Ray Yousefian: Yeah, yeah. Happy to. So, throughout my career, past 25 years, I've been around really growth investing in some way, shape, or form. Cut my teeth in emerging markets, working for a family office, making investments in technology, some consumer plays over in Southeast Asia. [00:02:00] And then found myself in the investment banking gauntlet, Morgan Stanley, in the technology group and really overseeing all kinds of transactions.

So you think about M&A, debt offerings, obviously a lot of equity capital raises, et cetera, and really across that entire ecosystem. So you think about, semiconductors, software, a lot of the internet models that were around at the time, and it was a great place to learn, and love it dearly.

Later on, then transitioned to finding myself on the equity capital markets desk, standing that up, or helping to stand that up, for Morgan Stanley in the northeast out of the New York office. And then, was lucky enough to have fantastic clients like the ones that you mentioned at the top of the program, really advising on the most important transactions that those companies were facing today.

After that, [00:03:00] started having some conversations with Jody LaNasa, the founder of Serengeti Asset Management, and Jody is a very storied special situations investor, having run Goldman Sachs' Special Situations Group in the early 2000s, and was really part of that entire cohort of, now you think about firms in the private credit landscape, like Sixth Street kind of came out of that whole group, Silver Point, et cetera.

So very storied history. And for your listeners, the one thing that I would say about Jody and Serengeti is that the foundation and the principle of special situations is you really try to find opportunities whereby you can limit your downside risk, but still able to participate in the upside, and that's really where you're going to derive a [00:04:00] differentiated return relative to what a typical equity investor might be taking in the S&P 500, or choose your index product.

Brian Dally: So it sounds like Serengeti has found at least one of those.

Ray Yousefian: That's right.

Brian Dally: Tell us about it.

Ray Yousefian: Yeah, so, I run our stock finance strategy, and it's the largest strategy that we have at Serengeti to date. And at a very high level, what we're doing is, we think that we're bridging a really important need for both investors and then also our counterparties, and when you find yourself in these situations, this is where you can really find unique opportunities in a market set.

And so, what are we doing? We are trying to build exposure into the most exciting, largest, fastest growing private technology [00:05:00] companies that you hear about on a daily basis. So think about companies like Databricks, Stripe, Anthropic, et cetera.

Brian Dally: Everybody wants in these companies.

Ray Yousefian: Yeah, right. Everybody is very excited about what they're delivering and their place in the ecosystem and why they exist. And, but along with that, there's a lot of compensation that is delivered in terms of equity compensation. Right? And as these companies stay private for longer, we felt that there was a need for a solution to address some of the liquidity problems that they were having.

Tenders are definitely one way, and that's great, but if you are an employee, and this is an important asset for you, you may not want to sell out of your entire position. You want to retain some exposure to the upside. So stage left, Jody got wind of this very early on and said, "Look, there's got to be a [00:06:00] way that we can help facilitate this market, because me, as an investor, would love to be able to have exposure into these things, but maybe we could do it in an overcollateralized way."

And so, we developed the idea of being overcollateralized relative to the underlying equity of some of these most exciting companies, and then being able to have a return that was more of an interest rate focused return in terms of a pick rate, but then also participate in the upside through a stock fee. And from the individual's perspective, from the counterparty's perspective, that was also fantastic, because I don't have to sell out of my entire position. Right?

Brian Dally: If we take a step back for the audience so that everybody's tracking, it seems like, at least, from what I read, individual investors are pretty [00:07:00] excited about the idea of getting exposure to these private companies before they go public, and that's now more possible in more ways. I guess the classic way is somebody gets an allocation, and then you know that somebody, and you get to buy some of that stock.

Ray Yousefian: That's right.

Brian Dally: And that's a stock investment. That's an equity investment. You are talking about something very different. They want to hang onto it because they believe in their company. And they probably don't want the tax liability. I would imagine that's an advantage.

Ray Yousefian: 100%, Brian. You've done your homework, and I think that you understand a lot of the benefits of why this is so attractive, to both sides. But if we were to focus on the investor side just for a minute, because let's talk about that overcollateralization and what it is that we're actually doing.

If you were to invest in the last round of these companies, or if you were to buy in the secondary market, which is now trading at a pretty high premium for a lot of these names. You are investing [00:08:00] dollar for dollar, delta one, and for people that aren't familiar with the phrase, basically, that means that your risk curve is, if the stock price goes up a cent, your value goes up a cent, and if it goes down a cent, then your exposure goes down by one cent, or your total value, right?

