The Exchanges

Q And how did that progress over your years before you came over to this side of the business?

A I started at CSFB. I had the opportunity to go to Merrill at the end of my two-year program to be a senior equity research analyst. So I moved out to Merrill on the tech group in San Francisco. I guess they called it the global growth group and was there during the whole implosion of the tech bubble and Was fortunate enough to be at a stage of my career. I was given the choice. Hey, you can go back to business school. I had a guarantee when I went over and they were going to potentially move me to New York and find a spot for me, but it was easy enough for me to go back to grad school. So I applied to a couple of different grad schools, but ultimately chose the financial mathematics program at university of Chicago and was going to go to school full-time and try and work part-time, like got an offer from bank of America. To be a quant in the strategy group there that was mostly focused on fixed income derivatives, some FX, some of the exotics, but I ended up going to school part-time and working full-time, and that was kind of a great financial decision. But I worked there for just maybe it was a year and a half, 18 months before they shipped me off to the Tokyo office and landed in Tokyo as a junior trader on the derivatives desk. And work my way up. So I was running the fixed income, mostly like interest rate derivatives, swaps, swaptions, capsules in Tokyo, and then got tran…

AI assessment note: “I started at CSFB. I had the opportunity to go to Merrill”

Q And did your thoughts at the time extend beyond basketball into, hey, thinking differently about this game you grew up thinking about one way could be extrapolated into other things?

A I'm not sure I was that forward thinking at the time. To be honest, I grew up in very small rural Alaska, and it didn't have any clue. I thought I wanted to be an engineer when I went to school, and that's obviously not the path I took, but I remember my first foray into the financial world wasn't until I was really a sophomore in college. And it was through the people I met at Grinnell that kind of opened my eyes to the financial world. Neither of my parents went to college and I really just had no idea of the whole, whether it was investment banking or asset management, I had no real concept at the time.

AI assessment note: “I'm not sure I was that forward thinking at the time.”

Q What was it like when you got that call?

A I was like, do you have the right number? I don't even know what you guys do. I was only conceptually aware of endowments because Grinnell was kind of famous for being this little tiny college in the middle of Iowa that had a large endowment. And certainly knew people who worked in the investment office, and that's how they got my number, but they wanted someone who had kind of international experience, experience in fixed income, experience in equities, and so my background kind of loosely fit there, and obviously I tied to Grinnell College as well, so. And the truth is, my kids were starting school, and we had started the kind of private school thing in Tokyo, and my wife is originally from the Midwest. She's from small town Iowa, actually, and It just worked out for the family. And I thought the job was super interesting. Certainly the compensation scales are very different running a derivatives trading desk at an investment bank versus working at a smaller endowment. So that was kind of a big life decision. And it just seemed like something, Hey, this is super interesting. It's more meaningful. And it ended up being a great decision in hindsight.

AI assessment note: “I was like, do you have the right number? I don't even know what you guys do.”

Q And what's that balance of you want to have a concentrated portfolio. So something's got to be big enough to move the needle, but then there's sort of known left tail risk so that you don't want it to be too big. How do you think about sizing?

A It's more of an art than a science. You size things based on how they fit in the overall portfolio and then whether or not you can underwrite the downside. And then again, we're always looking for things that we think add positive convexity to the portfolio, right? They have significant asymmetric Risk and reward. As a general, if I tell the team, look, if we're not willing to put one percent of the portfolio in it, then like that's not a lot of conviction. And for one percent for us is currently just over a hundred million us dollars. So we don't always have that type of liquidity, right? Like the opportunity set isn't always that big. So things aren't always sized there. But again, if you're not willing to put one percent of the portfolio in it, And if you, let's say you do a disastrous job underwriting the downside and you lose half your money there, we can tolerate 50 basis points on the overall portfolio and hopefully make that up in other places. Particularly if we think it's very, very idiosyncratic, right? We're looking for opportunities that aren't based purely on our macro view of the world. But for us to go above that again, we would have to have a significant view of downside and really be comfortable with the underwriting process.

