The Exchanges

Q Yeah. So you mentioned a couple things about terms that were deal killers for you in these two examples. How do you think about fees?

A What matters is net returns to us. And so if a fund is able to generate really reliable, exceptional returns, Net of all their fees. I'm less worried about it. On the other hand, looking forward, you don't know if they're going to generate those sorts of returns. You're pretty sure they're going to generate those sorts of fees. So it's situational. But one thing I want is transparency. One thing that I think is developing is staged or tiered carry. If a fund generates three times their money in a IRR that's 30% or above, I think a 25% carry may make a lot of sense. What I don't want to see is 12 different sources of revenue, some of which look like maybe they're calculated on a leveraged company value and fee offset that's below a hundred percent. That just makes me feel like you're trying to make money off of our money, even if we don't make money. So somewhat nuanced view, I don't detest high fees. I don't expect private equity fees to go down anytime soon. And I think there's a place for having a healthy fund. That's another reason, by the way, we invest in smaller funds because the largest fund managers not only have astronomical fee revenue streams, but they're also the cleverest people in the world about charging fees that we can't see. And I don't want to play that game with them.

AI assessment note: “What matters is net returns to us.”

Q And what was the impetus for moving over to Cincinnati?

A University of Cincinnati had a job opening, and there were two of us. Tim Cavanaugh and I were, were co-CIOs, and that was fine. We made it work, but it's not an optimal structure, and, and either of us could have done the, basically two people doing one person's job. So we were able to each assume control of our own pool of capital, And I was very, very excited to work for university. I had amazing family office clients. I was very excited to work for a larger pool of capital and family offices. You know, like I said earlier, there's a range of different qualities. Endowments I think are generally regarded as all pretty high quality places. And so just from a kind of good housekeeping seal of approval, I was eager to have that experience as well.

AI assessment note: “University of Cincinnati had a job opening, and there were two of us.”

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A It is the underpinning. It is necessary but insufficient to have success. You can't have success with a bad governance structure. And a bad governance structure includes not only a very clear delineation of roles and responsibilities, and also the right roles and responsibilities. I think it's extremely difficult, if not impossible, for a committee to pick private equity managers in quarterly meetings. I don't think, for example, that works very well. Maybe you could make it work, but that would be a hurdle you'd be overcoming. And so discretion within the office is critical. I think clear discretion and clear rules around what the office can do. In our example, we were able to hire and fire managers and manage exposures within the pre-approved ranges by the investment committee. We recommend as strategic asset allocation ranges and targets. And then the investment committee approves those approves at kind of risk level, which There's no way of defining, articulating a risk level, so it's more of an iterative, intuitive process, but that's also their role. And then they are responsible for making recommendations regarding hiring and firing the CIO. So there's accountability, there's a sharp line drawn between the amount of risk and the implementation of that risk, and I think that that structure works very well. We have a very well-written investment policy statement that lays …

AI assessment note: “includes not only a very clear delineation of roles and responsibilities”

Q So everyone runs around whether it's in private equity or public equity and hedge funds, and they want to be with the best managers. What does the best manager mean?

A Well, I suppose people define that differently for a gigantic pension. Perhaps the best manager is the one with whom you can put four hundred million dollars or with whom you can have a lot of co-investment. That's not at all how we look at it. And I will also offer to you that we don't really look for the best manager aside from venture capital, which is an extraordinary part of the investing world. We're not trying to hit the top mark because in doing so you risk hitting the bottom too. The way we look at private equity is if we can do nothing for the wrong reasons and make all of our decisions for the right reasons, Then we can probably cut out the bottom fifth quarter, maybe third of the distribution. In which case, if we pick median now, all of a sudden you're talking about two thirds of the way up, almost top quartile. And we're not usually swinging for the fences. What we're trying to do is find very reliable execution, high conviction ideas that are managers that add value to their companies, that buy things at reasonable prices, that use low leverage and And we think if you have a portfolio of those things and there can be a million of those things, if they're three, four or five hundred million dollars, every town can have four of them successfully. So there's not a shortage of those names. The difficulty there is sourcing them. It's really challenging to find ones in…

AI assessment note: “What we're trying to do is find very reliable execution, high conviction ideas”

Q What's your view on concentration after having that experience?

