Navigating the Lower Middle Market.

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Hello, welcome everybody to
another episode of Arthur's

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Round Table.
Thanks for everybody paying

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attention to the podcast.
Super appreciate it, and also

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the Family Office Insights
community who shared it quite

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freely.
Really, really grateful for that

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as well.
Brett and I have known each

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other maybe 15 years, something
like that.

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Some ridiculous amount of time.
Time flies, yeah.

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So we're super happy to have him
today and we're going to start

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as usual with his journey and
then we'll get into it from

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there.
So Brett, thanks for doing this.

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Really appreciate it.
Yeah, my pleasure, Arthur.

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I my journey is not as a crow
flies, as one would say, but

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there are some threads as we
reflect back on it.

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I was born in Edmonton and then
our family moved to somewhere

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north of Edmonton.
As those of you that are in the

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New York Greenwich region right
now might be feeling some of the

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colder temperatures, it's kind
of refreshing to me as long as

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it's not too windy or raining
and cold that I don't like, but

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actually like the crisp weather.
Parents are school teachers.

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Mom unfortunately passed a
cancer when I was young.

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And so the the path as a teacher
is to go off and teach somewhere

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that's less desirable and build
your resume and then move to

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more desirable place to live.
And unfortunately that became a

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place that we stopped.
I was fortunate to have parents

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in the school system and very
thankful for the community

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growing up and being involved in
the school.

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Ended up speed skating on the
Canadian National team.

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A post college.
I I went to the oil drilling

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rigs to get some further cold
weather for a year to pay for

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college.
A post high school in areas they

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call the northern, the oil sands
and whatnot in northern Alberta

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and northern Saskatchewan.
And I thought that was a good

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learning lesson because it
teaches you you don't try.

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To do right.
Exactly right, that sometimes

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you you figure out what you want
to do by what you don't want to

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do.
Well said.

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But but with all seriousness,
you know, it was a great

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opportunity to make money and
work hard in order to pay for

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college.
I then transferred up to McGill

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University, finished my
undergraduate degree and wanted

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to work on Wall Street.
And at the time McGill had one

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of the strongest launch pads
into Wall Street and was

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fortunate enough to get a job at
Solomon's with Barney back at

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the time as a division of
Citigroup, which I thought was

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pretty fun as a kid.
From a small town of under

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10,000 people to new.
York.

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Yep, Yeah, In New York.
And at the time, Citigroup was

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the largest financial services
firm in the world.

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And that was pretty fun, and it
was a phenomenal learning

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experience.
I was surrounded by a bunch of

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really smart people doing a lot
of different things, a lot of

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deals, a lot of data, a lot of
information, and, you know,

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pretty creative, which I found
quite interesting.

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And I caught the bug of really
marrying some of my

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entrepreneurial things with
finance to launch a fund, which

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I did in 2004 with some friends
and colleagues.

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We launched our first lower
middle market private lending

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and private equity investment
fund.

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At the time, working with
different states in the US to

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help invest in local smaller
businesses which were part of

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economic development programs,
investing in women owned,

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minority owned and underserved
areas within various states in

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the US.
And that was a, you know, great

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learning experience where you
really learned the importance of

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being local to engage with
business owners, build trust.

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That was a lot of fun.
Ultimately I then built that

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into a business where I, I
restructured, rebranded and

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launched a a new trademarkable
firm called Star Mountain

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Capital in 2010 to we, we
recently celebrated our 15 year

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anniversary and I think today we
have the largest if not at least

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one of the largest teams that is
independent and purely dedicated

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in a specialized way to the US
lower middle market with roughly

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130 full time people and 40
operating partners.

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So that's and just under 5
billion of assets under

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management is our Business
Today.

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Nice.
Nicely done, right?

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I've seen the growth along the
way, so good for you.

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Brick by brick.
Brick by brick and and also I

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think it's important to note
that or at least explain what

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you mean by lower mid market.
I know what that is, but let's

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let's share.
Sure.

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What, what the business, yeah,
that's one of the the, the, the

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bad things about the finance
industry is fraught with jargon.

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The the way we think of it is
companies that generally and

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most broadly this is probably a
little bit broader than it's

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deserving, but 5 million of
EBITDA to 50 million of EBITDA

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is where we focus.
We are not specialists in the

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startup venture capital world.
I think that's a different

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environment.
You are underwriting different

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things and taking more of a, you
know, a bet on different things

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and a different risk reward.
So that's not what we do.

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We also don't want to compete in
the larger market where very

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large asset managers are highly
active and very fluid and the

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market's more competitive.
So we don't want the venture

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more startup risk and we don't
want the more highly competitive

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market risks.
And so that kind of squeezes us

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into that 5 to 50 million of
EBITDA world, which we we

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execute against in direct
lending strategies, private

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equity strategies as well as
secondary strategies to really

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have a lot of data insights and
capabilities within that market.

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Is that deal flow still robust
for you?

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Is there plenty to look at?
It is an in fact, Arthur, this

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is now my 23rd year investing
nearly 100% of my Personal

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Capital in that market.
And the reason I continue to do

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that is the market dynamics
today are arguably better than

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they've ever been one.
And I'm a guy that just likes

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thematic aspects.
I don't mind working hard.

