The Exchanges

Q What was the most influential part of your academic career on your window into how you think today?

A When people see my academic background, law school, philosophy graduate school, econ as an undergrad, people assume that, well, law school must be relevant to an investment career, and an econ, surely that's relevant, and they almost brush the philosophy degree under the rug as a kind of slightly embarrassing two years of, of jaunting through the world of ideas rather than anything practical, but actually that was the most helpful. Because especially the type of philosophy that I studied, which was contemporary analytical philosophy, and I studied at All Souls College at Oxford, and I had just the most rigorous experience imaginable. What you're doing is you're questioning basic assumptions, and you're doing it in a, not necessarily a data-driven way, but a rigorous logical way, coming to conclusions that you share with very smart peers and colleagues, And get them to pressure test them for you. That's great training for investment because the quickest way to lose money is to go into a situation, being sure that you're right. And if you learn one thing as a philosophy student is that you're probably not right.

AI assessment note: “philosophy degree... actually that was the most helpful. Because especially the type of philosophy”

Q We'll certainly get into specifically what you're doing with Constellation. There's been this shift in these asset owners sort of shifting the way they invest in the markets. So we hear about it with the Canadian plans and otherwise. What have you seen as these kind of trends in the seats you've had leading into this about in particular those pools of capital?

A I'd like to start with three trends that have popped out for me in the last 10 years. The first 10 years ago, we weren't talking about asset owners. People talked about pensions. Sovereign wealth funds was becoming a term of art and started to be picked up in the press around a decade ago. Whether it's the financial crisis or other awakenings within that community of state-affiliated, pension-affiliated asset allocators, a number of institutions were born around 2008, 2009, 2010 that brought together sovereigns and pensions in new ways. You had the International Forum for Sovereign Wealth Funds, the Institutional Investor Roundtable, the Fiduciary investor round table for cooperation and partnership. I will not bore you with the acronyms for 10 more of these, but the amazing thing is that there's about, let's say a hundred trillion of institutional AUM in the world, which to help people figure out what that means, I like to say, look, world gross product is 80 trillion, 60 trillion, depending on who you ask and how you calculate it. So you're talking about More than one year of world gross product saved by institutions. And if you look at the concentration of that capital, you've got 20 or 30 groups that have the ability to move mountains, to move tens of trillions of dollars in a concerted way. And those groups were getting together. So I'll come back to this when we talk abou…

AI assessment note: “I'd like to start with three trends that have popped out for me”

Q Yeah. So there's certainly an elegance to the flow of value creation and that economic structure to those asset owners. Though ultimately, you and your team are individuals working for these asset owners, and so how do you get aligned in your incentives as individuals, as the people, you know, doing these deals and creating these economics?

A Has to work. And we started with a white blank sheet of paper on that point, and because we had the benefit of three parties around the table and a year to build this right, It was crucial to us that we have the right long-term alignment. You can't forget about management. Our principles there were, it should be very long-term alignment. So 10 years plus. It should still be a situation in which the vast majority of the enterprise value created is owned by the asset owners that set us up. So we kind of started from the opposite end of a typical GP. So on a typical GP set up, the founder owns a hundred percent. And maybe they get diluted later by selling a piece to a large asset owner. We started with asset owners on a hundred percent and management can vest in if certain milestones are reached over a very long period of time to something that will be meaningful to them and keep them part of the fold. And I think that's up and down consistent with our philosophy.

AI assessment note: “management can vest in if certain milestones are reached over a very long period”

Q Oh, that's great. You mentioned an investment pet peeve. What's your biggest overall pet peeve?

A I hate the kind of tribalism that leads to so naturally and quickly for people to a me versus you mentality. We see it in politics. We see it in global politics with bridges between countries metaphorically being burned down these days and going to your questions about positive, some game versus zero, some game. It just frustrates me that for whatever reason, humans seemed hardwired to create clans. And, and define success in a narrow way. And this is the problem of our generation is how to think globally. And it's a pet peeve. And it, it feeds into investment pet peeves too, because people tend to think, well, I want to pick the best stock, or I want to pick the best deal as against thinking, who should I partner with? Because the latter question implies that you're trusting and relying on somebody else in a way that People are often not comfortable.

AI assessment note: “I hate the kind of tribalism that leads to so naturally and quickly for people”

Q How does the decision making process work on the individual investments for any of these opportunities?

