On this episode of Fund Flow from McGuireWoods, host Jon Finger sits down with William [Billy] Prather, founding partner and Chief Investment Officer of Cypress Creek Partners, to discuss market opportunities for emerging managers, what makes the Cypress Creek team successful, and building bridges with LPs. 

Billy had his first taste of the emerging market space at Blackrock and UTIMCO. These early experiences shaped his vision when founding Cypress Creek Partners. He intended it to be a firm focused on building long-term relationships.  

“Nobody has a crystal ball. Nobody knows that they're going to get to that ultimate vision. But having that shared vision directionally is important,” Billy says, describing one of the most important factors in choosing a partner. The other important quality in a partner is a clear willingness to listen and learn. After all, you can’t teach someone who already thinks they know everything.

Billy provides advice to GPs looking to fundraise in today’s environment. He likes to see partners who are on the same page and who have a shared agreement of what runway is acceptable. When vetting partners, it’s important to not lose sight of what matters — finding great LPs and great new investments. More experienced GPs can market themselves based on their current LPs and their rapport in the industry. 

During this episode, Billy shares his views on how Cypress Creek finds success, what he looks for in strong emerging managers, and trends he sees for upcoming partnerships. With a focus on the long-term, Billy also provides his outlook on the five to 10 year forecast for emerging managers, including increased expenses to run a firm and new opportunities for spin-outs. 

💡 Featured Guest 💡

Name: William [Billy] Prather

What he does: William is the Founding Partner & Chief Investment Officer at Cypress Creek Partners. He has over 15 years of investment experience across global private and public markets with over $4 billion invested. 

Organization: Cypress Creek Partners

Connect: LinkedIn

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This podcast was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this podcast, you acknowledge that McGuireWoods makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in the podcast. The views, information, or opinions expressed during this podcast series are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This podcast should not be used as a substitute for competent legal advice from a licensed professional attorney in your state and should not be construed as an offer to make or consider any investment or course of action.

You are listening to Fund Flow, a podcast for emerging managers offering insights into the journey of new and aspiring fund managers seeking to have access in a crowded market. Tune in as McGuireWoods's partner and host, Jon Finger is joined by guests ranging from first time fund managers, to proven emerging managers, experienced LPs poised back emerging managers and other key participants in the emerging manager ecosystem. Hear their real world perspectives and gain actionable tips to help inform your strategy and position yourself for a successful fund closing.

Welcome to Fund Flow, a podcast for emerging managers. I'm Jon Finger, and today I am very pleased to be joined by Billy Prather, founder and the CIO of Cypress Creek Partners, which spun out of one of the largest university endowments and is focused on empowering the next generation of investors via their anchor partner model. Billy, thanks so much for joining us today.

Well, thank you Jon. I appreciate the opportunity to be on one of the, I guess, first dozen or so of these Fund Flow podcasts.

Excellent. Bill, appreciate you. Let's start, and if you wouldn't mind, tell me a little bit more about your history in investing and how it led to the launch of Cypress Creek.

Yeah, I guess that's a bit of a longer question, but Cypress Creek, for background, really stands as the third investment team that I had the opportunity to help build in my career. The first one was at BlackRock as a GP, the second one was at UTIMCO as an LP, making Cypress Creek the third one. But when I really think about my investment career, I used one basic lens, and this will tie into some of our later conversation about what we really do at Cypress Creek, but the lens is, this first decade of my career was really spent on the GP side. It was an amazing experience, basically under the BlackRock umbrella the whole time, and it was a truly go anywhere type capital. The second phase of my career, or the second decade, was really the LP side, which started with UTIMCO and is currently with Cypress Creek. And by the way, UTIMCO, the University of Texas Investment Management Company. That was not a mistake on my side, that's my alma mater for undergrad and my grad. So I was quite drawn there.

