#405 - Christopher Zook - Founder of CAZ Investments - Building An $11B Alternative Investment Platform

Chris Powers: Christopher, welcome to Fort Worth. 

Christopher Zook: Thank you. I'm glad to be here. Love Fort Worth. 

Chris Powers: I told you, you have the purple tie. You're going to get in anywhere today. 

Christopher Zook: That's perfect. 

Chris Powers: All right. I wanted to start in a spot that I thought was super interesting. So, you read a book or, no, I'm sorry, you read a series of letters or series on Tony Robbins 25 years ago, and that became the catalyst or the spark to how to start CAZ. So maybe what did you read and what happened after that? 

Christopher Zook: It's funny because of the fact that I was working really hard, I was fresh out of school, and I got home late night one night, like 11 o'clock from the office, warmed myself up some dinner, and I'm watching TV just to decompress, and I see this very large human being on TV with big hair and big teeth. And it was one of his original infomercials. And I ordered the tape series because I loved what I heard. And Lisa, my wife, and I did the 30 day tape series, back on cassettes for those who remember actually a cassette tape. And part of that, you go through a goal setting workshop. And it's your one year, three year, five year, ten year goals, etc. And so it was that point that I set a goal to open up CAZ Investments, knew the name of the firm, knew kind of what the business model was within 10 years. And then nine years and nine months later, indeed, we opened the doors of CAZ. And obviously that's not a coincidence. But everything was shaped along my journey for nine plus years to that's the outcome. How do we go about accomplishing that? And it all started with that tape series. 

Chris Powers: Okay. But you hear about like goal setting in lots of different ways. There had to have been something, maybe it's because Tony's a captivating guy. Maybe he laid it out differently. What spoke to you there different from every other time in life you had been told to set goals?

Christopher Zook: I'd always been a very focused person. I mean, I did it athletically, I did it with work. I love just the framework of it, of it's not just what you want to achieve, but why you want to achieve it. And as somebody who's always been really focused on, I want to do this and there's really important reasons behind it, I just love that framework. And it also was just very easy to adapt to because of the fact that, at the time, still am, a golfer. There's a saying in golf which is aim small, miss small. You want to hit a very small target because if you can hit the small targets, you can hit the bigger target. And so, the more focused you become, the better. But certainly, Tony's an amazing communicator. But I just love the framework of it, of it's really about the why, not the what. 

Chris Powers: Okay, so that would have- I guess you would have been, what, early 30s when you launched? 

Christopher Zook: I was 31 when I launched the firm. 

Chris Powers: What was the initial vision for CAZ? I think you just celebrated your 25 year anniversary. What was the initial vision? 

Christopher Zook: So, the initial vision was very similar to what it is now. We've always been about investing our own money and then allowing other people to come alongside of us. And I got into the industry because I just love managing money, I love investing. And we wanted to be able to do things that were not necessarily plain vanilla, but do them in an advantaged way, not just to do something to do something. And so fortunately, I was backed by a very, very good group of shareholders that helped put me in business. And so, my job every day and our team's job every day was to go figure out where to invest their capital for them, obviously at that time, amount that my family could invest alongside of that, which was great because I got to come along for the ride, if you will, and then open it up to a broader network. But really, we didn't market. It was very naive, candidly. It was the field of dreams model. Build it and they will come. We had a really awesome track record for 13 years, and they never came. We grew a little bit at a time by referral, but it wasn't until 2014 and a pretty seminal event that caused us to say, hey, we actually really need to tell people what we're doing so that that way we can expand the network because it helps everybody. 

Chris Powers: What was that event? 

Christopher Zook: So, it's a fun story and a frightening story at the same time. 

Chris Powers: I like those. 

Christopher Zook: In 2007, we were very convinced that the housing bubble was going to burst and that subprime mortgages were just going to get destroyed and happened to have a long term relationship with a guy by the name of John Paulson. I'd invested with John since 1994. So, when he told us about what he was doing to short subprime, it was a no brainer for us. And so, we created a vehicle specifically for that purpose and obviously did really well. And more than that, and this is important to the story, more than we did really well, it was a much easier time for us because when everybody else was so stressed out, we were wondering what to go buy. We made a lot more money on what we bought after the Global Financial Crisis than even the short of the subprime. But so fast forward, it's now 2013, basically. And I'm a member of River Oaks in Houston, a country club. And there was a guy that I played golf with a couple of times who basically came up and threw me against my locker. I mean, like this. I said, I don't know what I did. Tell me what I did and I'll fix it. And he goes, I'll clean it up for this purpose, but he says, Zook, I am really, really upset with you. He said something different. But I said, as I said, you tell me what it is, I'll fix it. He's probably 20 years my senior, so I figure I can take him if I have to, but I didn't want to. I was like, look, I'll fix this. Just tell me what I did. He says, I heard you shorted subprime. I said, yes, sir. He goes, why in the blank didn't you tell me that? And I said, you're not a client of our firm. You're not supposed to prospect in the locker room. That's a real thing. Why would I have told you? He said, you do not have a blankety blank, blank, blank, blank, blank right to tell me what my family is interested in and what we're not. You tell me everything you're doing with your money, and I'll decide if I want to invest. I said, you know what, you're right, and I apologize. So, from that point on, we just started telling everybody, and literally it was like this. I don't care if you invest. I'm doing this with my money. I just don't want to be thrown against my locker. So, tell me if you want to invest, great. If you don't, that's fine too. Well, as it turns out, a lot of people did. And so that was actually the catalyst to go out and build a team that would communicate to folks, because we knew that the bigger the network became, the more we could write larger checks, which gives us more access and better negotiating power, etc., etc. And literally at that time, we had about 300 investors. Now, we have 8,700 of them. 

Chris Powers: Okay, so you come out... You come out of the locker room, you realize you basically need to build capital formation. Did you go find a playbook that already worked? Did you dream up your own system? How did you think about capital formation? 

Christopher Zook: I went to where I've really always gone, which was to Tony, to Tony Robbins. I had continued to follow his work for, whatever that was, 12 years at that point, or 22 years at that point. But I'd never gone to any one of his live events. I'd always just done the tape series and CDs as they went to CDs. And so, I was like, there's got to be a way for me to not just try to figure this out on my own. Because, as he says, success leaves clues. So let me go figure out how to model what others have done successfully. So, he has a program called Business Mastery. I went to that program in January of 2014. I'd actually gone to Date with Destiny, which is a completely different program. Anybody who's ever watched the Netflix I'm Not Your Guru documentary, that is Date with Destiny. So, Date with Destiny is all about an individual kind of designing your own destiny. It was totally life-changing for me. And I tell everybody, if somebody goes [?] all out, their life will be changed after that. This is not an advertisement for Tony, but he's changed my life. And I say this all the time, publicly, many places, other than my Lord and savior, Jesus Christ, and my wife, nobody's had a bigger impact on me than Tony, period. Nobody. So I went to the event, Date with Destiny, changed my life. I immediately signed up for Business Mastery. That was literally the next month. I went to that and designed what he refers to as the irresistible offer. What is it that nobody else can compete with you on, and how do you build out a business plan to do that? And I designed it over six days of literally 18 hours plus a day. It's an immersion kind of event. And came back and literally transformed the company from the ground up a hundred percent over the next year or so. 

Chris Powers: When you showed up, did you already have in mind what the irresistible offer was, or is that what you get out of six days? You uncover it through... 

Christopher Zook: That's exactly. I had no idea what the even concept was because it's not something he really talks about in other settings. I mean, he may have, and I just missed it. But in his case, the irresistible offer is if you go to Business Mastery and after the first day, you don't see a million dollars of value, you get all your money back and you walk away. No lose. Like it's expensive. But a million bucks of value or the cost of admission, sounds like a good trade. And they really work with you over the course of that six days to what can you do in your industry? Whether somebody is a real estate person or an investment person or selling ice cream, whatever it is, what is it that they can do that's totally different, that makes them stand out from their competitors and just makes it really easy for customers or investors to say yes? 

Chris Powers: Okay, so the magic question, what's the irresistible offer? 

