E324: How The University of Cambridge Built Their Privates Portfolio

What does it take to build a world-class private equity portfolio for an 800-year-old institution? In this episode, I sit down with Sam Sturge, Head of Private Equity at the University of Cambridge endowment, to discuss how he rebuilt the program with a mandate to generate inflation plus 5% returns for generations. Before joining Cambridge, Sam worked at Morgan Stanley and Partners Capital, and today he oversees a concentrated portfolio of buyout and venture relationships within the university’s £4.5 billion endowment.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00David Weisburd?

  So Sam, you've had incredible career going from Morgan Stanley to then Partners Capital. But I want to start with, how did you came to run private equity at Cambridge University?

• 0:11Speaker 01

  Six years ago now, our CIO had joined a few months before, was looking to rebuild the whole investment team. And also just looking to increase the allocation to private equity substantially. I think all those kind of factors really kind of married with, I guess, my long-term ambitions and motivations, which for some reason I love private equity and the ability to kind of take this brand and use that to leverage to build a world-class portfolio, which was just too good an opportunity to pass up.

• 0:42David Weisburd?

  You're building for one of the most historic institutions in the world, but you're more or less building it from scratch. How did you go about doing that?

• 0:51Speaker 01

  At the core of it, like what is the mission objectives of the endowment as a whole? It is to preserve or increase the real value of the endowment for not just decades, but centuries to come.

• 1:02Speaker 01

  We have a distribution rate of 4% and we want to have a margin of safety. So that means we have a target return for the whole endowment of inflation plus 5%. I'll admit as a relatively high return target, and so it's therefore really important for us to have a meaningful allocation to risk assets.

• 1:22Speaker 01

  We believe that private equity should have the highest return out of all asset classes. And so naturally it makes sense for us to have a large allocation to the asset class. Why do we think that's the case? And I think firstly, I'm going to, I think private equity for me and just trying to keep it simple, because there's many different strategies. It's kind of focusing mainly on buyout and venture capital is the two core asset classes, or two core strategies here. Within buyout, we just believe managers have the ability to influence the operations and strategic directions of businesses. And they also have a longer term focus than say in public markets where people are very focused on quarterly earnings and shorter term decision-making.

• 2:03Speaker 01

  And so managers that have that skill and differentiation should lead to kind of longer term revenue and earnings growth and naturally then higher returns.

• 2:14Speaker 01

  On the venture side, I don't think we necessarily believe the market will have the highest absolute returns out of all asset classes, but.

• 2:22Speaker 01

  We do believe investing in early-stage disruptive technologies has the potential to deliver outlier success if you're partnered with the right firms who are investing in the right companies. It is a people business. A private fund can last for 15 years or more, and that's a considerable amount of time to be spending with these people. And I think there is just a fundamental question of, do you want to be in business for these people for that amount of time? And within that, there's a, it comes down to alignment. Are the management incentives and motivations truly aligned with what we view as success?

• 2:57David Weisburd?

  How do you ascertain that? How do you look at incentives and figure out whether you as the LP are aligned with the manager?

• 3:07Speaker 01

  That's a really good question. The endowment is about four and a half billion pounds, which is obviously a lot of money, but in the grand scheme of financial assets is relatively modest, which I think gives us the real privilege that we are focused to deliver the best risk-adjusted returns rather than on deploying capital. And so that alignment really boils down to that, which is, are the key decision-makers at an investment organization, are they motivated to deliver outlier returns rather than necessarily build a large business focused on asset management and focus on gathering management fees?

• 3:52David Weisburd?

  What do you find psychologically that drives those that want to be great investors versus great asset gatherers?

• 3:59Speaker 01

  We spend way too much time, or maybe it is the right amount of time, talking about this amongst the team. If we look at our managers that have sustained outperformance for a considerable amount of time, it comes down to, gee, just an inert competitiveness. They want to win. And they view winning as generating the best returns compared to their peers. And they will move heaven and earth to do that, even after reaching financial security. And in some ways, doing it more for the love of generating those returns than the economic incentives that flow from that.

• 4:36David Weisburd?

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• 6:01David Weisburd?

  It's where the managers get their ego and their ego attachment. Some managers get their ego from, I have all this AUM, I have all these management fees. Other managers actually get it from, I have the best fund. I'm not a NASA gatherer, I have the best returns, I have the smartest strategies and I'm doing well for my LP. So it's really about where you get your sense of purpose and your ego.

• 6:24Speaker 01

  That's completely right.

• 6:27David Weisburd?

  So let's double click on venture specifically. Andreessen Northridge just raised the largest venture fund in history. There's other venture managers that are very tactical and very capacity constrained and focus on having smaller funds.