But really to kind of get to the heart of it, it's that blend of GP/LP experience that you'll see consistent across my team at Cypress Creek that is really truly instrumental to understanding our strategy. That sets the stage a bit, but the Cypress Creek journey for me probably looking back, it really started with me walking into my boss's office at BlackRock in 2014 in Midtown Manhattan and telling him I was going to go join my alma maters endowment, become an LP. And what I really told him was, "Look." He looked at me a little funny and he said, "Well, so you don't want to be on the GP side? And I said, "Well, hold on, to be clear, this is not a traditional LPC. My endowment, my alma mater has been really running more of this private equity of private equity type model." Jon, you probably get it. I didn't really know what that meant. I was just kind of saying some words that I had heard and built some building blocks.

So I obviously later found out really what that meant and had an opportunity to evolve that strategy. But I guess what is probably critical to understanding what I thought of as the private equity of private equity at the time is understanding a little bit about UTIMCO's history. And Jon, I think you probably know a little bit more about UTIMCO's history, but for your listeners, it's probably prudent to go into some of that.

Sure.

You can stop me if you disagree though.

That's great.

Okay. Well, so UTIMCO, I mean today it's called a 60 billion plus institution, it has a phenomenal reputation and a well-deserved reputation for anchoring new and developing managers. Back in the '90s when UTIMCO was actually formed, it started investing in private assets and it understood out of the gates the importance of building those deep relationships when you have these long data partnerships. And so in the early innings, they really built, I call them bridges, they built one bridge between that GP/LP, and it was capital. And when you think about new and developing managers in the '90s, there weren't a lot of people pursuing that. It was not crowded with capital. And so that bridge was a differentiator by itself. UTIMCO are obviously great partners, but that capital was a differentiator. You fast-forward to the 2010s, UTIMCO is probably about 20 billion or so when I joined and it was pretty clear at that point, capital was the commodity. If you looked at that bridge, that was a heavily trafficked bridge between the GP and LP that people were partnering on.

And so it no longer provided that uniqueness. And so the hiring of my cohort at UTIMCO, most of which were from the GP side, were under this thought process of, how do we deepen these relationships? How do we build other bridges? And so the second and third bridge were built, which was first the front office bridge, which is hire people from the GP side, hire people who understand the assets, the business models, who can execute quickly and are empowered to be the partner, that flexible dynamic partner that is necessary in the early stages of building an investment firm. And then the third one, the back office bridge, our COO today was brought in over at UTIMCO, Benjamin Murray, to build the first ODD program, or Operational Due Diligence program. And the way we partnered with Ben internally was we had him basically consulting on how to build the perfect foundation, this well-designed back office that shaves off that left tail risk. And this created two additional areas of value transfer and partnership, and so we really had three bridges at that point.

A fantastic run, we put about four billion in the ground under this strategy, if you look at the Cypress Creek team, an immense amount of success. With all things, over time it changes. And I remember very, very distinctly the University of Texas had built a new system tower downtown and we were in one of the beautiful corner offices. And me and some of my partners today were on the strategic partnership committee for private investments. And the ask in that room was, who should we commit a billion dollars to this year? And it wasn't who as in what number of partners it was what single partner. And if you start to reframe that you get that, where we started was lower middle market and new and developing managers, that was a very different ask. It's a great ask and people can be very successful doing it, and the endowment has continued to be very successful. But I looked at some of the partners here at Cypress Creek and it's like, man, we've come a long way.

That's fantastic, Billy. Great color. And it's not too dissimilar from a lot of the emerging managers who were at funds that were right where they wanted to be and it started out as a 300 million dollar fund and became a billion and all of the sudden it's two billion and you turn around and say, "This isn't what I love doing." And of course it's not to say that's everyone's story, but that story, absolutely, we see that on the GP side as well, which leads to so many of the emerging managers. So that's really a unique insight and I definitely do appreciate that. How do you assess and articulate the real unique market opportunity today with emerging managers that makes the segment so attractive?

By the way, I think you're spot on that a lot of emerging managers share a similar story of they find success and their firms grow and they kind of want to get back to the roots. So I guess I'm not unique, but in many ways what's really powerful about that is now that we've built Cypress Creek, I think fundamentally we've gone through the experience that a lot of our partners have gone through. And so I think that's that's really made us better partners. But when you ask why new and developing managers or emerging managers, the way we do everything is there's a heavy dose of data. I mean, if you look at our backgrounds, BlackRock and UTIMCO and organizations like that, the investment theory, the portfolio construction, all of that stuff really matters to us, but it's not the end all be all.

