The Exchanges

Q So what did you find when you first showed up at Swib coming from your background and how you took your career from there?

A What I found when I got to SWIB was I had joined their private group, and at that time they had their private group, it was the private debt that was quasi-public, I'm blanking on the term. They did a private loan program, long-term loans to Wisconsin companies, and they had the private equity program there as well. And they had one analyst, and I was supposed to serve all three to four portfolio managers. Eventually they all wanted their own analysts, and I had to pick which one I wanted to go to, which portfolio. And I chose the private equity portfolio, the venture capital and the buyouts because it had most spoken to me and it was most similar to real estate. And maybe at the time I was still thinking that eventually I'd like to maybe transfer over to the real estate program at SWIB. It was working there and beginning to learn and understand that industry. I can smile now because I think those first meetings, every time I went to a meeting and I'd come from real estate and someone would talk about carried interest, I just was like, carried interest, what is that, you know, because I was thinking of interest as an interest rate on the loan because my job had been to put the loans on the apartment complexes, and so, like, what kind of interest is carried interest, and so it makes me smile when I think about sort of how incredibly naive I was and how Much I had to learn. Fell …

AI assessment note: “What I found when I got to SWIB was I had joined their private group”

Q It's such a different construct than, as you said, a typical endowment foundation. Just to kind of calibrate, over the almost 20 years you were in the seat, or maybe it's more relevant talking about the last 10, what did the returns look like from a return and risk standpoint compared to maybe a median or even a top quartile, you know, endowment or foundation?

A Over the period of time, you know, it varied. In that first period of time when we had it, right, in 2005, equities were taking off, so we were underperforming. So then there was a question. You know, you go through the financial crisis and coming out of that, when you came out of that on the long-term basis, at one point, we were top one percentile over the ten-year period. Like, that's how well it had propelled us. And we had some great picks. For those folks who've been around long enough, one of the earliest hedge funds we put in was the Pulse and Credit Opportunity Fund. So there was substantial tailwind from that particular hedge fund in 2007. Bridgewater had some fantastic senior. So the hedge fund portfolio doing the overlay when the beta portfolio was weak offered a ton of value in that window. Now you start to move forward, and the markets take off, and now we have a tailwind of we're underweight equities, and all you really had to do was own passive exposure. You owned the market, and you had great returns. When I left, we were still a top quartile, even though we had perpetually been underweight equities relative to everyone else, and I think that was in large part built upon the fact that we had a portfolio that The bonds had done well. They actually were the best performing. The levered bonds were the best performing asset class we had, which I think surprises som…

AI assessment note: “at one point, we were top one percentile over the ten-year period.”

Q So then how did you think about the investment strategy of that capital? You have this unique lens of this tech transfer piece, but then there's also a big body capital to put to work.

A I lived through two incredibly different regimes when I was there. When I first arrived, we ran a pretty traditional portfolio. And then ultimately we went and embraced the Bridgewater concept of the all weather and overlay portfolio. But when I got there, the traditional portfolio was still, there was definitely a venture-ish, high risk taking aspect to the group because we had a portfolio that was 80% equities and 20% fixed income. And if you broke apart the fixed income, five percent of that fixed income was high yield. So we ran a portfolio that was about 85, 15. The vol on that thing, I think, was like 14% when I got there, which put us on a roller coaster that we were either the best of the best or we were down at the bottom. And the roller coaster, you get a makeup of a trustee group that at some point started to get a little nervous with that amount of volatility. And the current director who had brought me over, he was entering like year 28 of being at Wharf, so there's a lot of longevity there, as you can even see by my tenure. And Mark was going to retire, and when they were looking for his replacement, the question was, do we want to continue with this high volatility portfolio? And then we ultimately ended up with a man named Tom Weaver who joined us, who at his former employer had really Really embrace the concept of what all weather was about and diversification …

AI assessment note: “When I first arrived, we ran a pretty traditional portfolio. And then ultimately we went”

Q Was there like a core engine that was effectively indexed?

A Yeah, it absolutely was. What we did was we used futures for large mid and small cap US equities, as well as we used the futures for the EFI, and then we had emerging markets. And in emerging markets, we sometimes used active management because that was an area where you weren't sure you really wanted. And for sure, when we added frontier markets in, we had that for a while, that was all actively managed. So the decision usually was that it makes sense Could you efficiently get the exposure you wanted better by the overlay plus the passive approach, if you will? I like to say passive. It's almost that vehicle versus hiring the combined group together, you know, and in the case of Frontier, what you were getting, even if there was a derivative, you're not sure you wanted it. So in that case, in the decision, yes, it's more expensive, but there's more return potential and it's better managed in an active. So we would make those types of decisions. Private equity for sure. You can't separate the alpha from the beta. That's just one package. So you're going to have to do that together. And when we did real estate, we did really just core real estate. We did a little bit of read exposure, but for the most part, we hired core managers to do that. So we had a combination of active versus passive, and it really was asset class by asset class that we made that decision.

