E118: Loyola University's $1.2 Billion Edge

In this episode of How I Invest, we’re joined by Michael Kakenmaster, Director of Investments at Loyola University Chicago. Michael shares his journey and expertise in managing university endowment portfolios, with a focus on private markets and hedge fund strategies. He offers valuable insights on how to build sustainable, diversified portfolios and the strategies that have led to success in his role. We also discuss the evolving landscape of venture capital and how institutions like Loyola are adapting to market changes.

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

• 0:00Speaker 00

  We have two venture fund commitments. One is focused on China VC, but they also have a US-focused fund strategy. And the other one is just a pure US-focused strategy.

• 0:10David Weisburd?

  What have been some of the most valuable lessons you've learned from your allocator friends as it relates to venture?

• 0:15Speaker 00

  If you're raising $50 million, what does that look like? How many companies? What's your ownership target? What's your follow-on? Or if you want to raise $100 million, I think there's a big leap in what you have to do as a VC to kind of get allocation to when you're writing a $250,000 check into a round is a lot different than when you want to write a $1 to $2 million lead check into a VC. And so it takes a different skill set.

• 0:44David Weisburd?

  You mentioned earlier that you have an opportunistic bucket. And one of those opportunistic investments you've made is into a helicopter lease fund. Tell me about what made you invest into a helicopter lease fund?

• 0:54Speaker 00

  It's actually something that was born out of my time at a family office prior to Loyola. So at this office, we had been kind of investors in private credit for a number of years. I'd say they, you know, had to to them. They were investing in private credit managers in kind of the early 2010, 2011. So spreads were nice and wide. You got after-tax return, after-tax yield was attractive, I think, relative to to public options. But as time went on and markets matured, and this was still, you know, back in like 2018, but by then, you know, the private credit markets were a lot bigger than they were eight years prior and spreads were fairly, were narrowed, just were in a low interest rate environment at the time.

• 1:36Speaker 00

  So there wasn't a ton of risk reward to be had going after-tax yield, after-tax returns for the family. And so we set out to try to find, you know, an alternative. And we came across this new fund that was looking to buy and lease helicopters. And there were some, some interesting tax benefits to it that the family got on board with. And so we ended up making a commitment and fast forward, I come over to Loyola and, and this manager was looking to make their second funds. We had carved out this opportunistic private investment bucket to do interesting things that Weren't necessarily a venture investment or growth equity or buyout to kind of leverage just our sourcing network and do stuff that we found,

• 2:16Speaker 00

  you know, can return something within our return thresholds, kind of mid to high net return perspectives. And mid to high team net returns and do so in kind of a differentiated fashion. So we, being in the endowment, we don't have the kind of tax implications of family office, but, but we were able to kind of get comfortable with the strategy here and were able to make a commitment to the second fund.

• 2:42David Weisburd?

  Does it basically just come down to there's just a limited supply of capital that's able to invest into something like a helicopter fund? So these very unusual or esoteric investments have this embedded premium. Talk to me about that.

• 2:55Speaker 00

  This kind of goes into a lot of things that we find interesting where there may be smaller market opportunities. And so you don't have a lot of maybe name brands, investment firms that are larger go after them because it just doesn't move the needle for them. And I think in the aviation finance market, there's a lot of what you'd call like kind of commercial aircraft leasing funds or railcar leasing funds. And those are big markets. I think they're well understood and the returns are, I think, easy to kind of predict or expect because it's, again, the market is very efficient in that matter. With helicopter leasing, one of the things that we did a lot of work on was just the history and the why, right? If the esoteric market is so attractive from a return perspective, like why isn't there more capital?

• 3:38Speaker 00

  And in this case, I think a couple of things was is historically what we learned is that there were some, some tougher stories, some tougher outcomes for different helicopter leasing companies that I think might have deterred a lot of investment firms from taking a look. I think the, you know, the implication of owning versus leasing aircraft, the economics of which was probably not widely well known. I think in this case, this manager would tell you that leasing versus owning makes a ton of sense. And so there was, I think, just a, just lack of just kind of fundamental knowledge of the market and just maybe, if you did a quick Google search on some of these, you know, legacy players and maybe one bankrupt or out of business,

• 4:16Speaker 00

  you say, I don't want to spend time there. It seems like I do that when I got, you know, perfectly good, like midlife commercial jet that I can lease and have a little bit more understanding of what the risk return is. So, so I think that's kind of with this specific asset class, the reason maybe kind of parlayed that into your find parallels to other asset classes that go more off the run.

• 4:35David Weisburd?