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And that's perhaps the thread
between oil rigs, speed skating

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and Star Mountain is labor.
You know, we're not afraid to

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work hard, but we're not people
that think we can outsmart the

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market or time the market or be
smarter than everybody else.

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We just think we can have and we
have a very specialized business

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that gives us a lot of
competitive advantages and we're

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willing to do slightly smaller
deals with really a focus on

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returns and on alpha and low
correlated returns.

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So the market today is more
robust than ever, one because of

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aging demographics, you have
more private business owners in

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America today than ever that are
in their, you know, 60s and 70s

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and saying, OK, I need to do
something with my business.

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And we really sit down with them
and understand their business

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and be a solutions based
partner.

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Maybe you have kids you want to
transition it to, maybe you

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don't.
Maybe you have partners who want

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to transition, maybe you don't.
Every situation's a little bit

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different and it's that labor
involved to sit down, understand

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the business, come up with
investment structures, pair that

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with specialized resources that
really resonates with some of

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the best businesses in America
and that aging demographic just

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creates a demand for capital.
The second thing that we like is

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that if you can grow a business
from the lower middle market,

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let's just say you grow a
company from 10 million of

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EBITDA to 30 million of EBITDA
on average, you can probably

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increase the valuation multiple
by maybe 50%.

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So that valuation arbitrage
taking a company from a less

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efficient market into a more
efficient market allows you to

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capture a premium, you know,
return on the business and

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systematically capture that
valuation arbitrage, which is

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another thing that again
business owners want to do.

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We want to help them do it
obviously.

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And we want to do that, you
know, with our capital and our

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investors capital, which also
for taxable investors ends up

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creating a lot of long term
capital gains and tax

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advantages, which the category
of luck.

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Last year, the QS ES program
also updated.

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And so now there's a further tax
advantage potential for many

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people.
But that aspect drives more deal

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flow than ever, right?
So if you think about that,

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you've got aging people and you
say, well, if I'm somebody

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sitting there with a $15 million
EBITDA business and I can buy 2

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of my competitors that each do 5
million of EBITDA, now I'm worth

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more and I can buy their EBITDA
cheap.

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Oh, and then there's a big tax
advantage aspect to it.

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So it's like that just drives
capital demand.

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And at that end of the market,
your big branded asset managers,

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I'll call them, aren't generally
interested.

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You know, your big investment
banks, the deal size are too

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small for them to get the fees.
So the market remains

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inefficient with fewer
competitors, at least fewer big

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scale competitors.
And so I think in my 23 years,

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this is probably the most robust
we've ever had it.

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So the deal flows there.
And then is it fair to say that

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the model is still, as I
understood it when we talked a

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few years ago, is exactly what
you said, you're taking a

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smaller company with a lower
multiple just because of its

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size, aggregating it by merging
other similar companies into it.

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And then it's more interesting
to that acquirer that you're not

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competing against, but you might
want to sell that aggregated

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entity to them.
That's right, yeah.

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And if if you look at the larger
middle and large market private

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equity firms, many of them have
a lot of capital and a lot of

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capital they want to deploy.
If you look at capital

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formation, there's been a huge
increase in capital formation

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going to, I'll call it the Black
stones of the world and KKRS and

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so forth that have big
fundraising teams and you know,

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large funds and those managers
in general that have been, you

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know, very successful, great
firms continue to grow and they

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have capital they need to put to
work.

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So they generally aren't going
to want to mess around with a

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whole bunch of smaller little
deals.

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That's too time consuming and
labor intensive and you need a

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specialized business to do it.
It's almost like, I don't know

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what a simple analogy is, but if
you think about going fishing or

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is there a different fishing rod
you need to go fly fishing and

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deep sea fishing or something.
But it's even though you're

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still fishing, you know, there's
it's a different way to find

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these companies, a different way
to analyze them and a different

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way to actively work with them
in the lower middle market than

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it is a larger market.
But if you can build those

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companies up and professionalize
that into the larger market, now

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you've got a very large buyer
universe and a lot of low cost

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debt capital and financing
capital, which I'm sure you

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know, you've all read about the
influx of private credit in the

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large end of the market.
Well, that's very positive for

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valuations, right?
When people can finance things

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easily and cheap, that's good.
That's good.

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So that's financing things
easily cheap on the exit side.

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And just because there's not a
lot of people playing in the

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lower middle market, you also
can command higher, I'm like I

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say fee, but you can charge
higher interest rate because

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nobody else is really interested
in doing the heavy lifting that

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you're interested in doing not.
That's right, the.

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Value that you're, you're
creating for somebody that's got

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a $10 million business and
they're going to aggregate it to

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30, right?
That's right.

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It's, it's a bit of a step
chart.

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So if you, if you, one of the
things I like about our

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business, it's what I think of
as a Warren Buffett style of

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investing, meaning a value based
investment where you know on the

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debt side of our business, it's
low leverage, it's strong

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covenants, but it's also a
higher interest rate because the

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market's less efficient and
there's a lot of business owners

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looking for capital and their
use of proceeds is high.

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So if you're going to acquire
EBITDA cheap from a competitor,

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is it worth it to pay us an
extra 1 or 2% interest,

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especially if to your last
point, we can actually help you

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build a Better Business that's
worthwhile.