AI assessment note: “Yeah, it absolutely was. What we did was we used futures”

Q What were your sort of biases within the construct of sort of the type of what type of managers you liked?

A I like to have a blend. It was my preference to have some long-term, well-established. I've always enjoyed working with a relationship, as you can guess, with Bridgewater. That was one of the very first products we put in there, and we kept that pure alpha, and the all-weather, we eventually lost the training wheels, and we stopped using pieces of that. So I liked having big, high-quality managers. We had AQR in there for the longest time. But then you would like to marry small nichier strategies where you could take maybe person risk, if you will, and you would size it appropriately. So where it's a star hedge fund performer, you're not going to put a big proportion of that portfolio because there's a big risk in that particular manager, but you're probably not as worried about Bridgewater imploding on you. So you can move a little bit more capital there, but then you get the difference between are they too big and can they still generate the return? Versus the smaller manager, what you're hoping for is that they can generate the return. So we went international. The last manager that I added in before I left was based in Hong Kong. So you were looking for new markets that had the ability to capitalize on something that still existed that hadn't been over invested.

AI assessment note: “I like to have a blend. It was my preference to have some long-term, well-established.”

Q And then did you within that kind of, let's call it beta pool, even if some of it was a blend, did you just have like an active rebalancing to, you know, let's call it a third, a third, a third?

A The lovely part about using derivatives is, and this I thought was pretty neat, and we've been introduced to this by, it was the Clifton group at the time when we first started working with them, the idea of you hire your manager, and then they would look and see how much cash they have and would get you to your exposure. We had a daily look at that portfolio, and so what we did was we set the volatility of the asset class, times are waiting, and then we put a band around it, and we would every day get that, and if we exceeded the band, Within some time period, we would instruct parametric slash Clifton to rebalance. So we kept the beta piece. When I say set it and let it, you're like, we weren't trying to let it tilt. And we had bands that it went around, but that was where we wanted that. That was the exposure we said we wanted, and we weren't trying to make our gains there. We were trying to make it elsewhere. Then you can guess that there's the added complexity of the alpha portfolio and the beta portfolio aren't growing at the same rate. So there was a mechanism by which we would true up, and we would, if the active management piece exceeded one percent of the overall portfolio, we would adjust the asset allocation weight. So it sounded really complex. I'm sure once it was in place, it actually ran really smoothly. It was the process of getting it put in place that took so…

AI assessment note: “if we exceeded the band, Within some time period, we would instruct parametric slash Clifton to rebalance.”

Q So look, I know you are Wisconsin through and through. So why don't we go all the way back into your background and initial foray into investing?

A Okay. Listening to a podcast you did with someone before I got on here to just familiarize myself, the individual talked about how they always knew what they wanted to do, and I would say I was the exact opposite. I had no idea, and my whole career I would probably classify as an accident. I grew up in a really small town. It was mostly a farming town. My parents, neither of them went to college, so I didn't have a great idea of what, where I ended up today. None of that was No one to me. I had no idea about this world whatsoever. All I really knew, and I love when people have great stories about why they chose a college, I primarily chose mine because I wanted to move to a big city, and at the time, Madison seemed like a big city when you're coming from Freedom, Wisconsin, and even my selection of choosing business was because I kind of, by process of elimination, hadn't found anything else that spoke to me, and I ended up in the business program, and then when you take all of the First classes, the finance one spoke to me, so that's probably as good of an example of how I ended up where I was. I really fell in love with real estate, actually. I thought it was nice. My dad was a mason, so I kind of thought there was a nice thing to building things, and I think there is a building things about my career and what I've chosen to do. Went into real estate primarily, real estate fi…

AI assessment note: “I grew up in a really small town... Went into real estate primarily”

Q All right, Carrie, so you mentioned that you did leave. Why don't you walk me through after, what was it, 18 years at WARF, you decided to leave, and what you're doing now?

