rights mean on an IRR basis.

So if a fund is returning 25% gross IRR on net basis, that's 19%.

Said another way that if you were to invest all of it on a 0-0 basis, you'd get kind of

600 extra basis points.

Or if you do one-to-one, it's 300 extra basis points.

So it is a pretty significant source of alpha if and when you can negotiate it.

And also, big caveat, if and when you know how to not be adversely selected in your co-investments.

That's a great point.

Steve is very thoughtful and very good.

I've known Steve since I was in the private equity business and my son was recently a student of his so that was kind of fun.

Steve's great and he's right about that.

The adverse selection thing is really an important point, right?

So many foundations and institutions don't have the kind of experienced staff to make decisions on these co-invests.

We have a huge investment staff, people who have been in the private equity business for years.

So we hope to avoid the adverse selection issue.

The more powerful thing, even than the co-invest, is when you can be lucky enough to help seed something for a manager, a new fund, a differentiated fund, something that

they really want to do and really want to get off the ground quickly.

And you can get some GP economics as well.

So that you're not only getting some co-invest rights, but you're also participating a little bit in the carry is really where the unique opportunity comes.

Maybe you could double-click on the seating opportunities, maybe without giving the exact name of a manager.

What do some of these opportunities look like when they come on your desk and you decide to pull the trigger?

Pick one that would be interesting.

You've got GP stakes.

You know, the issue with GP stakes today is that most of those investments were done without a liquidity provision.

In other words, you have

a perpetual fee stream, which is very nice, but there's no way to monetize that fee stream.

And different things have been tried.

Secondary sales typically are at a discount, so that's not a great event, although it may be better than not having a liquidity event.

So if someone was looking to launch a perpetual GP stakes vehicle that would have in it its own internal liquidity, like an interval fund, a tender offer fund.

That's something that maybe we would seed and we would be part of the GP.

Something like that.

Something new that's differentiated.

I just use that one because

it's something we are looking at and thinking about.

It kind of goes back to Procter ⁇ Gamble model.

You keep one pivot foot.

So you either do new product with the same customer or new customer with the same product.

So you like to seed not a new relationship, but you like to seed an existing relationship with a new product.

You can do that.

That is true.

Or,

you know, one of the things that's important and most important is team.

So

we're okay seeding a fund, a first fund, for a team that's spun out

and has a track record as a team,

as long as it's the team.

right uh and or or largely the team uh what we're not okay is people are just coming together for the first time and from disparate places.

We usually aren't excited about doing those.

But there are always exceptions to every rule.

And as you mentioned, your 70 billion AUM, your $100 billion, including assets under advisement.

You're starting to approach this very large pool of capital, which comes with its own challenges.

How do you retain alpha with going around with $100 billion?

And how do you practically operationalize that in a way that keeps your clients kind of getting alpha in the market?

Yeah.

You know, there's $12 trillion.

If we're just talking private markets, there's $12 trillion

between now and 2030.

It's going to be private investments by individual investors.

In other words, non-institutional investors.

There's a lot of places to put capital.

We are not yet at a point where it's constrained.

Now, people often say, well, what about the smaller ones?

What about the ones where you can only write $20, $30, $50 million checks?

Well, the answer is those have to be in a pooled vehicle.

So you're not going to do direct co-investments very often in

venture capital opportunities where you only have a $20 or $30 million allocation.

That's going to have to be part of a co-invest vehicle.

So you can still create the alpha.

The only thing that you're not getting is people who like to kick the tires and do things by the each.

They're not getting that opportunity in those

smaller vehicles.

I personally don't think that's an issue.

There are some financial advisors and investors who think it is,

but it's just the nature of it.

There really isn't a choice.

So the larger co-investments, the larger fund investments can be done direct as one by one.

The smaller ones have to be in pooled vehicles.

When I think about co-investments, I think about it as all about incentive alignment.

So there's two aspects to it.

They're like, where are the incentives for the manager?

And also, is the manager good at their craft?

So if you think of kind of a two-by-two matrix, you could have somebody that's very good at their craft that has bad incentives, probably even worse than somebody that's not good at their craft and has good incentives.