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And so all across our business,
we're really built to drive

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alpha in a systematic manner.
And if you think about the

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alpha, you know, 1, you know,
definition of alpha or pure

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alpha is getting paid for labor.
And that's how I viewed life.

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I'd rather get paid for labor
and doing the hard work and

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having a specialized engine that
I would say, well, I'm going to

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pay a really high price for this
company.

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I hope it's going to keep going
up or whatever the risks that

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you're taking, you know, hoping
that you can do things.

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And that's just again, it's a,
it's a different way of

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operating.
I get much more comfortable,

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lower valuations, lower leverage
entry points because what we've

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found and I think data would
support is it's harder to lose

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money.
And that's always one of our

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pillars that start around is
let's start off, but not losing

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money, easier to make money if
you don't lose it, but then

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you've got the valuation
arbitrage and whatnot.

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And if you think about cash flow
streams it, it's an asymmetric

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00:13:26,360 --> 00:13:29,480
return of cash flows, right,
because it's harder to lose

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money.
But it's, you know, you don't

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have to change the world to take
the company from recently one of

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00:13:36,120 --> 00:13:38,880
our companies grew from 10
million to 150 million of

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00:13:38,880 --> 00:13:41,320
EBITDA.
Now that's an asymmetric outlier

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00:13:41,320 --> 00:13:44,480
at the high end, but it's not
like we found Google or

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something like that yet.
You know, the amount of returns

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00:13:48,560 --> 00:13:52,720
we can make off that and tax
advantage returns is quite

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00:13:52,720 --> 00:13:55,640
compelling.
So we we like that.

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00:13:56,560 --> 00:14:03,240
So I don't want to compel you to
give tax advice, but the QBs

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00:14:03,360 --> 00:14:10,040
thing, QSBS, my understanding is
it needs to be AC Corp at the

247
00:14:10,040 --> 00:14:15,040
onset of the entity.
Is merging a new company provide

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00:14:15,040 --> 00:14:20,080
an opportunity to cause it to be
AC Corp for the new aggregated

249
00:14:20,080 --> 00:14:22,360
company?
It does, yeah.

250
00:14:22,720 --> 00:14:25,040
Yeah, this is in the category of
of luck.

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00:14:25,040 --> 00:14:28,320
I guess the the being 1/4 Irish
maybe pays off every once in a

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00:14:28,320 --> 00:14:32,360
while and this certainly is one
of those where many of our

253
00:14:32,360 --> 00:14:34,520
companies qualify in their size
base.

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00:14:34,520 --> 00:14:38,240
They didn't really under the
previous code, but the updated

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00:14:38,240 --> 00:14:43,120
one in July, they do, which is
very exciting for us and our

256
00:14:43,120 --> 00:14:45,960
investors.
And yes, we can sit down and

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00:14:45,960 --> 00:14:49,720
structure the company as AC Corp
when we make that investment.

258
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And then you can help, you know,
acquire other competitors,

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00:14:52,480 --> 00:14:55,320
further professionalize them.
And you know, and the

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00:14:55,320 --> 00:14:59,480
government's trying to motivate
people to ultimately make

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00:14:59,480 --> 00:15:01,600
smaller investments where you
can't.

262
00:15:01,640 --> 00:15:04,200
It's hard to get rich on
management fees, right?

263
00:15:04,200 --> 00:15:07,400
You create wealth from returns
and performance and that's

264
00:15:07,400 --> 00:15:09,640
really what we're built at Star
Mountain.

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We invest a lot of our own
Personal Capital.

266
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We share our carried interest
with 100% of our employees.

267
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So we're all here to generate
you know asset returns, whereas

268
00:15:18,600 --> 00:15:20,680
you know we're not doing multi
billion dollar deals where you

269
00:15:20,680 --> 00:15:22,440
can make the kind of money on
fees.

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00:15:22,760 --> 00:15:28,160
So that program works out great
for both are what we call value

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00:15:28,160 --> 00:15:31,880
added lending where we'll do a
loan with a piece of equity and

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00:15:31,880 --> 00:15:33,480
within our private equity
business.

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00:15:34,120 --> 00:15:35,880
And then we're actually looking
into that now that our

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00:15:35,880 --> 00:15:39,200
secondaries business which has
some further tax advantages to

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00:15:39,240 --> 00:15:43,920
it including where we can buy a
discounted portfolio of loans or

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00:15:43,920 --> 00:15:46,760
an LP interest from somebody in
a private credit fund at a

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00:15:46,760 --> 00:15:50,840
discount to par.
That pull to par can create a

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00:15:50,840 --> 00:15:54,760
long term capital gain benefit
again for tax investors,

279
00:15:54,760 --> 00:15:58,000
obviously not giving tax advice
so forth, as you alluded, but

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00:15:58,000 --> 00:16:00,600
these are all things that can
create, you know, meaningful

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00:16:01,120 --> 00:16:04,520
value and, and, and there's
there's perhaps some QSBS

282
00:16:04,840 --> 00:16:07,720
underlying value within that
that we're further exploring as

283
00:16:07,720 --> 00:16:08,880
well.
Got you.

