The Exchanges

Q What was his business that led to the foundation at his passing?

A Well, when he came out of Princeton, his father was a serial entrepreneur and had most recently started a company called Dietrich Industries, not far from Pittsburgh. And as Bill described it, it was a horrible business model. His father had started this thing as a lumber and steel distribution center, trying to buy scrap steel cheap from the mills in Pittsburgh and then punch them into valuable small pieces. It was horrible. But Bill was trying to keep it afloat, eventually took over in the 19 seventies. Bill really landed on a product that he bet the farm on, which was non-load bearing steel studs. So really light metal, raw form steel that would hold drywall up. And Dietrich studs became wildly popular, and that business just compounded by the mid nineties. Had grown to over 2000 employees in production in 19 states and four or five hundred million a year in revenue. So he really had a success on his hands.

AI assessment note: “a company called Dietrich Industries... product that he bet the farm on, which was non-load bearing steel studs”

Q So 90% illiquid is a far extreme of what you hear about in a pool of capital like that. How did you come up with that number compared to a 50% number that is more common in some of the more aggressive endowment and foundation portfolios?

A Well, it was just trying to capture that additional return, and we didn't set out saying, hey, we should target 90. When I took over the portfolio from Bill in 2010, I think we were probably 50% illiquid, but the returns have been robust. We did not have in the last 10 years any U.S. public equity exposure except public positions in our private book, so that was the entirety of our U.S. beta. So the private actually continued to outperform the public in our book. So that stretched out. So we're taking the last five or seven years, we've been more careful and deliberate in terms of our fresh commitments to liquid strategies, trying to get that number down.

AI assessment note: “we didn't set out saying, hey, we should target 90”

Q How'd you get from the investment banking side over to investing?

A I joined PNC Capital Markets in Pittsburgh, and we did M&A advisory, mostly on sell side deals and lower middle market. And after doing a few of those, you sort of understand how the structure and the financing takes place. Being a little ambitious, I sat down with one of my colleagues and said, hey, how about if we go and raise a private equity fund and we can be a principal in these transactions? So we pulled in one of my high school buddies with a forensic accountant, And one of my MBA buddies who was an engineer ops guy, and we went out to raise a private equity fund in 2000. That's how I was introduced to Bill Dietrich as a potential LP.

AI assessment note: “we went out to raise a private equity fund in 2000.”

Q So how did he build the structure of the governance to allow you to invest in a different way?

A He first decided that everything had to be as well documented as possible. If you had a shot at persistence and sustainability of this, it had to be well articulated and rooted in thoughtfulness. And as he always said, clear writing reflects clear thinking. So when he crafted his charitable trust document, alongside of it, he wrote a 16 page statement of philosophy. Which was his explanation of why he wanted to pursue a high growth strategy for the benefit of the supported organizations, and how he wanted to go about doing that. And right after we formed the foundation, I expanded on that document and wrote a further overview of investment philosophy, which is even more detailed about what we're doing and why.

AI assessment note: “alongside of it, he wrote a 16 page statement of philosophy.”

Q Why don't you go all the way back?

A Okay, we'll go all the way back. So I was born and raised in Pittsburgh, and I was the eighth of nine children, and my dear Irish mother said that the babies arrived with pleasant regularity, and later when my wife and I had three children, my father called it a starter set. They grew up in very, very modest circumstances, and my father was able to attend college thanks to the GI Bill. He came back from World War II and went to Duquesne University, earned his accounting degree, Came out and joined a subsidiary of the Hillman Company here in Pittsburgh as a clerk. And after a couple years, joined the parent company for the next 60 years. Worked for and alongside Henry Hillman, ultimately becoming CEO of the Hillman Company. And he and my father had a wonderful relationship. Henry Hillman was truly a pioneer in private equity and venture. If you look back at the league tables in the 19 sixties, if they had those, Pre-venture, so to speak. The Hillman Company was right there in terms of investing in early stage companies. The 19 seventies venture finally began to take form, and Henry Hillman and my father were anchor investors in Kleiner Perkins Fund One, and a few years later in KKR Fund One. I learned a lot about investing from my father, not just technology and innovation investing, but really about people. How people are really at the core of making good decisions in private i…

AI assessment note: “So I was born and raised in Pittsburgh, and I was the eighth”

Q At the onset, you talked about lesson from your father, and also Bill, about the importance of people in this business. How have you gone about sourcing and selecting managers to fill this portfolio?

