Jan 22, 2024 · 1h 12m · capital-allocators
Tilly Franklin – Endowment Model at Cambridge University (EP.363)
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gold bands on the timeline = statements, start to end. Hover to read, click to jump. CC turns on captions
In this episode of Capital Allocators, host Ted Seides interviews Tilly Franklin, CEO and CIO of University of Cambridge Investment Management, discussing her non-linear career path, the rebuilding and governance of the Cambridge Endowment Fund, and her high-conviction approach to manager selection and portfolio sustainability.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Ted holds 18.6% of the talking time here. How this is scored →
Ted as informed peer 5.7 Guest teaching 3.3 Guest disagreement 0.2 Ted pushing back 0.2
speaking balance: gold is Ted, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 41:35 Rejecting the lower bar thesis
Franklin gently pushes back against Ted's premise that building out a new asset allocation allows lower conviction managers into the portfolio.
Hardest push from Ted ▶ 45:00 Challenging PE marks and denominator effectTed raises standard industry criticisms regarding inflated private equity valuations and denominator risks, prompting Franklin to defend UCIM's fundamental portfolio leverage.
Biggest teaching moment ▶ 31:20 The philanthropy paradox of free tuitionFranklin explains why UK university endowments are smaller than US peers, pointing to the counterintuitive psychology where historically free tuition depressed alumni giving.
Ted holds their own ▶ 45:00 Drilling on private market valuation incentivesTed demonstrates deep industry expertise by challenging the reality of private equity marks, reporting incentives, and allocation distortions.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Ted as informed peer | Guest teaching | Guest disagreement | Ted pushing back | Why |
|---|---|---|---|---|---|---|
| Tilly Franklin's Academic Background and Corporate Operating Career | 4 | 2 | 0 | 0 | Ted guides the biographical narrative through Franklin's academic transition from English literature to McKinsey and operating roles. Franklin candidly explains her self-described random path and how consulting served as her conversion course to business. | |
| Operational Lessons from Virgin Group and BBC Worldwide | 5 | 3 | 0 | 0 | Ted prompts Franklin to extract operating lessons from Virgin and BBC Worldwide. Franklin delivers nuanced reflections on Richard Branson's core focus and the stark contrast with BBC's bureaucratic hurdles. | |
| Analytical Evidence vs. Vision in Buyout and Venture | 6 | 3 | 1 | 1 | Ted probes the distinction between venture capital and buyout investing frameworks. Franklin points out that core business fundamentals unite both, but admits her analytical style suited buyouts better than visionary venture investing. | |
| Transitioning to Allocator Role at Alta Advisors | 5 | 4 | 0 | 0 | Ted asks what drew Franklin to the allocator seat and how direct investing differed from manager selection. Franklin admits she initially naively assumed manager evaluation was just security selection before realizing qualitative dynamics dominate. | |
| Firm Specialization and Optimizing Decision-Making Groups | 6 | 4 | 0 | 0 | Ted asks about organizational design elements driving success and how UCIM structures decision-making. Franklin explains why decision-making groups fail to scale and details how UCIM workhops ideas early before narrowing down to core deciders. | |
| Rebuilding UCIM and Hiring for Cognitive Diversity | 6 | 4 | 0 | 0 | Ted inquires about the state of UCIM upon Franklin's arrival and the recruitment process. Franklin describes inheriting a post-turnover portfolio and applying psychometric testing via Hogan to deliberately build cognitive diversity. | |
| Remote Team Building and Modern Team Structure | 6 | 3 | 1 | 1 | Ted jokes about Franklin's track record of starting jobs right before major market shocks and asks about building teams remotely during COVID. Franklin details remote culture formation and defends asset class specialization combined with cross-portfolio communication. | |
| Cambridge Endowment History and Asset Allocation Strategy | 6 | 4 | 0 | 0 | Ted inquires why British university endowments are smaller than their US Ivy League peers despite centuries of history. Franklin explains the historical legacy of free tuition in the UK and outlines UCIM's target asset allocation. | |
| Evaluating Manager Discipline and Process Consistency | 6 | 3 | 0 | 0 | Ted asks how to rigorously evaluate process consistency in external managers. Franklin highlights that style drift and opportunistic departures from process represent major red flags. | |
| Evolving Investment Process and Assessing Fund Managers | 6 | 3 | 0 | 0 | Ted questions balancing process discipline against adapting to changing market conditions. Franklin details how COVID forced managers to adapt and discusses qualitative assessment of manager motivation and learning from mistakes. | |
| Portfolio Concentration, Role vs. Conviction, and Experience | 6 | 2 | 1 | 1 | Ted asks whether growing a new portfolio leads to lower hurdle rates compared to an established one. Franklin clarifies that every manager must meet a high-conviction threshold and explains the internal tension between role vs conviction. | |