284
00:16:09,280 --> 00:16:15,640
Isn't it also interesting or
true that the people at the

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00:16:15,640 --> 00:16:21,880
higher, the institutions at the
higher part of the market are

286
00:16:22,240 --> 00:16:27,160
often times having non tax
investors so they're not paying

287
00:16:27,160 --> 00:16:32,400
tax whether it be a a, A?
Public pension fund or

288
00:16:32,400 --> 00:16:34,840
something?
Fund something like that so.

289
00:16:35,080 --> 00:16:36,480
That's, that's generally right.
Yeah.

290
00:16:36,480 --> 00:16:40,960
I think most larger funds are,
are typically going to have a

291
00:16:40,960 --> 00:16:43,720
lot of institutional investors
and, and at Star Mountain, we're

292
00:16:43,720 --> 00:16:46,920
roughly, you know, half
institutional investors and

293
00:16:46,920 --> 00:16:51,240
half, you know, taxable family
office and individuals and so

294
00:16:51,240 --> 00:16:53,400
forth.
That way at the end of the day,

295
00:16:53,400 --> 00:16:56,800
your non taxable investors just
care about the overall returns.

296
00:16:56,800 --> 00:17:00,120
And one of the other things that
they like about Star Mountain

297
00:17:00,120 --> 00:17:03,600
and the lower middle market, in
addition to the alignment aspect

298
00:17:03,600 --> 00:17:05,880
of our team, which is very
important to them because they

299
00:17:05,880 --> 00:17:08,520
don't want to lose money.
They know downturns can come and

300
00:17:08,520 --> 00:17:10,960
inevitably do.
They want people that are going

301
00:17:10,960 --> 00:17:14,200
to really work hard through
potential challenges, but they

302
00:17:14,200 --> 00:17:16,400
also want less correlated
investments.

303
00:17:16,400 --> 00:17:18,880
And if you think about one of
the benefits of the lower middle

304
00:17:18,880 --> 00:17:22,680
market is you can access
companies like a special needs

305
00:17:22,680 --> 00:17:26,640
school bus transportation
company or a pet hotel boarding

306
00:17:26,640 --> 00:17:30,320
and grooming business.
A business that can be very

307
00:17:30,960 --> 00:17:34,760
might be slow growth, basic
boring, but in the event of a

308
00:17:34,760 --> 00:17:38,720
market downturn, slow growth
basic boring is good, right?

309
00:17:38,720 --> 00:17:41,960
So something that can have a
good total absolute return, but

310
00:17:41,960 --> 00:17:45,920
be very uncorrelated to
geopolitical risks, you know,

311
00:17:45,920 --> 00:17:50,080
large market technology and so
forth, AI and whatnot, which may

312
00:17:50,080 --> 00:17:53,640
continue to transform, but
certainly I think has created

313
00:17:53,640 --> 00:17:57,240
tail risks that we see a lot of
investors now saying I want to

314
00:17:57,240 --> 00:18:01,640
find some things that are good
investments and less correlated.

315
00:18:02,760 --> 00:18:05,400
And, and obviously you've seen a
run up in commodities and other

316
00:18:05,400 --> 00:18:07,160
things like that, but some
people are saying, well, what

317
00:18:07,160 --> 00:18:10,040
does gold do for me?
How does it create cash flow?

318
00:18:10,400 --> 00:18:12,560
Well, it doesn't.
So in this case, you're finding

319
00:18:12,560 --> 00:18:17,400
things that are less correlated
that have a fundamental purpose

320
00:18:17,400 --> 00:18:20,560
and a value to them.
And that's that's where a lot of

321
00:18:20,560 --> 00:18:23,600
the institutions and some of
like the large family offices

322
00:18:23,600 --> 00:18:27,000
that are really focused on
generational wealth protection

323
00:18:27,000 --> 00:18:30,040
are getting very acutely focused
right now.

324
00:18:30,640 --> 00:18:33,600
Yeah, totally makes sense.
When there was a lot of talk

325
00:18:33,600 --> 00:18:38,640
about, you know, the the trades
businesses, the H back and so on

326
00:18:38,640 --> 00:18:41,920
and so forth.
Did you find that activity in

327
00:18:41,920 --> 00:18:45,200
that area was interesting to
Star Mountain?

328
00:18:46,160 --> 00:18:47,920
It is.
And then we've made a lot of

329
00:18:47,920 --> 00:18:51,880
money during it in fact,
including with HVAC businesses

330
00:18:52,400 --> 00:18:53,920
and others.
And and if you think about the

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00:18:53,920 --> 00:18:58,360
US economy, it's largely a
service based economy that's

332
00:18:58,360 --> 00:19:01,080
hyper fragmented.
You overlay that with the aging

333
00:19:01,080 --> 00:19:04,280
demographics and that valuation
arbitrage and you kind of have a

334
00:19:04,280 --> 00:19:08,560
perfect storm.
And so that dynamic persists.

335
00:19:08,560 --> 00:19:12,040
Now, what I don't think you want
to do is chase hype, right?

