The Exchanges

Q From where you were coming, derivatives, you're probably talking about public markets. How similar or different was it when you were looking at private market investments?

A Well, what was funny was my last job at the bank was actually covering financial sponsors in the LBO go-go heyday when we were levering deals beyond all possible limits, and so I would see the deals from the bank side when we were offering credit on the deals, and then we were hedging the deals, and so I, I knew what the deals were priced. I spent a lot of time as the deal person, And then it was very interesting to sit across from that manager as a potential investor and hear the story of why they bought that company. So as we would listen to the managers tell their stories and review their performance on the fund, gross of fees and net of fees, the fee discovery was huge, right? Because everybody would ask me, well, what are we paying for that derivative? I said, you're not There is no fee for the derivative. We're going to buy it at this, and the dealer's going to turn around and sell it. You know, we're buying it at X, they're selling it at Y, it's called bid-ask, there's not a fee. And that was a big learning, right? And then when I would see what the fees were in the private side, and the gross to net spread, that was extremely eye-opening. And the fact that these things were marked quarterly, and I said, like, what about daily and daily margin? It was very different, very different.

AI assessment note: “when I would see what the fees were in the private side... It was very different”

Q What was the structure of the organization at Kresge when you joined?

A It's about the same size. We've grown a little bit in headcount, but when I went for the position, we spent a lot of time talking about my background and the fact that they were hiring me specifically for my experience in derivatives. However, the team was structured as generalists from the top to the bottom, and at the time, I guess, Rob was the CIO, and there were three of us at the senior level, and we had a couple analysts who worked for us, and everybody worked on everything. We had to all do manager diligence. We had to I'll do asset allocation. We were jacks of all trades. So although my background was specific because we do a lot of trading in the portfolio and hedging and overlays, they also expected me to learn how to be a manager, sourcing and diligencing. So I said, okay, that sounds great. I'd love to learn that. So I looked at it as a gift. And then I said, who's going to work with me on the trading side? So I taught them a lot about, here's what the street is doing when you're facing off against them and on a trade. And then they taught me a lot about, Here's the questions you need to ask when a manager comes. They show you a pitch book. These are the qualities that we look for, and I've learned a ton from my colleagues who come from the ENF world and have been doing this a lot longer than myself.

AI assessment note: “the team was structured as generalists from the top to the bottom”

Q How is the team and the structure of the team similar or different over your decade?

A It has evolved, for sure, and I think for the positive, we on the senior team have learned, and I appreciate the fact that we've got a good relationship with the junior team, and they have given us their feedback as to what could make it better. When I started, I think we had two analysts, and the idea was to build on the program similar to the way the investment banks do it, to hire talent out of undergrad, train and teach them, give them support to get their CFA, and And help them move on to the next stage of their career. We're private foundation. We're generally not growing that fast in assets, which also means we're not growing that fast in headcount. So if you're a bright junior talent who's growing, there's just not that many places to move up, right? Because until somebody retires or leaves or moves on, there's not a clear growth trajectory. There's not as much turnover with small numbers. So the idea was give junior talent a really good introduction to the business, a really good training grounds, sit across the table from some of the smartest investors in the world, inform yourself about what you think your skill set and your passion is, and then go back to business school, go back to law school, go back to grad school, use what you learned at Kresge as a generalist, and go move on. And the idea was at maturity, you're at We would have one analyst coming in every year…

AI assessment note: “When I started, I think we had two analysts, and the idea was”

Q And at your size, so call it four billion, how do you think about fees in some of the more expensive areas?