With the concept of overcollateralization, typically, when you look at what we've done historically, we're advancing about 35% or 35 cents on the dollar of that equity. So, we are typically three times covered on a collateral basis, meaning that you're going to take a lot of the volatility out of the underlying exposure that you have as an investor.

Brian Dally: So it's not that there isn't downside exposure, it's just set up and structured in a way that it's unlikely, [00:09:00] in most cases, that you're going to realize downside. Or that you're giving away some upside.

Ray Yousefian: 100%. And let's run the quick math on that. So if our average advance rate is 35%, that means that you're going to remain unimpaired. So you invested a dollar in our strategy, you're still going to have that dollar up until you have a decline of 65% or more in the underlying equity.

Brian Dally: There's definitely a risk that it takes a long time to get liquidity on these investments. That's just part of private market investing in general in most categories, right? It takes a long time. Liquidity can be uncertain, the exit. And what you're really talking about is when they finally go public or are acquired by another company, hopefully they don't go out of business, these companies. I mean, I don't think Anthropic's going out of business.

Ray Yousefian: No.

Brian Dally: I think they made... What was the figure?

Ray Yousefian: $40 billion run rate right now. It's pretty incredible.

Brian Dally: They added $11 billion [00:10:00] in revenue last month.

Ray Yousefian: It's almost like $1 billion a week. I don't think the market has ever seen a company grow as quickly.

Brian Dally: Any company anywhere can always hit a wall, go out of business, whatever, or have a suboptimal result, but it sounds like the way you guys have positioned this, it lets you have some of that upside and have exposure to these companies without worrying that you're buying at the top. Because if you are buying at the top, there's a cushion.

Ray Yousefian: Right.

Brian Dally: Yeah. Okay. I got it. How do you think investors who are starting to get into alternatives, maybe they've been in a private credit fund, maybe they invested with Groundfloor or some other sort of real estate, private credit or private equity maybe even. How should they think about this in their portfolio? Where does it fit?

Ray Yousefian: Yeah. So I think that it really, it kind of bridges two buckets. Like I said before, if you want exposure to the highest growth sector in the world [00:11:00] today, arguably with some of the most important companies that are changing the dynamics about how we live our daily lives or how we interact in our offices and in our work lives, et cetera, it's really this cohort of companies within the technology sector, and I almost hate using the technology sector because it's permeated every single industry. Right? So it's really just broad-based tool sets that you want to gain this exposure to. But, if you're unsure about being able to think five years into the future, and ultimately what is going to be the exit value, right?

Brian Dally: Hard to know. A lot of debate about that.

Ray Yousefian: It is hard to know. And I want to have a little bit of downside protection just in case things don't unfold the way... Who would have known that we'd [00:12:00] be in the conflict that we are in Iran right now. And all of the knock-on effects of everything that's happening as a result of that in energy markets, Strait of Hormuz, all, all of these types of things. And if you want that little bit of downside protection, this structured way is an unbelievable way to gain exposure to that asset class.

Brian Dally: See, this is a great example of what you were saying about special situations. Right? This is an amazing opportunity that you guys have spotted. How do you find the borrowers? Where do they come from? Has it taken a long time to build that up? What is that process?

Ray Yousefian: It's a lot of efforts and it's a lot of great partners and partnerships.

Brian Dally: Okay.

Ray Yousefian: So, I would say a fairly significant amount of our flow comes through what I would call specialty originators. These tend to be smaller broker-dealers that have traversed in the secondary markets, et cetera, and we've educated them [00:13:00] on our solution, and they're able to present it as a viable option, right? A different option. And, we get quite a bit of flow through that mechanism. But then as you can imagine, once an employee or an early stage investor or a founder, we work with founders all the time, there's some ancillary benefits to our structure. Get to retain your voting rights, all of that type of thing. But you can imagine, then there's water cooler talk, right? You do this for one person, then they're talking to their friends, colleagues. They're like, "Hey, yeah, look, I was able to pay the tuition."

Brian Dally: Does it take a lot of employees to participate in a company to build enough of a position? Or how do you think about balancing your position across the portfolio within one company?

Ray Yousefian: It varies, and it varies per company. Now, when we're building our fund, and I know that we'll talk about the Big Cat Fund later, we [00:14:00] are taking a diversified approach. We know our target list, and it's not 100 names, it's really 25 that we really care about. By the end of the portfolio maybe it's 30 names as companies exit and we recycle or whatever. But that's what we're targeting around, and we'd like that to be balanced in the portfolio with the exception of maybe a couple names that we know and love that we think could be outside positions in that fund. So we really are trying to focus...

