In this episode of the Ignite Podcast, Brian Bell engages with Chris Schelling, Managing Director of Private Investments at Caprock. With a distinguished career spanning two decades and expertise across private equity, hedge funds, private credit, and real assets, Schelling shares thought-provoking perspectives on alternative investments, decision-making, and market dynamics. Whether you're an LP, a venture capitalist, or simply intrigued by financial strategies, this blog synthesizes key insights for those who might skip the podcast but don't want to miss the wisdom.
Behavioral Finance: A Driving Force
Schelling's fascination with behavioral finance stems from his background in psychology and statistics. He views investing as the interplay of human behavior and market dynamics, describing it as a "social science" where probabilities shape outcomes. His observation that "past performance is not predictive of future results" often holds true—yet the strongest indicators of future behavior remain historical actions and incentives.
Key takeaway: Understanding behavioral drivers in markets enables sharper predictions and decisions.
Alternative Investments: The Creative Frontier
For Schelling, alternative investments represent the "creative destruction edge of capitalism." From venture capital to private equity, he argues that private markets exhibit stronger persistence of returns compared to public markets. Why? Liquidity constraints in private markets shift focus from sentiment to actual value creation. Schelling highlights that persistent success depends more on individual deal attribution than the reputation of firms, reflecting the shift from brand power to people power.
Key takeaway: People—not firms—drive consistent results in private markets.
Red Flags and Green Lights in Due Diligence
Having conducted diligence on over 100 funds, Schelling identifies critical markers:
Red Flags: Lack of personal investment in funds, misaligned fees, and overcommitment that limits risk appetite.
Green Lights: Fund size discipline, cohesive teams with proven track records, and an ability to address mistakes transparently.
His diligence philosophy starts with a "no," methodically disproving objections before building toward a "yes." This approach mitigates confirmation bias and emphasizes rational decision-making.
Key takeaway: Start with skepticism, gather data, and look for managers who learn from missteps.
Venture Capital vs. Private Equity: Risk, Returns, and Scaling
The discussion contrasts venture capital's power-law dynamics with private equity's steadier return patterns. Schelling emphasizes the importance of fund size discipline in VC, where outsized scaling can push firms out of their competitive sweet spot. His advice to LPs: Avoid bottom-quartile funds and focus on disciplined teams capable of consistent results.
Key takeaway: Fund size growth should align with strategy; overexpansion dilutes performance.
The Democratization of Alternatives
A key trend Schelling highlights is the democratization of private markets. As high-net-worth individuals gain increasing access to alternatives, the segment grows faster than institutional markets. Caprock, with $11.5 billion in AUM, bridges this gap by offering institutional-grade access without conflicts of interest, such as commission-driven products.
Key takeaway: Private markets will dominate future growth, demanding patient, long-term capital.
Three "I"s Framework for Assessing Managers
Schelling applies a framework of Integrity, Intelligence, and Intensity:
Integrity ensures alignment between promises and actions.
Intelligence prioritizes deep knowledge over raw brainpower.
Intensity reflects passion tempered by balance, avoiding burnout.
Key takeaway: The best managers are ethical, knowledgeable, and driven without being myopic.
Managing Cognitive Biases
Mitigating biases like confirmation bias and recency bias is essential in decision-making. Schelling integrates tools like personality profiles and rigorous debate, alongside a "rules and responsibilities matrix" to ensure decisions are informed by the right expertise.
Key takeaway: Build systems that offset bias and elevate the most informed perspectives.
Concluding Thoughts
Chris Schelling’s insights offer a masterclass in blending psychology, strategy, and diligence to navigate complex investment landscapes. His experience underscores the value of patience, rigorous analysis, and adaptability in achieving success in private markets. Whether you're building a portfolio, leading a fund, or exploring alternative investments, his perspectives illuminate pathways to smarter, more impactful decisions.
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Chapters:
Introduction and Chris Schelling's Background (00:00 - 02:00)
Venture Capital Insights (02:00 - 05:00)
Challenges of Venture Capital (05:00 - 08:00)
Transition to Caprock (08:00 - 12:00)
Advice for High-Net-Worth Individuals (12:00 - 16:00)
Sourcing Fund Managers (16:00 - 20:00)
Behavioral Finance in Investment Decisions (20:00 - 25:00)
Opportunities in Private Credit (25:00 - 28:00)
Mitigating Cognitive Biases in Due Diligence (28:00 - 32:00)
Impact of Institutionalization on Private Investments (32:00 - 36:00)
Negotiating with Fund Managers (36:00 - 40:00)
Adapting Criteria for Fund Managers (40:00 - 44:00)
Personal Anecdote: Private Detective Experience (44:00 - 47:00)
Conclusion and Final Thoughts (47:00 - 51:41)
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