A We did an analysis two years ago, I want to say. Where our hedge fund analyst was tasked with pull all the financial documents of every one of our hedge funds and figure out what fees we paid. And we're going to go after the people that we paid the highest fees to. And then it turned out that the person we paid the highest fees to was also our highest net return. They said, well, that was an interesting exercise, wasn't it? Um, armed with that information, we could at least have a conversation with the manager to say, listen, Explain to me where all these fees are going, and is this the right amount? And so having the knowledge is helpful to have the conversation, and that's where it's got to start. We're not big enough to drive a fee discussion, but we do engage in conversation, and we have seen some more flexibility, right? Managers are offering a couple different fee structures. You can do the one or 30, right? We've got one that's a zero in 30 that's kind of unique. We've got ones that are over a benchmark versus over an absolute, right? And so the fact that managers, while they might not always be reducing fees, they have seemed to offer some different alternatives to allow investors to choose the fee structure that we think philosophically fits best with us. On the private side, I think a lot of people have been using co-investments to Work down the gross to net spread. I…

AI assessment note: “We're not big enough to drive a fee discussion, but we do engage in conversation”

Q There's a non-institutional element to what he's doing, which is both endearing and in some instances in an institution of risk. How are you thinking about underwriting that and then how you might go about pulling the trigger?

A That's a great question. So as an individual, like you look at his education, his career background, he's clearly grown up in institutional firms, and he knows what it means to be institutional. I want him to develop into that at Still Lake. That takes a lot of investment. You know what it takes to invest in back office and all the systems and support that you'll need. That's going to be critical, I think, to gain institutional money, and it's something that I'm watching. I haven't had that specific conversation with him. Like, all right, Bruce, If you really want institutional checks, let's go through this kind of a list. Because that I view as a very easy to solve problem. No institution is going to invest if they don't believe in the person and the process and the portfolio. So once we get that right, then we can say, okay, are we going to invest in all the back office that supports this? That's the much easier one to solve than the person. And I'm a big fan of Bruce. And so continuing to stay in touch with them and Watch how he's investing the portfolio right now is where I'm doing the diligence right now. And then if we move forward on an investment, we would have to have that conversation of the institutional platform, operations platform.

AI assessment note: “if we move forward on an investment, we would have to have that conversation”

Q There's a non-institutional element to what he's doing, which is both endearing and in some instances in an institution of risk. How are you thinking about underwriting that and then how you might go about pulling the trigger?

A That's a great question. So as an individual, like you look at his education, his career background, he's clearly grown up in institutional firms, and he knows what it means to be institutional. I want him to develop into that at Still Lake. That takes a lot of investment. You know what it takes to invest in back office and all the systems and support that you'll need. That's going to be critical, I think, to gain institutional money, and it's something that I'm watching. I haven't had that specific conversation with him. Like, all right, Bruce, If you really want institutional checks, let's go through this kind of a list. Because that I view as a very easy to solve problem. No institution is going to invest if they don't believe in the person and the process and the portfolio. So once we get that right, then we can say, okay, are we going to invest in all the back office that supports this? That's the much easier one to solve than the person. And I'm a big fan of Bruce. And so continuing to stay in touch with them and Watch how he's investing the portfolio right now is where I'm doing the diligence right now. And then if we move forward on an investment, we would have to have that conversation of the institutional platform, operations platform.

AI assessment note: “once we get that right, then we can say, okay, are we going to invest”

Q What were some of those early lessons on both sides that you taught them on trading and then that they taught you about manager selection?

A You never are quite getting the deal that you think you're getting maybe. Certainly on the trading side, I think we were trading with one counterparty. Chances are we weren't getting the best price. So step one was we pretty significantly expanded the number of counterparties that we traded with and did a lot more price discovery on both the way in and the way out. So that took some work, but overall it improved what we were able to do. So that was good. And then When I first met a manager, I would meet somebody, wow, they were really nice. That was great. I totally understand it. And my colleagues would say, Donna, that was terrible. I was like, what? And so that was one data point. And I quickly realized when I got data point number two, I had a line. And when I got data point number three, I had a surface. And then I started collecting more and more data points, and the picture got so much greater. Clearer. And when I work with junior people now, when they first come in, it's so funny to see their reaction to the very first data point that they collect, because they have no idea where in the universe that lands. And then when they start collecting more, and they define the boundaries of the universe, that's what I feel like I spent the first, I'm still building my picture of the universe, but building that universe over the first easily two to three years of just Constantly …

AI assessment note: “step one was we pretty significantly expanded the number of counterparties”

Q Before that, when you're digging through the due diligence, either you're doing the analytical work, you're looking at deals for a private fund, you're trying to figure out portfolio construction, who's doing that work?