A So we've taken a couple of approaches. First, we travel quite a bit. I'm probably on the road, 80, a hundred days a year. Rest of my team have younger families, so I don't ask them to do that. So traveling is important, and we try to meet with smart people on the ground, allocators, investors, and we try to build our own views. We also trade notes with like-minded investors. So we have a network that we're proud of, a bunch of other endowments and foundations who kind of approach investing as we do. We actually, Bill started a great idea, 21 years ago, a golf outing, Just outside of Pittsburgh at Laurel Valley Golf Club called the Dietrich Private Equity Invitational. It is an oversubscribed event, so we have a hard cap on it that we're actually keeping the hard cap, Ted. And we invite about 64 either CIOs or heads of private equity from endowments and foundations and fund to funds. That's a great amount of fun. It's a couple of days, but there's also a good amount of gossip that goes on about GPs and who's in the market and What spicy off balance sheet information's out there about a GP. So that's part of our network as well. But really it's, at this point, interviewing maybe 300 GPs a year to get to only a couple we might add in as a new relationship.

AI assessment note: “interviewing maybe 300 GPs a year to get to only a couple we might add”

Q So what happened at your fund over those six and a half, seven years?

A We ended up doing okay. We got two X net for our investors, but what we discovered in investing, and we were targeting the micro market, so control transactions of industrial companies, one to three million in EBITDA. And by the way, we thought we had a very clever pitch, Ted, on why we were investing in these companies. We said, you know, these small companies are like a small ship, and it's easier to turn a small ship than a large ship. You see how sophisticated that metaphor is, Ted? And we realized much later that That's an incomplete metaphor, and that modest waves can also capsize a small ship. So the distribution of returns looked more like a venture portfolio. We had a horrible zero transaction, and we had an eight X. It all worked out, but it was a heavy, heavy lift, and through all these lunches, Bill and I got to know each other, and he wanted to know exactly what we were doing and why, and then we had a very momentous lunch in about 2006. He said, you know, I've been listening to you, Ed. I really want to invest in your next fund. And I said, well, we're not going to do it for these reasons, I explained. And he said, well, I have a better idea. I said, what's that? He said, I chair the investment committee at Carnegie Mellon. He said, we have a terrific guy as CIO, but he needs to move on. He's a brilliant guy, smart guy, but he's got three speeds, slow, slower, and…

AI assessment note: “We ended up doing okay. We got two X net for our investors”

Q So beyond writing down that structure, how did he improve the governance? Because lots of people write their investment policy statements.

A Yeah, he put in the controlling trust document the fact that he wanted the trustees to delegate investment authority to the CIO and CEO of the foundation. That's unusual. We do not have an investment committee. I remember back when Bill was recruiting me from CMU, I asked him what you would have asked, Ted. I said, hey, what's the governance structure going to look like at the Dietrich Foundation? He said, Ed, I served on many investment committees. Investment committees should always be an odd number, and three is too big. I was like, God, I love your style. I said, are you going to put that in writing? He says, it's in the document. That is one thing that Bill thought was important to separate, to the extent possible, the oversight and governance from the actual investment management, because I serve on many investment committees today. You have great experience, of course, and you know that career risk aversion is a very powerful and probably not Something a lot of people admit to, but career risk aversion drives a lot of behavior, and Bill felt to the extent you could put some distance between the asset allocator and the oversight or governance group, you had a shot at allowing the CIO to be more bold, because Bill always said, boldness is necessary for outperformance. Undoubtedly, that is true. You need to be able to have the flexibility and the latitude to build something…

AI assessment note: “he wanted the trustees to delegate investment authority to the CIO and CEO”

Q Where did that six or seven percent grow to?

