E223: The Art of Capital Allocation at $86 Billion Scale
Timestamps are as accurate as they can be but may be slightly off. We encourage you to listen to the full context.
Podcast Summary
In this compelling episode, Peyton McElroy, an investment professional at Future Standard, provides insider insights into the world of private equity and alternative investments. Future Standard manages over $86 billion in assets across private equity, credit, and real estate for both institutional and private wealth clients. (00:23) The conversation explores their innovative approach to democratizing alternative assets, their focus on middle-market private equity, and the strategic merger that created Future Standard. (00:25) McElroy shares valuable perspectives on manager selection, portfolio construction, and the evolution of fund structures including the rise of evergreen funds versus traditional drawdown structures.
- Main Theme: How institutional investors identify, evaluate, and build long-term relationships with private equity managers while navigating the changing landscape of alternative investment structures.
Speakers
Peyton McElroy
Peyton McElroy is an investment professional at Future Standard with eleven and a half years of experience in private equity fund investing. He is a Yale graduate who has spent his career focused on middle-market private equity investing and building long-term partnerships with general partners. At Future Standard, he helps manage the deployment of $2 billion annually across private equity investments and is instrumental in the firm's emerging manager program.
David Weisburd
David Weisburd is the host of the "How I Invest" podcast, where he interviews leading investors to understand their investment strategies and decision-making processes. He focuses on extracting actionable insights from institutional investors and has built a reputation for asking penetrating questions that reveal the nuanced approaches of successful investment professionals.
Key Takeaways
Middle Market Private Equity Delivers Superior Alpha
McElroy emphasizes that middle-market private equity consistently outperforms large-cap buyout by 350-450 basis points on average at the upper quartile level. (05:11) This outperformance stems from reduced competition, more operational improvement opportunities, and the ability to maintain specialized focus. The key insight is that "if you want alpha in the private markets, you've gotta go down market." (06:06) For professionals seeking superior returns, this suggests prioritizing middle-market exposure over large-cap alternatives, despite the latter's brand recognition and perceived safety.
Specialization is Key for Scalable Success
As private equity firms grow larger, specialization becomes crucial for maintaining performance. McElroy notes that successful large-cap managers like TOMA Bravo maintain their edge through deep sector specialization in software and technology. (06:24) The generalist private equity approach of the 1990s focused on financial engineering no longer works in today's market. (07:03) This principle applies beyond investing - professionals in any field should develop deep expertise in specific areas rather than trying to be generalists, as specialization creates sustainable competitive advantages even at scale.
Build Relationships Before You Need Them
The most successful emerging managers Future Standard backs are often spinouts from existing relationships they've cultivated over multiple years. (10:09) McElroy describes this as a "multi-year process" where they build relationships with partners at established firms who may eventually start their own ventures. This relationship-building happens through consistent communication, providing value during difficult times, and demonstrating partnership beyond just capital deployment. (12:01) The lesson for ambitious professionals is to invest in relationships strategically and consistently, long before you need them, as these connections often become the foundation for future opportunities.
Partnership Means Supporting People Through Adversity
True partnership is defined by how you respond when someone is facing challenges, not during good times. McElroy explains that Future Standard gains respect and trust from GPs by being supportive during difficult periods - whether it's a partner departure, a deal going poorly, or needing amendments. (12:08) They provide resources from their broader platform, make strategic introductions, and offer flexible support while maintaining their fiduciary duties. (12:28) For professionals, this translates to being the person others can count on during tough times, as these moments reveal character and build lasting trust that pays dividends throughout your career.
Success Comes From Knowing Who You Are and How You Create Value
The most successful GPs that survive from fund one to fund four and beyond have one common trait: they know exactly who they are and how they create value at the portfolio company level. (20:21) This clarity extends to understanding their strategy, their competitive advantages, and how they execute on value creation consistently. (20:31) McElroy emphasizes that while innovation and improvement are necessary, the core value proposition must be clear and executable. This principle applies universally - whether you're building a career, starting a business, or leading a team, having absolute clarity on your unique value proposition and how you deliver it consistently is fundamental to long-term success.
Statistics & Facts
- Future Standard manages over $86 billion in assets under management with 600 professionals across 12 offices, making 50 fund commitments annually while deploying $2 billion per year in private equity. (00:12)
- Middle-market private equity outperforms large-cap buyout by approximately 350-450 basis points on average at the upper quartile level, demonstrating significant alpha generation potential in smaller fund sizes. (05:25)
- As of a few years ago, no private equity funds over $10 billion in size had achieved a 2x net return multiple, highlighting the challenges of maintaining performance at massive scale. (07:42)
