The Exchanges

Q Were there particular sections of the book that when it went out into the world and people started reflecting back that really resonated for others?

A There were some. Now, to be fair, the book came out in 2009, and it was not a particular time when investors looked particularly smart, so my timing was not good. Certainly the incrementalism, I think, was something that resonated a little bit. The idea that usually if there's one problem, there's multiple, so you really have to dig and not dismiss a little problem and think it'll go away. And then a third one that I think resonated a little bit with people was the idea that to create a successful and happy workforce, you actually need to be good at your job, and then the happiness follows, or to be successful in whatever endeavor you're going after, rather than let's make everybody happy, and then they'll be good at what they're doing after.

AI assessment note: “Certainly the incrementalism, I think, was something that resonated a little bit.”

Q And what did you find some of the frustrations working at a public pension?

A A couple of them were being under-resourced, so there were basically three of us that were managing eight billion dollars with consultants, but we were doing everything. I think we were hitting the broad side of the barn, but that's about all we could do. So that was one, and then the second was, at least in Rhode Island, the lack of trust in the government. So there was a real suspicion about What we as investors were doing on behalf of the pension. So there was a little bit of guilty until proven innocent, which is impossible to do. So there was a lot of concern that we were not managing the plan well. And at the same time, there had also been some pension reform. So people were already less than thrilled.

AI assessment note: “A couple of them were being under-resourced... and then the second was... lack of trust”

Q So a lot of those strategies, there is a package with a blend of, let's say, idiosyncratic positions and then some type of market beta. How do you measure and then manage the risks so that you can just deliver that portable alpha piece when you will have some residual risks in a portfolio like that?

A So we're not maniacal about taking out all the residual risks. Certainly if you think about macro in general, that usually is directional. What we're looking for is something that's not consistently the same direction. So if it's directional, today I'm long rates and tomorrow I'm short rates, and I'm good at it, that's fine. What we don't do is try to take out the betas underneath. Partly we haven't done it because operationally it's difficult, and then partly because if a manager tells us at the end of the month or even the end of the week that they're along something, by the time we put an offsetting position on, they might be shorted, so it's too hard to try and offset it. What we do look, though, is over time, does anybody have a bias? And if they tend to have a beta bias, then they're probably a candidate to leave our portfolio.

AI assessment note: “What we don't do is try to take out the betas underneath.”

Q How do you think about leveraging your size, so the size of the pool at SWIB, to effectuate outcomes?

A One of the ways that we try to leverage both our assets and again, the delegated authority is by going into managers relatively early on. We have on occasion done day one, but we will often do year one investments, and we are willing to work with managers on what they're looking to achieve from a business perspective and what we are looking for as well. So let me give you a few examples. One, during late 2020 and early 20 21, it was hard for some managers, particularly younger managers, to raise money on the P.E. side because everybody was scared about what was going on in the world. So we had some managers where we had made an initial allocation and we went back to them and said, OK, you're having trouble getting to your final close. What if we give you another twenty five million that'll get you Close enough. And in exchange for us giving you another 25,000,001, you're going to close the fund and stop fundraising and start making investments. And two, we want better terms as a result of this. So that's one way that we've done it. Another thing that we've done is we partnered with one of our multi pad hedge funds. They basically spun out their technology and created a separately managed account platform. So us and UTIMCO together basically anchored this new manager, and as a result of that, we were able to both help them to design the systems and the reporting and all of that,…

AI assessment note: “One of the ways that we try to leverage both our assets and again”

Q So what'd you find when you came out of business school and went to do it?

A It was a lot of fun. I was at J.P. Morgan Asset Management on the buy side, and it was a great privilege because you got to meet with CEOs of the largest companies and was relatively young and relatively uninformed and got to ask them questions and think about the business challenges that they were facing. And at the same time, you didn't have to convince them to do anything. You could talk to them, figure out if you thought they were going to solve their business challenge, and if they weren't, you could just Not participate in the stock, and if they were, then you could own the stock and hopefully go along for the ride with them.

AI assessment note: “It was a lot of fun. I was at J.P. Morgan Asset Management”

Q How do you think about what to do internally versus externally?

A So our default position is to do things internally, but then there are three reasons that lead us to do things externally, and they're pretty reasonable, such that the portfolio ends up being about half internal, half external. So the three reasons that we would do something externally are, one, we just don't feel like we can do it from Madison, Wisconsin, so think emerging markets. All of our emerging markets we do externally. Second, we're looking for some diversification from what our internal teams are doing, because the internal team may be great, but they're going to have a specific style, and we probably want to have some diversity of styles. So for instance, we have an internal team doing high yield. We also have an external manager that just does things a little bit differently. And then the third reason is just to be able to partner with the greatest investors in the world. So Well, I think Madison, Wisconsin's lovely. Not everybody wants to live there, so we don't want to preclude ourselves from accessing the best talent in the world.