A Combination of the junior and senior people. We all have different skill sets, right? Some of us on the senior team like stories more, some of us like numbers more. Same thing on the junior team. Some like a rigorous Excel analysis. Some like to look at a lot of industry research and map the manager onto the industry research. So a variety of approaches, and that is done with us. We'll make sure we highlight it to Rob so he knows what direction we're going. And we use a number of tools, I would say. We've got a great in-house tool that has dramatically improved our ability to To look at our portfolio construction. It used to be a kind of a tangled web of Excel spreadsheets. Now it's a great system that allows us to, we could roll up by geographical exposure across all asset classes. We can roll up by sector exposure across all asset classes. We can do a bunch of different things. So I think we've gotten better at portfolio construction. That's usually led, I would say, by the senior team, because we're generalists, and we can ask those portfolio construction questions, where the junior person is much more likely to say, This is the fee structure of this manager. These are their returns. This is the comp set. This is where they're falling out. They're going to get more in the micro details and be very much asset class specialists, and then we're going to see where it fits in the…

AI assessment note: “Combination of the junior and senior people. We all have different skill sets”

Q So I imagine in that type of situation, when it is difficult, there's the three senior Members of the team. There's Rob, the CIO. You're not all going to have the same opinion. How does the decision get made?

A Ultimately, Rob has to make the decision. You know, I mean, that's, that's his job as a CIO. There is a lot of healthy debate, a lot of opinions. He will always invest the time to do the diligence. He's not going to just sit around the room with us and listen to our opinions. He'll get on a plane. He'll go to the manager. We'll have the meeting. And sometimes all of us end up at the meeting. Sometimes just two people end up at the meeting. There's always a question of what's the alternative? You're just gonna pull the plug, and what are you gonna do? What are you gonna replace it with? Just firing somebody isn't always the answer. What are you gonna do with it? So he's got to make those hard decisions.

AI assessment note: “Ultimately, Rob has to make the decision. You know, I mean, that's, that's his job”

Q It's a highly scientific study. Really curious to ask, what was the implication of that for you?

A Good job. Get back to work. You know, not meaningful. It was nice to get the recognition. I can't lie. It was great that two of us on the team were on the list. Our team is made up of more than two of us. I learned so much from everybody on our team from the top to the bottom, and I don't think I'd be overstepping to say that Rob learns a lot from everybody on the team too, regardless of whether we're on the list or not. So It was a bit of a high five around the room. It was great for the team to be recognized, and there was some joking, of course. We work in a foundation, and that list got circulated, and maybe some people said, well, what does this mean? Does this mean people are leaving? Are they getting recruited away? And what I appreciate is that Rob is the type of manager where this wasn't news to him, so he didn't freak out. He was pretty excited, and He was like, great job. It wasn't uncomfortable for either the two of us who were on the list because we're pretty open with Rob about our career trajectory. Rob views it as his job to help us with our career trajectory. So those pieces were not uncomfortable in our shop, which was great. Maybe at the margin, a number of our managers picked up the article or saw the headline, and they were like, wow, it's really great to be partnered with Kresge, with two people on that list. He's got a solid team. And I hope they felt tha…

AI assessment note: “Good job. Get back to work. You know, not meaningful. It was nice”

Q So let's project forward, and let's just assume that for whatever reason, you're the chief investment officer somewhere. From what you see today, what are the differences in how you spend your time today from, say, how Rob spends his time?