Christopher Zook: So back then, and it's changed a little bit just because scale brings other benefits, but back then, it was really simple. We were always the largest investor in everything we did. We just didn't message that very well. I didn't know how to market. I was an investment person; I'm not a marketing person. And so, we didn't really communicate that we're the largest in what we do. But we said, you know what, we're not going to charge management fees at all. We're just going to take carry. So, the irresistible offer is we're the largest and we don't get paid unless you make money. It doesn't guarantee it's going to work, but we are aligned. And people go, hmm, that's different. You're not just raising money for the sake of getting a management fee. You actually believe this thing's going to work. And then we're very fortunate that we've done really well for people with a very high batting average. But what it did is we had to completely change the business model, because if you don't know when you're going to get paid, you have to have a different setup. And that is where it's a fascinating story of, we had to completely re-shift our balance sheet, our focus, make sure that we were right sized for that. Because we had a pretty good idea that we were going to make money and how much we were going to make, but we had no idea when. It could have been a year, could have been six years, it could have been never. So, you have to be able to withstand the ups and downs, which is why virtually nobody does that. Well, immediately, people are like, I don't know if I'm interested, but that's different, and I'll listen. And then all of a sudden, they realize that we have access to a firm like an EnCap, largest private equity focused energy- energy focused private equity firm in the world. Or our partnership with Robert Smith at Vista or partnership with H.I.G. or partnership with some of- John Paulson. And people are like, okay, so I can get into that. I can't get in on my own. And you're not going to charge me anything other than a percentage of the profits if I win. And the answer is yes. And they go, okay. And then all of a sudden, you start stacking these various opportunities. They start germinating and throwing off profits, which then we could reinvest in the business. That allowed us to grow our team. And then ultimately, fast forward to 2021, and actually Tony became an investor with us, and that's what led to the book and other things. 

Chris Powers: Okay, so when you go back to when you launched the firm, were you charging fees at that point or...? Okay, so you had- So 2014 was the dividing moment of we're no longer going to charge fees. We're going to move to this model. 

Christopher Zook: The board thought I was nuts. 

Chris Powers: Well, I think you're nuts. I have so many questions. So, can we go a little deeper on that?

Christopher Zook: Sure. 

Chris Powers: How do you- So if you're just an executive now looking at how are we going to operate this business for we don't know when the cash is coming, is that you just going I'm going to make a huge bet on the firm, I might go into the red for a while, but I'm almost betting on the come? 

Christopher Zook: No, we absolutely went straight into the red. And I mean, we literally- That's why my board thought I was nuts. Our shareholders, though, have always been there to help us grow. What I told them in literally 2001, when they first invested, I don't need a check. What I need is you to help us grow and help us find great investments, help us evaluate them. So, we selected them very intentionally based on sector specialization, that kind of thing. But so, we went to them and said, look, this is what we're going to do, and we're going to need you to provide balance sheet flexibility for us because we're going to lose money first. And having invested for a long time, it's just the J curve of we're going to lose money for some number of years, but we should. If you model it out with any level of success, we should do much, much, much better. And there's actually others in the industry that have, I don't want to say copy this, but they have adopted similar approaches. The difference is you can't scale because you can't go hire 50 people unless you have a really big balance sheet, in which case, as an entrepreneur, you're going to end up giving up so much of the business that you start to misalign interests there. And so, we created some really unique structures. I'm very proud of that. What is the- necessity is the mother of invention. We created some fantastic ways to monetize what was the opportunity set to be able to benefit from what was going to be there, but we didn't know for sure when it was going to be there. And so, for four years, we didn't make any money after making money for 13, which is kind of a big shock for people. But it's the reason we did the transaction with Tony, which I can go into as much as you want. So Tony became a client of the firm in ’18. I had nothing to do with it. I didn't even know he was talking to our firm because he was working through his partner, Ajay Gupta, who ran his kind of family office. Ajay was introduced by a gentleman that runs a hedge fund that had become an investor of ours. He had worked with Paul Tudor Jones. Well, it's very well documented, Tony's worked with Paul Tudor Jones since the 80s. Very closely. 

Chris Powers: Yeah. As a coach and...

Christopher Zook: As a coach and a guide. And so a gentlemen in Florida that had invested with us because it's just a networking world, he came to our themes event in Houston to watch a guy by the name of Peter Cecchini speak at our very first Themes event. He's like, this firm's different. I want to invest. Irresistible offer was in place. He goes, I love this. I want in. He told Ajay, Ajay became an investor in the GP stakes world, where we bought a piece of a company called Monroe Capital because they already knew Monroe. Like, hey, I actually get to buy a piece of the company, not just invest in their funds? Yes. Great. We're in. So, one of my partners comes in and he goes, Christopher, Tony Robbins just became a client. And I just was in the middle of something. I turned around and said, Tony who? And he goes, no, Christopher, the guy that you quote like every day, he just became a client. Because I hadn't met Tony. I'd met him in passing, but literally never had spent any time with Tony. So fast forward, 2020, he had had a position in Creative Planning, the wealth management firm, financial planning firm, etc. Really great firm. He helped them grow dramatically and they're a wonderful business. Tony sold his stake to General Atlantic, the private equity firm. So, in the non-compete, he couldn't compete in wealth management, financial planning. Well, obviously that's not who we are. So met with Ajay, Tony's son Josh, and they had no idea my history with Tony and that he had changed my life. None. They hear it a lot, he's changed a lot of lives. But they had no idea that that was the case. And they said, we got to tell Tony this. This was like after a five hour dinner. Tony goes, I had no idea, I want to meet him. Went to Palm beach, had a 13 hour meeting, literally, at Tony's house. And we crafted out a partnership. But here's- we're known as the largest investor in GP stakes. We're the largest in the world. We have 75% of the market share for secondary purchases in GP stakes. And this is exactly what a GP stake is supposed to look like. He goes, okay, what problems in your business do you need to solve for or challenges? And I said the irresistible offer is great, but I can't go hire 30 people tomorrow. But the opportunity set is so huge, I know I'm leaving tons of money on the table. And over the course of that conversation, great, here's what we'll do. Tony put money on the balance sheet. Nobody took any money out. Tony, Josh, and Ajay became partners. That then gave us the capital to grow, growth capital to go out and hire ahead using the irresistible offer to be able to have a compelling story to tell people. And by that point, had become pretty good at it. And from there, literally, we did that transaction in May of 2021, and we have grown from two and a half, almost 3 billion, to 11 billion in four years, four and a half years. 

Chris Powers: God, there's so much I want to unpack on this. 

Christopher Zook: Well, let me add one other thing because I think it's important. I left it out and I shouldn't have. The other thing is it just wasn't a check though because he brought strategic value. Tony has a very large network and a very large platform. So, things like writing the book together, it was a New York Times number one bestseller. If Christopher Zook had written that book, it would have been well received, but it would not have been number one on the New York Times bestseller list because it didn't have the brand associated like it does with Tony. So, Tony brought not only, and Josh and Ajay, economic value, but they also brought strategic value to be able to open doors that we couldn't open, credibility, etc. And I'd already had that playbook a little bit. It's very well-known publicly that all four of the founding partners of EnCap were shareholders of CAZ. The Cockrell family is who really started me in business. Ernie's one of the most well-respected people in Texas, and they were just phenomenal partners. But so, I already had seen that that gives you credibility. I mean, if I go talk to somebody in Midland, whether it be Cody or someone else, they already know that if EnCap is investors in your company, the individuals, not the company EnCap, but the individuals, this is legit. And so just that credibility opens doors and then that ultimately leads to, we still got to perform, but it gives us the ability to do things we wouldn't necessarily be able to do either at all or certainly a lot faster. 

Chris Powers: I mean, you basically just answered the question. So, I'm basically just regurgitating what you said. But I think this is something like every entrepreneur needs to hear. You can either own a bigger piece of a smaller pie and say, I don't need Tony in, I'm already at 3 billion, or you clearly probably in that 13 hours, but probably over a long period of time, and you just said you did it with the EnCap people, said as long as my small piece of a bigger pie is with these people, let's keep riding... again, maybe the answer is there, but if somebody's sitting here listening to this, going, okay, what are the next steps I take to take a smaller piece of this pie, how do you get over the hump? Because you had something that was working. 