Brian Dally: is it hard to get to the position that you want?

Ray Yousefian: It does take time. But as these companies continue to grow in value, your average ticket sizes grow in value because now you're talking about companies with market caps that are in some cases approaching a trillion dollars. And many of them in the hundreds of billions of dollars.

Brian Dally: Wow. So you have your target list. Would you say [00:15:00] that 30 companies is diversified in this context? How would you rate that as diversification?

Ray Yousefian: And I think it's important to also understand how we view the underwriting lens for private companies. Because when you think about diversification, everybody's going to be thinking, "Well, doesn't the S&P 500 have 500 companies?" Okay. And isn't that diversified?

Okay. So let's start with the funnel that we're looking at for Big Cat. First of all, these are companies that we believe in the next two to three years at least have the criteria to pursue an exit if they wanted to. So we're not necessarily trying to take venture risk here. These are late stage behemoths that are the leaders in their sector sub-sector of the product or service that they are doing. They have hundreds of millions in revenue, if not [00:16:00] billions, already. They're compounding at rates that are double, triple that of public markets. So on average, these companies are growing and compounding 40% plus. Okay? You have a gross margin profile that's best in class, and then if they're not profitable, there's a distinct path to that profitability, or they're running the business unprofitably on purpose.v
Look, I get it, and we don't have to get into like specific names, but--

Brian Dally: And they typically have pretty huge cash balances.

Ray Yousefian: In very large cash balances. At least enough, even if you're burning, like in the case of some of the large language models, you probably have at least three years of runway.

Brian Dally: Right. Yeah, and that feels, in that industry, pretty good, as a backstop. One more question before we take a break. The Big Cat Fund, you mentioned it. What is [00:17:00] it, and what do you think investors love about it?

Ray Yousefian: Yeah. So, what is it? Exactly what we've been talking about. It's exposure into these uniquely positioned crème de la crème late-stage growth companies that are transforming the world. Able to help out the underlying shareholders of those companies in the ways that we talked about, and importantly, are able to gain this exposure with the return profile that we talked about.

Now, I think it's important, let's put this into context, okay? When we're thinking about adding a company onto the Big Cat list, et cetera, we're really underwriting to a three-year exit. That's our bogey. And as I described before, we have a return mechanism that is PIK oriented, so we get an interest rate type of [00:18:00] return.

Brian Dally: PIK means paid-in-kind.

Ray Yousefian: Paid in kind. Yes, thank you very much. And, in addition to that stock fee component, which is direct delta one. When you put those two things together, on average, we'll generate probably a 1.6 times MOIC over that three-year period, which corresponds to a 20% Gross IRR at a flat exit. So we aren't underwriting any increases in the value of the underlying equity.

Brian Dally: And it sounds like even if the exit is less than flat, you're still returning...

Ray Yousefian: And this happens all the time, even in some of the recent IPO exits that we've happened. To put that into context, if we're advancing at a 35% rate, even if a company exits down 50%, you're getting your money plus some. One, two times MOIC.

Brian Dally: Does this fund pay a dividend [00:19:00] or a distribution along the way, or where is the liquidity for investors in the fund?

Ray Yousefian: Yeah. So the liquidity will come after the investment period, which is purposely short. It's only two years. Relative to other private vehicles that last...

Brian Dally: So you're locking up your money for two years.

Ray Yousefian: Yeah, yeah. And then, as we have exits along the way, either M&A, IPOs, tenders, or another place where we can seek liquidity, any special dividends will get paid to the investor first before it then goes to the underlying holder. All of that will then start to get paid out.

Brian Dally: So it sounds like as these Big Cats come of age and achieve liquidity, there could be some pretty good checks coming out to investors.

Ray Yousefian: Without a doubt.

Brian Dally: Love it. This has been a wonderful start to our conversation. When we come back for part two, I want to get into the market. A lot of people are talking about the market. Obviously, you guys are astute observers. Love to [00:20:00] hear how you see things. We'll also talk about how we're partnering together because I'm excited about that.

So for our audience, you can connect with Ray via his LinkedIn, which we'll include in the show notes. You can also check out serengeti-am.com.

Check out all the episodes of our podcast at groundfloor.com/podcast, and if you have a minute and would be so kind, we'd appreciate you liking and subscribing wherever you tune in. Thanks again for joining us on Beyond the Stock Market.

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