February 27, 2024 • 1hr 29min

Ali Hamed - Building an Investment Firm - [Invest Like the Best, EP.362]

Invest Like the Best with Patrick O'Shaughnessy

Ali Hamed returns to Invest Like the Best six years after his first appearance. In that time, his firm CoVenture has grown from managing around $200 million to over $2.5 billion in assets. Ali continues to find alpha in esoteric places through creative investing approaches across venture capital, asset-backed credit, and hybrid strategies. In this wide-ranging conversation, Ali and Patrick discuss CoVenture's evolution, Ali's investing philosophy, lessons learned in building an asset management firm, and insights on markets from YouTube catalogs to real estate. They also explore Ali's experience working with legendary entrepreneur and investor Michael Ovitz.

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Key Takeaways

CoVenture has grown 10x since Ali Hamed's last appearance on the podcast, from ~$200 million to over $2 billion in assets under management
Ali attributes their success to:
- Focusing on interesting, differentiated investments rather than chasing hot sectors
- Being disciplined about not deploying capital in overvalued markets
- Developing multiple strategies across venture, credit, and hybrid investments
- Growing talent internally rather than relying on lateral hires
They look for investment opportunities in markets that are small today but have potential to become very large
Asset-backed credit is a key focus - they aim to enter new asset classes before they become mainstream and crowded
Ali believes many private credit strategies are mispriced, especially non-sponsored vs. sponsored direct lending
When evaluating venture investments, they focus on:
- The "aha moment" of what others are missing
- Whether the founders have called their shot accurately
- If the investment aligns with the firm's strengths
Building an enduring asset management firm requires being uncompromising on a few key principles while being flexible on many others
Working with Michael Ovitz has pushed CoVenture to raise their standards and move faster

Introduction

Ali Hamed returns to Invest Like the Best six years after his first appearance. In that time, his firm CoVenture has grown from managing around $200 million to over $2.5 billion in assets. Ali continues to find alpha in esoteric places through creative investing approaches across venture capital, asset-backed credit, and hybrid strategies.

In this wide-ranging conversation, Ali and Patrick discuss CoVenture's evolution, Ali's investing philosophy, lessons learned in building an asset management firm, and insights on markets from YouTube catalogs to real estate. They also explore Ali's experience working with legendary entrepreneur and investor Michael Ovitz.

Topics Discussed

The Journey of Building an Investment Firm (3:11)

Ali reflects on CoVenture's growth over the past 6 years:

They've maintained a focus on interesting, differentiated investments rather than chasing hot sectors
Their success comes from loving investing itself, not just the status or ego boost
Starting as "fundless sponsors" doing deal-by-deal investments was difficult but built useful muscles:
- Forced them to find truly differentiated opportunities
- Put deals under a magnifying glass - each one had to work
Early struggles, like having to save a struggling portfolio company, taught valuable lessons

"We never got that memo. We thought the whole time we were supposed to be investing in interesting things that we think we'd make a lot of money on."

The Influence of Time and Scale on Asset Classes (15:08)

Ali discusses how asset classes evolve over time:

Older, more mature asset classes often have yields compressed by:
- Competition from many smart investors
- Ratings allowing regulated entities with cheap capital to invest
They look for newer asset classes that are:
- Too small for large players to care about today
- Have potential to grow very large over time
- Not yet rated or accessible to regulated capital
This allows them to earn outsized returns with less competition

"These older asset classes have largely just had the yields taken out of them."

The Power and Potential of YouTube's Asset Class (22:39)

Ali explains their thesis on YouTube catalogs as an emerging asset class:

Similar to music royalties - media assets with declining revenue curves
Partnered with Spotter to become dominant player in financing YouTube creators
YouTube has been around for 20 years, growing 40% annually
Sends ~$15 billion per year to creators
If financed similarly to music royalties, could be a $100B+ asset class

"YouTube's been around for 20 years. Two, it's been growing up about a 40% CAGR. Still, it sends something like $15 billion out per annum to YouTubers."

The Future of Real Estate and Housing Supply (27:33)

Ali shares his thoughts on the real estate market:

Housing supply is a major issue, especially for younger generations
Interested in ADU (Accessory Dwelling Unit) market in California
- New laws allow converting single-family lots to multi-unit
- Potential $450 billion market just in Los Angeles
Currently making small investments to learn the space
Expects it to become a major focus in next 2-10 years

"Depending on who you ask, people would say that Los Angeles probably needs 1.5 million more homes or room for 1.5 million more families."

