Fish and rice: on the half of investing we don't talk about

This is the first issue of Working Notes. I'll be writing here about creative capital and private markets -  the structures being built at the edges. You're on the list because we've crossed paths. Unsubscribing takes one click, and I won't take it personally.

There was a period of my life, living in New York, pre-kosher, where I was prone to indulge a borderline unhealthy interest in good sushi.  It was the golden age of Omakase proliferation, and I was hooked.  

Sushi has exactly two ingredients: rice and fish. 

Virtually the entire way up the culinary ladder, the ingredient that matters, the focus of review, is, of course, the fish. 

But get to the top, and it flips. Exquisite fish is table stakes - anyone can pay up for Tsukiji Market's freshest catch. What defines a great chef is the rice. The blend of grains, the homemade vinegars, the serving temperature. It is not a coincidence that sushi literally means sour rice. 

The investment management world runs on sushi logic. Every investment has two core ingredients: what you invested in and how you funded it.

The vast majority of investors spend almost all their energy on the former.  The deal is the proverbial fish - tasty, exciting, and hopefully differentiated. 

But the most successful managers - Blackstone, Apollo, etc.- have flipped the model on its head. They recognized that the alpha of deal-making has been largely competed away. The funding, they understood,  is where you can really set yourself apart.  

So they scaled into trillion-dollar firms by solving the other side of the equation. Insurance platforms for permanent capital, interval funds, retail distribution channels.  

In venture and growth, fish is still very much the focus, and few firms are accustomed to thinking otherwise. There's a reason for that, and it isn't a failure of imagination.

Financial structuring tends to thrive in just the places that venture falls short: cash flows, transparent pricing, and liquidity. Companies burned cash, valuations moved violently, and private companies received investment from a relatively small club of investment firms.

That's why the talent in financial structuring went everywhere else: credit, real assets, public markets, and why venture grew up alongside as its own world, run by people who arrived through technology or corporates rather than through finance. Two industries in parallel, with very little shared language. 

I crossed from one to the other about a decade ago, and what surprised me most was how much of the finance toolkit simply hadn't come with me.

Venture has since stopped being a cottage industry. Twenty years ago, almost nobody outside the industry talked about software companies. Today every conversation is about technology, and the money has followed - global venture funding has gone from under $60 billion a year to more than $400 billion. 

The companies absorbing that capital stay private far longer and get far bigger before they list. Platforms like Forge and Hiive now make it possible to generate immediate liquidity in leading late-stage names at size. The depth of their marketplace provides real-time price discovery. In addition, more and more late-stage private businesses are generating material profits (e.g., Stripe, Revolut, Canva and Databricks), something considered heretical just a few years ago.  

The conditions that kept structure out of this asset class are disappearing, and the tools are following them in. 

None of this is exotic outside venture. NAV loans and preferred facilities. Continuation vehicles. GP warehouse lines. Prepaid forwards. Founder margin loans. Employee tender facilities. Each one is a different answer to the same problem: an owner holding something valuable with no way to turn it into cash. 

There's a pattern in how these new financing tools get priced.

When a structure is unfamiliar, very few people will write it. Not because the risk is worse, but because nobody has seen it work, and finding out means building it from the ground up, with no precedent to work from. The handful willing to do that work get paid for it, a premium on ordinary risk, collected from everyone who wasn't willing to go first. It lasts as long as the unfamiliarity does.

Private equity ran this experiment already. NAV lending, borrowing against a fund's whole portfolio rather than any single company, was a niche product five or six years ago, written by a handful of firms who could name their price for it. The loans performed, and capital noticed. Today the same facility, against the same collateral, earns a fraction of what it did, and every large credit manager offers one. Not much about the risk changed; what changed was how many people were willing to write it.

A live version is running right now. Consumer and mobile gaming companies spend heavily to acquire customers, and those customers pay back that ad spend predictably over several months. General Catalyst figured out that you could finance that repayment stream directly, rather than lend against the company's balance sheet, and built a dedicated vehicle to do it.

The returns are extraordinary. High teens to mid-twenties, against loss ratios that are rumored to be sub-1 %. There is almost nowhere else in credit where those two numbers sit together. It's a brilliant piece of structuring, and the market has noticed. A bunch of firms are now building toward the same product, several of them here in Israel.

Those returns will come down. Good returns attract capital, and capital competes them away. Which is why the size of the opening matters as much as the discovery. My friend and mentor Raphi Schorr likes to talk about beautifully inefficient markets: inefficient because certain access barriers (knowledge, complexity, etc) limit the supply of capital and beautiful because they're big enough to be a sustained source of alpha before others arrive to compete away returns.

Judging is most of the work. We looked hard at what General Catalyst built and decided it wasn't ours to build. That product rewards continuous deployment, capital comes back quickly and has to be redeployed just as quickly, and our edge runs the other way: the situation nobody else can price, worked out slowly, once.

Which is how we ended up building a GP carry financing solution, as far as we know the first proper one in Israel. Nobody could tell us how to price it, how it would be taxed, or how to structure it, so we worked it out from scratch over many months. The next one will take weeks. 

That frontier is what I want to use this space for. There's a great deal being built at the edges of private markets right now, most of it unfamiliar, some of it exceptional. I'll take you into these structures as we come across them - what they are, who's building them, what they cost, how they're priced, and the point at which they stop being interesting.

If you allocate into private markets, the useful thing isn't knowing what's on the menu today. It's watching what gets added next.

Come along.

- Richard