AI assessment note: “our default position is to do things internally, but then there are three reasons”

Q How are you thinking about the opportunities in private credit?

A It's a very interesting space. We're active, and I would say a little bit cautious. So on the positive side, if you look at the size of the publicly traded and then bank market, it does seem like private debt is not that huge. So you could say there's plenty of runway to go. On the other side, the private debt markets haven't really been around during a proper distress cycle. Because they really weren't of any size in 2008, which was the last time you had a real cycle. And even if you look at there was a mini cycle in the energy markets in 2014, and there were a lot of distressed folks that didn't do so well in that period. So we're somewhat cautious on that front. Anybody that we're working with on the private debt side, we are looking for people that have some workout and distressed experience. I'm a little cautious around that, though, because everybody says they have it, and if it's been 10 years or 15 years, we'll see who's really got it. We're doing more in MEZ, more in distressed, and a lot of the distressed people that we're working with, we're giving them trigger funds, so that we'll give you a certain amount of money today, and if there's a real proper distress cycle, we'll give you more, but we don't want to pay fees if a proper distress cycle doesn't come around. And then interestingly, in our hedge fund book where we're doing specialty finance, some of that also lo…

AI assessment note: “We're active, and I would say a little bit cautious.”

Q Let's dive into each of those and the concept of the SWIB edge for these external managers. What is it that you do to try to become this preferred partner?

A So it all hangs together. Most of the people that work for me on at least the senior level have been there 10 plus years, so we have a lot of longevity, so we have really deep histories with many of the managers that we're working with. That's one place that we do it. Second place is, again, because of this delegated authority, we can be very responsive. When we're shown, for instance, a co-investment, we can respond within a couple weeks. Whereas, I'll contrast that with Rhode Island, we did not have delegated authority. So all the decisions were made by what we call the State Investment Commission. So when I was there, we would talk to managers, and they would say, do you want co-invest? And we would say, yes, we'd love to have co-invest, but I can tell you right now, we will not be able to respond in time. So we'd love to see any package you have around the co-investments, because going back to my earlier comments about details, It's really helpful to see how people actually do their investing, but we're not going to be able to respond in time. And I think a lot of the managers really appreciated that because some of them came back to us and said, it was great that you said that because all the other people said they would do it and they couldn't respond in time either. That is not true in Wisconsin. In Wisconsin, we really can respond in time. Again, because it's a very sho…

AI assessment note: “because of this delegated authority, we can be very responsive.”

Q How do you think about private equity in the markets today when we're seeing opportunities?

A What we're seeing is the mega end of the market. It's harder to get liquidity. We had a period of frothiness there in 2021 where it was easy to go public. Everything was moving really quickly. And then we hit 2022 and we had a denominator effect because all of our portfolios went down. Nobody talks about this, but I think we also had a numerator effect in that everybody GPs and LPs, we were all so excited in 2021 that everybody was raising bigger funds. We were making bigger commitments. It was just getting a little overdone. So now what we're doing is we're dealing with that. So now there's a bit of an overhang. The 2021 liquidity was unusual. And the 2023, 20 24 liquidity is probably less than normal, but not Vastly abnormal. It just feels vastly abnormal because 21 was so amazing. So in that environment, it's particularly more difficult for larger managers because you have fewer ways to exit. You really can only exit through IPO or through publicly traded company making a very, very large acquisition. Those don't happen every day. Whereas in the lower mid market, where we'd be thrilled with a billion dollar exit or even less, There, we've got three avenues to exit. Some of them are big enough to IPO, but we're not dependent on the IPO markets. The other two ways that we can exit is one, to a bigger PE shop, so another sponsor, and a lot of these companies are really quite ma…

AI assessment note: “Whereas in the lower mid market... There, we've got three avenues to exit.”

Q As you look at over the next couple of years, what are some of the areas of innovation that you're leaning into to continue to develop the investment program?