We could argue that.

But

what I really want to double-click is when you create these pooled capital and when you negotiate with GPs, how do you make sure that your incentives are aligned?

And how much thought goes into that very question?

So when we're creating a co-invest vehicle, we are not charging our clients anything for that co-invest vehicle.

So our incentives and our clients' incentives are 100% one.

What we're trying to do is to get the best returns for our clients.

So what we're looking at is making arrangements with GPs who we believe are going to create interesting opportunities for us to invest

and making sure that we are, to use your vernacular, devil, clicking on the diligence to see that we agree with them in where these investments make sense.

Their incentives are twofold, right?

Raising more capital and the need to create co-investment.

They want to raise more capital that they get fee and carry on.

They know that it's a necessary evil to create some co-investment, so large capital sources will invest with them because that's what they require.

But they also have incentives sometimes to do larger deals than perhaps their fund size would dictate.

And in those situations, they need the co-investors.

So they have two sets of incentives.

And we obviously want to be part of both and be there for them when they need us,

as well as

creating a better return, as Professor Kaplan tells us, through the co-invest vehicle.

By the way, there was an interesting article.

I can't remember exactly where it was, but it was about David Swenson.

And it was about that everybody believes that David's brilliance in the Yale model was because he was first into private markets in a very large way.

And that is true.

That is a big part of his brilliance.

But what also was part of his brilliance, and was pointed out in this article, was his ability to get to know GPs early on and to be a great partner to these GPs.

So having been a GP, I understand their side of the equation.

And what we try to do is to be great partners to them from the beginning so that there is a series of opportunities that when they think of launching things or doing something differentiated or when somebody spins out of those GPs, they think of us because they know that we are there for them to advise them, to tell them what will work, and to be there if they need additional capital for something or they need to seed something that they want to start.

I'm always fascinated double-clicking on these long-term games with long-term people, this Naval quote of how do you play these recurring games with the same actors and how do you build relationships over years and sometimes decades.

Unpack a relationship like what you're talking about, where you're investing with them early and then you continue to invest.

And how does that start?

And is it kind of always quick pro quo, or is there just this reputational relationship capital that builds and you're kind of always giving to each other?

So double click on that a little bit.

I, you know, I hesitate to

say any names because there's confidential revisions and all that.

So, there is one very well-known name

that is one of the top six that I mentioned that raised 59% of the capital that we as a firm and some of our predecessors have been investing with over a very long period of time.

And we have invested in many of their vehicles

that span

credit,

GP stakes,

and other

related investment vehicles.

And the idea is that we have the kind of relationship where when they're launching something or thinking about something,

we're talking to them early, and they're gauging what our appetite might be for that, and we're gauging

how we see it and whether it fits or not.

Let's double-click on kind of

how those relationships build out.

Businesses people, and this is no different,

while it can become very transactional,

and that's unfortunate,

it should always have that element of relationship and culture.

And when you can be consistent in the way that you approach things, and they are consistent in the way they approach things, you do build up a cadence and trust

that I think

makes it much easier to get to yes on an investment.

It's not unlike a co-investment opportunity where in the beginning you're diligencing the manager and then you're only diligencing the actual underlying company.

So there's almost like this two-step diligence and

it's all.

And we're all human.

We all have things that we do better than other things.

And we all have mistakes that we make consistently and we try to learn from, and we all have our own frailties.

So, you learn, you learn what is the sweet spot for someone and

why it makes sense to invest with them in those kinds of things, and maybe not in other things

that are not perfect for what you're trying to accomplish.

In that vein, has there ever been a situation where a GP has given you back the money because the strategy no longer made sense or made a mistake and communicated well that you backed that GP in another fund.

And in what cases did that happen?

There has been a case

where we backed a GP

and

the strategy got overpriced very quickly.

And we went to the GP and said, look, you know,

we have given you a commitment.

We don't think it's in your interest or in our interest to continue down this road.

Why don't we work something out?

We've made one investment.

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Let's, you know, maybe

if there's anything in progress that we think we're committed to do, let's do.