A Well, if it's a seed, it's in Woffers discretion to pull the trigger. And if it's something else, then it goes to our board. And I mentioned that our board is the three people that speak collectively for our balance sheet. And this is part of the challenge of setting up something like this is, is the regulatory challenges of managing third party capital, the fiduciary obligations that come with that. That's why it took us a year. And that's why we benefited so much from what I started by saying, you know, Wafra is unusual. We're a GP and an LP. So we're able to have conversations with other LPs, other asset owners on a peer to peer basis. But we had the infrastructure of a GP as a SEC registered investment advisor to manage capital. And we'll continue to innovate structurally so that we can keep pace with With the set of opportunities that's coming out of this ecosystem that we've built.

AI assessment note: “if it's a seed, it's in Woffers discretion... if it's something else, then it goes to our board”

Q You mentioned at the onset this notion of this activity being positive sum, and that is something you don't hear that much about. It's a nice ideal, but in a lot of capital markets and a lot of these pools of capital, individuals, incentives, people are compared to others. How have you tried to engender that positive sum game across these constituents?

A I think the easiest way to do it, I mean, look, one of my biggest pet peeves is that people tend to look at financial markets as either zero sum or even negative sum. And I think that comes from the fact that we were raised to view public markets as the archetype of how things are done, and I win, you lose, you win, I lose. And that is the case. If I'm writing an option and you're on the other side, you know, one of us is going to do well. The other's not in private markets. First and foremost, things are very different. This is about value creation fundamentally. And I think that's never been more true than today, given where entry multiples typically are, is that you have to have a value creation story with respect to GPs that we back and who are essentially the portfolio companies of constellation. We have to have a value creation story around them. And with respect to the asset owners that partner with us and have been the owners of this new entity, we have to have a, a value creation story for them, which may go beyond what we do specifically within constellation where we're helping them in other source, other deal opportunities and improve their ability to execute in a range of markets across the world. So What I typically do is instead of attacking that bias that people have in some sort of philosophical way is we'll just give a real world opportunity. One of our manager…

AI assessment note: “What I typically do is instead of attacking that bias... give a real world opportunity.”

Q Why don't we start with where the seeds of your interest in this work began?

A That's a challenging question because you couldn't imagine a childhood that was further from my current pursuits than the one that I actually had. So I was in school until I was 26. I'm the child of, of two academics. I didn't even know what business was. I remember asking my dad growing up, so who live in all these nice houses? And he really didn't know either. When both of your parents do the same thing, whether they're Doctors or professional athletes. I think you just assume that that's what all adults do, and I was an only child until I was nine. My folks, as I said, were both academics and very academic academics, if you know what I mean, a history professor and a developmental psychologist. Their friends were academics. Their kids were my friends, and so I was in this kind of guild that was focused on the life of the mind, not the life of commerce, and it took me through my Early twenties to begin to realize that as much as that was the only life that I'd known, it wasn't really the life that I wanted. I think the commonality between that upbringing and the world of investing is that both of them are lenses on the whole world. So if you're a philosopher, you get to think about everything through the lens of philosophy. And if you're an investor, you get to think about everything through markets. And while even at 26, 28, when I was at McKinsey, 29, when I was at Lehman g…

AI assessment note: “I was looking for the same kind of thrill that I had in the academic world”

Q but a lot of what we hear about is this move to get closer to the underlying security. So whether it's co-investments with private equity sponsors, even lead investments. So as you're forming a new organization, how did you think about where to start on that investment activity if you're building sort of a new team? And why not go all the way to the end and do direct deals?

A First of all, at Wafra, we do sometimes do direct deals, but I think any responsible pension CIO or CEO will tell you if they have the governance to do what the Canadians have done or the Singaporeans have done and really build what you might call a non-for-profit GP in the context of a state plan. Alaska doesn't have that capability. Rail pen doesn't have that capability. Sweden and KIA just aren't structurally built to do that. And so in some sense, you know, if you want to say that the Canadian model is the most idealistic, I think it is. Our model is a step in that direction, but one in which we recognize that as asset owners, we're going to continue to need to work with the most talented GPs. We want better alignment with them. So that we're getting better information, access to deal flow. Yes, there's some complexity around creating that alignment, but in the end, we're trying to build a throwback relationship to a simpler era in which GPs and LPs trusted each other in a different way. I was listening to a recent version of your podcast, and there was a mention of a company that helps LPs validate the fee and carry that they're paying to GPs. I think to me, that was emblematic of a Breakdown in trust, which we've seen since the financial crisis, and we wanted to return to simpler way of working together. So to answer your question, I think the core part of what we do as s…

AI assessment note: “we do sometimes do direct deals, but I think any responsible pension CIO or CEO”

Q What have been the biggest challenge that you faced either in the formation of this or the implementation thus far?