• 6:43David Weisburd?

  Where in the market is it an asset to have capital? And where in the market do you really want to be constrained?

• 6:52Speaker 01

  Million dollar question, isn't it? We believe there are many ways to win.

• 6:57Speaker 01

  And I think kind of taking that example that you just highlighted with Andreessen, I think at the end of the day, it comes down to people. And so how many exceptional people do you have that are seeking to invest the amount of capital that you have? And that can be in a fund of $20 million through to an institution that's raised $15 billion. And I think the manager needs to know, or any asset owner or manager needs to know, what are their competitive advantages and what are their rights to win? Within venture, there is

• 7:39Speaker 01

  this reinforcing brand effect where people that have a desire to be successful want to be associated with successful brands and firms that have backed those amazing companies before. And in a world which has never been so competitive, having that

• 7:57Speaker 01

  the scale and resources to make their portfolio companies heard, sounds like a very attractive strategy. On the other side, whilst we're living in this era of incredible innovation, it's still how many truly transformative companies are going to be created per year? And how does that then, how many of those companies or what market share does a firm raising that amount of capital need to invest in?

• 8:24David Weisburd?

  For endowments, where does your capital structure give you an advantage? And how do you push that advantage in venture?

• 8:31Speaker 01

  Well, I just said in terms of the managers, I think we need to put on to ourselves. And I think

• 8:37Speaker 01

  I talk about it a lot with my colleagues where I think we need to look at ourselves and say, well, what is our advantages? And I think, yes, we can go with endowments initially where they are long-term perpetual pools of capital where

• 8:57Speaker 01

  They should have the ability to be consistent and loyal investors. And I think also another key point is that the returns are going to charitable and positive activities, which I think on the margin will, um, investment managers do prefer. But I think then we have to look at ourselves and we can say, well, I mentioned our size before, which gives us an advantage where we can maybe make smaller commitments to managers. So with those capacity constrained managers, a $10 million commitment is a lot easier to get into in these capacity constrained managers. And that can still be very meaningful for us.

• 9:41Speaker 01

  We're also increasingly looking at, well, how can we connect the venture managers with the research centers within the university? And the Cambridge is one of the world leading sense of excellence for artificial intelligence, for robotics, for quantum computing, for material science, which, kind of acting as a conduit for that should be incredibly attractive for venture capital firms.

• 10:10David Weisburd?

  Right now, there's this DPI crisis, as some people have labeled it, which is before 2024, you have on average 24% DPI per year. Last two years have been 9% DPI in alternatives.

• 10:28David Weisburd?

  So a lot of LPs are asking themselves, should we be deploying more into private equity, into venture, or should we wait until more DPI is made available? The contrarian point to that would be, everybody is vacating the space. Why not be offensive and capture market share? Where do you sit on those two sides of the continuum and why?

• 10:55Speaker 01

  I think it's great if everyone is saying not to invest. I think private equity has matured as an asset class over the last 30 years. And I think for us, I think as people kind of that may be kind of more here for shorter term, I think for us, where we just fundamentally believe in what I talked about earlier in terms of the reasons why private equity has a right to generate significant returns above and beyond public markets, I think net fewer limited partners competing for those best general partners and those general partners

• 11:35Speaker 01

  having theoretically less competition should be a great thing looking forward. On the specific point on liquidity and DPI, for us, it's always been very important to manage our liquidity and not get over askew on the liquidity and be truly reliant on distributions in any particular year. And

• 11:57David Weisburd?

  How much do you trust your NAV marks in your portfolio today? How much credence do you give them?

• 12:07Speaker 01

  It's a good question. We obviously speak to our managers on a regular basis, spend a lot of time traveling and spending time with them in person, reviewing the monitoring, the quarterly reports. And every six months, we do a big exercise across the portfolio on looking at the earnings growth and revenue growth and the margins and the leverage and everything like that. So we have very good visibility into the underlying assets that we hold. A job for us is not to question whether or not a company should be marked up or down by 5, 10%, but I think with that you get a good feeling of whether or not a manager is more aggressive or more conservative on their marks. Our general bias has been

• 12:52Speaker 01

  towards more quality focused managers where they are more focused on, I would say,

• 13:04Speaker 01

  They prefer to give good news and so we've generally seen more prudent valuations, slower markups as public comparables have risen up and I think on average, we see a markup on exit of our buyout companies in the region of 20 to 30%. When we're looking re-underwriting a manager, we spend a lot of time going through the historical portfolios and making sure that we feel comfortable with how they're marking and compare and contrast them to the rest of the portfolio. And so it's always interesting to see when you have a venture backed company as owned by multiple managers within our portfolio and we can kind of compare and contrast to see

• 13:47Speaker 01

  the valuations that each of them are holding at and naturally if one is holding it at a much higher valuation or even a much lower valuation than the others, that's a good impetus to start a conversation.