And so one, I would just say the data, when you really look at the interquartile skew with new and developing managers, lower middle market managers, there's great skew there. When you look at the market landscape, and again, we're lower middle market almost exclusively, the fragmentation of the lower middle market allows for more operationally driven value levers. And if you take a step back and ask, what are we really building to, we're building to a cross cycle portfolio, we're trying to take out a lot of the vault and say, no matter what the market does, we can still create value with our partners in these underlying businesses. And so that market structure matters to us as well.

And so data is one, and then when you really start to understand what we do as a firm, and I kind of talked about those bridges, we think it's self-reinforcing. When I say it was the private equity of private equity it's, well look, we're trying to create two-way streets. We're trying to allow our partners to focus on where they have the deepest edge, which is usually building businesses and finding great businesses to invest in. And so some of the back office aspects which are complicated and never changing, we remove some of the noise off their plate. And by doing that, we improve the transparency to us, which is self-reinforcing. We also remove a lot of the left tail risk that can be built into a back office unknowingly. And so it's self-reinforcing and so you say, "Well, these are our operational value drivers of how we create value for our partners, which it's a little bit self-serving maybe if you really pushed me on it.

Sure. You touched on it a little bit, but I think maybe it would be good for the audience to really get to know Cypress Creek a bit better on this episode. Teams are of course of the utmost importance when evaluating emerging managers, the same is true for LPs for a variety of reasons. What do you think makes the Cypress Creek team so successful, and maybe share a little bit more about what that team looks like.

Our core team has been doing this for eight years or so together. And so we know each other, we know how we all operate, where our personal genius lies and there there's benefits to that. But if I look and say, "Hey, what really makes us so successful?" It's process. We are extremely process driven, that that would be number one. And so everything kind of goes through part of a mechanical funnel. But the other thing we are is we're very proactive. And so this starts at portfolio construction. And I said, we're data driven, we'll take the data set and then we start scorecarding sectors and then once we decide on what sectors and weights we want in these sectors, we start looking for those partners, which is a mapping exercise. So we're mapping talent ecosystems because people spin out of all these great firms day in, day out.

And there are certain firms that if you take a step back, the heuristics that we've understood is that some of them are just great firms for training people and people spin out all the time and we want to make sure we're clued in on those. And then we map themes within those, and so then we're also looking for the macroeconomic tailwinds and seeing who's chasing the same ones that we think are interesting. And that'll generally set up a team that we have found rather than showing up on our doorstep, which we think is pretty powerful and it makes us very early in those instances. I think that's something we're really good at.

The other thing I think that really differentiates our team and has created a lot of success is we're so long-term oriented. We're about MOIC, we're about compounding over vintages and vintages. We're not transactional. You'll hear me say this a lot, and you probably already have heard me say this, Jon, but we are long-term greedy and we want our partners to be long-term greedy, not short-term greedy. Meaning a partnership, the way we think about it is it's got to be, it cannot be a transaction. We put too much human capital into our partnerships for us to view it as a transaction. It's got to be long term, it's got to be a partnership.

That's great. Maybe talk a little bit, you've touched on a few different ways that your strategy and frankly your historical investment strategy is differentiated, but in what other ways do you think Cypress Creek's, for lack of a better term, go to market strategy differs from other LPs?

Yeah, I mean, again, you've heard me talk about the bridges. I think different teams have different aspects of that. But overall, we're not filling a box. We don't have a model term sheet that we say, "Hey, this is the term sheet, let's do it or let's move on it." It's much more, these are people businesses, every strategy and every business is its own, it's unique and we appreciate that and we treat it as such. And so we're never going to say, "Hey, here's the term sheet we used on the last deal, why don't we just use the same term sheet?" We're going to get to know the team, we're going to get to know what matters and what works for the strategy and we're going to build the box around it. And that is something, it's art, not science. That's something that we've been really great at and hopefully our partners would echo that. But I think that's our biggest differentiator. I'm not going to regurgitate the bridges or any of the points I've already made, but I think that stands to be pretty powerful, that specific point.