Christopher Zook: It's really hard because you clearly have a level of accountability. And for a lot of entrepreneurs, they have full autonomy. Well, once you have shareholders, you don't. Whether or not they are in your business or not, you still have a fiduciary responsibility to do a great job for them. So, you can't just be fully autonomous. There's a lot of entrepreneurs that can't get past that. I have one of my shareholders that literally he gets mad at me every time that we award equity to our team, every time that we want to do something like we were doing with Tony, we don't need that. We'll just keep it all for ourselves. And I had to help him understand that the only way to make this pie much bigger is to align people and give them incentives. And so, this will help us all do better. He's a believer now, but he fought me for years. And in his company, he literally has never given equity to any of his employees. He's never given equity to an outsider. He owns 100% of it and he's done really well and that works for him. This is such a fast moving world though. And we now own stakes in over a hundred different private asset management firms, all minority stakes. And so, it's the classic illustration of we're willing to back people who want to bet on themselves. If they want to grow and they need capital for some reason to solve for that, we want to provide it to them. But there's accountability that comes with that. For so many entrepreneurs, they're afraid of it. And so, they just say, well, I'm just going to keep it, my full pie to myself or maybe with some of my key team members. What I will say is you have to make the decision of the why you want to do that. And it's totally fine, if somebody has the desire to stay small but fully controlled, that's okay. But why do they want to do that? Is it out of fear? Is it out of lack of conviction or afraid of messing up? Or is it because of the fact that that's really the right thing for them? If somebody wants to grow just for growth's sake and they don't have a good why, it's going to end badly. The other thing is, it really does, I cannot stress this enough, it depends on who the partner is. Don't take money from non-strategic people just for the sake of taking a check unless it's your last check. You want to sell, sell to the highest bidder, no problem. Otherwise, it should be a strategic buyer or a strategic investor because y'all are going to be married and you better like each other. 

Chris Powers: When you got to Palm Beach for that 13 hour meeting, did you already know a deal was going to happen, or did it- like, were you already 90% there or did you- So the question is like, what do you remember from that 13 hour meeting? What were the turning points in that meeting that made it clear that you're obviously bringing in one of the world's greats, you're clearly great at what you do, but you kind of started the meeting with like this is a coin flip? 

Christopher Zook: So, the conversation going into it was that there might be something really interesting strategically to do. At that point, it did not involve, any of those conversations involve Tony actually buying a piece of the business. It was just let's explore that we do something really, really unique in the investment world. Tony obviously has a very, very big platform. Seems like there might be something to do there. That's how it started. That was it. Tony was the one who said, look, and I don't want to speak for him, but he said this on air before. Christopher basically parrots back what Tony says better than Tony does some days. Because I've just lived it for my entire adult life. And one of the things that he talks about a ton, which is where focus goes, energy flows, and if you have the right people involved and success leaves clues, and you model the right people, and you can pour an accelerant on a business, you can dramatically grow that business. But you’ve got to be prepared for what that feels like and what it looks like. And so, he said, one plus one could definitely equal a lot more than two here. What does that look like? What are your needs? And he does such a great job in all of his communication of understanding what the psychology is of the person that he's talking about. What is it that they're afraid of? What is it that they're excited about? What is it that really motivates them? And in my particular case, he was able to explore my motivation is being impactful. Again, as somebody who is strong in my faith, it's like I'm here for a purpose, to do whatever God wants me to do, whenever he wants me to do it, however he wants me to do it. My job is to say yes and be faithful. And he's like, great. How big do you want it? And I said, as big as God wants it. And he goes, are you really prepared to do that? I said, ask my team. Nobody outworks Christopher. Nobody. And if it ever changes, then I probably need to exit stage left at that point in time. I love what I do, and I work incessantly. Sometimes I need to make sure I slow it down. That's a different conversation. But it is something to where I love it. And when you meet passion with hopefully some ability, and I believe that I've got some really good wisdom over the years that has been guided, that it's something that you could do something really unique. But so, that's how the conversation went. And it was like, okay, we want to do the irresistible offer, but we need to solve for this. How do we solve for this in a way that allows us to really accelerate the growth? And then what are the channels you want to go into? We had already started morphing. 

Chris Powers: And what were you solving for? 

Christopher Zook: So how do you go hire a whole bunch of people when you don't know when you're going to get paid? 

Chris Powers: To do what? To bring in deals, to raise capital, all the above? 

Christopher Zook: To raise capital, primarily. We already had an- and this is another tip of the hat, if you will, to Tony's business mastery, is I'd never heard Peter Drucker's quote, which is, business is just effectively innovation and marketing. That's it. On the innovation side, we were world class. On the marketing side, we were, at ’21, we were pretty good at it, but we were not world class. And so, okay, how do we become world class at this to match our innovation? Another word would be manufacturing. We have a manufacturing machine. We get to look at 2,000 investments a year, pick and choose what we want from some of the most unique things that other people can't get. Well, that's great as long as you have the ability to fund them. And so, this lag effect of, okay, we can reinvest profits when they come in, when things harvest, how do we accelerate that? And that was capital formation was the primary solve there, but also the solve was as you grow an organization, maintaining culture, and what does that look like? Well, we knew we needed to hire more professional management because at that point, I basically was every role in the firm and way involved in too many things that I shouldn't be because I wasn’t either the best at it or they weren't the best use of my skill set. So, we needed to do that. Well, you need capital to do that. You need stability to do that. When you don't know what your budget's going to be, there's a little less stability. And so, you add all those together, it became pretty easy. Fix the balance sheet, hire the right people, have somebody that's world class in helping us develop those people in the case of Tony, and then go out and tell the world what we do on a much broader stage. That all adds up to be very successful. We still got to execute. And every day, I mean, my team gets tired of hearing me say this. We are a 25 year old startup. We run like that every day. We think like that every day. And ultimately, it's about how do we truly stay ahead and maintain the moat that we have in a world that changes really, really fast. 

Chris Powers: And you said, you said one thing. You said you got to know- Tony had questioned you and he said, are you sure? And you said, I think, you got to know what it feels like and you got to know what it looks like. Can you expand on the feels like? Like, what does it feel like to go from 3 billion to 11 billion in four years? 

Christopher Zook: The best person to ask that question is my wife, Lisa. So very short version, I became an empty nester at a young age because Lisa and I are high school sweethearts, been together since I was 15 years old. We got married when I was 20. She likes to tell people she got me young enough to train me. There's a lot of truth to that. But so she's two years older. And we got married when she graduated from Texas Tech, and I obviously had another year and a half. I graduated high school early to be with her. But so, because of that, our son was born when I was 25. He was an only child. So, at 18, he left the house. At 43, I became an empty nester. So, I had the opportunity to do things that people with young children might not be able to do. And I came back from Palm Beach, and the first thing I did is I said, sweetheart, we got to have a conversation. because after at that time, 20 years, there's a lot of people, and we've been very blessed, could just chill and slow down. And I said, sweetheart, if we do this, it is going to be on like Donkey Kong and it's going to be a sprint like we haven't seen since I started in the industry. And if we're not willing to make that sacrifice, we shouldn't do this. And so, we prayed about it hard because of the fact that, is this what God wants us to do? And we just felt totally compelled that, yes, this is a door that was open for a reason to allow you and your family to be more impactful for his kingdom. So go, run, do this. And it's exhausting, but it's also invigorating. 

Chris Powers: Yeah, I can tell. 

Christopher Zook: So, we really do have a lot of fun. And we've gone from, I mean, 16, 17 people to 80 plus over that period of time. 

Chris Powers: Dang. All in Houston? 

Christopher Zook: No, not all in Houston. We do have people all over the country now, primarily in capital formation. The home office is in Houston. We have about 60 people in Houston. The rest are around the country. 

Chris Powers: You'll be episode 405. So Todd Peterson, 403. There's a guy named Chris Huckabee that'll come between this, 404. This is the third episode in a row that the person that I'm talking to's most critical decision came after consulting the wife. That is a common thread that's going on. 

Christopher Zook: Well, I mean, I say it all the time. I've really made two major, major mistakes in my life. Both of them, Lisa was like, this is a bad idea. And I was like, sweetheart, I got this. There's the old saying, that the Holy Spirit speaks to wives more than men. I am... not necessarily that it's more, but differently. I'll just say it that way. I believe that my wife does have the gift of discernment. I think it's one of my gifts. But she is very wise. And ultimately, I realized after a couple of these mistakes that it was like, if we're not both aligned on this, God does not say to me do this and her not do this. God doesn't play games like that. And if we're not unified, then we're just going to wait. And we're going to continue to pray about it. We're going to explore. And there's been many things that I was like, this is so exciting. I want to do this. And she's like, well, I don't know. That used to frustrate me to no end. Because every male knows the next thing I'm going to say. Why, honey? I don't know. I can't tell you. It just doesn't feel right. As a guy, I just like I gotta understand. I can't tell you – that's infuriating for most men. And I've learned as I've gotten, hopefully, older and wiser, okay, I need to try to figure it out because I really need to have a little more tangible reason for this. But when you and I continue to pray about it, let's talk through it. And inevitably it comes back to either I get convicted that that was not a good idea, or she comes to a point to where this feels much better to me because I understand it more or whatever the reason is. But I'll tell you, husbands, your wife is your greatest asset. Or not. And the more you cherish her and the more that you lift her up and the more that you two are in prayer together, the more that you're likely to have a really, really good, wise counsel that can be very impactful for any decision, minor or major. 