A In our hedge fund portfolio, we have 10 positions. And we think that 10 positions is about the right amount of diversification. It's about the maximum amount of diversification in order for us to be able to monitor and manage and understand and know those hedge funds really, really well. So there's a certain just resource balancing that has to go on there. And that's true across the whole portfolio as well. We couldn't have a portfolio of a hundred positions. We're a too small team. So we have roughly half that, including both public and private. And we think we can know them very, very well. And some of them are big, passive positions. We have a huge slug of Vanguard, 500. And I don't know if that's dorky or not among my endowment brethren, but I don't care if it makes a lot of money for the university. That's what I'm focused on. And so with some of those positions, we can maybe have a little bit more in active positions that we need to monitor more closely. But that's a key trade off for a team our size.

AI assessment note: “we have 10 positions. And we think that 10 positions is about the right amount”

Q Can you give an example Of where that conversation went awry?

A We've never had that problem. So I'm very pleased to report that we've managed around that. So what you want to do is have buy-in from your committee on the process, and ideally on the portfolio as well, so that if something should go wrong, they understand why it's in there. If a private equity manager should stumble, for example, they understand why it's there. And ideally they can even be enthusiastic about and push us to invest more with that manager or go in the offense. In order to achieve that, we had what we called information sessions, which were basically offline discussions with a subset of investment committee members where we gave them all the details of a manager ahead of making the investment. We were very clear on every one of those calls that we're not asking for your approval. We're not asking you to endorse or not endorse. We're asking you to listen, provide feedback, and provide any connections you have. So that's just a kind of practice that keeps those lines crisp and keeps the responsibilities where they belong.

AI assessment note: “We've never had that problem. So I'm very pleased to report that we've managed around that.”

Q So when you look back, why is the five percent too high?

A One of the things that it's counterintuitive to most folks, first of all, just from a historical standpoint, the five percent was created when interest rates were like at nine. If you think of it as interest rates minus four, the spending policy would be negative two now, which doesn't make any sense, of course. But we're spenders. We sell when we're down, and we sell when we're up, and we sell in the middle. And the calculation methodology, the formula for that five percent is looking over the last three years, or five years, or seven years, depending on what institution. And sometimes it's a different model, but many of them have that kind of moving average spending policy. And that means that after 2008, people were spending five percent Based on the last couple of years values, which was 10% based on their 2009 values. And so what that does is it takes a significant number of dollars out of the endowment. So it is very difficult to recover. The number of dollars that are recovering is much, much less than the number of dollars that got, that got hit by the crisis. And so it just requires certainly years, if not decades to recover from that kind of hit. The other thing is that most folks have a foundation fundraising fee that goes to their Fundraising arm to help their budget, which means that that five percent is actually a little higher than it sounds and maybe five, five …

AI assessment note: “the five percent was created when interest rates were like at nine”

Q Is there a story in there with begging and begging and then getting access and then doing the work and then walking away?

A Yeah, there are a number of those stories actually. We were looking at a group, I'm going to be vague, a group in the Midwest that's a sector focused firm run by two really compelling people, brilliant, brilliant people with a sensational track record. And we begged our way in and we Every time we went to this city, we met with them for years, for three or four years. We probably met with them eight times during that and sent them Christmas cards and were as nice as we could be and, and built what I think was a real personal relationship, which I think is key in this business, notwithstanding the financial nature of it. And so finally we got access to due diligence and had an opportunity to invest a real amount with the fund. And on our final due diligence visit, we walked in and the whole staff had this Or of arrogance from the, from the first person we met to the last person we met, their view was basically, you are so lucky to be here. On top of that, they had some, some fee structure that was terribly misaligned and they were determined not to change that. And so for reasons that are not necessarily box checking, they ended up being the art side of this, not the science. We ended up saying no. I'm comfortable with that decision, but holy moly, did we waste a lot of time on that.

AI assessment note: “Yeah, there are a number of those stories actually.”

Q Sort of a non-traditional way of training. There were only three people on the team, and was the guy in New York kind of running the portfolio?