A What I decided to do now was go back to specializing. I have always been impressed and fascinated by people that just become experts in their area, and at the time, some folks have said, why wouldn't you become a CIO someplace else? And so the challenge of just becoming a CIO at a bigger place would be a challenge, don't get me wrong, but that wasn't the kind of challenge that I was looking for. I had always managed our venture capital portfolio at some level, and the hedge funds were interesting, but my passion and my love has always, it turns out, been in the private markets, whether it was the real estate pieces or the venture and the buyouts. And what we did at Wharf, we also, I co-managed our direct investment program, so we would invest directly into some of the startups. So that had always been part of where I kept my fingers. We'd done a lot of efforts to enhance the local ecosystem, starting a venture capital fund here in Madison, in partnership with the state pension fund, had supported some of the accelerators. So I had this desire and interest to, as we started out with Wisconsin through and through, To take what we knew, to take our institutional investment expertise, what we knew about venture, and just really focus on that and try to really get venture capital to the state to fund the innovation, so simply said, maybe take my WARF playbook when it came to that as…

AI assessment note: “What I decided to do now was go back to specializing.”

Q into that portfolio. I just have one question on the governance aspect of it, which is when you changed the nature of that portfolio to increase diversification, reduce the volatility, how much of that was a governance decision that the volatility might shake up the board at some point in time compared to what you thought was the right composition independent of that for the long term of the foundation?

A That's a fascinating tale to watch how we, we move from such a traditional portfolio style boxes, active management to where we went. When Tom came in, the idea was not to change the volatility. What he wanted to do, you could sell all weather two ways. You could either keep the same volatility and get a higher return or keep the same return for lower volatility. What Tom sold to the investment committee and what we were trying to achieve was Was the same level of volatility, but as long as we're going to take that much volatility, let's get higher return. We ended up delivering significantly less volatility, and the way Tom would originally model it, he hadn't given any diversification benefits when he would calculate what the volatility on the portfolio was going to be. And ultimately, they were so much more, at least in that time period we were doing it, that market volatility was crashing, if you will, but we were even significantly lower than that.

AI assessment note: “What Tom sold to the investment committee and what we were trying to achieve”

Q All weather is a concept. What was your particular implementation of that concept?

A I'll start with how I structured the team, was we had a provider of the derivatives exposure up in the Minneapolis area, and we controlled asset allocation, and we came up with what the asset allocation was, and when we used derivatives, that group would implement that piece of it, and we would monitor it, and then I took the team, and we said, what can we do here? We can focus on the alpha generation, the part where you're adding extra Because if there isn't a whole lot of value to be added by just the market exposure, let's make sure we have people that are good at helping us set the asset allocation. And our approach was, is a little bit trite to say, but it really was set it and let it. And so the idea is it's all about diversification. So we were trying to do that all, whether we wanted the equal boxes and there's a lot of art even to that. So when folks would say you're just 25, 25, 25, We had a higher weighting towards equities than, than the fixed income piece, but we had a lot more balance than most people had. And giving you that timeframe, we rode this through the 2008 crisis and it was pretty painful. And cause now you had correlations at the depth of that kind of going to one, and now you're holding a levered bond portfolio, but we stuck with it. And when we did that, we came out of it so much faster because eventually the fixed income came back, yields dropped. An…

AI assessment note: “we had a provider of the derivatives exposure... and we controlled asset allocation”

Q And how did you take the universe of, say, hedge funds and decide where you wanted to play within those confines of market exposure?

A We ended up with portfolio when I left that maybe had somewhere between 12 to 16 managers, and they're not, I don't think, an overabundance of strategies. There was a, when, when Tom ran the portfolio, I think we had every quant manager of notes that you could get. Not surprisingly, we found in 2007 that they all correlated together, so we got rid of some of that. There was a nice blend of Of quantitative as well as somewhat niche focused strategies. And a lot of people would take their very focused strategy and we would be able to get them to remove the market beta from it for us and just give us that active exposure. So we got a lot more sophisticated over time and working with managers than when we started.

AI assessment note: “we would be able to get them to remove the market beta from it for us”

Q I just want to understand the perspective. That 900 dollars, were there subsequent donations, or was it just the cash flows from the tech transfer activities that contributed to what became this significant pool of capital?

A Over time, there were smallish donations, but all the donations to the campus go to the more traditional. There is a UW Foundation. It's UW Foundation and Alumni Association now. This was primarily built off of royalties, and they were pretty prescient back in the day because they didn't pay all the money back because they knew that they needed to defend the patents. They also weren't sure the foundation. The university had been in business for 70 years or something at that point. And they hadn't ever yet had a big invention like this, so they didn't know how long it might take for the next one. So the trustees originally decided to establish an endowment to protect the intellectual property and be able to do the types of programs. Also back then, they actually managed this patent. You can still find bottles that have, this was a vitamin D, was about, people don't know what this typically means these days because you never hear of rickets, but Back in that time period, Ricketts was a big deal, and it was a vitamin D deficiency. So this patent, and what it was about was the irradiation of food to put vitamin D into it, and when they did that, that essentially eradicated Ricketts, which is, that was always part of the super fun part of working at Worf, was you were involved in these really interesting technologies, whether it got licensed to someone like a Kellogg Foods, or went …

AI assessment note: “Over time, there were smallish donations... This was primarily built off of royalties”

Q So when you go to start your own company, how did you distill all the lessons you learned from running wharf into something? It's now your own without a governance structure. What did you sort of put in place as the values that you wanted to impart in the business?