And then let's not go forward.

Let's you release us from our commitment.

We'll make sure that we deal with you fairly.

And that was the right thing to do at the time, and it did work out.

Now, we've not done another thing with that particular GP, but we would because it worked out well.

Taking a step back, when it comes to picking private equity firms and your first commitment into them, what's the criteria that you look for and how has that evolved over your career?

When I started in the private equity business, people would ask me what was important in private equity and how do you make decisions about investments?

And I would say, oh, you know, it's about industry dynamics, competitive positioning, and people.

And if you'd asked me 10 years into it, what would I say?

I would say it's about people, culture, people,

culture, and that the industry dynamics and the competitive positioning are table stakes.

You have to have it.

But,

you know, you really need the right people and the right culture.

And today,

depending on the asset class, some of it's about sourcing.

Some of it's about what happens when things go bump in the night.

But in the end, it's always about having the right people with the right reps and the right backgrounds.

And perhaps it's painstakingly obvious but maybe you could double click why it's people and culture and how that plays out within a manager.

Look, everybody makes mistakes and everybody makes hiring mistakes, everybody makes strategic mistakes,

investment mistakes.

You know, you miss things, right?

You know, I look back on the, there were two investments that I made that I wish I had mulligans on, and I look back and say, well, how did I do that?

How did I make those mistakes?

It was always

somebody in the daisy chain

that you should not have trusted in the way that you did

that gave you information that turned out not to be

what you learned it to be ultimately.

Now, that's not to say people can't be great and still make mistakes.

They can't.

The best investors are still not going to bat a thousand.

Ted Williams didn't bat a thousand.

Nobody bets a thousand.

But it is to say that you can usually pinpoint, if you do a post-mortem, where you went wrong, what you missed.

And

without getting into tremendous detail, it's usually something that was, in hindsight, painfully obvious.

And if it was the right person doing the right digging, might have been a little bit more of a factor in your investment decision.

As you build out Crescent, you're also building out a pretty sizable organization.

And how do you set the culture and the policies in a way to make it succeed?

When we started Crescent, the first thing we did, there were I think 10 of us at the time, we went off-site with a woman by the name of Laura Desmond, who had just retired as the CEO of StarCom Media, whose specialty was brand blueprint and culture.

We spent three days off-site talking about what our culture needed to be and where we wanted to take it.

That got

memorialized in a one-page culture card, which exists today.

We review it all the time, I would say formally annually, but all the time.

And there's only been a couple of very small changes to that culture card over time, which goes through our spirit, our behaviors,

and all of the things that we measure ourselves on.

We try very hard to hire against those factors, and we try very hard to weed out when those factors are not being adhered to.

It's not perfect.

Culture is not a perfect game.

You're going to make some mistakes and have to adjust.

But so long as you hold yourself up to it and you understand what your key tenets are, right?

So for Crescent, it was built by clients for clients.

It's having the use of our scale for the benefit of all of our clients and the full alignment with our clients, putting our clients first without ever losing that boutique feel.

It's extreme accountability.

It's optimistic energy.

It's all those things.

And when we have members of our firm that are not exhibiting those things, we make changes.

One of the things that...

I always try to improve myself is how to hire for culture.

It's much easier to hire for quantitative skills.

How do you suss out somebody's culture fit in the hiring process?

It kind of depends on the level.

If you're looking at the very top levels, I highly recommend, and you can, I will use his name because you can do that, using GH Smart, Jeff Smart.

It's

yeah, yeah, I mean, you really want to put people through the personality paces.

And when you don't do it, it's when you make mistakes.

And we've made it.

I I mean, if you really want to understand what motivates people, what their strengths are, what their weaknesses are, and the type of manager they are, and the type of leader they are.

So, at the highest level, I mean, I really think you do have to do the assessment.

As you go lower down in the organization, personality profiles are okay.

You know, we do use personality profile indices.

There are a number of those that you can use.

That helps.

But there is some pattern recognition that you can get to by giving people scenarios and seeing how they react to those scenarios.

How do you react when a person does this?