• 13:59David Weisburd?

  Do you think all things being equal, LPs have incentive for their GPs to actually mark up their book and mark more aggressively?

• 14:06Speaker 01

  That's the alignment point that we talked about before.

• 14:08David Weisburd?

  Because there's alignment with the manager of that pool of cattle. There's this principal agent problem that exists on the LP side as well.

• 14:15Speaker 01

  I can see that for us or say for me, where the time horizon, looking forward and building this portfolio is for decades to come. I think the underlying value is what really matters and so, and I think it is a far easier, you build a lot more trust with your stakeholders and with your limited partners and with the general partners, I would say if you are conservative on those valuations and then you surprise on the upside.

• 14:46Speaker 01

  We do take a lot of note when, say if a manager that is not doing so well on the performance side ahead of the next subsequent fundraise, you start seeing markups in that portfolio. And I think that for us then is really important to, when you have that underlying data of the revenue growth and the EBITDA growth. So I think it's a far easier conversation to have with the manager when you say, well, you've marked up your portfolio by 30%, but your earnings are only up by 10%. Can you please explain to us why you've changed the valuation multiple of these companies? And I think unless you have that transparency and the ability to kind of go into that amount of detail, it is always going to be a.

• 15:30Speaker 01

  A sticking point, and this may be one of the real benefits, the endowment where I think everyone has a long-term horizon where

• 15:41Speaker 01

  if I kept on coming to the boards that we have saying, look, we've had these amazing markups, but then coming back to them six months or a year or two years later and saying, oh yeah, that great markup I told you about it ended up being sold for a discount to that, I think that would quickly erode trust between us. So I think it's again, you have to get the incentives right within us as an organisation. And I think we need to be very much focused on that long term.

• 16:12David Weisburd?

  Turtles all the way, all the way down. What are the incentives of the GPs? What are the incentives of the people at the seat at the LP? What incentives are the underlying capital pools doing with those people in those seats? For example, some organisations, I interviewed the CIO of CalSTRS, I was there for 23 years. He built a very enduring team and as people see that, they're incentivised to think more long-term versus other organisations, when they're churning people every three to five years, they're not going to have the same

• 16:45David Weisburd?

  incentives as an organisation that's known for giving people a long runway. So it's really incentives all the way down.

• 16:52Speaker 01

  Completely agree. And I think I mentioned it briefly at the start, but

• 16:57Speaker 01

  I think that we have, we have the time horizon of the institution, which the university's over 800 years old now, which kind of think re-puts things into perspective. But I think also if you look at the time horizon of the team and of the individuals and with our CIO joining in early 2020 and myself and my senior colleagues joining around a similar time, I think kind of having that mindset of the team where we're building something for the next 10, 20, 30 years and as all having that long-term time horizon, I do think brings a lot more alignment, a lot more trust.

• 17:36David Weisburd?

  Hi Professor Steve Kaplan on, he wrote a famous paper, Do Private Equity Funds Manipulate Reported Returns? And TLDR, on average, they tend to skew conservative, but managers on their fifth, sixth, seventh, eighth fund tend to be more conservative than emerging managers that may be struggling to raise capital. So there's also, you have to look at those incentives. It's all fine and dandy to say that GP should have long-term incentives. If they're struggling to raise and they have this existential crisis, they're going to be more likely to overinflate their marks, whether consciously or subconsciously versus somebody that's trying to build a 100-year relationship with Cambridge and wants them to invest for the next 10 funds.

• 18:18Speaker 01

  Completely agree, and I think that's where we're in a very privileged position, where we run a relatively concentrated portfolio. So across buyout and venture capital, we have around 30 relationships. And you'll probably have a better number for me, but there's well over 10,000 venture capital firms. And I think a similar number for the buyout firms. And so we have the privilege of being selective and kind of running through that. And again, it comes back to this alignment point at the start. I think if we find a manager that, and we do our diligence and we find something erroneous in their reporting or their valuations,

• 19:02Speaker 01

  it's very hard to start a relationship when you don't have that trust. We have a great team and I think we're incentivized to not just look at past performance and it's really to think about future performance. So I'm really proud that we have backed managers in the past that were not the top performers in some instances, weren't even above the average in their performance. And there are reasons for in the past what led to some difficult years of performance, but they'd learned from those mistakes or they've evolved their capabilities. And now we believe that going forward, they can outperform. Again, that requires more work, that requires more diligence.

