Dynamic Allocation and Concentrated Conviction – Zack McGuire (EP.524)

Zack McGuire · Children's Healthcare of Atlanta

Pockets of inefficiency in private markets are getting harder to find as more capital flows in.

Children's Healthcare of Atlanta's team wants to stay in pockets of market inefficiency to earn excess returns. McGuire says that is getting harder in private markets as more capital comes into them. The argument is that rising capital inflows erode the inefficiencies a patient allocator relies on, which pushes the team to look for edges such as becoming a full life-cycle investor, co-investing and anchoring independent-sponsor funds.

“Examples of that would be we wanna stay in the pockets of inefficiency within markets. That's getting harder and harder once more capital comes into private markets.”at 32:29

Zack McGuire · Children's Healthcare of Atlanta

Lower middle-market buyout alpha is being squeezed out as capital floods in, mirroring hedge funds.

His team still sees inefficiencies in the lower middle market, but says buyout as an asset class may be following the path hedge funds took about fifteen years ago. Large amounts of capital have entered the space, and much of the alpha has been squeezed out. The team has to stay small and nimble and partner with managers who can still generate exceptional returns. Those opportunities exist but are getting harder to find.

“Buyout as an asset class is possibly going through what hedge funds went through fifteen years ago. We had so much capital coming to the space, a lot that alpha squeeze out.”at 39:48

Zack McGuire · Children's Healthcare of Atlanta

Buying a manager's secondary-sale assets at a deep discount was highly accretive from day one.

A manager running a secondary sale brought the team in for co-investment. The team bought a high-quality asset at a significant discount to its value. The purchase was highly accretive on day one. The manager then explained the prospects of the portfolio companies in that fund, which helped the team underwrite the deal. He cites this as a model for leaning into relationships that generate strong returns.

“We ended up buying a high quality asset at a significant discount, highly accretive day one, and the manager helped us understand the prospects for the companies that were in that fund.”at 47:01

Zack McGuire · Children's Healthcare of Atlanta

Biotech's crash was a buying opportunity; his team added capital and sees a strong long-term opportunity set.

His team's biotech theme performed very well, then crashed. The team re-underwrote the theme, developed conviction in its managers and in the long-term opportunity set, and stuck with it, adding capital when prices were down. He cites the portfolio's compounding as the best-performing public equity segment, which he says validates the decision to hold through the drawdown because the team had the right partners.

“The level of compounding within that portfolio is by far the best performing public equity segment. We stuck through, added capital when it was down, because we had conviction in the theme.”at 41:09

Zack McGuire · Children's Healthcare of Atlanta

Japan's corporate governance reform has produced buyout-like or better returns through an activist manager.

After studying Japan in 2023, the team concluded that an aggressive corporate activist manager was the best way to express the governance reforms underway there. They partnered with that manager across public and private equity. The manager has compounded tremendously and is now the fund's third-largest public equity position. He attributes the returns to idiosyncrasies in Japanese corporate governance that create unusual opportunities for activists.

“Tremendous alpha from the market. I would describe earning buyout like returns or better given the unique idiosyncrasies around corporate governance in Japan.”at 42:29

Zack McGuire · Children's Healthcare of Atlanta

Venture has split into two markets, with insider rounds priced differently from primary rounds.

His team has seen venture split into two markets: insider rounds and primary rounds that outside investors can access. Through a referral-based relationship, the team has offered equity to trusted advisers who work with startups in exchange for that work. These advisers then help the team take down proprietary positions, often at the insider round price. The team has built a strategy around this dynamic, which he says falls outside a standard fund or co-investment structure.

“we've noticed there's an interesting dynamic where there's almost two venture markets that have evolved.”at 47:51

Zack McGuire · Children's Healthcare of Atlanta

AI makes investment analysis far more efficient, but human judgment and accountability remain the differentiator.

As AI improves, it makes analysis work much more efficient, so professionals should use it. The lasting value lies in what only a person can do, which may not be analysis or research. AI accelerates those tasks, but the human role is developing judgment and taking accountability for decisions. He presents this as a point about how AI changes the investor's job, not as a forecast of job losses.

“As AI increases, it makes the work of analysis much more efficient. It's so important to use technology, but have somebody help you think about what are the only things that you can do... AI is an accelerant for those things.”at 1:01:28