AI assessment note: “if we're not willing to put one percent of the portfolio in it”

Q At an aggregate level, it's easy to make the case that it never makes any sense, but you're not really dealing the aggregate level. You're dealing with the subset of managers that you inherited when you showed up and maybe a few that you liked from before. So how do you put together that kind of bearish macro perspective, say on long short with bottom up manager by manager decisions?

A We're just hugely selective. And I guess You have to be humble and intellectually honest about your ability to really choose the absolute best performing managers. There's a lot of large number problem in that, let's say, 95% of the time we can tell a really good manager from a really bad manager, but if only one percent of them are actually really good, then you still end up with five to one ratio of not so good managers with good managers. Right now, I'd say we only have four, what you'd call traditional hedge funds in the whole portfolio. And then we're also looking for places where we can leverage that relationship to make the overall portfolio better. So we're looking for people we can kind of use as either outsource research partners, places where we can add capital. And we think they have a really interesting idea that again, is kind of idiosyncratic to everything else we have in the portfolio. That's a really valuable relationship for us. And I would say the, we also understand the process. We understand their portfolio and we have the ability to Assess when things are going poorly, whether it's a short-term or long-term problem. And I would say most of our partners, we've been able to produce significantly better returns than, than you would think just looking at their headline numbers, because we have the conviction to kind of add capital when things aren't going that…

AI assessment note: “We're just hugely selective. And I guess You have to be humble and intellectually honest”

Q What opportunities are you particularly excited about today?

A Frontier markets is super interesting. I emerging in frontier markets for us has been a big bright spot in the portfolio. If you look at the headline return numbers and emerging in frontier markets, it's significantly lagged developed markets, particularly the U S over the last Five years. For us, it's the opposite. We've been able to find really unique, interesting places to put capital in some of these markets that has been a big differentiator for us in terms of performance. Again, it tends to be individual name, individual securities, but we have a ton of really high quality partners on the ground there, and it's been an interesting hunting ground for the last several years, and I think it's gotten better over time, not worse.

AI assessment note: “Frontier markets is super interesting. I emerging in frontier markets for us”

Q When you're looking at a manager, are you focused on underwriting their positions more than their process to find the next position?

A We use that lens of underwriting their existing position, so it's really just like case studies of either what they currently own, what they haven't, and that's how we evaluate, like, what caused you to make this investment? What was the process that led to this? Do you have a kind of unique differential view on the quality of the business or the industry? What is the real investment thesis? Is that empirically verifiable investment thesis that's different than what we think the market or how the market is viewing that business? And that's the lens Through which we look at their process. How did they think about valuation? How did they think about risk and return? How did they think about the industry? We spend our time focused on looking at those individual names.

AI assessment note: “We use that lens of underwriting their existing position, so it's really just like case studies”

Q How do you think about taking this model and applying it in the venture capital area?

A Venture capital is tough, right? Just the nature of the industry. It's tough to underwrite. If you look at our partners, and we have a great group of partners who have done extremely well for the portfolio, but we haven't had really much success in kind of the micro VC world. Like there's so many of these small micro VC funds. And again, these are a lot of smart, talented people who come from good places, but it's just really tough for us to underwrite and find unique Differentiated thinkers in that area. And so we've just shied away from it. We typically, I guess we've concentrated our exposures and people that we think we can partner with very closely and we have ways to monetize the relationship outside of their ability just to pick really good early stage companies and that we can grow our exposure with them over time, either partnering in these co-investments or finding ways to add capital to what we think are the most interesting ideas.

AI assessment note: “we've concentrated our exposures and people that we think we can partner with very closely”

Q How difficult was it for you stepping into a seat where there was a much more diversified group of managers to start winnowing it down?