336
00:19:12,040 --> 00:19:14,360
Because there's some things
like, for example, one of my

337
00:19:14,360 --> 00:19:17,480
partners made a lot of money
doing a consolidation of car

338
00:19:17,480 --> 00:19:19,720
washes.
They built it up, sold it to

339
00:19:19,720 --> 00:19:22,040
Goldman Sachs.
Everybody had a very successful

340
00:19:22,040 --> 00:19:24,800
exit.
Then we recently looked at this

341
00:19:24,800 --> 00:19:28,760
other car wash business where
people just felt like, oh, on

342
00:19:28,760 --> 00:19:31,280
paper, yeah, you just put up a
whole bunch of car washes and

343
00:19:31,280 --> 00:19:33,840
it'll all be this profitable.
Then you sell the higher market.

344
00:19:33,840 --> 00:19:36,360
Every makes a lot of money.
Well, yeah, but what if you have

345
00:19:36,360 --> 00:19:39,160
three car washes on the same
block and people only need one?

346
00:19:39,440 --> 00:19:42,000
Now all of a sudden you're
fighting for labor.

347
00:19:42,040 --> 00:19:44,760
You have to drop your prices.
And now all of a sudden you have

348
00:19:44,760 --> 00:19:46,800
a car wash you have to pay rent
on.

349
00:19:47,000 --> 00:19:50,480
It might be unprofitable.
And all of a sudden, an asset

350
00:19:50,520 --> 00:19:54,560
turns into a liability.
And that gets ugly really fast.

351
00:19:54,560 --> 00:19:59,840
And so I think people that chase
hype, you know, sometimes they

352
00:19:59,840 --> 00:20:02,480
get lucky.
But rarely are they

353
00:20:02,480 --> 00:20:05,520
systematically successful.
And that's where it's just like

354
00:20:05,520 --> 00:20:07,120
Start Mountain.
Like we don't invest in real

355
00:20:07,120 --> 00:20:09,360
estate, we don't invest in the
energy sector, We're not

356
00:20:09,360 --> 00:20:12,160
investing in public markets.
We know what we're good at.

357
00:20:12,280 --> 00:20:15,240
We're specialists at it.
And I think whenever you see

358
00:20:15,240 --> 00:20:19,440
people kind of dabble in things
or chase things that sounded

359
00:20:19,440 --> 00:20:24,080
interesting, just because it can
be a good investment doesn't

360
00:20:24,080 --> 00:20:25,920
mean it will be.
That's right.

361
00:20:26,080 --> 00:20:30,160
And in your example, the car
wash, you know, seven years ago

362
00:20:30,400 --> 00:20:35,240
there was you could basically
buy a car wash and have zero

363
00:20:35,800 --> 00:20:38,840
economic investment because of
the tax benefits associated.

364
00:20:39,040 --> 00:20:42,480
That went away, of course still
interesting business, but not

365
00:20:42,480 --> 00:20:44,520
like it once was.
And maybe your friend

366
00:20:44,520 --> 00:20:48,280
participated in all that.
There's a lot of tax benefits as

367
00:20:48,320 --> 00:20:50,520
I recall.
So let's.

368
00:20:50,880 --> 00:20:52,360
Yeah.
I think you also don't want to

369
00:20:52,360 --> 00:20:54,640
and that's where you look at
your investor base, what you're

370
00:20:54,640 --> 00:20:56,400
doing.
I don't think you want to make,

371
00:20:56,680 --> 00:21:02,200
I think you want to look at tax
opportunities as an extra bonus,

372
00:21:02,520 --> 00:21:06,440
but you want to be fundamentally
good investment that then has an

373
00:21:06,440 --> 00:21:09,480
extra potential, the icing on
the cake if you will, but make

374
00:21:09,480 --> 00:21:13,000
sure the cake is solid.
I think people that chase the

375
00:21:13,000 --> 00:21:15,840
tax things that sometimes
there's like a window of time

376
00:21:15,840 --> 00:21:18,120
where that works, but then
inevitably you end up having

377
00:21:18,120 --> 00:21:22,560
people that, you know, typically
face losses and things.

378
00:21:22,800 --> 00:21:25,000
And we've seen it solar and
different things as well

379
00:21:25,000 --> 00:21:27,480
recently that again in a period
of time where people made money

380
00:21:27,480 --> 00:21:29,880
and a lot of people lost a lot
of money there.

381
00:21:30,520 --> 00:21:34,040
Yeah, that I think that's right.
So can you talk a little bit

382
00:21:34,040 --> 00:21:36,480
about your historical
performance?

383
00:21:39,160 --> 00:21:43,400
I can to the extent of of what I
can specifically share if people

384
00:21:43,400 --> 00:21:46,600
have, you know, questions they
want to understand more about as

385
00:21:46,600 --> 00:21:48,960
business owners or as
perspective investors.