• 19:44Speaker 01

  But as long as you believe they are applying some differentiated capabilities in a repeatable manner, then we will spend the time to unpick that and take a look.

• 19:56David Weisburd?

  A lot of GPs, obviously, very hesitant to be vulnerable. And certainly there's an art to the kind of mistakes that LPs accept versus ones that are unacceptable.

• 20:14David Weisburd?

  Maybe double click on that and tell me about a case where somebody made a mistake and that actually helped them grow trust with you as LP.

• 20:24Speaker 01

  It's a great question and I think you can kind of take this multiple ways. Going back to a previous point on managers to focus on what they're truly great at. And we've had a particular manager comes to mind. That was focused on a particular geography here in Europe.

• 20:45Speaker 01

  They were very transparent that they thought they had a reason. They they were a software specialist manager and had a deep domain expertise in that area. And software can go across borders. And so they had a belief and an ambition to expand beyond their their region in in Europe to some other countries. And I think for us, what was important there was they reached out was said that they were thinking of doing that. We advised them not to and saying, you've got plenty of opportunity in your area. And they did.

• 21:25Speaker 01

  And they did that by building a new office, hiring a new team because they wanted people that could speak that particular language here in Europe.

• 21:33Speaker 01

  And that didn't work out. But to their credit, they came to us and said, yes, this did not work out. We're going to take some time to reflect.

• 21:46Speaker 01

  Here are our learnings from this in the sense of we are, we have a distinctive culture and trying to hire in that culture didn't work.

• 21:54Speaker 01

  Which I thought was a, that that shows true partnership with the manager, kind of opening up to their mistake and kind of especially when when we guided them otherwise. And actually.

• 22:08Speaker 01

  A couple of years later, after all of that, last year, they said, oh, fine, we're going to try again. But here is what we learned previously. And this is what we're doing differently this time. And it's early days, but actually in the years since they've done that, it seems to have gone exceedingly well. And so I think if you have that dialogue, you can do that.

• 22:31David Weisburd?

  Most people don't realize how incredibly difficult it is to actually have alpha in the private markets. How much of a hurdle it is. And once they capture that lightning in a pan, they just assume, well, how about over here? And the right way to think about it is every new strategy is default debt. You need something exceptionally unique. You need exceptional talent, exceptional synergies or exceptional perspective and track record in order to capture alpha, another part of the market. It's almost like underwriting a strategy from scratch.

• 23:06Speaker 01

  I completely agree. I think we say to our managers quite frequently, and whether this could be with co-investments or continuation vehicles, let alone new strategies is

• 23:19Speaker 01

  there's a huge value to simplicity.

• 23:24Speaker 01

  What, when you wake up in the morning, what's the first thing that you think about? When?

• 23:31Speaker 01

  How many plays do you want to be juggling? How much time do you want to focus on? Like you only have a certain number of hours in a day or the week or a year. And how can you use that? To the best of your ability to deliver the best returns that you can. And we talked earlier, there are some benefits to scale in certain situations, but I think for in most scenarios, we would argue that keeping things simple, keeping things focused, keeping things focused on those core areas of expertise will lead to better, more sustainable investment returns.

• 24:10David Weisburd?

  As I turned 40, I started thinking about this finiteness of the year. Let's say there's 50 working weeks a year. There's five days, so 250 days. And I think high level thinking tops two hours per day of truly first principle thinking or very high output thinking. So you have 500 hours per year that you could focus. Where are you going to focus those 500 hours? I think people assume they're off by an order of magnitude. They think it's 5,000 or 50,000 hours, but it's really 500 hours of really high level thought you have in a year.

• 24:43Speaker 01

  I completely agree. And I think you could argue maybe even less for a lot of people. One of the real joys of this job is, and the seat that I'm in, is that I get to spend a lot of my time speaking to some of the most successful, intelligent people in the world.

• 25:03Speaker 01

  Most of the managers that we're investing with have been near the top of their fields. They've got anywhere from five to 50 years of investment experience. And so naturally, every interaction, every meeting that we have, there is something to learn, which I think is just an incredible place to be or position to be in.

• 25:27Speaker 01

  But I think to your point, you can either look at it as a benefit or a pro or a con of what we do, where I'm coming up to six years here. I think we've built a truly world-class portfolio where we have these 30 relationships. And so I think what it's really turning to now is unpicking with the managers that we have, where we have our highest conviction, what has led to them being so successful? And what has led to us having that conviction in them? And what are the learnings that we can take from that to then say, okay, well, when we're meeting the next manager in that first meeting, what are those questions that we can ask to kind of quickly get to that point where we think, do they have those capabilities

• 26:09Speaker 01

  or values that we've seen successful firms before?