What's your reaction when someone tells you something that you find out is not factual?

Those are the kinds of things that you can learn a lot about what they're really about.

So use the PPI stuff.

Use other

personality indices if you like them.

But ask questions to elicit how people will behave in certain circumstances and then at the very top levels I really do think you need an industrial psychologist review.

I read Jeff Smart's book back in 2008 my senior year in college and I think the best way to explain it is that people do not change.

So all hiring processes should be based on their track record of behavior.

And how you phrase it and how you get references to tell the truth and all those things, that's detailed in the book.

And that's that's kind of the how-to.

And, but I think it's an interesting thing that if you look at people's track record of what they're doing, aka don't listen to their narrative or they're selling themselves in the interview, you're going to get much better hiring decisions.

No question.

But I do like also

something that Jeff says, which is you want to ask the same questions through the same, you know, to a group of people.

So you're getting some comparative data.

But I also like to add the, you know, the scenario questions

and see how they react to the scenario questions.

Kind of hypothetical.

If you were in this situation, what would you do?

Yeah.

Yep.

So last time we were chatting, you corrected me in telling me that lower middle market, where it's a place that you guys are very active in, there is an opportunity to have financial leverage on investments.

So tell me about the lower middle market and A, where's the opportunity set and how do firms invest using leverage just like the large firms do today?

Maybe we take a step back and talk about the difference between where lending is generally today

and where it was maybe 10 years ago.

So

today

you have many opportunities for leverage.

And those opportunities are

bank-syndicated loans, which at the higher end still are the largest share of the market,

but are less so in the middle market and the lower middle market.

Sponsor credit today is a much higher share of sponsor credit, is private debt or private credit than there used to be.

There are

even

unique lenders in the lowest part of the middle middle market

that will do somewhat of asset-based stretch loans.

And there are more and more players coming in every day and more and more products being launched by the areas of the world and even the largest players.

So if you really think about what's happened since the GFC, you've seen a proliferation of private credit.

That was starting to happen, you know, 2010, 12, 14, those areas.

But where it really accelerated was 2019 when rates started to change and you could really make good returns investing in credit.

And today,

you might say an average is probably about 11% return on a sponsor credit in the middle market, maybe 11.5%

or higher in the lower middle market for senior debt risk.

What's the difference in the middle market or the lower middle?

Well, in the lower middle market, you have the risk that the companies are smaller and things go bump in the the night, it's easier for them to not be there.

But you're using a little bit lower leverage, so maybe four times or less versus four and a half to five times or less in the upper side of the middle market.

And you're getting a little more spread.

You might be getting another 120, 140 basis point spread in the lower middle market to compensate you for the risk.

But there is plenty of capital available to leverage in the lower middle market, especially for sponsor credit.

And why is that?

Because

when I started in the private equity business, my first deal was 10% equity and 90% debt.

You know, that was in 1989.

Today, very few deals aren't pretty close to one-to-one, right?

So you're putting a dollar of equity in for a dollar of leverage in.

And there's more dry powder in the equity side still than there is on the credit side.

So everybody's so worried about this big blow-up in private credit, and you read a lot about it.

I personally am not concerned.

It'd be easier to say I am concerned because then, if it happens, I look smart.

But I really believe that

sponsor credit with solid sponsors

is not a highly risky proposition because you've got a dollar of equity behind the dollar of debt, and the one thing you know is that GPs abhor a zero.

They don't want a zero.

So

if things get a little scratchy, they're going to put more money.

And if things are really awful,

sure.

But so I think the

proposition is that the private lenders are

taking a lot of share from the banks and they're providing a lot more liquidity in the market.

And because rates are high enough today to provide a return to the investors, people are pouring in.

Because if you can make 11, 12, even 10%

on senior debt risk and private equity over a long period of time is 13%

with a lot longer duration and a lot more risk, you can see why people are allocating higher and higher amounts to the private credit side.

I want to double-click on something very interesting.

There's a game theory to the private credit in that the private equity funds do not, to your point, want to do a zero, and the private credit is senior to the private equity.