Chris Powers: Do you know Terry Looper? 

Christopher Zook: Absolutely. 

Chris Powers: Have you read his book? 

Christopher Zook: I have. 

Chris Powers: Getting Neutral. That's basically what you just went through is like getting neutral, which sometimes is frustrating. 

Christopher Zook: It's very frustrating. It's been a long time since I read the book. I had actually forgotten that concept. But it's something to where as a hard charger, for those that know the disc profile, the D on the disc profile, I just want to run through a wall. I mean, I'm a former football player. I coached high school football. I mean, just testosterone. Let's go. Followed Tony for 35 years. I mean, that's pretty... like, let's just figure out how to do it and do it yesterday. Getting neutral is hard. 

Chris Powers: Let's talk about what you are the best at or what you have the largest market share in, GP stakes. How did this all come about? And I really want to dive deep into how it came about, how it works, how you've set it all up and why it's become kind of the leading horse at CAZ. 

Christopher Zook: I'm going to start with the how it works, because I think with that, everything else falls into place. So you and I are both wearing boots today. Imagine you're a boot maker. And you have a customer that agrees to buy a million dollars worth of boots from you in the next year. And it doesn't matter if you deliver them on time, in the right size, in the right skin and the right color, you still get your million bucks. No matter what. It's a really good customer. But in the contract, it also says that if you deliver them on time, in the right shade and the right color and the right skin, you actually get an extra million bucks. Like, hey, I want that customer. That is every single private asset management firm, because they raise money for a fund, they get a management fee no matter what. Even if they don't even invest the money, they get a management fee. If they invest the money successfully, they get this thing called carried interest or incentive fees, performance fees. So typically, again, there's different, higher or lower, 2 and 20. Most people are familiar with the 2 and 20. 2% management fee come Hades or high water, 20% of the upside. So, in that instance, you have a billion dollar fund, you're going to make 20 million a year for five years, and they cannot fire you. That's $100 million of revenue and you know exactly when it's going to come in. So, the opposite of my irresistible offer is these people know exactly what their budget needs to be for the next five years. It's pretty easy to make money when you do that. But you turn the billion into 2 billion, if you're good at what you do, you make $200 million. So off a $1 billion fund, you make $300 million. That's a really good business model because you can't get fired. And so worst case, you make 100 million. Best case, you might make 300, 400, 500. And then likely you go start another fund and you raise $2 billion or you raise $4 billion, and now you're making, I don't know, 80 million a year, every year, guaranteed contractually. And you might turn that $4 billion into 8. And that's an $800 million carried interest. Well, last time I checked, that's how you become a billionaire. So that business model is advantaged. And oh, by the way, it doesn't take twice as many people to raise a twice as big fund, twice as large a fund. So, it's got enormous operating leverage. It's the best economic model, period. Enterprise software is close. But there's no better business model. So that's the what, how it works. Back in 2013, GP stakes really didn't exist, except for in hedge funds where somebody would buy 20% of a hedge fund manager, they would get to participate in the upside ownership of that hedge fund manager. We passed on that because in a hedge fund, you get your management fees, but people can leave the building. If you don't do well after two years, you're out of business. If you do great after two years, you're going to make a gazillion dollars. But it's a binary outcome. I don't like investing in binary outcomes. I like positive asymmetry, low amount of downside, lots of upside. It's hard to find, but when you can find it, you want to lean in. In 2013, the industry changed. It actually began to move into the world of private assets. So, one of your former guests, Barry Sternlicht, Starwood, sold a stake, minority interest. 

Chris Powers: And he did that because he wanted more capital on the balance sheet to go grow?

Christopher Zook: That's exactly right. It was growth capital. It's funny, Michael Rees from Dial was our original partner and still is our largest partner in this area, we had him on our podcast, the Holy Grail Investing podcast, and literally we joked that he messed up because we shouldn't have called it GP stakes. It should have been called GP Growth Capital. It is what it is. People know it as GP Stakes. But so, Barry wanted to grow his business. Then Robert Smith, Vista, sold a stake in their business. Then the four guys at EnCap sold a stake in their business. And I was obviously very close to that situation because of my relationship with them. And I'm like, I like this business model. So, we immediately went full deep dive and about eight months later understood the way it worked, became a large investor in it. Then we saw it continue to prove concept, and then ultimately we're the largest investor now in the world. We've allocated about $9 billion total. A lot of that's obviously harvested at this point in time. And we have about 75% market share of the secondary market for GP stakes, which is a fascinating thing that most people don't think about. 

Chris Powers: Yeah, what's that? 

Christopher Zook: Going back to my point, if you're going to sell a stake in your business to somebody, you better like them. So imagine that somebody's a private equity manager. They sell 20% of their firm to someone. To CAZ. But in the contract, it says, by the way, after five years we have to be able to sell it, and you can't tell us who we can sell it to. 

Chris Powers: You as CAZ can sell it? 

Christopher Zook: Can sell it without the permission of the GP. You're going to like... No, I want to know who's going to be on my cap table and who's going to be in my boardroom. As a result, all the vehicles that were created for GP stakes are perpetual. They do not have an exit. Most people are familiar with- most partnerships are like a five year investment period, a ten year life, maybe two one year options. That's not true in the world of GP stakes because it needs to be perpetual. Well, they've done really well. But now we're 12 years in and the industry's grown from 13 billion in total market cap to 120 billion in market cap. And this is private holdings. There's a lot of people that have done really well. They're like, at some point, I do need to exit this position, or you have a change in the CIO, they want to put their own stamp on the new portfolio, or an estate needs to sell it to disperse, whatever the case might be. There's no definitive exit path, so they have to sell in the secondary market. Well, we're the largest investor with everyone in GP stakes basically. We're Dial's largest investor, we're Blackstone's largest investor. We're one of Peter Hill's key partners, Hunter Point’s key partners, you go down those, Bon Accord's largest investor by a factor of many. So, we are effectively Switzerland and we invest and partner with everybody. So, if you're going to call someone to buy this asset from you, we already have models on everything. We're already pre approved by all the sponsors to buy it. We already know all the assets themselves, and we can be the fastest bid that they'll ever see. We'll be the fastest no in the West. That's actually a thing for our team. We'll be the fastest no in the west or we'll be very thoughtful. But we literally gave somebody a bid. They had to close quickly for some reasons that were very episodic for them. They came to us and said, here's the asset. Do you know it? Already own it. Great, we need to close in two weeks. And the sponsors agreed to facilitate this for us. What's your price? At that point in time, we gave them a fair price but a really fair price to us because we could move quickly and we can move in almost unlimited size. We did a half a billion dollar GP stake secondary transaction. It was a very limited process. There was only five people allowed to bid, period, by the sponsor because whoever bought it was going to be the largest investor in their fund and be on their LPAC and all that kind of stuff, limited partner advisory council. So, they're like only five people can do it. These were all big firms. We were the only one that could write a full half a billion dollar check in that one investment. So, our price didn't necessarily have to be the highest in order to be able to win that. So, it's a very unique position in the market. 

Chris Powers: Okay, so what do you, when you are going to look at a GP, what are you underwriting? You're underwriting their track record, how many funds they've already raised, who the team is. You're obviously underwriting what assets are in those funds that they've raised. And then you're underwriting their ability to continue to raise funds going forward. 

Christopher Zook: That's 100% correct. You couldn't have said it- I couldn't have said it any better than you just did. 

Chris Powers: But you have to go through each fund and underwrite every-

Christopher Zook: Every single one of them. Obviously, we've got great partners that we work with. But this is a deep domain expertise for us, so we could do it just as well as they can. But the good news is we can partner with them. They have teams that we can collaborate with. But you've got to look at every fund that's in the ground, every business plan as to how they're going to grow, what their limited partner base looks like. Are they going to go into the private market, the high net worth market, the retail market? Are they going to stay institutional? Are they really in this for the long run? Are they doing this for the right reasons? If it's beach money, somebody just wants to go to the beach, that's fine. It's just not going to be that interesting to us because it's really all about growth. The thing about the GP stakes world and just private asset management and business in general is what's most valuable is the contractual management fees, the management fees that just you can't lose, and typically 60% operating margins for these businesses just on management fees. So, then the variability comes from carry. It's going to be lumpy, and you’ve got to try to predict it the best you can, but you're going to pay a lot lower multiple for that because of its uncertainty. 