386
00:21:48,960 --> 00:21:52,680
Our team would be delighted to
talk to them about, you know,

387
00:21:52,760 --> 00:21:55,640
for qualified investors, what
type of strategies and

388
00:21:55,640 --> 00:21:59,280
structures we offer to help, you
know, them achieve their total

389
00:21:59,280 --> 00:22:03,000
return income, diversifying tax
advantage and other potential

390
00:22:03,000 --> 00:22:07,360
benefits that they'd have.
But but generally speaking, we

391
00:22:07,360 --> 00:22:09,960
performed very well.
I guess that's enabled us to

392
00:22:10,000 --> 00:22:14,720
grow both in protecting capital,
generating, you know, solid

393
00:22:14,720 --> 00:22:18,920
current income on our income
vehicles and really staying true

394
00:22:18,920 --> 00:22:21,520
into our market opportunity that
as we talked about the aging

395
00:22:21,520 --> 00:22:24,840
demographics and whatnot has
continued to become a more

396
00:22:24,840 --> 00:22:27,800
compelling market.
What we haven't done and when I

397
00:22:27,800 --> 00:22:31,560
used to do asset management M&A
25 years ago, you'd see people

398
00:22:31,560 --> 00:22:35,520
build a good track record and
then kind of jump up market with

399
00:22:35,520 --> 00:22:38,160
a bigger fund and then all of a
sudden they're in a different

400
00:22:38,160 --> 00:22:40,560
market and it's much more
competitive and then their

401
00:22:40,560 --> 00:22:44,800
returns of course diminish.
So I think staying true to your

402
00:22:44,800 --> 00:22:48,200
market is critical.
And that's where I think, you

403
00:22:48,200 --> 00:22:51,160
know, in our case, we've had to
be focused on investing a lot of

404
00:22:51,160 --> 00:22:54,760
our own Personal Capital because
you can't grow your management

405
00:22:54,760 --> 00:22:57,440
fee base to the same level.
So the way you create wealth is

406
00:22:57,440 --> 00:23:00,200
really making returns with your
own money.

407
00:23:00,480 --> 00:23:04,480
I also think that the discipline
that creates with your team is

408
00:23:04,480 --> 00:23:07,920
very different when people
aren't trying to chase fees, but

409
00:23:07,920 --> 00:23:10,640
they're really focused on
investing their own capital.

410
00:23:10,960 --> 00:23:13,600
And it's hypothetically what
we're all supposed to be doing.

411
00:23:13,600 --> 00:23:18,280
But if you look at people's
incentives, often the incentives

412
00:23:18,280 --> 00:23:21,360
are not as aligned as one would
probably hope.

413
00:23:22,280 --> 00:23:25,200
Yeah, incentives matter.
There's no question about that.

414
00:23:25,920 --> 00:23:28,560
As long as somebody understands
them, they matter.

415
00:23:29,040 --> 00:23:30,800
Sometimes people don't
understand them.

416
00:23:30,920 --> 00:23:33,000
Yeah, yeah.
Well said.

417
00:23:33,320 --> 00:23:36,080
Yeah, So what?
What's on the horizon for you

418
00:23:36,080 --> 00:23:38,440
guys?
Anything new you care to share?

419
00:23:39,040 --> 00:23:40,760
Yeah.
We're, we're really excited

420
00:23:40,760 --> 00:23:43,760
about our secondary's business.
I think, I think a few things. 1

421
00:23:43,760 --> 00:23:47,960
is, you know, different products
we have, there's been a lot of

422
00:23:47,960 --> 00:23:50,320
noise in the market now, but
some of the larger market

423
00:23:50,320 --> 00:23:53,040
lending and while a lot of
people still want different

424
00:23:53,040 --> 00:23:55,240
forms of credit, which makes
sense.

425
00:23:55,240 --> 00:23:57,840
I think a lot of people now are
saying, well, I still want some

426
00:23:57,840 --> 00:24:02,520
credit, but where can I find
some diversifying credit to what

427
00:24:02,520 --> 00:24:05,080
I'm already invested in?
So I think we're seeing a lot of

428
00:24:05,080 --> 00:24:08,280
interest there, especially as
rates are coming down.

429
00:24:09,440 --> 00:24:13,040
The ability to generate a
potential premium yield is of

430
00:24:13,040 --> 00:24:16,080
interest.
The second thing is within

431
00:24:16,080 --> 00:24:21,200
secondaries, as the market is
bigger and more fragmented, you

432
00:24:21,200 --> 00:24:26,320
just have more people that may
want early liquidity in lots of

433
00:24:26,320 --> 00:24:29,640
different types of funds.
So again, we always like things

434
00:24:29,640 --> 00:24:33,800
where you have positive
information advantage, motivated

435
00:24:33,800 --> 00:24:36,360
sellers and a big market
opportunity.

436
00:24:37,000 --> 00:24:40,000
And then what's also interesting
about secondaries is if we do

437
00:24:40,000 --> 00:24:43,560
have a market downturn, it tends
to have a bit of a counter

438
00:24:43,560 --> 00:24:48,280
cyclical aspect where people are
more panic selling and you can

439
00:24:48,280 --> 00:24:51,560
buy them assets cheaper.
So I it's not a hedge, but it

440
00:24:51,560 --> 00:24:53,360
kind of acts in a similar
capacity.

441
00:24:53,360 --> 00:24:55,920
So I like that in My Portfolio.
I also like the taxable

442
00:24:56,200 --> 00:24:59,440
advantage aspect that you can
get from purchasing ordinary

443
00:24:59,440 --> 00:25:02,520
income assets at a discount.
And then within our private

444
00:25:02,520 --> 00:25:05,920
equity business, the tax
advantage aspect around the QSPS

445
00:25:05,920 --> 00:25:10,560
we talked about, I find those
really compelling in addition to

446
00:25:10,560 --> 00:25:13,200
just the aging demographics
aspect.