A That is something that I think about all the time. And again, over the 10 years, it's evolved. When I saw what Rob was doing when I first joined, it looked a lot like my job today. When I see what he's doing now, it looks very different. We've all gone through growth as he's gotten pulled into more and more things at the foundation and board seats and things that he's doing outside his day job of being the chief investment officer and investing our endowment. He's had to learn to trust his team to make decisions. He still has to sign the final paper, but he's had to learn to trust us and give us decision-making authority. We have had to learn to step up. And say, Rob, this is my recommendation, and this is why. It used to be more of a dialogue of, here are my thoughts, here's why I would, here's why I wouldn't, make the call. Now it's, I recommend this, and these are the three things why, let me know if you disagree. And that's been growth on both sides. Growth for him to accept that kind of recommendation, growth from us to feel confident doing that. And our team needs to work together and earn each other's trust. I can't go recommend something that I know that any of my other colleagues would not agree with. So we all have to, we have to earn each other's trust and kind of collectively, because the first thing Rob's going to say is, does John agree? Does John agree? Does Sean…

AI assessment note: “he's gotten pulled into more and more things at the foundation and board seats”

Q Were there any stories you heard that weren't as positive outside your organization?

A I didn't hear any direct stories. Nobody's come to me and said that was the most awkward day. But I do know that there are people who don't have that same kind of dialogue with their CIO. And in a way, I mean, that list was admission that pretty much everybody on that list was talking to a recruiter, because I believe that list was mostly put together by the recruiters, and so the recruiter probably didn't nominate you if they hadn't had at least one conversation with you. So that was clearly recognition that everybody on that list had been talking to recruiters. So if your boss was not aware of that, that could have been an uncomfortable day, and my guess is there were some uncomfortable Well, days. I don't know specifically. That would be my guess. I'd bet on it. Yeah.

AI assessment note: “I didn't hear any direct stories. Nobody's come to me”

Q These are young people out of college, maybe a few years experience if they've been with you for a little bit. How do you decide When their judgment should influence, even, so you're going to China for two weeks, you only have two weeks. There's only a certain number of meetings you can take. Where does the rubber meet the road, and who sets the agenda for that trip?

A It's evolutionary. We have found that the first year young talent is with us, you're feeding them and bringing them along. And then it goes through, like, really this S-curve. Like, it's, it's amazing. Over the short window of time, they go from one level to another level. And then you can see a change. You can see a change in the way they're writing notes. You can see a change in the ideas they're delivering up. You can see a change in the way they're networking and they're sourcing ideas because they'll travel with us, particularly to annual meetings, right? And we'll introduce them to our peers on the senior teams. They'll network with the junior people on the junior teams. And you'll see this pretty dramatic shift in the ideas they're serving up. And so It's evolutionary. We obviously keep tons of lists and research databases around managers operating in different asset classes. We're all always reading the journal. We're reading Institutional Investor. We're reading all kinds of sources for ideas, and it becomes two-way. It really does become two-way. Unfortunately, they probably leave us. You know, they're leaving around four or five years when they're getting really good, but it's fun to work with them, and I think makes us sharper and better. On the senior team.

AI assessment note: “It's evolutionary. We have found that the first year young talent is with us”

Q What have been the biggest challenges you've faced the last couple of years?

A Emerging markets have been a tough place to be. If we're talking investing, you know, there's years where you look smart for overweighting emerging markets. There's years you look less smart. We're, you know, less smart time frame. We've been in a decent period for liquidity. I think when I first started, managing liquidity was like a daily and weekly thing. I mean, that was all we really looked at. Finding new opportunities. I think we've kissed more frogs and said no to more things in the past two years. That's It's not demoralizing. It's just hard. Finding something differentiated where you feel so compelled that the price and the risk return opportunity is interesting. I've heard that story before. I've met 10 other managers that look just like that. So the volatility that we've had recently, this year and past couple months, is actually a bit exciting. We're finally going to see some differentiation. We're going to see some shakeout of people who, you know, rode the wave up for the past 10 years. There's going to be shakeout. There will be pain, right? There will be losses in places. But I think, I think it will be a more interesting investment period going forward. Other challenges, you know, I think we're constantly driving to improve our operating metrics. We're always thinking about how can we travel better, smarter, cheaper, do more, right? Live within a budget. We're…

AI assessment note: “Emerging markets have been a tough place to be.”