Chris Powers: Because when you're buying in, you're buying existing carry that might already exist in funds that are already... So, it's not a carry in every future deal. You're also buying a discount of- Okay.

Christopher Zook: That's exactly right. So, everything in the ground, everything they put in the ground forever. That's what a classic GP stake is. And there's other variability in how deals can get structured, but that's the way almost all of them are set up. And so as a result of that, what you end up with is the management fees, it's really easy because it is what it is, their operating margins, their expense levels, those kinds of things. The carry is going to be much more lumpy, unpredictable. And so, you have to buy that cheaper. But you also got to really understand it. And I'll come back to that as why that's uniquely challenging in some industries in a second because it's a common question I get. But then from there, you also look at what's on the balance sheet, how much they have in their own funds, underwrite what that should generate in returns, and then what's the enterprise value look like going forward, that's going to be based on growth. And it's a little crass to say it this way, but we want all of these firms to perform well for their partners. But the main thing is can they raise more money? So, they have to generate enough return to be able to grow, but they don't have to be top decile like we would want if we're an LP and we're just investing in their fund because their margin of safety is they're still going to get paid a lot even if they just do okay. Now I chair the investment committee for the State of Texas Pension Review Board, and I see this all the time. The number one thing that people who run pensions or foundations, endowments, their number one goal in life is to not get fired. That's nothing against them, but everybody's that way. If you can go out and hire a fund that's really, really large that's very stable and that's a well-known brand, you're never going to get fired for that decision. If you go out and hire somebody that's brand new, that's never done this before and it doesn't work, you might get kicked out. So, in that situation, the large firms, the larger middle market are the firms that are more established, they just have an advantage because those kinds of investors are always going to be willing to allocate capital to them as long as they do well enough. So, it's all about basically modeling out the growth rate. You discount it back to current day, what's a fair price. And again, you're not buying 100%. You’re buying, let's say, 12%. So, they own 88%. And so, they have a huge incentive and huge alignment. We have a saying we're freakish about alignment. There's no guarantees in this world ever. But good decisions usually are made when there's good alignment. There's frequently bad decisions made when there's bad alignment. So what we try to really look for is this freakish alignment where we're going to buy 12, you're going to use it as growth capital, you're going to keep 88, it's going to be worth a lot more. Tony bought a minority interest in our business. It's been a phenomenal return for him because it helped us accelerate our growth. That's what we're looking for in somebody else. I said I would come back to one thing that is a common question. Because people will look at the hundred different firms we own stakes in, and there's very few technology companies in there. We own a stake of NEA and something like Synnovis in London, or you look at firms like Silver Lake. These are big, big, big firms. In the case of NEA, they’ve been around for 40 years. It's very hard to predict their carry. But they're a very significant stable institution that's going to be around for a long time. But you're going to have to value that carry a lot lower. I know they're one of the largest investors in Databricks. I know what it's worth right now on paper. But ultimately, I've been around. I lived through the tech bubble. I made a lot of money shorting during the tech bubble. The only thing, the price that matters is when the lockup comes off if it goes public or when you sell it. So, you cannot give like, okay, we're early investors in OpenAI, ChatGPT. I know what it's worth on paper and it's beautiful. But until we exit it, it's not real. So, we have to look at that from the same perspective of these firms may have this huge amount of carry or they may end up with very little. So it's more about the management fees, etc. But so, you can't value them the same. And some of those firms do not want to sell a stake because they just don't think it's valued enough. Or if it's venture, true classic venture, you just can't do it. It's really hard because there's no way to underwrite what something is going to be worth. When we invested with a firm in Silicon Valley, they put $3 million out of a $300 million fund into Solana to help start it. They've taken out 1.2 billion of a $3 million investment or whatever, round numbers, and there's still a lot of value there. I obviously would never be able to predict that nor would they. They put a small position in because obviously it was very high risk. That's why you tend to see a lot more stable businesses like a H.I.G. or a Vista or a Starwood or a Silver Lake or a Platinum Equity or a Golub Capital or Monroe Capital. These are firms that are really, really solid businesses, 20, 30 years old that are expected to continue to grow. 

Chris Powers: Can I challenge you? 

Christopher Zook: Please. 

Chris Powers: Isn’t Vista a technology platform? 

Christopher Zook: It is. So enterprise software certainly would fit in tech. It's not venture. They're not early stage. They're control buyout. Doesn't mean there's not risk. It's mature businesses. They will get involved a little bit earlier sometimes, but mainly more from a credit standpoint, and there's more risk. But literally, it's a great example because when we bought into Vista alongside Dial, it was a $13 billion firm, about the same size as we are today. It's $120 billion today in less than a decade. So, today they're a lot more volatile potentially in their market. But at the time, it was an emerging growth company, same thing like a Clearlake. Clearlake was 8 billion. Now they're 100 billion. So, there are other firms that we're investing in today that are $6, 7, 8, 9 billion today. They have the potential to be 30, 40, 50 billion. I just can't tell you for sure which ones are going to be, which is why you diversify and you don't do just one. 

Chris Powers: Is that like a power law thing? Is that just where the world's going, where there's going to be fewer bigger managers and there's just not going to be a lot of small managers anymore? Or is that just a sign of the cycle? Like, how do you think about that? 

Christopher Zook: I think there is some cycle and I do think that there's some systemic aspect to it. What a lot of institutions have learned is it's hard to keep track of 30 or 40 different sponsors. So let's just lean in on 10 or 12 or 15. Again, I see this all the time in the pensions here in Texas. I'd rather have fewer, safer, higher quality, that at least I can stay in touch with them, because a lot of people don't appreciate you might have a $3 billion pension that has three people on staff. That's it. Whereas you would think that that big of a deployer of capital would have lots and lots of team, but that's just not the way they're set up. And so they need to have a streamlined operation. At the same time, there's a lot of data that indicates that the best performance comes from newer funds. Funds one, fund two, wildly outperform fund sixes and sevens and eights. That is definitely some of why that will always exist. But if 401ks do become a real thing... 

Chris Powers: What do you mean by a real thing? 

Christopher Zook: So, the Department of Labor has said that, yes, you're allowed to put alternative investments into a 401k plan. But under the Biden administration, they came back and said, if you do it, that's a really bad idea. Which means nobody did it because they were afraid of getting sued. And if the President of the United States says that's a bad idea, what's your defense? So, nothing happened. Then President Trump was reelected and he came out and said, I think it's a great idea. And people are now trying to feel their way through it. But everybody's number one objective is how do you make sure that you don't get sued candidly. So, once it does become much more prominent, if you're the sponsor of a 401k plan, your job is to give a full menu of options to your participant for them to choose from. If you have to choose ten different sponsors to give them ten choices, that's a lot more difficult than if you can choose two that each have five across asset class. So that is a big, big trend. We think that what's going to happen is a hollowing out of the middle market size firm. The big firms will acquire the middle market firms, and these small firms will become middle market and they'll get acquired. Because I do think, I mean, we've had in our portfolio, here in Dallas, HPS sold to BlackRock, you have Monroe sold to a European company called Wendell. You have many transactions. Arcmont sold to Nuveen. These are transactions that are going to continue to accelerate because the large firms, they already have all the relationships. They just need different offerings to show those relationships. But I think there'll always be the entrepreneurs who are spinning out of a larger firm. They want to have their own opportunity to be able to prove that they can do it. And they're going to need a lot of backing. So, we do a lot of GP seeding as well. 

Chris Powers: Can I just move over real quick to the OpenAI comment? So, when I think about that, when you're writing a check, I assume the larger the checks get- maybe it doesn't have to be an OpenAI discussion. It's more things like that where you're getting in a huge slug of private capital into these things on paper that look amazing. Is it a situation where the larger the check you write, maybe you have a little more flexibility with what you can do with those shares? And I'll ask you from this standpoint, I've been an angel in a lot of deals. Small check, they don't care in the least about me on their cap table. I was in the seed round. Things happen. Valuation goes up. I'm ringing the bell. Can I get out of this deal? I'll sell at a discount. I'm very often met with the same thing, we don't want anybody on the cap table, if you could even get anybody to respond, and you just kind of sit in the deal. I've been in some of these deals since 2013. I would imagine if you're writing a larger check or something in the position that y'all are in, it's not just money out, we're praying until the end. What advantage do you have to writing these big checks in these big firms that maybe an angel wouldn't or an individual wouldn't? 