A Well, I talked about that, that year that we spent really getting together in person weekly, which may not sound like much, but you're talking about three continents, and Juneau is not an easy place to get to, nor is Kuwait City. London and New York are a bit easier. That was brutally difficult. I joke that I'm only 25 years old, and I just aged by two decades over the course of that time. Wasn't difficult because Anybody didn't want it to happen. It was just difficult to do. It was difficult to find a solution that could work for the regulatory tax and other jurisdictional considerations, the bespoke bylaws that this group has or that group has. Fortunately, we had really involved people, and I think it's starting a partnership like this is, you know, going back to where we started our conversation with my academic background, you know, it's a little bit like Writing a PhD thesis. If you're not super into it when you get started, you're probably not going to finish. And we were super into it. We wanted to do this to, to be a kind of standard bearer for a new type of institution that was owned by, by capital. I'm not going to say capitalists of the world unite. You have nothing to lose but your chains, but there was a real desire to, to do something innovative that would benefit pensions and sovereigns who are In, frankly, tragic circumstances in terms of shortfalls. This is an…

AI assessment note: “It was difficult to find a solution that could work for the regulatory tax”

Q Was it tricky at all with any of those other partners in Constellation that wanted their own say in the types of managers that you would back?

A So there are certainly some sovereigns and pensions for whom this sort of partnership would not work. If you have the luxury as a GIC, a Tomasic and Omers to effectively operate as a large non-for-profit GP with well-compensated direct investors, you may decide you don't need to ask the question, who should I partner with? You should ask the question, what should I buy? And then go buy it. In our case, Most pensions and sovereigns don't have that luxury for all sorts of reasons. You know, the highest paid person in Wyoming is not the guy that runs the twenty billion dollar state mineral wealth fund. It's the college football coach. So there are compensation issues globally. There's talent retention. These entities are not generally located in financial capitals. So there are reasons to pursue this kind of Joint effort, even if that means giving up discretion to a group that's based in New York that can manage the capital collectively. What I will say, though, is that 23 months ago when we set out to do Constellation, we thought we were getting into the seeding business jointly, and we have done that, but taking a step back two years later, there have been a few surprises that speak to your question. First, we've noticed that Slightly more mature GPs that might have two or three billion in AUM are still interested in this value proposition because if they can get a catalytic inv…

AI assessment note: “even if that means giving up discretion to a group that's based in New York”

Q When you were coming into Wafra, what were you coming in to do initially?

A I'm so grateful that Wafra took the chance to hire me when it was absolutely unclear what specific value I was going to add. I think folks thought this is somebody we'd like to work with and let's see what happens, which incidentally I think is the way a lot of great professional relationships begin rather than filling a particular box. I didn't come in with an idea of Constellation, nor was Constellation my idea alone, and I want to talk about the collective effort that went into putting it together both with the Wafra team that had already for a decade been doing GP stakes and GP seeding, which is something that people should understand in order to understand Constellation, and then the work that our partner asset owners like Alaska and Railpen and Sweden and The Kuwait Investment Authority and others contributed.

AI assessment note: “it was absolutely unclear what specific value I was going to add”

Q management firms moving to Ridgeline gain a decided advantage. That's why customers call it miraculous, game-changing, and an awakening. If that's not how you would describe your investment management tech, request a demo at ridgeline.ai. And now, back to the show. And so on a day to day basis, is it then the WAFRA team that's doing the meetings, conducting the due diligence, raising priorities for the decision making unit?