447
00:25:13,200 --> 00:25:17,640
So we, I guess we, we, we love
all our children and at

448
00:25:17,640 --> 00:25:21,280
different at different times
that each act better than the

449
00:25:21,280 --> 00:25:24,800
others, but they, they all tend
to perform pretty well across

450
00:25:24,800 --> 00:25:27,760
cycles.
Yeah, There's been a lot of talk

451
00:25:27,920 --> 00:25:32,680
and some wringing of the hands
of many people that are looking

452
00:25:32,680 --> 00:25:35,880
for liquidity that just can't
get it, whether it be an healthy

453
00:25:35,920 --> 00:25:40,600
interest in a fund or as an
early shareholder in a company

454
00:25:40,600 --> 00:25:43,480
that hasn't gone public yet,
right, or is about to.

455
00:25:45,440 --> 00:25:46,760
Yeah.
And if people are looking for

456
00:25:46,760 --> 00:25:48,960
early liquidity, please feel
free to reach out to us.

457
00:25:48,960 --> 00:25:52,080
We, we, what we don't do again
is the venture capital stuff.

458
00:25:52,080 --> 00:25:56,240
So the shares in a company that
didn't go public, that's a

459
00:25:56,240 --> 00:26:00,600
different world, a different way
of you're kind of analyzing what

460
00:26:00,600 --> 00:26:02,240
you hope's going to happen in
the future.

461
00:26:02,240 --> 00:26:05,720
We're better at analyzing
fundamental cash flows,

462
00:26:05,720 --> 00:26:09,560
fundamental businesses and more
of that value based investing.

463
00:26:09,560 --> 00:26:12,080
But if people are invested in
private credit funds, private

464
00:26:12,080 --> 00:26:15,400
equity funds, private credit
assets, private equity assets of

465
00:26:15,560 --> 00:26:19,120
companies and funds that
investing companies that do 5 to

466
00:26:19,120 --> 00:26:21,600
50 million of EBITDA.
Again, if we can be helpful,

467
00:26:21,920 --> 00:26:24,960
we'd be delighted to see if we
can be helpful in any capacity

468
00:26:25,680 --> 00:26:28,960
on that front.
But I, I think that there will

469
00:26:28,960 --> 00:26:33,400
be more and more people that are
invested in lots of things that

470
00:26:33,400 --> 00:26:36,480
are much less liquid than they
hope they are.

471
00:26:36,960 --> 00:26:41,040
And I think that fortunately for
some creates challenges.

472
00:26:41,040 --> 00:26:44,160
And usually the flip side of a
challenge is an opportunity.

473
00:26:44,160 --> 00:26:47,440
And so we're pretty geared up.
And some of my partners that

474
00:26:47,440 --> 00:26:50,360
were, you know, executives at
Fortress in the great financial

475
00:26:50,360 --> 00:26:52,600
crisis, you know, it made a lot
of money in the downturn.

476
00:26:52,600 --> 00:26:57,600
And we're pretty geared up, you
know, to be defensive in what

477
00:26:57,600 --> 00:27:00,360
we're investing in, but also to
look to capitalize on

478
00:27:00,360 --> 00:27:05,880
opportunities that we think are
to some capacity inevitable over

479
00:27:05,880 --> 00:27:11,920
the, you know, quarters to come.
So just just to be clear, you're

480
00:27:11,920 --> 00:27:16,960
interested in LP interests and
funds in the segment that you

481
00:27:16,960 --> 00:27:23,200
can analyze as opposed to the
more venture shares that have?

482
00:27:25,040 --> 00:27:27,520
That's right.
Yeah, Yeah.

483
00:27:27,600 --> 00:27:29,880
And if people want, we can help
try to connect, you know, if

484
00:27:29,880 --> 00:27:32,080
they're friends of yours in your
community, Arthur, we'll always

485
00:27:32,080 --> 00:27:35,280
try to be helpful to some other
folks that are the venture space

486
00:27:35,280 --> 00:27:38,480
around there.
But that's, we won't be a buyer

487
00:27:38,480 --> 00:27:40,600
of that, but we can help the
people connect into that world.

488
00:27:41,240 --> 00:27:43,320
The the venture world is a
different world.

489
00:27:43,320 --> 00:27:46,400
I think you need to be, you need
to live and breathe that and the

490
00:27:46,400 --> 00:27:48,880
risk reward profiles a bit
different.

491
00:27:49,800 --> 00:27:53,080
We at Star Mountain really focus
on trying to have the highest

492
00:27:53,080 --> 00:27:55,600
probability band of returns
possible.

493
00:27:55,600 --> 00:27:58,160
We're OK not getting a 50%
return our money.

494
00:27:58,160 --> 00:28:00,360
We just again, we don't want to
lose money.

495
00:28:00,360 --> 00:28:03,520
We want to try to make that, you
know, mid to high teens and

496
00:28:03,520 --> 00:28:05,880
things go well again to the 20s.
And if you can kind of

497
00:28:05,880 --> 00:28:10,200
systematically target those type
of returns across cycles, you

498
00:28:10,200 --> 00:28:12,720
know, that's really been what's
worked well for us.