Christopher Zook: I'll answer three different ways. The first is, the bigger the check, the more negotiating power you have. So, a lot of times we can secure in advance the documentation to say if you go public, you have to distribute shares. You can't just hang on to them. So, within some reasonable period of time, however that's defined in negotiations. So that's a common thing we'll ask for. Because you do want to have that flexibility. If it's a private company, still, sometimes we'll have the ability to say, look, we really want to sell some of our position. We were early investors in Anduril, Anduril’s obviously got an amazing growth story, and we sold a small amount of our position simply because of the fact that it was becoming too large. 

Chris Powers: How do you do that? You go to an investment bank and... 

Christopher Zook: You could. In our case, we had somebody that actually approached us that we knew already and that we actually partner with on occasion. And they're like, look, we know that- they get the copy of the cap table, like y'all are meaningful. We'd like to buy some of your position or all of it, and then it just becomes a negotiation. But you still got to have the company's approval. So, not going to say that Palmer personally took a look at that, of whether or not they would sell. But they knew the buyer. They didn't care that we were reducing some of our exposure because the fund it was in now is a very large position, which is a beautiful thing, but also from a diversification standpoint, can become problematic. We still have massive confidence in the company. In hindsight, I kind of wish we wouldn't have sold some of that, but that's what risk management is and that's what our investors pay us to do, is to make sure we understand both sides of the equation, to make sure we can live with the worst case. I mean, it's always been our mantra. What's the worst case scenario? If we can live with that, the upside will take care of itself. So, the first way is you negotiate that in advance. The second way is when you are large enough, you're in the conversations about what the game plan is and you can say, look, totally agree with that, but if you're going to do a tender of some kind for your employees or whatever, we want to have tag along rights to do that. And usually, they're going to say that's fine, but we also got to be able to drag along as well. And as long as it's fair, no problem. The third way is that in most of these situations, we have very specific partners that are involved. In the case of OpenAI, we invested four and a half, five years ago. I mean, ChatGPT was like barely an idea in some ways, but our partner was Vinod Khosla, Khosla Ventures. We interviewed him for the book. He is a legend in Silicon Valley, and he and his team were very early, helped start basically OpenAI. And so, we were able to invest alongside them. Obviously, they control the governance, so it's not CAZ that they have to get a conversation with. The conversation is with Khosla. Khosla is obviously very meaningful. 

Chris Powers: So, Khosla's lead, y’all are an LP with Khosla or in their syndicate or whatever. 

Christopher Zook: Correct. Either an LP in their fund, which we are in the case of Khosla, or a co-investor alongside of them. We do a tremendous amount of co-investing. One of the things that we learned very early on and intentionally, literally for 25 years, it's always been true, no one can be an expert in everything. So, what we have been really, really good at is in certain areas like GP stakes, energy, we have a lot of domain expertise just because we built that over 25 years. But in most of these other areas, somebody brings me a biotechnology company, I'm not going to pretend I understand the molecule better than some PhD who studied it her entire life. They've forgotten more about it than I'll ever learn. We're going to partner with them, and I don't have any problem paying them for their expertise, but I'm not going to get involved in something unless we're shoulder to shoulder with somebody that has an information advantage or at least has all the information to be able to make a good decision. The node code, I mean, there's no way in the world we should have- would have ever invested in OpenAI that early because we don't understand that at the same level of a Khosla or a Peter Thiel at Founders Fund or somebody like that. We'd rather partner with them. Anduril, same way, we partnered with Peter and his team at Founders Fund and that's how we got exposure to it. We're not going to pretend we're the expert in it. We're going to invest with those that are and we're going to be, in most cases, their largest check writer. And when you write 100 million dollar checks or 500 million dollar checks or billion dollar checks, they tend to give you what you ask for, within reason, of course. 

Chris Powers: And if I am- as it relates to y'all, is the offering to your investors, take Anduril for example or just take any deal you do, whether it's tech or not, you're just getting an OpenAI, or is it like a tech fund where you're getting exposure to a lot of things, or is it SPVs? 

Christopher Zook: So, everything is based on theme. We're a thematic firm. We find the theme, we find the best risk reward, we find the best partners to do it with, and then we create a structure that's usually very unique. I mean, we're one of the very few places in the world that somebody can invest in a lot of the things we do, whether it be GP stakes or professional sports, and actually have liquidity where they can get out. Like people are like, how's that possible? It's only possible because of the size of our network and the diversification that we have. But those structural advantages go back to the irresistible offer a little bit. They're like, where in the world can somebody get out of a professional sports team after they buy a piece of the Astros?  With just whenever they want to, they can sell. That's not normal. That's our irresistible offer now in addition to... Yeah, it's very much... just because we talked about it, our three UVPs and every business owner should know what their three unique value propositions are that they can deliver. It's got to be three, because as Tony would say, one, two, three, many. People can't remember more than three. So, we got $650 million of our own money and our own funds. We’re the largest investor in everything we do. Two, we can get access to things that most people could never get unless they can write a $100 million check or more. And three, we can either provide structural advantages and better economics than they could get even if they went directly to something, or we don't charge management fees and we just take a percentage of the profits. That's how that's shifted over time. Well, if you're able to provide somebody with something they can't get, a piece of the Astros, and you can also give them liquidity to get out if they want to, that obviously is really unique and that's a unique value proposition. To your question, though, our auditors at Deloitte will tell you immediately exactly how many the number is, I can't even remember what it is, but over 25 years we have 120 some odd funds. Some of them are thematic in nature, like just space and defense or just professional sports or just GP stakes. Others are funds of one asset or maybe two or three assets that are much more co-investment, typical SPVs, we call them conduits. We're a conduit to that opportunity for people. But we also do have, and it goes back to being freakish about alignment, one of the things we learned is that if you only have $5 million of the best thing since sliced bread, how do you allocate that across 8,700 investors? Does Tony get it? Does Christopher get it? Does Daryl get it? Who gets it? And the answer is there's no good answer there. So, you go put it out there and it's oversubscribed 50 to 1 and everybody gets 2% of what they wanted. Nobody's happy. So, we said, okay, we're not going to do that. But you’ve got to have a way for everybody to invest in everything we do, otherwise, you're cherry picking. That's not fair either. So, we have a fund of everything we do in the private markets that people can choose to invest in or not. But they know if they pass, they're missing out on some of the things we do. I mean, Figure AI is a good example, the robotics company, unbelievable success story. At the level we invested in, it was way too early to do a conduit or an SPV. Therefore, it's only in our fund of everything. If somebody's not in it, they don't own it. But if they're in that fund, they get everything else. And the other thing that we do that's pretty unique, going back to the kind of irresistible offer, anybody who invests in that vehicle, our fund of everything, they have right of first refusal on all the co-investments that we do alongside that vehicle where we do a conduit. So, like we did, I can't say the name just because of regulatory reasons, but we did an investment in a very high profile space company about a month and a half ago. Not SpaceX. This is much earlier stage in that. Much earlier stage than that. But I mean, it's like a household name in the world of space, but it's series B. So very early. We were oversubscribed four to one. So, if somebody has that right of first refusal, that's a very valuable thing for them to do. So, what a lot of advisors will do for their clients or their families will do is they'll just invest in our fund of everything a reasonable amount relative to their portfolio, and then they pick and choose the ones they want to lean into and they have that right of first refusal. 

Chris Powers: You've said alignment ten times already. Can you maybe just give a few other examples of where alignment shows up that isn't that- maybe other firms do it one way or maybe it's not even wrong, but it's not truly aligned. Like when you think about alignment, it comes in various forms. Can you just give a few examples? 