A Yes. So you can think of us as the management group. Sometimes people ask me, why is this the only example of a sovereign to sovereign pension to pension collaboration that has discretionary capital? And we're at a little over a billion of discretionary capital at this stage. Why is it so hard? Other people seem to want to do it. And I think you either put the partnership together and then go find a GP, which can be challenging because investment committees don't want to approve an idea until you have the team or one group can contribute a team to the partnership, which is also challenging because if it's going well as an investment strategy, uh, Why should one sovereign or pension want to give it up? And so I think the hardest conversation that we had along the way was to talk to Kuwait about, look, this is an investment strategy that's going very well, but think about it. If you're a new GP and you're interested in taking a hundred million dollars to be backed by Kuwait, how much more exciting would it be for you to be backed by A North American sovereign, a UK pension, a Scandinavian pension, two large Kuwaiti institutions, and then you've got three continents. And by the way, that proposition is growing and they have a total of a trillion of AUM. That's a different conversation. And it's not one that our presumptive competition in the seating space can have with you. So the…

AI assessment note: “Sometimes people ask me, why is this the only example”

Q Yeah. To get there, you mentioned structure a few times. So why don't we start with how did you structure and staff constellation?

A The first thing people talk about seeding. Obviously I know you're very familiar with hedge fund seeding and that was where these things began. I've been surprised over the years that asset owners, big pensions and sovereigns, that is, haven't done more to not just seed managers, but to create new ones that they own a hundred percent. Arguably, that's what Omers and GIC and Tomasic and others have done, but with a one-to-one relationship between the GP and the pool of capital. There's been press out of CalPERS in the last couple of years about creating an internal GP. If you can do it, and not everybody has the governance to get it done, what a great way to become aligned. You give the GP the flexibility to operate commercially, outside the, the reach of the politics of whatever government is leading the particular pension or sovereign, but you also align them with the goals of the end constituents. So when we set up Constellation, our first challenge was to set it up in a way that had those benefits as a new GP Constellation should be owned in equal parts by Alaska, Railpen, and PIFIS in Kuwait. And it's as simple as that. It's owned 33% by each group. We then structured it in such a way that other investors, such as the Swedish and the Kuwait Investment Authority, who, who by regulation generally don't Own an operating company could come in in parallel, and with that structur…

AI assessment note: “Constellation should be owned in equal parts by Alaska, Railpen, and PIFIS in Kuwait.”

Q of these investments, and today you could go and present to a new manager and say, you know, we have effectively permanent capital. There's no need to sell our stake down the road. At some point in time, it's likely that one of the partnerships that you back will fail. I mean, in theory, all of them fail, but many haven't. How have you thought about what the message is?

A Asset owner base has a generational timeframe. Most of them are cashflow positive through 20, 60, 20, 70. If I had to list of kind of fourth mega trend back when we were starting our conversation, I would have said it's a move to longer duration capital that matches longer duration, underlying opportunities. Blackstone's been working at this. You see new structures all the time. It is hard for conventional GPs to operate in that way because they're looking for a crystallization of carry after five to 10 years, depending on the asset class. In our case, the opposite is true. It would be hard for us to operate if our plan was to sell in five to seven years, because if you think about GPs, the kinds of groups that we back, they're either family owned businesses or closely held partnerships. Not to knock Goldman or Morgan Stanley or JP Morgan, but if you're a family owned business, who do you want as a partner? Somebody that's going to come in for five or seven years and force you to restructure? Maybe sometimes if, especially if you're looking for the best price, but what we find is a lot of folks are looking for a generational timeframe partner. So what that means is that in terms of the structure of our capital, it has to be quasi permanent. Yes, there needs to be a way for the investors to eventually pull money out or what's the point. But on the flip side, it can't be tied to …

AI assessment note: “Asset owner base has a generational timeframe.”

Q I'm still curious about the structure of your team, and you mentioned that the management team can kind of earn their way into ownership of Constellation. How about the people below the management team, and how do you compensate someone in a competitive world for talent?

A I'm proud to say that because we had really smart people around the table as we were designing the governance, that we built something that Has a lot of flexibility in it. So every year the board gets to decide who's contributed, and we also have flexibility, which we plan to exercise to build advisory councils and to bring in industry leadership from around the world to support what we're doing. We have a kind of convening function within Constellation, so that, that extends to more junior professionals that we want to ensure Can grow with this business. And it has to do with ensuring that we're working closely with the asset owners up and down their mastheads and with others who can support us. And because we were born out of institutions like the International Forum of Sovereign Wealth Funds and the double IR, et cetera, there's just a natural community of people that we can draw on and where appropriate compensate to help us build something.

AI assessment note: “every year the board gets to decide who's contributed”