André Perold – Investing Through Exponential Change

Capital Allocators – Inside the Institutional Investment Industry

Ted Seides interviews André Perold, co-founder and CIO of HighVista Strategies, about navigating an investment landscape defined by exponen

Key takeaways

• HighVista Strategies seeks opportunities in structurally inefficient markets where deep specialization creates a moat.
• The current era of exponential change requires investors to balance AI-driven growth with 'anti-AI' investments like small buyouts.
• In private equity, the decline of available carry is driving talented professionals to spin out and form new, specialized firms.
• Effective private credit strategies should focus on bespoke, complex loans rather than commoditized direct lending.
• HighVista utilizes AI agents within a secure sandbox to automate the initial screening and scoring of investment opportunities.

Main topics

• Exponential Change
• Biotech Investing
• Private Equity Dynamics

Notable quotes

Those are the most dangerous words in investing is saying this time is different. But this time, is different.

Conclusion

The episode offers a profound look at how institutional investors can

Transcript preview

Speaker 3 (0:00) You're seeing companies with extraordinary earnings growth, high valuations. We're seeing venture investments in the many billions, 20 billion value, 5 billion before. How do you decide those? How do you think about investing in a world where the underlying fundamentals are changing very quickly, but the price is very high? If the price was low, would you believe it was changing? Because the price is high, it's consistent with things going really well. When the price is high, you always recoil. Part of you needs to say something like, AI is going to work. 10 years from now, we'll be in a world we won't recognize. May not be the case. That's possible. Maybe only half of that's possible. It's still profound. Maybe only a quarter is possible. It's still profound. If I think that's true, it means that I need to think long-term and be comfortable owning things at high prices, knowing that in any normal investment environment, you'd never own them because this is different. Those are the most dangerous words in investing is saying this time is different, but this time is different. Speaker 2 (1:19) I'm Ted Seides, and this is Capital Allocators. My guest on today's show is Andre Perrold, the co-founder and chief investment officer of Hyvista Strategies, an alternative asset manager overseeing $14 billion that searches for alpha opportunities in structurally inefficient markets. Andre has twice been a past guest on the show, starting way back with episode number two, and both conversations are replayed on the feed. This time around, we start with Andre's assessment of the most exciting and unusual investment environment he's experienced, alongside his thoughts on how to build capabilities and construct portfolios to navigate exponential change. We then turn to the beautifully inefficient markets where HiVista has built core capabilities across biotech, lower middle market buyouts, early stage venture, and specialty private credit. Before we get to the interview, we spend a lot of time on this podcast asking other people questions. This time, we're turning the tables on you. We just launched our latest audience survey. We want to learn more about who's listening, how you listen, and what we can do to make Capital Allocators even better. Links in the show notes. Thanks as always for listening and helping us compound knowledge and relationships. Capital Allocators is brought to you by AlphaSense. Here's something for you. Most AI tools today are very good at sounding right. But can you actually trace it back to a filing, transcript, or specific passage that drove the answer? Or are you just trusting the confidence of the output? For allocators, that's not a minor concern. A missed filing, incorrect source, or context that gets lost somewhere in the retrieval chain aren't edge cases. They're how decisions go wrong. AlphaSense is the AI platform built specifically for this. They own the content, over 500 million curated documents from broker research and expert transcripts to filings and earnings calls. And they own the retrieval layer on top of it. That means every answer can link back to an exact verifiable source. Because the answer is only as good as what's underneath it. And with AlphaSense, you know exactly what that is. See it for yourself. Try a free trial at alpha-sense.com slash capital. That's alpha-sense.com with a hyphen in the middle slash capital. Capital Allocators is also brought to you by Morningstar. Morningstar helps break down the barriers that stand between investors and their goals. Access public and private market research and data within your tools and AI platforms. Utilize indexes backed by independent research. Navigate complex markets with clear and timely credit ratings. And help free up time with managed investment solutions and retirement services so you can move forward with greater confidence. Morningstar. Nothing in your way. Visit Morningstar.com slash game on to discover your next move. Capital Allocators is also brought to you by Admired Leadership. Back in April on episode 497, I sat down with Randall Stutman, the executive coach behind Admired Leadership, who's advised more than 500 CEOs, including some of the most respected names in asset management. Randall introduced me to Alex, an AI leadership coach's team built on 40 years of proprietary research into what the best leaders actually do. For investment professionals, that means your entire team gets on-demand coaching grounded in the behaviors that drive results and build the kind of followership that retains your top talent. We use Alex, and our team at Capital Allocators swears by it. Try Alex for yourself at the link in our show notes, tryalex.admiredleadership.com. Please enjoy my conversation with Andre Perrault. Speaker 2 (5:41) Andre, great to see you. Great to be here, Ted. It's been a little while since you were on the show. I'd love you to catch me up with how you're thinking about the investment landscape. Speaker 3 (5:50) A lot has happened over the years. We started Hyvesta in 2004. We went through the GFC. There's nothing like today. It is the most unique environment that I have ever seen. It's the most... exciting investment environment that I've ever seen. It's the most uncertain environment that I've ever seen. The reason is there's so much change going on. It's exponential in nature in many dimensions. It's not just one thing is happening that's big. At the same time that it's exciting from a different perspective, if you care about the next generation, if you care about