| Cambridge Governance, Stakeholder Management, and Currency Hedging | 6 | 4 | 0 | 0 | Ted asks what makes Cambridge unique compared to other institutions. Franklin details the collegiate university structure with 21 discrete college investors and explains their formulaic sterling currency hedging strategy. | |
| Private Equity Perspectives, Leverage, and Illiquidity Budgets | 7 | 3 | 0 | 1 | Ted asks about private equity skepticism, denominator effects, and private credit allocations. Franklin defends PE that creates fundamental value rather than leverage, shares that UCIM buyout leverage is lower than Russell 2000, and expresses reluctance toward private credit due to capped returns on illiquidity budget. | |
| Real Estate Fund-of-One Vehicles and Fund Duration | 6 | 3 | 0 | 0 | Ted asks about internal direct management versus external mandates. Franklin clarifies that UCIM utilizes fund-of-one vehicles with open-ended horizons in real estate and discusses longer-duration private equity funds. | |
| Sustainability Strategy, Net Zero 2038, and Manager Engagement | 6 | 4 | 0 | 0 | Ted probes UCIM's approach to sustainability and climate change. Franklin details the Net Zero 2038 target aligned with Cambridge University's operational goals and explains the executive education program offered to fund managers. | |
| Measuring Carbon Emissions and ESG Challenges Across Assets | 6 | 4 | 0 | 0 | Ted asks how progress towards emissions targets is tracked year-over-year. Franklin details the difficulty of carbon accounting across asset classes, noting progress in private equity reporting and unresolved hedge fund methodology challenges. | |
| Emerging Market Opportunities, Nature-Based Solutions, and China | 6 | 3 | 0 | 0 | Ted asks about current opportunity sets and geopolitical risk in China. Franklin shares bottom-up perspectives on Southeast Asian equities, nature-based solutions, and on-the-ground observations of innovation in China's green transition and healthcare sectors. | |
| Promoting Gender Diversity with Girls Are Investors (GAIN) | 5 | 4 | 0 | 0 | Ted explores Franklin's diversity initiatives through the GAIN charity. Franklin outlines empirical data showing that women represented only 20% of graduate applications, prompting GAIN's targeted focus on high school outreach and internships. | |
| Thematic Research Models and Functional Specialization | 5 | 3 | 0 | 0 | Ted asks for broad organizational lessons from Franklin's career. Franklin discusses dedicating teams specifically to continuous thematic research without interruption from deal-execution pressures. |
Statements from this episode (30)
Franklin: Branson focused on the one or two critical business variables
“I learned a lot from just seeing how he would laser focus on the one or two elements of a business proposition that were really fundamental to whether it would work or not. He had this uncanny ability to really do that. Sift through lots of information and say…”
Franklin: Stating a PE value creation plan is far from achieving it
“I always ask the question when we're talking about value creation of who did what to who to actually get it done, because there's really one thing to say our value creation plan is X, but it's a huge gulf from that to achieving the value creation plan”
Franklin: Focuses on people over analytics in current investment approach
“Actually, funnily enough, now I've come much further sort of back around to focusing intensively on people. And a bit less on the analytical side of things.”
Franklin: Manager selection fundamentally depends on team continuity and decision process
“Being most fundamental in my view, whether the key people who made the successful investment decisions of the past were still there, whether the investment decision making functioned well.”
Franklin: High-quality investment decision-making does not scale to large groups
“Having people feel bought in, but actually keeping decision making to a relatively Narrow group, because I think one of my learnings is that really good decision-making doesn't actually scale very well.”
Cambridge workshops deals early to prevent diligence momentum and confirmation bias
“When we first started, we would have these team discussions once a The majority of the diligence had been completed, but what we then found was that everybody was already quite bought in to the idea of the investment going ahead. So as soon as we think somethi…”
Franklin: Inherited a Cambridge portfolio unusually overweight in public equities
“The previous investment team had left. There was a need to substantially rebuild the investment management function. The portfolio was also, it actually done very well. But was much more heavily invested in public equities than what I was used to, or what I wo…”
Cambridge endowment uses psychometric testing to ensure cognitive diversity among recruits
“And we, as part of our interview process, introduced psychometric testing for all of the new recruits, which was specifically aimed at finding people who would bring very different personalities, skills, and approaches to the table.”