So there's this incentive to follow, I guess, put good money after bad into some of their struggling deals.

Yeah, I mean, good money after bad has a pejorative connotation, so I'd probably stay away from that.

But what I would say is

if you're a private equity investor and you've used a lot of leverage,

even in the lower middle market, you've used four times, and a business starts to struggle, and especially in the upper middle market or the higher end, where it might be six, seven times EBITDA leverage.

And the business starts to struggle, you have a choice to make.

And that choice is

risk the possibility of losing the business entirely or delever and maybe hurt your returns, but still make some return, some reasonable return.

And usually

the decision to delever is the right decision.

Now,

that's not true in a scenario where you've totally missed something that has fundamentally changed the industry, right?

So

Google comes into the marketplace

and magazine publishers are going to really struggle.

And that was one of my failings.

We had a big magazine publisher when Google came into the marketplace.

And throwing good money after bad there probably didn't make sense, right?

That was good money after bad.

But, you know, manufacturing business, there's some new technology.

It hurts it a little bit, but doesn't kill it.

You'll delever.

Maybe you're going to make an 8% or 10% return instead of a 13% or 15% or 18% return, but it's better than losing your money.

So I think that's the bet, and that's the right strategy for most private equity firms in those situations.

One of the unique aspects of your large pool of capital is that it's mostly taxable.

I know there's some probably non-taxable

CRTs or IRAs, et cetera, but mostly taxable.

Have you found a solution on how to give access to credit in a tax-efficient way?

Yes, it's not for everybody,

but there are a couple of things that work very well.

One thing that works very well is obviously the smaller investor that has an IRA 401k

putting it in those vehicles.

So that works for a lot of people.

For larger investors, for very wealthy families, setting up insurance dedicated funds using private placement life insurance or private placement

variable annuities is a really good strategy.

Now, there's a lot of complexity to that.

It's not an automatic easy button.

But if you can work through the complexity for very wealthy investors, those strategies are less than 100 basis points of cost

for the insurance piece of it, and you shelter the tax.

If you could go back to 1980 when you graduated Harvard Law School and you were just getting into your legal career, which then turned into private equity and now with Cress of Partners.

What would be one piece of advice you could give yourself that would either accelerate your career or maybe help you avoid a mistake?

One piece, huh?

Let me start with what I tell young people today.

I tell young people that you are going to have

the lion's share of a piece of a puzzle.

And it's imperative that you do that the best you can possibly do it.

And you work your tail off to get it absolutely right and keep asking questions about how to make it better.

That's step one.

Step two is you understand

where that piece of the puzzle fits into the overall puzzle.

And you learn as much as you can about how it fits and how the overall puzzle works.

In shorthand, you have a perch, and from that perch, you can see a lot of things.

Make sure you take it in.

Make sure that you understand how everything works.

So if I could go back to myself, those times where I got hyper-focused on just the little piece and didn't understand the bigger piece, I didn't didn't advance as much as I did in those situations where I understood how everything fit together.

And so my best advice to the

24-year-old me or the, you know, whatever would be that, right?

I guess the 25-year-old me if it's 1980.

Make sure that you understand how everything works.

And

never stop learning.

And today, in today's world, lifelong learning is so much easier than it was in my world.

And

continue to to pursue other ways to learn around the periphery of that one puzzle piece that you have I think that would be the best advice I could give

I you know it's this generations are so different today

you know we talk about work-life balance and generations now.

Work-life balance for me growing up was work like a dog so that when you're older you can have some balance.

It just wasn't the same as what it is today.

So I think

if I could give a second piece of advice, it's really be present in those moments where you're having that balance.

In other words,

you know, if you're at an event for your spouse or your child,

you know, really be there and then go do what you got to do work-wise.

I can think of so many times

when I wasn't as present as I might have been.

I remember coaching my son's hockey hockey game and I'm in the middle of a deal and

the phones ring and

I'm like, oh my God, just be present for that hour, hour and a half, and then go do your thing afterwards.

So that would be the other piece of advice I'd be is always be present in whatever it is you're doing.

We touched on earlier one of your regrets of not building out the credit side of the business, but you clearly have made some very good calls.