society. There's some very ugly things. Don't confuse exciting investing with a great world, great society. It's not that. For investing, it's fantastic. If you put on your investment lens, what makes it exciting? Innovation and rapid change means that if you're trying to invest well, you need an edge. Your choices are buy an index or you can try and outperform. Your ability to get an edge is much greater and easier when things are changing rapidly. If you were following General Motors decades ago, everyone knew GM, everyone followed it, nothing was changing. To get an edge is hard. At a time when things are changing exponentially, let's rattle off something. AI is exponential in what it's doing on many fronts. It's a tool for productivity that's helping firms get better margins. It's changing our lives, enabling wars. The facets of AI are hard to fathom, and on each dimension, it's exponential. What's happening in healthcare, exponential change. The GLP-1 drugs are changing the outlook for our health in profound ways. If you look at the budget deficit, we have $2 trillion and growing. Feels very exponential. The U.S. debt was $5 trillion. early 2000s, it's 40 trillion. It's not all good. A big deficit is very exciting for investing. If the alternative is no deficit, it's not as exciting. The deficit's a problem for the next gen. If you're investing, it's great. That's the conundrum that we're in. You got to separate. You got to wear two hats. What I think about the actual world we're in versus the investing world. When things are Speaker 2 (8:27) exciting, because there's so much change, they're also pretty challenging. We'd love to get your sense of if you're able to capture some of these exciting movements, what are the challenges that you're facing and have to overcome to make that work? You're seeing companies with extraordinary earnings Speaker 3 (8:45) growth, high valuations. We're seeing venture investments in the many billions, 20 billion value, 5 billion before. How do you decide those? How do you think about investing in a world where the underlying fundamentals are changing very quickly, but the price is very high? If the price was low, would you believe it was changing? Because the price is high, it's consistent with things going really well. When the price is high, you always recoil. Part of you needs to say something like, AI is going to work. 10 years from now, we'll be in a world we won't recognize. May not be the case. That's possible. Maybe only half of that's possible. It's still profound. Maybe only a quarter is possible. It's still profound. If I think that's true, it means that I need to think long-term and be comfortable owning things at high prices, knowing that in any normal investment environment, you'd never own them because this is different. Those are the most dangerous words in investing is saying this time is different. But this time, is different. The question is, how do you invest well? So one way to keep your head straight is to say, I'm going to create an AI sleeve on the assumption it will be different. I'm not going to put all my money in it. I'm going to create that sleeve because I need to free myself from the idea that I can compare AI and non-AI investments and decide in each day which is the better one. Hard to do. The rest of your money is the anti-AI. You can be good at building a sleeve that if AI turns out to be this incredible evolution, innovation over time, will do really well. Then you need to think, if that's true, what would I invest in? It's a different mindset. You need two sides of your brain at work because we're so programmed to compare investments of all kinds with each other. You can't really compare them easily. That's a way trying to keep our heads straight and how to get it right. How do you think about navigating the investment world? You need to try to understand exponential math. We're very bad at exponential math. In COVID, we were going around the table here at Hyvista asking people, how many COVID cases would there be in the country? The numbers were ridiculously low. No one could imagine an exponential phenomenon. Of course, the whole world got it. If it's truly exponential for the long time, there's almost no price you shouldn't pay, but you're not going to pay. That's hard. So you need to find a way to get an edge. The only way we know to get an edge is to partner with experts in increasingly narrow areas. For example, if you think AI has legs, how do you figure it out? We've spent a lot of time trying to think where in AI should we place our bets. We have a lot riding on compute. We decided if AI was going to work, compute would be very big. We have found hard tech and other experts to work with to try and figure out where to do it. You need that narrow specialization to help you build a picture of what's going on to have some conviction. That's how we do it. In all of these areas of evolution, Speaker 2 (12:13) Rapid change, you have to do that. What are some of the other areas where you found that narrow specialization that you can identify and partner with? We do a lot of narrow specialization in Speaker 3 (12:25) everything we do. It's a hallmark of high vista. We do a lot in biotech. Some things in biotech might be exponential in change. GLP-1 drugs is a systemic thing in healthcare. In PE, we're trying to invest in a roofing company. small buyout. How do you figure out that the roofing companies, and you need to be with someone who really knows that space. We did a bottling company in small buyouts. We have evolved to where in everything we do, we look for very local specialization. It's a vast array of local specialists that inform these various portfolios that we run that then aggravate Speaker 2 (13:07) up. I'd love you to walk through some of the evolution of your business that started as one pool. Now there's a couple other strategies within that. We Speaker 3 (13:19) started off with a multi-asset mandate. Look around the world for the best opportunities. That's an important piece of what we do. There you get a sense from a top-down point of view, where are you cross-comparing against different areas? What are the best places to go to? It's bottom up, but you're looking top down and you're very macro aware. We've also realized that over time, things get competed away very fast. The world has become much more sophisticated. The firms that invest are super sophisticated today. Their clients are sophisticated today. If you look at what the clients can do today versus in the past, it's incredible to see the sophistication of clients across the board. Sovereign wealth funds, pension funds. family offices, endowments, anything that is vaguely attractive will get looked at quickly, get analyzed, and money will flow to it. We