I love it. I totally agree with you Billy. Talking about investment strategies of the emerging manager. What does Cypress Creek look for in emerging managers and the strategies that they're pursuing?

So Jon, we look at the market and we invest across private equity sectors and real asset sectors. And we have two exceptions though, we don't do VC and we don't do traditional real estate. Those are for two very different reasons. But when you really understand our goal of creating a cross cycle compounding of returns and being able to distribute liquidity to our investors, what that really means is the duration of VC is way too high. Also, our anchor partner model does not work well in that ecosystem and we had tried it when we were at UTIMCO. And so that's some of the nuts and bolts about the basics of where we invest.

What we look for in our most successful managers, and I can go through a laundry list of the work we do, but the most important from my experience, is having a shared vision of really what that team wants to build because we are going to see a significant amount of control to our investment partners. That's how our model works, it is about trust. And what we've learned, and honestly we've learned this in some cases the hard way, is if you don't have that shared vision of, "Hey, I want to build an investment firm," rather than, "I want to make great investments and my business may disappear with me," which are two very different animals. If you're not on the same page there, it creates a lot more conflicts than you'd ever imagine. And under stress, those come out pretty quickly.

And so what we've learned is, first and foremost, make sure there's a shared vision. The shared vision that we think is most powerful for our business model, not that you can't make money in all of these types of constructs, just what's most powerful for our business model and how we think about the world is true business builders building a true cross-generational investment firm. That's where we shine as a partner.

That's great.

We're truly focused on long-term, value add, lasting, durable relationships. One, duration of our relationships. We invest so much human capital with our partners, it is so expensive for us to go find another partner if you think about just man-hours. And we would just rather scale capital day in, day out with a very high caliber partner that we already have.

And so duration, on the onset, I mean we're thinking 20 plus year type partnerships. Fortunately we are young people so we can say that with a straight face, but Cypress Creek will live on without me. I guarantee you that. Just like we have our partners do, we've already kind of set our succession plans, even though I'm a whopping 40 years old so it sounds almost silly, but that's just the way we operate. I don't know, call us crazy. So that's the duration on the duration target. It's long. It's all about compounding MOIC. The pre-relationship, i.e., pre-investment, honestly it's generally several years or longer. We have one investment partnership, which we're getting pretty close to completing where it's a year and change. That'll probably be a record time for us. But it takes a lot of time to really perfect these types of relationships because it's a ton of trust going both ways. It's not something that's manufactured in a legal document.

Sure. And so getting in early, building the true trust, the relationship. And then thinking about the 20 years, how does Cypress Creek measure the expectation around future scalability of an emerging manager strategy?

You have to have a strategy or a skillset that isn't just a one and done. If you say, "Hey, I can invest 50 to a hundred million dollars in this strategy and this is what I know and I know nothing else," that's problematic. Because, for one, we're going to ask to give you 50 to a hundred million dollars and so you're not going to have any other LPs. And two, it's problematic because all that time and all that human capital, ultimately if we can't scale over time, it doesn't really leverage well. But there's a middle ground in there, because we're not saying everyone has to be a Blackstone and everyone has to be a BlackRock, and you don't need these open-ended funnels. We like lower middle market, you can scale a lower middle market fund to a very reasonable size and keep repeating. We have partners that have been doing this for ages and what ends up being the most important to us is that the capital raised fits the strategy.

Absolutely. I want to get to your, I think, very unique position and your view of the macro environment with emerging managers, I think that'll be super helpful. But one last question, as it relates to how Cypress Creek evaluates emerging managers. As a general matter, when you think about a team's history, pedigree, what are some of the more attractive hallmarks that you look for in a partnership?

Look, that is a great question. I wish I could say my answers would probably be surprises, but I really don't think they're going to be that surprising. We're generally partnering with people that have a decent amount of runway in their careers and that's great because there's a lot of runway for us to partner with them. At the same time, that usually means their track records are a little bit more opaque. It's not going to be the traditional, "Okay, here I can just run it through the Excel funnel and we have our output." And so we tend to be very good at deciphering and breaking down opaque track records. And what I would simply say is a track record of success, it could be in an operating company, it could be at an investment firm. It doesn't really matter to us, we're going to dissect that. But a track record of success is important.