• 26:13David Weisburd?

  Where is alpha in venture capital today?

• 26:17Speaker 01

  Great question. It's clear that the asset class has never been so competitive.

• 26:23Speaker 01

  Not just from a number of managers and a capital raise perspective, but also from the number of underlying companies that are competing against each other, trying to do the same thing. Investing in ventures, investing in innovation, and it's just clear that we're living in unprecedented times at the moment. And so therefore, we do believe there is a lot of value to be created. But this competition has really kind of switched how ventures worked over the last 30 years. And they've gone to the days when a founder would have to go up Sand Hill Road in Palo Alto, kind of meeting the 20 firms and asking them for money. So now the power very much relies with

• 27:04Speaker 01

  the founders. And those, the founders that have the highest potential know that they have a choice over which venture capital firms they partner with and take money from. And so

• 27:20Speaker 01

  the alpha really relies with those venture capital firms that have a differentiated proposition or a reason why an exceptional founder would want to pick with them and work with them for the next decade of their journey.

• 27:34David Weisburd?

  What about structural alpha in venture?

• 27:37Speaker 01

  In the end, you have to say there is structural alpha where

• 27:41Speaker 01

  there are a number of firms that consistently generate superior performance compared to the rest of the market.

• 27:51Speaker 01

  And then I think the question becomes, well, do you think they can continue it? Or do you think like at some point, all of these storied venture firms, they started themselves at some point and then they got themselves into that position?

• 28:05David Weisburd?

  That's the art and the science. The science is being quickly commoditized by AI. You put in the portfolio returns over the last five funds and AI will give you the right answer whether it was a good fund. The art is will they continue to perform?

• 28:22Speaker 01

  We spend a lot of time analyzing historical performance and was it luck? Was it judgment? Do we think it's repeatable?

• 28:31Speaker 01

  But in the end, it's a people business and it comes down to our assessment of those people. What are their skill sets? What are their motivations? And I think it's really important to

• 28:42Speaker 01

  have those dialogues with managers and try and get a sense of when you think their skills, capabilities, motivations will be changing or waning or passing on to the next generation and how you think about all of that is incredibly important. As you think about the life cycle of an investment, because in the end, we want to be invested with managers for multiple fund cycles, having this long-term horizon. So spending that time so we can either double down and increase our commitment size next time around or decide to part ways is a really important part of the job. Once you are invested with the manager.

• 29:21David Weisburd?

  Going back to another Professor Steve Kaplan study, 52% of top quartile funds have persisted and stayed top quartile, which is why LPs are so focused on this top quartile. But said another way, 48% do not persist. So you have a coin flip and figuring out who's going to continue to be great and who's going to revert to the mean is the hard part. If you could go back to 2012, when you had just started your career at Morgan Stanley, what is one piece of timeless advice you'd give a younger Sam that would have either accelerated your career or helped you avoid costly mistakes?

• 29:59Speaker 01

  Network is incredibly important. I don't think you can ever invest early enough in your network and build that up over time. And over time, it becomes a compounding benefit and

• 30:14Speaker 01

  I think a lot of, well, a young Sam was very focused on making sure that their call, that model was done correctly on the day. And I think actually spending that time, whether it be finding mentors you can learn from, finding peers that you can collaborate with and share ideas, finding people that may not actually seem

• 30:37Speaker 01

  directly relevant right then, but over time can do and, um, and over time that compounds and really

• 30:45Speaker 01

  puts you in a very strong and privileged position. And

• 30:50Speaker 01

  for example, now I would say

• 30:54Speaker 01

  nearly all, nearly all, if not all of our venture capital investments that we've made over the last three years have come from referrals from our network, whether that be other limited partners or existing managers in our portfolio, or even we spoke, when we've spoken to founders and entrepreneurs, they've mentioned some other firm and connected us.

• 31:14David Weisburd?

  You have to understand who's playing the long-term games and who you spend your time on, where you focus your time. That is upstream of everything. If you think of people as downstream as the most important, upstream of it is what people are in your network and what people talk to on day to day. Sam, this has been absolute masterclass. Thanks so much for Jump Hand Podcast.

• 31:37Speaker 01

  Thanks for having me.

• 31:39David Weisburd?

  That's it for today's episode of How I Invest. If this conversation gave you new insights or ideas, do me a quick favor. Share with one person in your network who'd find it valuable or leave a short review wherever you listen. This helps more investors discover the show and keeps us bringing you these conversations week after week. Thank you for your continued support.