A We timed it pretty well because we began to invest during a great run-up in the Chinese private markets. We peaked at a total portfolio exposure in China of 38% in late twenty-twenty, which is a big number. Today, as we sit here, we're about 19 or 20%. I was just preparing some data on that, and of course, some of that was the fact that the last couple of years we've had A reduction in the unrealized value in some of these holdings. But we also got a lot of liquidity. In fact, our portfolio in China over the last 10 years produced a hundred and sixty million of excess liquidity. One hundred and sixty million distributions over capital calls over the last decade in our China book. That's great. That shows the pipes work. So many of my friends in the business say, the pipes really work to get the money back. Yes, we get the money back. So a big chunk of that reduction of 38, 39% exposure down to twenty-ish, 10% of that, half of that reduction was really distributions. And the rest was probably the rest of our portfolio outperforming the venture over the last five years.

AI assessment note: “We peaked at a total portfolio exposure in China of 38% in late twenty-twenty”

Q What'd you find in your time at CMU?

A It was a great opportunity because they wanted to move the program from consultant-centric to staff-centric. So we were relying on Cambridge. We moved away from them. I hired Chuck Kennedy, who is now the current CIO at CMU, as my number two, and we built out the team. And Bill was supportive all along the way, especially instrumental as we got through the global financial crisis, of course. And then in 10, he and I sat down at our same table at our same place and had another momentous lunch. And that one, he turned to me and said, okay, Ed, I've been secretly interviewing you now for about 10 years, and I've decided you're the guy. And I said, what are you talking about? And he said, well, I've been building up this trust, and it's designed to fund the Dietrich Foundation upon my passing, and I'd like you to come and join me and work with me and be my designated successor, so that once I do pass, you'll run the foundation and run it until you're 70. That was the offer he made me in 2010. I kind of demurred because I was very happy where I was and said, hey, can we have this conversation again down the road? But I think he knew he had cancer at that point. I had a sense of urgency to get me on board, and I joined him. He died from complications of that in October of 2011.

AI assessment note: “they wanted to move the program from consultant-centric to staff-centric.”

Q So let's dive into the investment program. So you mentioned a love of illiquids. What did Bill set as the goal for the investing of the foundation?

A The goal is exceptional, outstanding, long-term performance, and that's ill-defined, but in my conversations with Bill, we always said, well, take some broad equity global index, and we ought to be outperforming that by two or 300 basis points net of everything over long periods of time, and we've done that. In terms of the actual construction of the portfolio, Bill left that largely to the CIO, except to note in his documents that he felt that the private equity Universe would continue to offer compelling risk-adjusted returns. That's a point about which I agreed with him totally. I think there's logic to that. It's interesting to me, in fact, that a lot of investors, when they talk about private versus public investing, talk about private equity should generate a premium return over public equities. I changed the verbiage a little bit on that When I think about it and I talk about it to people, I think private equity is true equity return, and public equity is a discounted or a lower expected return. The reason for that is simple, I think. There's no free lunch in this world. I think we can all agree on that. And you pay something for the luxury of, in a public security, owning a fractional share of a publicly traded company and You change your mind, you press a button, and T plus two, three, you have the cash on the barrel head. That's an incredible luxury. You stop and thin…

AI assessment note: “we ought to be outperforming that by two or 300 basis points net”

Q You mentioned certain questions that allow you to tease out aspects. What are some of your favorite questions that get into that aspect of integrity?