A We certainly were not popular in certain circles for quite some time, probably still not. And those are tough decisions. Those partners didn't necessarily fit our portfolio. I mean, these are smart, thoughtful, well-intentioned, good people, and often great investors. It's just, it didn't fit what we were trying to do with the portfolio. And so we had to make a lot of tough decisions at the margins. I would say like we went through with the board and garnered internal support, but we put in redemptions for almost half the portfolio in the first several weeks. Now I was fortunate to have the portfolio for several months, Before I actually landed in the seat. So we spent a lot of time going over individual partners and individual names of who we're going to keep in the portfolio and who we weren't. At this point, I think we've probably turned over. 70, 80% of the original pool, even more than 80%, actually. So the vast majority of it's been turned over and those we've kept, we've added capital to and concentrated exposures. But for the most part, it's a very, very different Looking portfolio than it was when I started three years ago.

AI assessment note: “We certainly were not popular in certain circles for quite some time”

Q And what are your sort of favored criteria within say a manager you kept in a manager that was close, but you didn't?

A It's the same lens that we look through all managers. I mean, first and foremost, we're looking for people we think are great investors, people who are operating in an interesting opportunity set, people we think have a institutionalized, repeatable process. Ultimately we evaluate them based on what we think the quality of their portfolio is. And we think about our portfolio on a bottoms up basis and that we own what our partners own in some fraction. So if we're, they own 10 stocks, and we're 10% of the fund. We think about our portfolio as these individual pieces, and then we have a fee and liquidity structure on top of that, and that portfolio has to make sense on a look through basis. So if you take our hedge fund portfolio three years ago, and I were to evaluate it on a look through basis, I'd say we own 2000 names on the both sides of the market, and we have a fee structure that's one and a half and 20. Like that's a portfolio construction problem, right? Because essentially you're an index fund on both sides of the market with an expensive active management fee structure on top of it. And the fee structure is problematic in that it guarantees you always do worse than the average, right? So you're essentially in long correlation. If you have a hedge fund that's up 10% and a hedge fund that's down 10% on a gross basis, you're flat, right? But you paid them both one and a h…

AI assessment note: “first and foremost, we're looking for people we think are great investors”

Q So that example brings up a whole host of questions in and around process. So the first is, how do you think about time allocation when you're spending all that time with a chunk of your team on one company?

A The truth is like, if I think about the overall portfolio, if we find four or five companies like that a year, we've done our job like four or five places and how much capital we have to reallocate every year. We hope you have a very long time horizon. And most of the time we're allocating to our core partners and reupping and funds. And we have lots of places we can put capital if we have excess capital, but finding these four or five differentiators of return places where we have excess exposure and we think it's super interesting over a long period of time. Like that's all we need. So the truth of it is that most of your time ends up being relatively unproductive just because you're looking at things that don't ever make it into the portfolio, but, but we have a big team and we have a lot of resources. And, you know, if we can produce a small amount of alpha compounded on a ten billion dollar portfolio over long periods of time, like that's definitely worth it.

AI assessment note: “if we find four or five companies like that a year, we've done our job”

Q How do you match this top-down thinking and bottom-up thinking if top-down is traditional asset class or risk exposures, and bottom-up is the one-off selection of the managers in your portfolio?

A Our focus is really on the bottoms up. You know, if you look at even the way we think about diversification, like we're trying to concentrate our exposures in individual investments that we think have completely idiosyncratic Outcomes over some period of time, right? So if you look at the largest contributors to the portfolio over the last three years, you'd see like a Brazilian utility company, a Swedish supplier of medical products and Indian biosimilars companies, a U S based aerospace and telecom company. And there's no reason why we think those investments should have correlated outcomes over some Investment time horizon. Now in the short term, like if we go through a crisis like we did in March, where the cost of capital rises for all risk assets, we don't expect that portfolio to be immune, but we expect those investment outcomes to be completely independent over our investment time horizon. And that's a lot easier framework to find real diversification. Whereas if I step back and say, what are the diversification benefits for being in venture versus public equity versus Private equity buyouts or real estate. Like that's very difficult to quantify, particularly in times of severe market stress where you really need diversification. And I think that's a better framework for us to evaluate real diversification benefits in the portfolio, as opposed to this top down approach…

AI assessment note: “Now we use the top down approach, both presenting to the board and as a framework”

Q What does the day to day look like or the week to week look like on your team?