A So we talked about our separately managed account platform. The other area that we're spending a lot of time, and I think we'll be spending more time going forward, is on the privates in co-investment. Both co-investment as it is, which is an area that we've been good at, but really have ramped it probably over the last seven, eight years, and we think that there's more opportunity there. And then there's a bunch of ancillary things that go along with that that I think are going to develop, which is I used to call them unnatural liquidity from private equity. So if you think about private equity firms, we're seeing a lot of selling off partial positions or selling off a majority but holding a stub position. We're seeing continuation vehicles, and we're seeing NAV loans. All of this is in an effort to get more liquidity, which is a bit of a collective action problem because we don't need the liquidity. We're actually growing our privates allocation at the moment, and we're happy to Do that. So when people are giving us a natural liquidity, we're not very excited about it. But I had an aha moment recently where I think these are going to become more and more parts of the universe going forward. They're not going away. So we need to get better at figuring out how to assess a continuation vehicle, how to help do our part as part of the industry to figure out what are we going to do…

AI assessment note: “The other area that we're spending a lot of time... is on the privates in co-investment.”

Q You mentioned wanting to partner with best in class managers. How do you define what best in class means?

A Well, it's always a challenge to figure it out, and it's always a moving target. It's a combination of a lot of things. It's a mosaic. You talk to them about how they're thinking about markets and how they're thinking about tackling different opportunities and how they think they can outperform, seeing if it makes sense, both in terms of what you know about the market structure and the competition. The one advantage that we have is we don't need to be the smartest people in the room, but because we can look at So many different strategies that gives us an ability to figure out which ones we think are better. Making a relative judgment is a little bit easier than making an absolute judgment. So I would say that's the primary place where we start. And then you look at the numbers to see, does that support what they're saying? So if somebody says they're really risk controlled, and then you look at their numbers and they have a 40% drawdown, something doesn't quite compute. Or if somebody says, They're really conscious about rates, and then you look at the regression against rate moves, and it doesn't quite foot, then you know there's something a little bit off as well.

AI assessment note: “You talk to them about how they're thinking... And then you look at the numbers”

Q So oftentimes, or at least by reputation, when a manager leaves one of the platforms, it's because of the drawdown and certainly have some of the risk rules work. Have you found doing your diligence effectively so that you can get comfort that they'll be able to produce in the future?

A So it's a combination of reference checks. We're talking to as many people as we can to determine whether they really left voluntarily or not. About eight of the 10 that we started with actually have been running money for a little while on their own, so we can look at their track records. And then the other thing that we really like about the managed account platform is that we can watch them, so we can see every day what they're doing. And I think that's been enormously helpful Both for the managers, because we can take a slightly longer timeframe than maybe some of the multipads can. So for instance, we had a manager recently who there was a situation that they wanted to go above their risk limit. It was something that was going to IPO. So there was a relatively short window on it, though not IPOs can go wrong, but it had a relatively short window on it, but it was definitely above their risk limit. So they could come to us and say, well, Here's the situation. Do you agree? And we agreed, and they held it for about a week, and we made a lot of money off of it. It's also been, I think, enormously helpful for our team to watch what the managers are actually doing, because it's one thing, again, to see the pretty pages in the flipbook that say, this is our philosophy, this is our process, but then when you watch what they do every day, it gives you a much better feel for who th…

AI assessment note: “it's a combination of reference checks. We're talking to as many people as we can”

Q As you started to look at funds, what are the things that you might have thought you would have known from being on the direct side that you had to learn analyzing funds?

A I learned a lot about different strategies and different ways of thinking about investing. So let me unpack that a little bit. When I was at JP Morgan, there was a very specific way that we analyze companies. And like anybody, we had a very specific process. So what I had to learn in going to the fund side was there are multiple ways to analyze companies, and there are multiple ways to think about how you're investing. So actually, in some ways, I wish I had done that and then gone back to the direct side because I would have been better at the direct side after doing that. But it was just interesting to learn that there are different ways to think through time horizons, to think through company analysis, to think through event management, catalyst management, those things.

AI assessment note: “what I had to learn in going to the fund side was there are multiple ways”

Q How do you think about partnering with these managers to help the rest of your portfolio? So whether it's the areas that they find interesting, or leveraging the skills of your internal team with your assessments of the external managers?

A So we do a number of things. Certainly we keep the dialogue open with our internal teams. If managers come to visit us, we make the meetings available to our internal teams and they will come join us. And it's actually helpful on both sides. So it's helpful for them to hear what other investors are doing. And it's also helpful for us to, after the fact, talk to our internal teams and ask them what they thought about the thesis. The thought process behind people's views, because I said earlier that I used to be able to read back the bear case to somebody. I'm removed at this point, so I'm not as good at that. Bringing our internal team in is often very helpful on that front.

AI assessment note: “we make the meetings available to our internal teams and they will come join us”