Franklin: Allocator pattern recognition requires asset-class specialization
“I feel so much of our job is about pattern recognition. And so if I want to appoint a Let's just say a PE manager, because that's my background. It's really hard to do so if I haven't seen all the other PE managers that there are that could potentially fulfill…”
Franklin: Donors give more when institutions appear financially inaccessible
“But actually, I think in terms of philanthropy, People tend to want to give when something's actually very inaccessible from a cost perspective.”
Franklin: Smaller endowments benefit by concentrating capital in early-stage managers
“There are benefits to being small. There are also obviously benefits to being large, but we are able to be very concentrated as a result of that. We are also Able to access fund managers that might have smaller funds or be a bit earlier in their life cycle bec…”
Cambridge endowment allocates 40% to equities, 25% PE, 20% absolute return
“We have about 40% in equities, about 25% in private equity, 20% in what we call absolute return, which is a sort of more market-neutral subset of the hedge fund universe, and then about 10% in real assets, and the rest is cash and fixed income.”
Franklin: Rigidly adhering to processes in changed markets is a red flag
“I think, again, a big red flag is somebody who almost religiously sticks to the process over time, even when market conditions have changed.”
Franklin: Cambridge Evaluates Managers Across Role and Conviction Axes
“So when we actually evaluate managers, we have two different axes, role and conviction.”
Franklin: 21 of Cambridge's 31 colleges invest in central endowment
“There are 31 different colleges within it, and each of them has their own endowment, and they are completely independent in terms of whether they choose to invest those endowments with the central pool that we manage or to do something completely different. So…”
Franklin: Cambridge hedges portfolio back to 60% sterling exposure
“We approximately have, this isn't exact at all, but approximately a third of the portfolio is in sterling related stocks. Opportunities are just over a third in dollar denominated investments, and then the other just under a third is other. And we have a polic…”
Franklin: Cambridge buyout portfolio has lower leverage than the Russell 2000
“So we actually looked at the leverage level of our underlying buyout portfolio. And that analysis showed that the leverage in our buyout portfolio was actually lower than the leverage in the Russell 2000.”
Franklin: Spend illiquidity budgets on uncapped returns, not private credit
“If we're going to use up what we think of as a sort of illiquidity budget, I'd rather be in an asset that offered the potential for Uncapped returns over time, of course, not all of them are going to achieve an extraordinarily high returns, but I didn't want t…”
Franklin: Cambridge buyout portfolio valuation marks are lower than Russell 2000
“So I can't speak for the industry as a whole, but within our buyout portfolio, the valuation marks are lower than the Russell 2000.”
Franklin: Cambridge uses open-ended fund-of-one structures for real estate
“What we've set up in a number of areas are a fund of one structure where we're still working with an expert third-party manager who But we're just the only investor in that vehicle, and the rationale for that has really just been that we're very long-term, and…”
Franklin: Stop pretending private equity funds actually have ten-year lives
“Frankly, very few private equity funds actually have a tenure life, as we all know, so let's stop pretending that's the case”
Cambridge Endowment aims to achieve net zero portfolio emissions by 2038
“So the core element of our sustainable investment approach is an ambition that we've expressed to achieve net zero greenhouse gas emissions from the portfolio by 20 38.”
Franklin: Emission-efficient companies will likely be more valuable than peers
“So when we think about our portfolio, it makes sense to us that a company that's a more efficient Consumer of emissions, shall we say, within its business activity over time as a long-term investor is likely to be more valuable than its peers who are less effi…”
Cambridge Endowment developed sustainability executive course for fund managers
“And we've actually developed an executive education course with the university that we are inviting our fund managers to attend.”
Franklin: Cambridge PE managers measuring emissions jumped from one to seven
“So in 20, 22, only one of our PE managers actually measured and reported emissions, whereas in 20, 23, there's going to be seven.”
Franklin: Cambridge does not require prospective managers to prioritize emissions initially
“We definitely don't expect a new manager to necessarily be focused on these issues, the point of investment. I think many of our managers are quite small boutique type fund managers. I think what's really important to us is that the manager is receptive to the…”
Franklin: China's Energy Transition and Healthcare Sectors Are Booming
“There are quite a number of industries where China is really booming, particularly in the whole energy transition supply chain, which is an area that we Think about a lot, partly as a business opportunity also in relation to our sustainable investment agenda. …”
Franklin: Less than 25% of UK investment professionals are women
“I think in the UK, less than 25% of investment professionals are women, and then as you get to a more senior level, it shrinks to a smaller percentage.”