A Well, this is like losing all my best stuff now if I go on air and tell people what we like to ask, but I'll share one. On this issue of self-awareness, say a manager's coming in and raising Fund Three for a three hundred million dollar target. At some point in the conversation, we'll ask a question like, assume the following. Assume you raise the 300 year targeting for this fund, and assume you deploy it in the fashion you've just articulated, and assume further there's no widespread economic calamity in the next five or seven years. And assume we sit down and have a cup of coffee in five or seven years, and we look back at this fund three, and assume we're all disappointed on a relative and absolute basis. What will have been the most likely cause? Now, this is not an overly complicated question, but it's often one they haven't thought about. When you take the economic sort of externality risk off the table, it forces them to step back and look at Where the real soft spots are in their execution, sourcing, exit strategy. Sometimes, if you can believe it, Ted, the GPs refuse to accept the premise of the question. And they will say, well, we've never failed. We've never had an underperforming fund. I refuse to accept the premise. And that's usually a pretty big flack. But sometimes they say, you know what, we spent a lot of time thinking about this. And if we screw this up, We …

AI assessment note: “we'll ask a question like, assume the following... What will have been the most likely cause?”

Q You mentioned earlier that this last couple of years haven't been the best for the strategy on a relative basis. How do you continue to communicate with your trustees to make sure they have confidence in you? Sure, the twenty-year numbers are good, but maybe 10 years from now, if this continues, it could be a tougher slog.

A Yeah. Well, we've tried to be as transparent and clear as possible that we think that this is just another shiny object in front of us, the S&P, and you know this, and most of your listeners probably do. The amount of concentration today in the S&P, is extraordinary. If you take the top decile relative to the remainder public securities in the U.S., it's at three X. It's the highest ratio Market cap in a hundred years. So you have really seven stocks that are driving a lot of the S&P 500. What we've tried to do is just remind our trustees, we're playing a long game here, and I actually, in a recent presentation, went back and showed the seventies and said the energy stocks were the thing. Energy stocks, six of the top 10 market cap companies in the world in the seventies were energy stocks, and they were 24% of the S&P 500 versus four percent today. And everyone said, that's the new normal. Forget about bonds. This is energy. And then that collapsed. And then it was Japan. And the next decade, Japan's the new normal. The Nikkei has exploded. And eight of the 10 market cap companies in the world were Japanese companies. And Japanese stocks were, at that time, 45% of the MSCI world, and the US was 33%. The next decade, of course, the tech bubble or the NASDAQ was up 15 X or 10 years. Oh my gosh, that's a new normal. So you try to bring historical context around these periods of t…

AI assessment note: “What we've tried to do is just remind our trustees, we're playing a long game”

Q have a marketplace where in the last five or 10 years, you now have scaled venture players, maybe half a dozen of them, and they have the ability to acquire talent, much like we've seen in the hedge fund space with pod shops. How do you think about a solo GP or a smaller GP's ability to compete with someone that seems to have a war chest to acquire talent?

A The weaponization of the balance sheet is something we're all trying to figure out, and that's where Sean's comment earlier about the personal connective tissue between the GP and the founder, the special founders, is why there will always be an advantage of the small early stage investor because, and I want to pick on anyone like Andreessen, but if they have that much capital, they have to deploy in the early stages just buying options. For larger checks later, I just don't think the character of that relationship building with the founder is the same thing as a fifteen million dollar solo capitalist who is taking the calls late at night and going through that human journey of going from zero to the one. There will always be an advantage for those who can build those authentic relationships, but the math is stunning when you think about how powerful these Large entities can be and how they can influence and create their own weather, as has been said. And I'm not sure how it's all going to play out. They may end up with returns that shock me, but those numbers are going to be staggeringly large in terms of exits to get four or five X off of fifteen billion. Sean, thoughts?

AI assessment note: “personal connective tissue between the GP and the founder, the special founders, is why there will always be an advantage”

Q What's your take on the concept of co-investments as a way of defraying fees, which isn't something you've mentioned?