Q How does the decision process work from there?

A There's always two questions. The first question is yes or no, and how much, right? So particularly in the private asset classes, the how much is always a question. I think a lot of us have the The challenge in our venture portfolios right now is some great paper gains have probably taken a lot of us over our target allocations, and so the question is, are we going to continue to allocate? Look at credit, and you say credit is extremely stretched. Why would we be putting a new dollar into credit? So the question is always, yes or no, and then how will you fund it? Are we going to use cash to fund it? Are we going to redeem from another manager? What do our liquidity windows look like? We generally have liquidity planning meetings at least quarterly, if not more frequently. Elizabeth Goldsberry, who runs our risk and ops, has got an amazing team who keeps us posted on how tight things are getting. We're always modeling what we think our distributions versus our capital calls are going to be. Are we tracking ahead or behind? Is this a source of capital this year or not? We're always projecting what we think our asset allocation is going to be a year from now, two years from now, if things play out the way we want. So while we'd like to say it's science, it's a lot of art. Assuming we get to yes. Sizing is the next question. And then The way we think about sizing, and I think our …

AI assessment note: “There's always two questions. The first question is yes or no, and how much”

Q And how do you size these various types of positions?

A So our asset allocation is, we have targets, but we also have ranges. So when we're sizing the positions, it's where are we with our funded managers versus where do we want to be in our range? So that's usually it. And then when we're doing the riskier trades, or the, I like to call the asset allocation trades beta trades, and the other ones alpha trades, right? And the benchmark for beta trades is don't do worse than the beta benchmark, right? And the alpha trades is don't lose money because negative alpha is not good, right? So the alpha trades is probably a little bit more work around the sizing, and that's around what could we lose? If it goes wrong, how would you feel about this being a losing position? Those tend to be lower vol trades, so to get to the target return, you kind of have to size them up, but because you're not spending capital to do it, it's okay. And, you know, there's a lot of debate around what's your target return for your alpha trades. Well, it might only be three or four percent, But it doesn't cost you anything to put it on. So it's kind of a free three or four percent. So then you're really concerned about, okay, if all I can really make is three percent, what could I lose? And so that's where the sizing on those trades comes in.

AI assessment note: “when we're sizing the positions, it's where are we with our funded managers”

Q So, you know, everybody knows that's the core of the issue, right? So how do you take that debate and turn it into a decision?

A We're all people. I would like to say that our team is all good people, and so breaking up with a manager is really hard to do. So, because of the way we're structured, we do have the ability to address portfolio construction without having to part ways with the manager. So that's step one is when there is the realization, my couple, right, that we did it wrong. We can add the exposure that we're seeking through derivatives. And so there's been some of that. But then there's also been, reluctantly, the hardcore look at the numbers, and even if this manager is focused on small or mid-cap value, let's look at the way small and mid-cap value indices have performed, and let's measure them against what we've asked them to do. That's where it gets tougher, right? Because sometimes, you know, we're invested with pretty concentrated managers. So then you say, it's a manager that I think is really good, and this is what they're doing, but maybe they're underperforming even the small cap value index. And then, then you say, well, are they bad? Oh, well, they owned six stocks, and one stock really performed poorly, and they had it really heavily weighted. And that is the tough one, That is really tough. We knew it. We follow the manager. We meet with them a couple times a year, read their quarterly letters, monthly letters, whatever they're sending us, and how much of it is our fault for …

AI assessment note: “step one is when there is the realization... We can add the exposure”