Focus is absolutely important as well. Meaning there is a clear edge, they know what they are good at. And part of that focus is generally having more process driven approaches and more operationally driven value drivers. And what that really allows us to frame is the repeatability of their success. Those are the more structured aspects.

And then I would say there's two things, one I've talked about, one I did not, which are more qualitative. And one of those is a shared vision. Nobody has a crystal ball so nobody knows that they're going to get to that ultimate vision, but having that shared vision directionally is important. And the other more qualitative one is a clear willingness to listen and learn. You can't teach someone who already knows everything anything. And so we're very cognizant of that because look, we use soft diplomacy with our partners, meaning we're all in the same boat, we're trying to all get to the same win-win solution. But there are partners who are more clearly understanding what they know and what they don't know and we find that we partner best with them because we're like that. And maybe this is us touting our culture around, but it's a frankness, it's an honesty and it's an ability to ask the stupid question maybe.

So shifting now towards some of the more macro questions. What guidance are you giving GPs as it relates to their overall strategy for their fundraise in today's re-up environment?

We basically get one of those magic eight balls that you shake around and put it in front of them and just say, "Hey, you can take this home in case you have any questions." I'm kidding, I actually probably need to get one of those from my desk. But the truth is it depends where the GP is. And so if you're asking me for a GP that is going to raise its first fund, has it closed on a penny, is thinking about spinning out of their existing organization or has recently left, the advice I give them is plan as if this is an investment you are making, meaning create a budget, think about your runway, talk to your partners, make sure you each have the same runway, make sure you are each on the same page. And I would tell them, I'd say, "Hey." If they came back and they gave me a one-year runway, I'd say, "Well one, you need to double or triple that, otherwise you're going to be coming to a year and you're going to have some tough conversations that you should have already had."

But two, if they don't put enough thought into that, it creates a lot of stress and noise that they can, I think address early on and really focus on what matters, which is finding great new investments and finding great LPs to support them in those. And so that's the advice I would say, "Hey, give yourself... I would say map out three years, make sure you're on the same page as your partners. Make sure it works for everyone. It is a really hard business to get off the ground. It's really hard to find those great partners, but they're out there.

That's great.

But it's worth it. It's worth it. Such a powerful business model once you get it going.

No doubt. So that's helpful for the GP thinking about the spin out, the launch. How about a little step further. So for the emerging manager who just closed on their first fund, fifty, a hundred, 300 million, whatever it is, what is some of the most important advice you would share with those emerging managers as they think about deployment, the next fundraise? What's top of mind for you?

One of the most important, I don't know if it's obvious or not, but the most important things from my perspective is your best marketing at that point is your current LPs and you should treat them as best as you possibly can. And that means transparency, clarity in how you describe what you're investing in and what you're doing and honesty, which means if things are going wrong or different than planned, you should be the first one bringing that up. And when you build, and nobody expects everything to go right perfectly the first time, but when you build that rapport and that trust through that kind of transparency and partnership, it goes a long way.

And the LP community is a small community. People trade seats a lot of times, but the LP community itself is small and that's your best marketing. Those LPs that you have today are the ones that are probably going to help you find your future LPs. And so don't lose sight of that. I think we've seen and talked to some firms that once they raise that first pool of capital, they're like, "Great, we can stop marketing and now we can just focus on investments" and you should be focusing on investments, but it's not black or white. It's, yeah, maybe you shift a little bit more of your time this direction, but keep investing in those partners. Make sure you go see them, face-to-face meetings, maybe I'm old school, Jon, you tell me, but I think face-to-face meetings are great. And getting in front of those partners makes it a very real human experience.

Absolutely. So pull out that Magic 8 Ball, what is your and Cypress Creeks outlook for fundraising by emerging managers in this year? I mean clearly there's a lot of noise in the broader economy. It's been a challenging fundraise environment. I do think that has started to work its way through the system in some respect. What is your fundamental outlook for 23?

