David Bizer set up GCW Partners in 2019 as the direct result of a number of shortfalls he’d perceived within the investment management market.
Among these were inherent conflicts of interest within the model used by certain institutions, particularly private banks that are affiliates of larger banks. Top of the list is product bias in the investments these banks make available to clients.
According to Bizer (pictured), a conflict arises when private banks put their own products on the fund platforms they offer to clients. These platforms purport to include third-party managers but he feels a bank’s own products are often pushed more than others, which helps them glean a greater amount from fees.
“They can be incentivised to promote some funds over others,” he says. “They are earning fees from those products that they would not be earning from other things a client could buy.”
Similarly, he adds, there are instances with private equity or venture capital funds on these platforms where the bank earns handsome fees from the sponsor-related business those funds do with the banking side of the firm.
Then there is the fact that many of the bank platforms ask the managers to share their fees with them. This, Bizer argues, often means the end client doesn’t benefit from any reduction the bank obtains.
“Again, that creates a bias in the availability of funds on the platform or that are promoted from the platform.”
So how does GCW address these issues? Bizer suggests GCW’s independence means it avoids conflicts because it does not have internally manufactured products to push. “We’re in an excellent position to evaluate those investments on their merits,” he adds.
On fee reductions, Bizer says GCW has a policy of passing on 100% of any benefit from fee reduction or discount in making an investment to the end client.
Global ambition
Before launching GCW, Bizer spent six years at California-based investment manager Jasper Ridge. Prior to that, he worked at Lehman Brothers in various roles including head of fixed income Emea and head of equity sales US. With the onset of the global financial crisis, however, he decided to hop over to the buy side.
Bizer’s banking phase followed a few years in academia as a professor of finance and then a stint in public policy at the Council of Economic Advisers to the White House.
He set up GCW with Icelandic native Siggi Thorkelsson, who co-founded and chairs Icelandic securities firm Fossar Markets. Thorkelsson is also a Lehman Brothers alumnus and a former head of equities Emea at Barclays Capital in London and a director of Barclays Capital Securities.
In addition to its London base, GCW has offices in New York and California, and nine employees. Bizer says it was formed in London, however, because the city has “a timezone monopoly” that is beneficial when serving global clients.
Bizer says he and Thorkelsson were careful to secure the best calibre of talent when building the team for the launch. The current line-up includes expertise in equity research, macro hedge fund management and distressed credit among other areas fund management and distressed credit, among other areas.
The firm runs both pooled vehicles and separate accounts. The pooled vehicles aggregate smaller client interests, creating enough scale to access investments not otherwise available to individual investors, while the separate accounts are for higher net-worth individuals (HNWIs). Portfolios aim to deliver between 2.5% and 3% of alpha per annum net of fees and expenses.
Staying the course
The firm launched in the quarter prior to the pandemic and, reflecting on events since, Bizer says it is now “relatively stress-tested” and that it “pretty much stayed the course”, which means GCW portfolio values dropped with the market in Q1 2020, before rebounding in Q2.
“Q1 2020 was just one of those moments, like 2008 and probably 2001 in the dotcom bubble and the Asian crisis in 1997,” he says. “There are a few of these moments in history where if you’re investing, you’re just glued to what’s going on and hope you made good decisions.”
With good decisions comes effective liquidity management, he says, to avoid being a forced seller in the tough times.
“It’s very inefficient to sell during a crisis,” he adds. “If an investor has been managing liquidity, they shouldn’t be forced to sell. When investors are forced to sell, they have to sell to people who have other issues and are less willing to be buyers. That just brings the price down.”
Liquidity is therefore at the forefront of GCW’s process. The firm prefers private market and alternative investment opportunities for HNWIs and private investors. These are inherently illiquid and typically have higher barriers to entry.
Yet in certain cases it hasn’t needed to pay the placement fee that other investors do, thanks to its relationships with the private equity firms.
According to Bizer, clients typically tend to be underinvested in such assets, yet they are missing out on an additional source of expected return due to the illiquidity premium. GCW therefore works closely with clients to determine their optimal exposure to these assets.
“We have a strong view in portfolio construction that the more liquidity there is in a market, the less opportunity there is for expected excess return,” he says.
GCW’s house view is that there is greater opportunity for excess return in the less liquid lower cap space because those markets are less picked over and less competitive, have greater barriers to entry and are more difficult to navigate.
Bizer explains: “For a highly liquid stock traded on the NYSE or Nasdaq, any investor can buy or sell that asset. So, when people think it’s mispriced, they step into the market and buy it if they think it’s underpriced and sell if they think it is overpriced.
“That competitive process brings the price closer to market consensus of the fair value for that That competitive process brings the price closer to market consensus of the fair value for that asset. But that’s not true for private assets because not everyone can step in and bid it up, and certainly not short it if they think it’s overvalued.
“There are ways of getting involved in private assets that mean you can actually contribute to the performance of that asset through operational improvements and improvements in governance.”
The team sets an illiquidity risk target on an individual basis for separate accounts and across its pooled vehicles. With separate accounts this target is determined using detailed analysis based on the investor’s individual financial needs such as income requirements as well as life events.
Value-add
When it comes to co-investing, GCW will directly invest in private equity or venture capital opportunities alongside selected partners. Bizer says the choice of partner is critical because someone in the group is typically on the board or in a controlling position to help guide the company.
A potential benefit from co-investing comes from receiving discounted or sometimes even no fee terms for the deals. This can occur if the fund is already making the investment and the manager is earning the fee through the arrangement they have.
“Again, that’s part of the value-add that one can get from private investing that one doesn’t particularly get from public investing,” says Bizer.
Another string to GCW’s bow is offering hedging and monetising solutions for private clients with concentrated single-equity stakes. The team’s recognition in the marketplace and relationships it has built over the years allows it to work directly with banks to conduct those transactions and these banks tend to treat GCW as an institutional counterparty.
Many investors typically use a private bank to intermediate in this type of service, but that comes with an extra layer of fees, says Bizer.
“My co-founder and I were in that business for 12 years, so we know a lot of the people at the major banks and we interact with them,” he says. “We have our own analytical toolkit that helps us price those things and we decided on a small number of banks to work with. We put them in competition and we get the best price we can for our clients.”
This article appeared in the January edition of Portfolio Adviser magazine.