A We're still building it, so I think we're still building the values, and it starts with who I decided to choose as my partner, so I wanted to find people who shared the same values, and one of the partners was formerly with me at my Wharf team and joined me, and another one was an operational person who had run one of the startup companies, and that's how I met her. One of our values is impacting a place or having, having an impact that's more than just For us, it's that we're going to do good here. It's honesty, it's directness, it's being us, it's, I think what NVNG is, is, is who we all are, I guess. We just stuck with what we know.

AI assessment note: “We're still building the values, and it starts with who I decided to choose”

Q you think about or thought about sizing in the sense that if your beta portfolio covers the risk of the pool of capital, that alpha portfolio in theory just needs to make a cost of capital, like it could be leveraged on top of the beta portfolio. So how did you think about how big to get it and what your required rate of return was on that alpha portfolio?

A Because we tried to balance it from, it became a liquidity question as much as anything. So clearly we had established some pretty stringent, just pure cash we held aside and how much cash we held aside to support the derivatives in the margin position. And we'd learned in 2008, pretty clearly how much you needed to have. Then there was the question of, did we think there was value in the private markets? And over time we had really created a big venture bench that was starting to align with With the tech transfer activities and the startup activities, it ended up being kind of a fallout between once you had your private assets, once you had your capital set aside, that's what was left, and then it became a, do we think that there are opportunities? So for us, what we would tell people is it's sort of up to whatever that percent level was, it's zero to however comfortable you are, and if there aren't great opportunities, After 2008, for the longest time, we sat with like a lot of cash. We didn't deploy it. We had a small team at that time. So we're rebuilding the team and we just didn't have the ability. There probably was all the opportunity, but we just didn't have the ability. So at that point in time, we saw a lot more cash. And what was nice about separating that way is you're always getting the market exposure, the private assets. There wasn't anything you could do about …

AI assessment note: “it became a liquidity question as much as anything.”

Q You talked initially about bringing venture and the benefits of venture into Wisconsin, so I'm curious what the fund will be. So are you looking at investments in Wisconsin, or is there some way that you're working with the full ecosystem of venture with that as a benefit?

A What we Recognized and thought was important was that what you're doing is you're focusing on getting professional investment capital to the state's entrepreneurs, to the best ideas, and that it isn't so much about worrying about whether we have a well-developed local ecosystem, though that is definitely part of it. It's looking out at the industry and seeing that there's a lot of interest in Midwest technology. And there's a lot more venture groups targeting it, be they right here in the Midwest, in our state, or even coastal firms that have developed Midwest offices or some that later stage will invest with a trusted local partner. So for us, someone recently had said venture is a social network. It's about networks and connections. And when you frame it up that way, what we were lacking in our state was sufficient connections, density, if you will. So what we can represent is we can support the local venture groups that will clearly have an interest in supporting the local entrepreneurs, but we can also represent a point of contact for other groups that may want to enter this ecosystem and see what's available here because the University of Wisconsin-Madison and the state universities, there's a billion dollar research spending every year, and there's just a fraction of venture capital that's dedicated to this. So the Midwest writ large, Really doesn't have as much venture f…

AI assessment note: “we can support the local venture groups... but we can also represent a point of contact”

Q How have you thought about the capital base for the fund?

A The way we looked at the capital base there, I mentioned earlier, there was an accelerator group that we had helped. We did an early sponsorship with, and we became really good partners because what they were trying to do was get more technology off campus somewhat. You start to have to change culture. And as part of what their product offering was, they had had a program where they brought corporate innovation groups together, and we would get invited to go to those dinners and those meetings. And I would find myself sitting next to a corporate innovation officer from someone from One of Wisconsin's big, you know, Fortune, 500 companies, and you'd start conversations around what they were doing and try to understand it, and then this whole new world gets opened up, and you realize back in the day, a lot of times someone would have like a GE or somebody in their buyout fund and say, this is great because now we can have access, but it didn't really work that well because the investment was located in the pension, which really didn't know how to get to the rest of the organization, and so it sounded good, but I don't know how in practice well it really ever worked out. Well, now you had innovation teams, and this was real, and this was a thing, and this was my first introduction to it. I know on the coast it probably had existed a decade earlier, but it had now gotten here, and …

AI assessment note: “The way we looked at the capital base there”