What's the best career call that you made over your entire career?

What's the best bet that you made and end up being very fortuitous?

It's going to sound almost Pollyannish, but I've enjoyed every step of the journey.

So

the call to be a lawyer,

you know, after having a business background, was probably a great call, even though in hindsight, if I did it over, I might have started in business because because that's where I ended.

But I learned a lot being a lawyer, and I think that,

you know, those relationships also have suited me, you know, really well over time.

So I would say that was a very good call.

Going out and actually having to make a payroll and starting something with my own money was also a huge call because until you've done that, it's very hard to tell people how to do it and it creates an enormous sense of respect for what it takes to operate a business.

And very few people are great operators.

That is definitely the skinniest set of people who can really operate a business.

There are a lot more people who can make investments than people who can actually really operate a business.

So, that was, I think, really critical in my development.

Having worked for people who were doing so many things in the public marketplace that were so unique and differentiated, like Harold Simmons, was huge for me because you know, I ended up being a private markets person, but my knowledge of the public markets and how they work and all the various securities was a great call for me.

Going into the private equity business, which I had no idea I was going to do that, it was, you know, it turned out to be really a natural move from having been an operator, a lawyer,

having done a lot of deals.

It was a great move, and so I think that was a great call.

And then I didn't mention that when

I

was recovering from cancer in 2011

and

decided I wanted to do something, instead of starting another private equity business, which would have been the

natural thing to do, I decided to build another operating business.

I built an alternative energy development company and then sold that.

And that was a great chapter.

It was a great call because it got me back into what I love to do, which is build things.

but of all those things and it's going to sound

I don't know how it's going to sound but

I always pinch myself that Eric Pecker and I got together started investing our own personal capital buying some companies doing some real estate things and then realizing that there was this enormous opportunity to build something that not only optimizes wealth for ultra high net worth individuals, but also optimizes their lives.

And to build something that was built by clients for clients, taking the clients' lend, creating this enormous alignment, and building something that really didn't exist.

And I would say still today, Cresset is very different

from

all of the competition because we optimize wealth, we optimize life, we create lifelong learning for all of our clients.

We create unique investment opportunities, we create unique opportunities for them to enjoy their lives, their lifestyles,

pay their bills, do their taxes, everything in one place, one nectaran, outsource family office.

And I actually think that's my crowning achievement.

I think that is the thing that I am most proud of because we're helping thousands of people to really live a great life and to maximize their wealth and created something that really didn't exist before Crescent.

That's so interesting because you have this career of

stacking these skills that together, there's probably, you're the only person in the world that has all these skills, legal, then private equity, then dealing with the public markets, dealing with alternative energy, dealing with family office.

And I failed to double click on this, but Crescent was started because you had the same pain point.

You didn't need any more money, clearly, based on your track record.

You wanted to solve your own problem, and those are oftentimes some of the best organizations.

Yep, find a need.

I mean, we talked before about a perch.

That was my perch.

Find a need, sit on a perch, find a needle.

People talk about, oh, I'm going to start a business.

My own son came out of the University of Chicago Business School, and his first reaction was, I'm going to start something.

I said, well, what are you going to start?

I don't know.

Does it matter?

Hell yeah, it matters.

Start something that you know.

Start something that you've seen.

Start something you know there's a need.

Well, you can find things that there's a need, even though you haven't been in a related business, but it sure helps if you've been in a related business.

I like the whole thought experiment: you should only start a business that won't get out of your head.

You try to

procrastinate starting and it keeps on saying, you need to start this.

Like, this is a pain.

I keep on having this pain.

Other people have this pain.

I have to start this business versus this romanticized idea of being an entrepreneur.

Absolutely.

Well, Avi, this has been an absolute masterclass on private equity, RIAs, building enduring businesses.

Thank you for jumping on.

I look forward to continuing this conversation live.

Thank you, David.

I would love to do it anytime.

And your questions were great, and your style is great, and it was a lot of fun to do it.

So anytime.

Thank you.

Anytime.

Happy to have it.

All right.

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