While attending the CFA Conference in Chicago, we had the distinct pleasure of meeting with Gary Fencik (yes, good old #45 from the 1985 Chicago Bears Super Bowl-winning team) who is a partner of the firm and Head of Business Development at Adams Street Partners, LLC. This interview is a little removed from the conference, but good things come to those who wait, and in a rare turn of events, we’re writing about an alternative investment that’s NOT managed futures with an expert in his field who also happens to be a former player of our all-time favorite football team. Cut us a little slack, eh?
Welcome to the world of Private Equity (PE). Though traditionally an investment offered to only the incredibly wealthy through a network of finance professionals, PE has been thrust into the spotlight repeatedly during the Republican Presidential primary, with continued reference to Republican candidate Mitt Romney’s work with PE firm Bain Capital, but outside of the knowledge that he invested in companies, most people have no idea what, exactly was being done. Essentially, it involves raising capital privately (read: off-exchange) to invest in a company. PE is typically characterized by a long term investing timeframe, a lack of liquidity, and high risk. These investments can be a 10+ year commitment, which is why those in the know refer to that investment point as the point of “losing control.” As such, with a countless number of direct offerings and 1,000’s of funds pooling investor capital worldwide, the core principles of alternative investment allocation strategies hold true even in the PE world. With hundreds of billions of dollars being invested in PE worldwide, and often in incredibly diverse investing environments among a wide variety of companies, it is clear why the expertise of Adams Street (a leader in PE for nearly 40 years) makes sense to employ.
As the conversation moved from a high level discussion on Adams Street and their PE work, we quickly found common ground on several topics that tie directly back to the core of why alternatives and the ever changing task of investing in them.
For many investors, understanding the need for the diversification value found in alternatives is easy. The perspective through the rearview mirror reflects what many in our space have come to see as a universal truth- that past performance cannot predict the future, but your best bet is to spread your risk and exposure across non-correlated asset classes. For us, the solution was managed futures, Fencik, however, became a strong believer in PE. After opening an office in London in the late 1990s to go global, Fencik and his team found that the rise of Asia had changed the PE landscape, and introduced a new set of challenges. He told us that he believes in the need to work with locals, to make sure you have the right tools, data and people on the ground doing the due diligence, reaffirming some of the sentiments expressed by Sam Zell.
As it relates to portfolio construction, Fencik recommended diversification across different sub-classes and emphasized manager selection as the most important part of evaluating an investment. Whether it’s a giant fund or a small venture, an investment in the US or abroad, the quality of the manager remains most important. He looks for a repeatable process to separate the lucky from the skilled (is there an echo in here?), and remains wary of style drift by an investment team (again, choose your team wisely). Firms tend to raise capital based on past performance, so if they have underperformed since, you need to identify what changes have been made, how the manager is performing against their peer group (not all strategies are built for all environments), as well as whether the size and style of trading are still compatible with your investment objectives.
As huge Bears fans and past season ticket holders, any conversation with Gary Fencik cannot go without a few questions for one of the former Monsters of Midway. One topic that has always been the topic of debate for outsiders is the notion that professional athletes don’t know how to manage their finances. Fencik unfortunately agrees with this statement, stating that most players have no concept of how short their career will be. As a Yale grad and financial professional, he fully believes in educating athletes on their finances and goes as far as to commit to the NFL’s yearly week long seminar for current and recently retired players where he speaks about managing finances and looking at the longer term picture.
His advice for pro athletes is to spend time with their accountants to help know their net income now, to set a current budget and one for a post NFL career. Finally he strongly encourages active athletes to network and take advantage of their celebrity status. If a current player asks for a meeting with the CEO of a company, he’ll get the meeting, but 2-3 years removed from the league, he’ll have to fight the HR fight. Fencik also named at least 10 players from his teams who are now coaches… even though none of them initially aspired to be coaches.
Finally, we asked him about his best and worst personal investments; generally speaking, this is one of our favorite questions to ask anyone, because everyone usually has a good story. The worst investment decision happened to occur while he was playing football – he put money into a seafood delivery service. His best investment was in his college roommate: the founder of Summit Partners (one of the benefits of going to Yale, right?).
Our chat with Fencik was definitely an interesting one. Forget the fan component for a second- it was just nice to talk to someone in alternatives who gets it. Fencik understands the true diversification value of an alternative investment, and while we don’t see ourselves persuading him to abandon the PE world, we look forward to seeing managed futures become his second favorite asset class.