Christopher Zook: So, I'll start with GP stakes just because of the fact that I think it's an easier place to start. The world of GP stakes, when you own 20% of anybody's business and you're a minority shareholder, your minority protections are very important. So if you don't have a compensation cap as an example, what stops them from paying out all the profits just to themselves? Well, that's not aligned. If instead you cap the compensation at a reasonable level from fair, based on negotiation, and everything's a lever in negotiation, then the vast majority of their earnings are going to be based off of the overall success of the business. Now you're aligned. Same thing, we have in almost every one of these situations what we call a Monet clause. They can't take our money and go buy a Monet. That's not going to generate a return. Potentially, it could be a good investment, but let's not do that. Let's make sure it's invested in people and expansion and that kind of thing. But so, you're aligned in that the money has to be used for the purpose that is there. The ability to not have self-dealing. One of the things, I made the choice 25 years ago to not do anything outside of our firm at all except for my personal real estate, art, things that would not be suitable for our particular, for our investor base. I don't do anything else outside. People show me deals. This is just for your personal account. I said I have no personal account. I invest only in the things that my investors are in or I don't invest. If it's not available to them, it's not available to me. That's an example. But I know so many people, real estate, venture, etc., this is good for the client, but this is better for them and they pick and choose where it goes. That's a hard no for us immediately. Other situations will see alignment get misaligned would be, if the outcomes and objectives are just different. I'm looking at an opportunity right now to where it says in the LLC agreement that even if the founder passes away, the control position must stay within his family. Well, as an outside investor, that's a no. Because of the fact that I don't want his children, who might be great, but I don't want to sign up today when they're 14 to know that they're going to be running the business that I own a piece of. No, thank you. Or his wife may be a brilliant businessperson, but I don't want to sign up for that today. And I certainly don't want a whole bunch of trustees running it because we know what that looks like. So that's misaligned. Absolutely, let's do what's best for everybody. It's not hard. Most of it comes down to just being honorable. And that's hard to ever gauge. But for the most part, after getting to know somebody for a couple of meetings or breaking bread together, you can determine where their values are. And if you're misaligned, don't do it. One of the things I say a lot is find great partners, be loyal to them, that are great people, then they will be loyal to you as well. So, there's a lot of people that say, I don't care who they are, they're a great investor. Okay, that might work. Until it doesn't. And then you find out that you're in- Maybe they stumble, but they're still going to put their interest ahead of yours. That's a problem. So, that's where the art of investing is there, not the science behind it. 

Chris Powers: All right, I want to talk about sports team investing. 

Christopher Zook: Sure. 

Chris Powers: So, one, when did this hit your radar? It seems like it's become a thing. How did this thesis become a thing? And I'm really curious, like how it all works. 

Christopher Zook: We actually just did, for those folks that are on LinkedIn, you can go to our LinkedIn profile. Last week we actually dropped what we call our Third Thursday Themes. Normally we do Third Thursday Themes. It's an interview with Ian Charles, our partner in sports or somebody, Vinod Khosla or somebody, Joe Lonsdale. That's what those are about, a particular theme. I think you know Evan Loomis. Evan we had on to talk about defense. Good partner of ours. So, the Third Thursday we did last week was different. At our annual themes event, which is every basically January, early February, we just celebrated the 10th anniversary. Joe Lonsdale was our keynote fireside chat. We did actually an investment, for our 10th anniversary, we did a special deal and we did an investment company roundtable, excuse me, investment committee roundtable. And so, all of our investment committee was sat up there and we kind of answered questions just like this. And it's funny because sports was the main one that got the chuckles because of the fact that I was the skeptic. I hated the idea. Why? And to answer your question, we first heard about this basically in ’19. And that's when the rules were changing. Because prior to that, no one was allowed to own a sports team in North America unless they walked on two legs. They call it the two legged rule. If you didn't walk on two legs, you couldn't buy it. No private equity, no institutions, that kind of thing. Just those that are individuals because that's what the leagues wanted. In 2019, Major League Baseball was the first to change the rules to allow very specific covered funds, as they're called, that are not conflicted. They don't own a piece of an agency. There's nobody in there that's an umpire. You wouldn't want that. They don't own a whole bunch of other teams themselves. So, there's all these restrictions. And so Arctos got permission from the league to buy in. They called on us. And everybody brings biases to investments, and everybody can go on LinkedIn and watch some of the same dialogue, but a lot of other stuff that we cover there that makes it worthwhile to do so. But the biases when people come to any investment decision, it may look like what they had that worked, or it may look like what didn't work. And it's very hard for most people to remove the emotion of this feels like a good thing or a bad thing. I'm very proud of the fact that I have this deep analytical ability to not care what it did in the past, what it was in the past, etc. But even I brought bias to this situation. I grew up in the era of the 80s and 90s, and as a football player and as a football coach, it's just a trophy asset. It's just for very wealthy people to own, to say they own a sports team. It loses money all the time, and hopefully it goes up in value one day. That's what I thought. 

Chris Powers: It's like, as long as egos continue to get bigger. 

Christopher Zook: But that's a really bad reason to invest. 

Chris Powers: For sure. That was kind of the model forever is like as long as rich people love owning great franchises, you can expect a good investment. 

Christopher Zook: That's right. That was the thesis. That's not a thesis I was willing to back. So literally, it took almost two years for Arctos and my team to convince me that this was a good idea because I looked at it wrong. What I was missing, that I readily admit now, is, for me, everything's a theme. What's the theme? Owning a piece of the Astros. Great. What's the theme? That the Astros are great. That's not a theme. And we miss investments because there's no specific theme around it, but it just helps us identify what we're good at and cull 2,000 investments down to what we actually can do work on. Then finally, they showed a slide about how media was changing. And so, the theme was very obvious. And it hit me between the eyes. I was like, oh, we're in. And they're like, what? We've had eight meetings with you or six meetings or whatever it was at the time. What do you mean now all of a sudden, I said, the theme is cord cutting. People are moving broadcast and cable to streaming. Got it. This is easy. I see the roadmap. We're in. And they're like, it was that simple? I said, yes, you should have led with that two years ago. But they hadn't really framed out the messaging on it, but they understood it. And people don't understand this and they don't appreciate this enough. In 2005, 15 of the top 100 live programs watched were sports. In 2025, 97 were sports. Why? Because if you don't have to watch a commercial, why would you? You're going to go watch it on Amazon Prime or watch it on Hulu or watch it on Fubo or whatever. So if you're an advertiser, how do you reach your audience now? You can't, unless it's a live event. So, what does that do to the pricing of advertising for live events? And one only has to look at the price of a Super Bowl ad as an easy benchmark. It's literally just up and to the right at a very fast growing rate. Because now, 97 of the top 100, that's the only place you're going to be able to reach people. That's the only way you're going to reach your audience. Therefore, you're going to pay a lot higher price for that. And if you're a streaming service, how do you reach your audience with something different if they can just get the same program rerun everywhere else? The answer is Thursday Night Football. What's the number one sign up for Amazon Prime of the entire year? Every Thursday night in the fall. Because if it’s the only way you can watch your team play, you're going to sign up, you might drop the next day, you might drop a week later, or you may go, huh, this free shipping thing, I like it. I'm going to keep doing this. They are very sticky. Paramount, when they had the wild card game, the only place in the world you could watch it was as a Paramount subscriber, this was two years ago, if I remember correctly, it was 30% of all internet traffic that day during that game. They will therefore pay a lot of money for it. So, the streaming rights are what drive this. And this was the other thing that I didn't realize. I kind of got it. But once I got it, it became much easier to make the investment. And this is true in North America. This is not necessarily true in other leagues outside of the Big Four. When you own your piece of Buffalo Bills, Los Angeles Chargers, when you own a piece of these teams, Dallas Cowboys, you own your 1/32 of the NFL, you own your team and all your local monopoly, which by the way, a monopoly is a pretty good thing. But you also own your 1/32 of the league and all this is public information that I'm going to tell you because the Green Bay Packers technically are public. So, this is all in their filings. This year, the check to every team, whether you're first place or last place, your dividend from the NFL was over $400 million. So, if you know, going back to my point at the very beginning of this, if you know exactly what your revenue is going to be this year, it's pretty easy to budget. Plus, you, of course, get all your local rights, your local stadium rights. I mean, those are 10 year contracts. The interesting thing is professional sports and GP stakes have a lot of correlation. It's not management fee driven and carry driven, but it's contractual fees and revenue. Now the Golden State Warriors, which we own a piece of alongside Arctos, they did their new stadium, they have a waiting list like three years long for all of the boxes in the stadium. And these are expensive boxes. So long term contracts, sticky, season ticket holders. And then obviously you do have the other things that are more driven by your win-loss, which is going to be your local media, your jersey sales, how many hot dogs and beverages you sell, those kinds of things. But those are just ancillary. And one of the biggest growth opportunities because of the world of digital now is the way that advertisers are able to customize advertising to you. So, as an example, if you watch a hockey game now, professional game, on the ice on your TV screen is going to be a logo for something. That logo will be different for you than it is for anybody else. And it's a little eerie. But whatever you were looking up on Google the day before just might be what that is. Very targeted marketing and advertising, much more effective. Therefore, people are willing to pay more for it. There will be a day very soon, my grandson and granddaughter and their mom and dad live here in Fort Worth. And so, Tripp, he's Christopher III, at some point, Tripp's going to want to watch football with Pops. And I'll be able to pull out my phone and I'm going to be able to hit a couple of buttons and his face and his name will be on the jersey of the quarterback, and he's going to be able to watch himself play quarterback for whatever team. Am I going to pay eight bucks for that? Absolutely. Just to be able to spend time with my grandson. Well, all that revenue is going to get split between whoever the app provider is and obviously the teams that are playing the game. Plus, this thing called international growth. I was in Tokyo early last year. We own a piece of the Dodgers alongside Arctos. And I mean, there's more Dodgers advertising in Tokyo than there may be in Los Angeles.