A Well, we certainly ask for that, and that's part of the appeal. I think I told you once about the story of a very, very large pension fund that I was on a panel with one time, and co-investment came up, and people were talking about performance. This very large, not-to-be-named pension fund representative said, well, we've done a thorough analysis, and we've outperformed in our co-investment program all of the primary GP fund returns from which the co-investments came. Kind of looked and said, well, that's interesting. Can I ask my panelists a question? And I said, well, that's pretty remarkable. I mean, if you normalize for, he was saying normalize for fees, the co-investments are outperforming the underlying fund performance. I said, well, that tells me that you're doing something that maybe your GP should do. You're filtering somehow, some way better than your GPs are, aren't you? And took offense to that question, but in truth, you think about the math, and a typical bio fund might have 12 positions. If you look at all the data, maybe in most cases, only three of those 12 outperformed the total fund return. If that GP comes to you and says, Ted, I got a co-investment for you, what are the chances you're going to get one of those three out of the 12? Otherwise, you should give an incremental dollar to the fund, and you have a total portfolio. Now, you normalize for fees, May…

AI assessment note: “Well, we certainly ask for that, and that's part of the appeal.”

Q So within that structure, how have you gone about figuring out how you want to deploy the capital?

A Stepping back, we really take a thematic approach to investing generally. From our perspective, as Bill always said, the Market Timers Hall of Fame is empty, ok? So let's pick some themes that we believe are going to play out over the next decade or so, and try to find the very best, most talented managers to exploit those themes in the right parts of the world. So the two major themes that sort of course through our portfolio are innovation in all of its forms, And second is the broad opportunity set in the emerging and frontier markets. Innovation is obviously best expressed through venture capital, and that's the belief that even though we've had incredible innovation in the last couple of decades, we still think we're in this super cycle of very exciting stuff across from deep tech. Obviously, AI consumes so much of all of our conversations today, all the way through healthcare to consumer, and we express that mainly through venture capital, and that venture piece is probably split Evenly, roughly, between the U.S. and non-U.S. Most of the non-U.S. in venture is in emerging Asia and Latin America. Little bit in Europe. Bill always said Europe is the largest open-to-air museum in the history of man. So he said, I'd rather live in U.S., vacation in Europe, and invest in Asia. That was another line of it. So we try to find opportunities that we think fit in that innovation the…

AI assessment note: “we really take a thematic approach to investing generally.”

Q So how did that relationship start and unfold?

A It was a very memorable meeting for me. I know that. I'd heard about Bill, and people told me this man is punctual and punctuated in everything he does. So I was sitting there in his reception with my pitch book, rehearsing my 45 minute presentation. This was 2000. Bill came walking down the hall, and he looked like a character out of a F. Scott Fitzgerald novel. He was six one, white hair, horn-rimmed glasses, early sixties. Pinstripe suit, pocket square, rep tie. He came and shook my hand and said, Bill Dietrich, follow me. And he spun on his heels and went down the hall, and I practically ran after him. We went into a conference room. He sat down, looked me square in the eye, put his watch right in front of him, and said, well, I'm here and I'm listening. That's how the meeting began. I immediately said, this is not a man to be trifled with. So I, in my mind, jumped to a shortened version of my presentation. I gave him a ten-minute pitch as best I could.

AI assessment note: “It was a very memorable meeting for me. I know that.”

Q With that as a backdrop, let's dive in on where you think is the most exciting place to play today. Ed, why don't you start?

A We think about the global opportunity set in venture from our prior conversations. Ted, we've talked about that. Our focus on China and India, it's a big chunk of our 52% that's venture. If you're talking specifically within the US, there's this AI thing. I'm not sure if you've heard anything about. It's going to be really big. Obviously, everyone is trying to figure out how dramatic this fundamental shift around AI is going to be and how that's going to play out, not only in direct opportunities, but technology adjacent industries are going to be touched in some way, shape, or form. That's creating all sorts of new underwriting on our end, trying to figure out how we can get exposure, whether it's through generalists or AI specialists, many of whom have popped up in the last five years. Then we also have some traditional themes, whether it's healthcare or consumer, that we're getting exposure to through generalists. That's going to remain a core going forward. In terms of stage, We are most excited about the truly early stage in the seed in NA, and as our size is relatively modest, at a 1,000,000,006, we can actually get access that's meaningful, and some of these smaller funds that can move the needle for us. That has been a theme across our venture book over the last 10 years, we've gone earlier, and that's played out well because we're, have the brand to do that, and we hav…

AI assessment note: “We are most excited about the truly early stage in the seed in NA”

Q How have you thought about continuing commitments going forward with that exposure from where we are today?

