Limited Partners, much like VCs searching for outlier founders, are often looking for fund managers who are "a little off." They value investors who think differently and don't follow the consensus, as this non-traditional approach is seen as the path to generating outsized returns.

To avoid the trap of raising ever-larger funds and being forced to invest, Sixth Street created 'Tao,' a $30B cross-platform vehicle. It acts as an overlay, allowing smaller, specialized funds to access large-scale capital for specific deals without distorting their individual investment strategies or mandates.

The dominance of low-cost index funds means active managers cannot compete in liquid, efficient markets. Survival depends on creating strategies in areas Vanguard can't easily replicate, such as illiquid micro-caps, niche geographies, or complex sectors that require specialized data and analysis.

A smaller fund size enables investments in seemingly niche but potentially lucrative sectors, such as software for dental labs. A larger fund would have to pass on such a deal, not because the founder is weak, but because the potential exit isn't large enough to satisfy their fund return model.

A fund-of-funds' back office is more complex than a direct VC fund's. Critical decisions around over-commitment strategies, capital recycling, and specialized fund formation are not just operational details—they directly influence final returns for LPs. Getting this specialized setup wrong can significantly mute performance.

The initial capital for a new fund-of-funds doesn't come from cold outreach to institutions. The process mirrors an emerging VC's first fundraise, relying on a personal network of operators, VCs, and high-net-worth individuals who already believe in the founder. The strategy is to work the existing network outward, not pitch institutions from day one.

When evaluating follow-on opportunities, the conventional wisdom is to look for a Tier 1 VC leading the round. However, a specialized fund with deep industry expertise leading a Series A can be an equally powerful, or even stronger, positive signal for a company's potential and market fit.

To overcome LP objections to layered fees, fund-of-funds must deliver outsized returns. This is achieved not by diversification, but through extreme concentration. By investing 90% of capital into just 10-13 high-potential "risk-on" funds, the model is structured to outperform, making the additional management fee and carry worthwhile for the end investor.

The majority of venture capital funds fail to return capital, with a 60% loss-making base rate. This highlights that VC is a power-law-driven asset class. The key to success is not picking consistently good funds, but ensuring access to the tiny fraction of funds that generate extraordinary, outlier returns.