499
00:28:13,600 --> 00:28:18,600
Does we, we could do a whole
segment on the QSBS stuff, but

500
00:28:18,600 --> 00:28:23,200
does some of that pass through
not just in the value of the

501
00:28:23,200 --> 00:28:30,960
company that is now sold for the
entrepreneur in, in, in the tax

502
00:28:30,960 --> 00:28:33,600
advantages of that, but does
that pass through to your LP's

503
00:28:33,600 --> 00:28:34,960
as well in some way?
It does.

504
00:28:35,240 --> 00:28:37,400
It's a huge benefit.
That's why I'm personally

505
00:28:37,400 --> 00:28:40,160
putting a lot of more of my
capital into that at the moment

506
00:28:40,160 --> 00:28:44,480
to say, in fact, we just had one
deal where the the greater than

507
00:28:44,560 --> 00:28:48,720
you know, 15,000,000 of profits
for your pro rata peace or 10

508
00:28:48,720 --> 00:28:51,960
times your money.
You can't have to think about

509
00:28:51,960 --> 00:28:54,200
that for a second.
But if you actually, you can

510
00:28:54,200 --> 00:28:59,320
actually get over 10 times your
money potentially depending on a

511
00:28:59,320 --> 00:29:03,760
lot of circumstances tax free.
Now, not often are you

512
00:29:03,760 --> 00:29:06,880
generating more than a 10 times
return on your capital, but

513
00:29:08,200 --> 00:29:10,200
fantastic if and when it
happens.

514
00:29:10,400 --> 00:29:14,400
But yeah, it's, it's a it's a
very for a US taxable investor.

515
00:29:14,960 --> 00:29:19,640
This current window right now is
incredibly compelling in my

516
00:29:19,640 --> 00:29:22,480
opinion.
I'm, I'm heading pretty deep

517
00:29:22,480 --> 00:29:25,040
into it because, you know,
there's no guarantee the next

518
00:29:25,040 --> 00:29:28,080
administration will continue any
issues.

519
00:29:28,080 --> 00:29:30,600
You just never know.
But it's the aging demographics

520
00:29:30,600 --> 00:29:33,960
is there today, the valuation
arbitrage is there today and

521
00:29:33,960 --> 00:29:36,560
the, you know, the tax advantage
opportunity.

522
00:29:36,560 --> 00:29:41,280
And so that kind of trifecta is,
is pretty compelling and maybe

523
00:29:41,280 --> 00:29:44,000
for some of us a bit of a once
in a lifetime even.

524
00:29:44,720 --> 00:29:46,880
Yeah, it might be.
In fact, we didn't know what was

525
00:29:46,880 --> 00:29:50,120
going to happen to it right when
it came through the regulations

526
00:29:50,120 --> 00:29:54,840
and came through well.
So let's do this if it's OK with

527
00:29:54,840 --> 00:29:58,720
you, let's do another one
whenever we have time to do it

528
00:29:58,720 --> 00:30:02,280
with you and talk about that or
or some other subject more

529
00:30:02,280 --> 00:30:04,040
specifically and get into the
weeds a little bit.

530
00:30:04,640 --> 00:30:06,000
Yeah, we'd be happy to.
Yeah.

531
00:30:06,000 --> 00:30:08,240
And we host some in person
things we'd be delighted to kind

532
00:30:08,240 --> 00:30:09,600
of think about with your team as
well.

533
00:30:09,640 --> 00:30:12,520
It's great how you guys get
together and share content

534
00:30:12,520 --> 00:30:16,280
information all together and
always a pleasure, Arthur.

535
00:30:16,680 --> 00:30:18,240
My pleasure.
Yeah, it was great.

536
00:30:18,920 --> 00:30:21,040
Brett, thanks for doing this and
thanks everybody for listening

537
00:30:21,040 --> 00:30:22,960
in.
Please feel free to share it.

538
00:30:23,160 --> 00:30:28,640
I feel like a YouTube promoter
and, you know, click here.

539
00:30:28,800 --> 00:30:31,480
But yeah, thanks for thanks.
For somebody told me something

540
00:30:31,480 --> 00:30:33,520
about TikTok.
I've never been on TikTok, but

541
00:30:33,520 --> 00:30:36,520
you said or have I?
Yeah, I guess it's, I mean

542
00:30:36,520 --> 00:30:40,720
become pretty substantial.
The most interesting thing that

543
00:30:40,720 --> 00:30:45,160
I've heard that just recently on
social media is that AI agents

544
00:30:45,160 --> 00:30:48,000
now have their own social media
program and they're talking to

545
00:30:48,000 --> 00:30:52,280
each other, which doesn't sound
good, but you know, progress

546
00:30:52,280 --> 00:30:53,920
maybe.
Yeah, that's funny.

547
00:30:54,240 --> 00:30:55,440
Thanks, Arthur.
A pleasure.

548
00:30:55,880 --> 00:30:57,240
My pleasure.
Thanks, Brett.

549
00:30:57,560 --> 00:30:58,240
Thanks everybody.