Chris Powers: Because of that pitcher. 

Christopher Zook: Absolutely. I mean, he is a legend. And literally the game that they played in Tokyo was oversold like five times. They could have done it in a stadium five times as large if they wanted to. So, the growth in the international, whether it be Europe, Africa, Far East, it's just immense growth. So, these businesses, they are growth businesses. But like any business, you gotta make sure you don't overpay. And some of the prices are getting really expensive. So one of the things that's really important to us, and it's one of the reasons why Arctos and others that we partner with, they have to have a value proposition. Because if they're just providing capital, then they're a price taker. If somebody wants to sell 10% of the team, they're just paying whatever price it is. And obviously the control owner decides who gets to buy that and who doesn't. But if instead you have the biggest digital platform and you can tell this owner more about their team than they know about their own team, that's an amazing value proposition. You're still going to have to pay a fair price. But you don't have to be a price taker. You can actually be patient because you don't just have to take whatever's available. But that's the other thing is you have a scarcity value. You only have basically two franchises that have been added in the last 25 years to any of the Big Four in North America. But it is very different. And this is one of the things that I will tell you that a lot of people are getting in trouble on. They're starting to say sports are great. Look how much the returns are. It's not correlated to anything else. It's outperformed the S&P by a dramatic margin. It has virtually no volatility. It even made money during COVID when you weren't allowed to have any games. But it's because of meteorites. And it's this cord cutting theme. Cord cutting is an irrefutable theme. So, we're like, oh, great, I'm going to go do this in minor league baseball, I'm going to go do this in European football, soccer, I'm going to go do this in cricket and rugby and all these other things. Some of them will work really well. I mean, padel is another one that's a fast growing sport. You look at pickleball. People are doing this and what they're missing is that they're not media driven. They could be, but it's a very different path. And they're not a monopoly and they don't own their share of the league. So, we do own a piece of Liverpool and Paris Saint Germain. But we don't own a piece of the European commission... 

Chris Powers: So, you have to underwrite that differently. 

Christopher Zook: You have to underwrite it differently. You have to pay a different price. And there's countless billionaires that have lost an enormous amount of money on European football teams simply because of the fact that you can get relegated, you then- it's the opposite effect. You get relegated down, your media value is dropped dramatically. That obviously hurts your cash flow, it hurts your business franchise. It doesn't matter how well the league is doing, it's only really how you do. Which also means your player costs are usually much, much, much higher. Whereas here in North America, you have controlled player costs. They're negotiated as a league, not at the individual team level. The league obviously sets those guardrails and the unions do that through collective bargaining. So therefore, everybody, going back to alignment, these valuations are helping dramatically the players themselves because of the fact that the players are benefiting from all these new sources of revenue because they're more a percentage of the overall revenue of these businesses. That means they benefit from these meteorites. It's a whole different kettle of fish when you start talking about outside of the Big Four in North America. 

Chris Powers: Yeah, I mean, you kind of answered it, the Big Four. Like if you look at UFC, even when UFC started, there were several other combat leagues. Maybe you're interested in the UFC now that it's made it, but you're not interested in the startups because at that point you also don't even know what league is going to be the league. 

Christopher Zook: Correct. It's very much a venture capital investment at that point. So you have to underwrite it as that, knowing it could be a zero or maybe it makes a lot of money. But it goes back to the point of what's the worst case scenario, if you can live with it, the upside will take care of itself. And we look at we own a piece of Aston Martin's Formula one team alongside Arctos. We own a piece of a lot of teams alongside other folks, but they're all very differently underwritten based on what their control provisions are, what their share of the economics are. And people can't just blindly say- that's why we haven't done anything in college yet. It's just right now nobody knows what the rules are. And until that happens, you don't really know what the economic model is going to be. Issuing debt to a conference or a team, that can work, but it goes back to the same point of, when you loan somebody money, it's a different kind of alignment as opposed to when you're partnering with them to make them grow and be bigger and better. That's what we're waiting for more in the world of college sports. 

Chris Powers: All right, so you met Tony in 2021. There was a huge inflection point. I think the next big inflection point has to be this podcast. So if we're sitting here five years from now, like I'm assuming you're planning your business out, and we came back five years, what is the plan for the next five years? 

Christopher Zook: One of the things that Tony and I have both been very passionate about, we wrote about in the book, is the democratization of private investments. So, we actually were working very hard with some of our friends in Congress to get a law passed to allow people to take a test to become an accredited investor. Well, that was passed through the House. It was stuck in Senate Finance Committee. The election happened. And then lo and behold, in June of last year, the SEC, with the stroke of a pen, said you can now invest in alternative assets of a certain type with no accreditation requirement. Anyone in the world, and at a $2,500 minimum, can now invest and own a piece of SpaceX and the Astros and everything that we've talked about. That didn't exist literally eight months ago. That has challenges that come with it, but also opportunities. And so, we are very excited about that because of the fact that one of the things we did when we launched the book is we specifically, if we're going to tell people this is the right type of asset to own, to diversify your portfolio, get 8 to 15 non-correlated assets. That's the holy grail of investing. If you do that, your portfolio should, according to Markowitz who won the Nobel Prize, should do more return with lower risk. Which is counterintuitive, but that's what he proved, which is why he won the Nobel Prize. But that's what you need to do. But, oh, by the way, you can't. That wasn't something we felt good about. So, we created a way for investors to actually do that, which up to six months ago, eight months ago, somebody had to be at least an accredited investor, which is why we were lobbying Congress to be able to work through that. Now literally everybody can do it. And so that we've expanded and we've actually launched a second fund that is now available to the entire world. And the more that we can open up the opportunity for advisors to use for their clients. I mean, perfect example, I met with an advisor the other day. Average client’s 1.5 million. So good size. But if you're going to go diversify them into alternative investments which have a $250,000 minimum or a million dollar minimum, they can't even participate. And so now that investor, that advisor could put 3%, 10%, whatever's appropriate for that client at $150,000 into a diversified portfolio that gives them exposure to all these assets they would not get any other way. So, five years from now, I think what you're going to see in our business, and I think in the industry as a whole, is this exponential growth among the number of people that can invest in alternatives that have never been able to before. And that's going to create opportunity and I think the ability for people to control a little bit more of their destiny. Because right now, we have this huge problem for investors that are not in alternatives. And it's not necessarily- it doesn't mean it's not going to continue to be successful, but it's a problem nonetheless. Most people don't know the number of publicly traded companies in the United States has dropped by more than 50% over the last 20 years. And so 92%, I believe it is, of the companies in the United States that are above a hundred million dollars of revenue, that's a good sized company, 92% of them are private. So you're missing 80, 92% if you're just in the public markets. Now, there's some amazing companies, whether it be Nvidia or Amazon or Google or whatever. Those are great businesses, but they're multitrillion dollar companies. And then you have not a lot of others to choose from. Which means in the S&P 500 now, 46% of the S&P 500 is ten names. So, it takes the other 490 to make up the other 54%. So, when people think they're diversified, they're not as diversified as they think they are, which means in a year like 2022, when the market gets kicked in the teeth, which it happened in April, they lose a lot of money really fast. And unfortunately, what happens to so many investors is they panic and they've been told, be a long term investor, just ride it out, it'll be okay. But at a certain point, and I've seen it multiple times in my career, that uncle point, they hit it and they just can't stand it anymore and they bail at the worst possible time. So, the more diversified they are, the easier it is to have a smoother roller coaster ride. We refer to it as get off the roller coaster. Get on the escalator. The escalator is not too bumpy of a ride, typically. So get on the escalator just through diversification. That's what I think is what we'll see over the next five years. And it will be a very large amount of capital that will shift.  

Chris Powers: In five years, we're going to come back and do this. 

Christopher Zook: I love it. 

Chris Powers: Thank you for joining me today. 

Christopher Zook: Thank you for having me. It's my honor. 

Chris Powers: This was awesome. 

Christopher Zook: Absolutely.