A We try and organize it as much as we can, but We'll typically have one to two team calls per week. You know, typically Monday morning, what are we working on? What do we think is interesting? What's in the pipeline? What can we kill? And we'll include the entire team on that, including operations folks. And we try and integrate investment and operations as much as we can. That's mostly pipeline focused. And then what's interesting that's happening in our portfolio, like who's adding to what names, how our position size is changing, what's performing, what's not performing. What are interesting hunting grounds, places to at least start your search. Right now it's very different just because there's no travel. I would have said I spent 30 to 50% of my time in any given week or month on the road, but that's not happening. And then from there, again, it's very random to like what kind of names or what geography, what we're spending our time on. It really depends on what's happening with our various partners in any given week. So it tends to be really random from one week to the other. And we organize the team so that nobody's over-focused on one geography or one asset class. So you could have three calls in a day looking at new investments. Or existing investments. And there'll be five people on each call, but none of those five people overlap on any given call.

AI assessment note: “We'll typically have one to two team calls per week. You know, typically Monday morning”

Q The Grinnell endowment has a pretty interesting history. And why don't you maybe talk a little bit about what drove the process over the years?

A It's probably most famous because of the connection with Buffett. Buffett hasn't been active since the late seventies, early eighties, but certainly was instrumental. And, and there's a famous investor. I think money magazine wrote him up as the most famous investor you'd never heard of. And that was Joe Rosenfield. And he had a huge role in the endowment from 1941 until 2000. And then, uh, David Clay, the CIO who hired me. He started in the eighties as well and worked with Joe and was really super instrumental in that portfolio over basically a 30 year period and super talented investor and just a wonderful human being. And I was so lucky to start there and work under David for that seven years I was there. He was just following more of that kind of Berkshire style investing than the traditional Yale model. David just was a really great investor. I think looked at the world in a very similar way to Joe did. And it was really good for me because I had no idea really what they did in an endowment when I first started. And I guess my role technically was director of public investments and then quickly took over as managing privates and publics, and then ultimately became the CIO in my fourth year there. But, but it was a great place to start. And David, still a great mentor.

AI assessment note: “He was just following more of that kind of Berkshire style investing than the traditional Yale model.”

Q At that age, did that different style of basketball sink in any deeper about kind of thinking differently?

A Yeah, it was certainly different at the time, and to be honest, it's a hard system to learn, and it doesn't come naturally. You know, if I look at the way my high school and kind of AU basketball coach taught basketball is, you know, motion offense, work hard, get great shots, try and set yourself up for opportunity, where here it was like, take that first initial shot, hopefully within 6:08 seconds. Of taking possession of the ball, and you're better off taking a quick three than particularly like the way we offensive would crash the offensive boards. You get a lot more of those kind of long rebounds on the offensive side than you do on the defensive side and kick it back out for another quick three. It was very different, and I think that the team approach certainly resonated in that every player had like specific responsibilities. We had designated shooters. And some really great players while I was there, but a different style of basketball. And you've seen it become more of the norm at a lot of places now, I think, which is kind of interesting. And the coach became pretty famous for it and wrote some books on the system, as he calls it.

AI assessment note: “I think that the team approach certainly resonated in that every player had like specific responsibilities.”

Q How does the process sort of work for your team and in finding a new idea? So you can break it down. Like where does the sourcing start?

A We try and spend a lot of time on the ground in the various markets that we're investing in. And it's really randomness and optionality. You never really know what the next interesting idea is going to come from, what it's going to look like. And which partner it's going to come from. So it's just basic blocking and tackling. I'd like to say we have a great funnel where we're looking at this really high level, interesting set of opportunities, and it boils down to a small group of investments that we end up making, but it's really random. And I think it's just hard work out there knowing what our partners are doing, knowing what our partners are looking at and trying to find interesting places to put capital.

AI assessment note: “We try and spend a lot of time on the ground in the various markets”