We've got data through the first half of 2022. I haven't really seen the second half, but first time fund managers that are in our ecosystem that we invest in, so ex-VC and ex-traditional real estate, you really saw that market, a number of funds getting raised get cut in half in 2022. I would, relative to 2021, I would think 2023 is better, there's just a lot of volatility and a lot of quick adjustments happening in 2022.

But I don't expect it to be where 2021 was. There are a lot of portfolios on the LP side that had pretty tough years and that hasn't truly, the denominator effect as people put it out there, hasn't truly I think shooken out. And so I think that's going to have an impact. And when you're looking for a slot on a full roster, it's hard. With that said, I've got to commend some of the larger teams like CalPERS who are putting more money into the new and developing manager segment and there's a handful of other large firms. I think that's so powerful and honestly I think it's a great investment and very thoughtful, and so hopefully that helps to balance the trade over time.

Do you see that news and it's awesome validating your thesis, everything you're doing, what are your reactions? And it's not just CalPERS, but what are your reactions when you see other news like that?

Honestly, I think it's fantastic. It is an underinvested space in the market. It's a very attractive space if done right. With that said, I mean if you look at the data and there's some survivorship bias in this, the halflife of an investment firm is one vintage, meaning from one vintage to the other, basically half of them will appear. And again, there's some survivorship bias in that data, but it is a really tough space. And until you get to fund three, four, you haven't really round tripped a lot of your capital, and so your staying power is still in question. And so done incorrectly, it's not a great ad to your portfolio, but there are teams out there who are really good at investing as part of the market and I think it's absolutely fundamental that it's part of someone's portfolio. I'm biased though, I guess.

Sure. And last question here, Billy, longer term, so as we look out five, 10 years, from my seat, the emerging manager community has changed significantly over the past five 10, frankly, as you've talked about five, 10 months. But when you look out longer term, what is your view of the landscape for emerging managers look like?

When I look five, 10, 15 years out, what I know, the two things I know to be true are, one, it's going to be more expensive to operate an investment firm. I will guarantee that. Two, not only will it be more expensive to operate a firm, you will have, maybe taking a step back, it's going to be more expensive clearly because you have a lot more regulatory expenses. You look at where some of the regulatory legislation has been going, I think that's clear as day. The other thing that's probably clear as day is that you're always going to have spin outs. When you look at all of the large established firms, and I love using Sequoia because Cypress Creek is a tree based firm, but Sequoia is obviously a VC firm, but it's also the biggest tree in the forest. It's easy to spot Sequoia. There's always going to be people leaving those types of enterprises to try to build something new. And every LP out there needs a bench. They may have their core managers, but they need a bench.

And so those things kind of contradict each other in a way. But I guess it's my way of saying there's always going to be a role for new and developing managers. It's a natural stage of the business and it's not going anywhere. The fact that the CalPERS and some of the large capital providers are putting a more concerted focus on this part of the market, I think it's welcome and there's plenty of capital need to go around in the space. I don't think it's going to create any sort of bubble dynamics.

Excellent. Well, Billy, thank you so much for joining me today on Fund Flow. As you know, I do believe that we had built early on a very strong relationship, just based on everything you are building at Cypress Creek, how you approach relationships, and I'm really very much appreciative for you joining us here, sharing your insights and your view with our emerging manager community. So thank you so much for your time.

Well, thank you, Jon. Honestly, I really appreciate what McGuireWoods and yourself are doing for the new and developing manager segment similar to what you helped do in the fundless sponsor space. So excited to be on it and enjoyed the dialogue.

Excellent, thank you.

Thank you for joining us on this episode of Fund Flow. To learn more about today's discussion, please email host Jon Finger at jfinger@McGuireWoods.com. We look forward to hearing from you. This series was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this series, you acknowledge that McGuireWoods makes no warranty guarantee or representation as to the accuracy or sufficiency of the information featured in this installment. The views, information, or opinions expressed are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This series should not be used as a substitute for competent legal advice from a licensed professional attorney in your state and should not be construed as an offer to make or consider any investment or course of action.