The Challenges of Investing in Platform Economies (30:15)

Ali discusses the difficulties of investing in businesses built on major platforms:

Many platform ecosystems like Salesforce or Shopify are challenging to invest in
Platforms often compete with, acquire, or kill successful apps
Lack of consistent governance policies makes it hard to predict outcomes
Believes platforms may become more stable for ecosystem businesses as founders transition out

"We're pretty bummed that the Shopify ecosystem hasn't become investable, partly because Shopify either competes with, kills or buys any of the apps on its platform that have done well."

The Pitfalls of Capital Formation in Asset Management (36:44)

Ali shares insights on raising capital for investment firms:

Many first-time managers rely on weak stories (geography, sector focus) to raise funds
CoVenture focuses on proving themselves with existing network before expanding
Seek LPs who want excess returns for unique views (family offices, Canadian pensions)
Aim to match capital sources to investment strategy maturity
Balance between fund structure and flexibility as strategies evolve

"We basically have to go to people who are already in our existing network that we've proven that we're good investors with by raising SPVs as opposed to a fund with a bad story."

The Evolution of Venture Portfolio (45:17)

Ali explains CoVenture's approach to venture investing:

Focus on identifying product-market fit before others realize it
Look for non-obvious markets with potential to become large
Maintain valuation discipline, especially for uncertain TAMs
Blend seed and Series A stages when appropriate
Evaluate founders' ability to make their vision obvious to others

"Our number one job is to identify product market fit before other people have realized there's product market fit there."

The Approach to AI and Other Emerging Technologies (51:14)

Ali discusses their view on AI and other hot sectors:

Don't feel pressure to be first investor in a space
Wait until they have an original thesis before deploying capital
Avoid making investments just to show activity in trendy areas
Benefit of multiple strategies allows patience in any single area

"We don't think that you have to be the first investor in a space to make the most money on it."

The Mispricing in Private Credit (54:42)

Ali shares his perspective on opportunities in private credit:

Believes non-sponsored direct lending is mispriced vs. sponsored deals
Many assume PE-backed companies are safer borrowers
In reality, founder-owned businesses may fight harder to avoid default
PE firms may be more ruthless about cutting losses
Credit investors often rely too heavily on historical data

"I bet you that when push comes to shove, a founder whose legacy, identity, entire net worth is in the equity of a company will do more to save that company than a private equity fund will if it's one out of 20 positions."

Building the People Side of the Business (58:46)

Ali reflects on lessons learned in building the CoVenture team:

Focus on being uncompromising on a few key principles
Maintain ability to deploy across multiple strategies to retain talent
Grow more slowly to develop leaders internally vs. lateral hires
Raise capital in ways that align with investment approach, not ease
Create paths for ambitious people to grow within the firm

"We've learned that our firm is largely built on the few things that we're incredibly uncompromising on."

The Challenges and Opportunities in Valuation (1:04:21)

Ali discusses their approach to valuation in venture investing:

Build bottom-up view of potential outcomes
More flexible on valuation for very large TAMs
Maintain discipline on valuation for uncertain TAMs
Willing to invest in imperfect companies at right price
Avoid overpaying for perceived perfection

"I think most investors are more willing to pay a lot of money for something with no problems than to pay the right amount of money for something with some problems."

The Impact of Michael Ovitz on CoVenture (1:19:40)

Ali shares his experience working with Michael Ovitz:

Ovitz's introductions open doors to high-level meetings
Raises the bar for quality and speed of execution
Expands Ali's view of what "good" looks like
Creates a sense of responsibility to perform at a higher level
Pushes the firm to move faster and demand more

"His normal is our great. And so he causes me to expect more from people."

The Kindest Thing Anyone Has Ever Done For Him (1:23:11)

Ali reflects on his personal motivation for investing:

Investing feels important and impactful
Allows solving intellectually challenging problems with real-world implications
Provides a sense of being needed and making a difference
Offers natural competition and gamification
Attracts ambitious people who push each other to improve

"If your goal is to solve a really complicated problem that has real life impact and feel needed a lot and be a competitor, it's the best job in the world."

Conclusion

Ali Hamed's journey with CoVenture over the past six years demonstrates the power of maintaining a differentiated approach to investing while building a scalable asset management firm. By focusing on interesting opportunities in emerging asset classes, developing multiple complementary strategies, and cultivating internal talent, CoVenture has grown significantly while staying true to its creative investing roots.

Ali's insights on everything from YouTube catalogs to real estate highlight the importance of identifying large potential markets before they become obvious to others. His reflections on firm-building emphasize the value of being uncompromising on key principles while remaining flexible in execution.

Ultimately, Ali's passion for investing as a means to solve complex problems and make a real-world impact shines through. His experience working with Michael Ovitz underscores how partnering with world-class talent can elevate an organization's ambitions and execution. For those drawn to the intellectual challenge and potential impact of investing, Ali's journey with CoVenture offers an inspiring example of building a successful, differentiated firm in a competitive landscape.