A China's hard to underwrite in the best of circumstances. Bill always said, you gotta get on a plane and go to do direct due diligence, especially in a place like China. He used to sum it up by saying, Ed, you can't shoot moose from the lodge. You gotta get mud on your boots. So we would travel quite a bit from 2000 eight, nine, all the way until 22. We felt like we had a very good sense Of the risk parameters around investing in China. Our confidence was really in the fact that having studied the market and studied their political tendencies, whenever China faced a really hard period, they tend to pivot back toward pragmatism. They tended to pivot toward business-led decision-making and stimulus and policy reform and whatever it took to get The GDP growth back. Those GDP numbers are all wrong, by the way, but they're directionally correct. But they would pivot always toward pragmatism away from strong ideology. 22 is very disappointing. We saw in Xi and the other Beijing policymakers really a disappointing tone deafness to what investors around the world were looking for in terms of guidance and predictability and They did some things with respect to their every five-year Congress that we felt was reason for some alarm. So we put pencils down. We haven't stopped looking. We haven't stopped investing entirely in China, but our allocation pacing has changed dramatically. So I thi…

AI assessment note: “We haven't stopped investing entirely in China, but our allocation pacing has changed dramatically.”

Q What are you most excited about in the portfolio going forward?

A We're really excited about some of the companies in our portfolio that are in the fence field. We have a nice exposure to Enduro, and we have a couple of others that we're really excited about, and Enduro's not going to be the only winner in that space. We have some direct co-investments in that we're super excited about. I don't want to name names and jinx it. We also have been building our portfolio in India. India, Bill and I had invested in back in. It was a disappointing experience. I brought on one of my managing directors in. And when he joined us, I said, what do you know about India? He said, nothing. I said, you're perfect. I said, I have a bias. I want you to re-underwrite, throw Clorox on the whiteboard and start scratch. And he did. And he traveled and he met everyone that we thought Was thoughtful in the space, and we've been rebuilding and building that portfolio. We're really excited about some of the managers we have there. India is, I think, on a really exciting trajectory. It's hard to compare India to China for many reasons, but the demographics are far superior. I think 50% of Indians are under 30 years old. I think it's 32% of Chinese. Capital markets are reforming and maturing before our eyes. Modi, and Modi's got a lot of False for sure, but he's done a remarkable job in terms of the tech stack and the ID program that they've implemented. Urbanization, t…

AI assessment note: “We're really excited about some of the companies in our portfolio that are in”

Q How do you apply the same thinking to your own portfolio construction about sizing of commitments and how you build it up across the strategies?

A Well, I think there's always a temptation to size based on conviction. I was talking to a friend who runs a prominent fund of funds, and he said, yeah, we did all the math on this, and really, at the end of the day, it should be equal weighting every, every, I said, yeah, but that's no fun. Get this enthusiasm for a manager, hey, we want to lean in. But it's good discipline, I think, to be biased toward equal weighting, because there's a tendency to To say, okay, well, I'm not quite sure about this one. Let's do a half of a bite on this one and see what happens. I think that's a very dangerous, slippery slope to get on. We have a saying that there's only so much beachfront property in the Dietrich portfolio. So it's either hell yes or no. We've been migrating toward that, and I think that's the healthier approach to take, but it's tough because there's some stuff you really, really like, but it's not a hell yes. So we try to keep warm and keep an eye on

AI assessment note: “it's good discipline, I think, to be biased toward equal weighting”