A He was running the portfolio, and the two of us in a mason were executing on his strategy. We spoke every day. It was fairly seamless, and traveling, we often traveled together, so it was not that different maybe than if he had been in the office with us. In fact, I'm not even sure you would characterize it. It wasn't that meaningful of a difference. It got different when he left in August of All of a sudden, things were importantly different, and my colleague and I there, Tim Cavanaugh, who's still running it, were suddenly in the driver's seat, and I think that we handled that transition very well. It was obviously an extremely exciting time to be in the investment world.

AI assessment note: “He was running the portfolio, and the two of us in a mason were executing”

Q And how do you define the best venture capital firm?

A The best venture capital firms, I think there's such serial correlation. There's such performance persistence in it, which I think is natural. If you think about the advantages to a venture capital firm of having taken Google public and having, Connections with the founders and so forth, not any specific venture cap. I don't mean to mention a specific firm, but I think that that reflects incredibly well on up and coming entrepreneurs, and they want to be able to meet with the famous entrepreneurs, and they want to meet with the folks who, and so I think there's a very valuable momentum that accrues to venture capital firms, and thus there's only maybe a dozen. I'm not exactly sure what the number is, but you kind of know when you see them, and if you can't be in those groups, Then it's a very difficult place to make money, and it takes a huge, huge amount of time. For a tiny little team sitting in Cincinnati, Ohio, none of us went to Stanford, GSB, so it didn't make any sense for us to spend time on that area. Probably waste money, certainly waste time that we could better spend elsewhere.

AI assessment note: “I think there's such serial correlation. There's such performance persistence in it”

Q It's not a zero percent. Yeah, I do. So how did you behaviorally broach that message with confidence, knowing that there actually is some chance that things could get worse and worse and worse?

A Somebody observed on your podcast just recently that the way that things get down to 90% is by going down 80 and then losing half their value. That's pretty intimidating. I can tell you an anecdote about one of the meetings we had, and then I'll answer your question. As we were walking in to meet with the head of the whole family, the man who built the business from which the wealth came, his wife looked at us and apologized. We had probably lost her a hundred million dollars in the last couple months, and she looked at us like she felt terribly sorry for us that we were about to have this meeting. So he was not gentle on us. But on the other hand, I think that a, uh, Pascal's wager is that if the world ends, doesn't matter. So you might as well behave as if it's not going to, right? It only ends once. And if it does, it doesn't matter what you did right ahead of time. And so I think we use that as a way of giving him confidence that it would be fine. And indeed we had a pool of capital that was designed to never go below a certain level. And so he said, look, we can rest on that. That will exist. You needn't worry about that pool of capital. And we'll work on ways to rebuild the other side of the ledger.

AI assessment note: “we use that as a way of giving him confidence that it would be fine”

Q So what's next on the horizon? What opportunities are you excited about?

A The opportunities in the portfolio. I would say this, I guess I'm in my eighth year now. I feel like we have set it up, but it's only step one and there has to be a reset. I mean, the last eight years has been more or less directionally one kind of market. We're a little lower on the risk of Spectrum. We can take more risk in the portfolio within our strategic asset allocation framework, just by choosing different types of managers and by having a different level of concentration in some areas. So I feel like we've set the table, but we haven't gotten aggressive yet. And I think that carefully, whenever the next price reset occurs, we can set up a whole new period of returns by buying assets at the discount and by investing in groups that are able to do that.

AI assessment note: “whenever the next price reset occurs, we can set up a whole new period of returns”

Q When you show up at the family office, what was there in terms of the investment portfolio?

A What was there was an outsource CIO, a very brilliant man and mathematician who was the CIO, but lived in New York. And he, as a mathematician and math professor, felt like bond math was the big shortcoming, that I hadn't studied bond math. I didn't have an MBA or PhD or anything, and that was something that he meant to resolve. So for six months, I sat at my desk in Mason, Ohio, and did problem sets, did math problem sets, bond math, reproduced duration calculations, modified duration calculations, and so forth. It was not something I think I was very excited about at the time. It has been incredibly valuable to intuitively understand how that affects the whole Panoply of investment assets.

AI assessment note: “What was there was an outsource CIO, a very brilliant man and mathematician”