  There was a period of time in the space that did not generate good returns and those circumstances have changed such that today, from a first principle basis, it makes sense here. You're getting essentially a free premium for not additional risk.

• 4:48Speaker 00

  Free premium, I don't know if that's, it's always the case here, find a free premium, but, but there's certainly, you know, some risk inherent to it. I mean, that's something that we get comfortable with through our due diligence. And, but yeah, I think, you know, finding these markets that are very overlooked and you're able to go in and be a institutional capital provider is, is a nice place to be in. So we were happy to support this manager again.

• 5:10David Weisburd?

  Walk me through your process for diligencing these unique asset classes like helicopter leasing. So comes to your desk, how do you process an incoming diligence?

• 5:19Speaker 00

  We have a small team and I'd say we are very big proponents of putting certain strategies into like the too hard to understand market where if, if we can't understand and confidently, effectively communicate why a fund performed the way it did to, you know, our board, our committee, or our stakeholders, we shouldn't be doing it. And so, you know, when we look at something that's a little bit more esoteric, like helicopter leasing, you know, we make sure that is this something that we could discuss with our stakeholders, our, our board, our committee to, you know, in a way that they would understand exactly what the return profile is, the risk profile, how they make money, et cetera. And with this one in particular, I think that the best way to do it is, and what we did here is kind of frame the strategy

• 6:04Speaker 00

  or the asset class in a way that's familiar to us and then work with the manager to kind of tell us where we're right, tell us where we're wrong, tell her where it's similar, tell us where it's similar, tell us where it's different. So with this leasing strategy, I say, I understand how, you know, I don't own apartments, but I've leased an apartment before. I kind of understand how that process works. Like walk me through how it's similar in terms of just the structuring, the term of the lease, the pricing, how is it different? What sort of insurances are you taking, things like that, to kind of come out with, okay, this is exactly how this market operates. And now I kind of understand it through a kind of a lens of something I'm more familiar with than not. Can communicate it in a more effective way.

• 6:47Speaker 00

  I should say that there are a lot of nuances to this particular strategy that I'd say I'm not not. The manager is much more qualified to walk you through, but we really spent a lot of time with him and just, you know, just asking a lot of what may be perceived as dumb questions, but it just, I think that's one of my biggest learnings in my career is, ask those questions early because it helps really kind of set the table and help you learn.

• 7:10David Weisburd?

  And how many people in the space do you speak to in order to, underwrite what the manager is telling you and to get more comfort around the strategy?

• 7:18Speaker 00

  We spoke to with this one, a lot of references that just, you know, were familiar with leasing, maybe more other aircraft leasing, verticals, just trying to understand, you know, partially back to what we said about just why or why not helicopters. And doing a lot of research into the history of the market, speaking with folks that might have a little bit more knowledge. It's a lot harder to find those folks for a helicopter leasing strategy than for a, you know, a venture fund, but, but, you know, hopefully through our network, be able to find a key people. I'd say, you know, also the benefit of, you know, Loyola, we're not unique to having an investment committee, but, we have a lot of smart people that that kind of look at what we're investing in and a strong, you know, affiliation with the university and want us to do well. And so, you know, they have various backgrounds spanning from private equity, venture capital, hedge funds, real estate. And so,

• 8:02Speaker 00

  we show them something like this and they ask, ask a lot of questions that, you know, maybe we didn't think of and have a different perspective on it. You know, in one case, one of our IC members had invested in a company that I believe had kind of business in the aftermarket helicopter parts business. And so he just had a unique kind of insight onto, hey, how is this manager valuing these helicopters? Like what's their, kind of terminal value underwriting because eventually, you know, they're going to have to sell these things and, you know, that price can vary based on X, Y, Z. And so, you know, that just kind of opens up, you know, us for more questions, learning more and stuff like that. So it's a really iterative process that that we can kind of get to our final answer.

• 8:37David Weisburd?

  In venture, you have this paradox where the best investments oftentimes don't have the support of the entire investment committee. There's disagreement around it. They end up, you know, returning 100x, 1,000x in some rare cases. Is there a similar dynamic in other asset classes where sometimes controversial ideas could lead to some of the best outcomes?

• 8:56Speaker 00

  Oh, yeah. No, I think so. I think, I mean, if you're investing in something like venture, from the perspective of a VC fund, I think finding things that are off the run, not loved, kind of out of vote, like that's how you generate the best return because you're coming into something that other investors have said, no, thank you. So maybe you're getting a better price. You know, you're a first mover into something. And so that maybe gets more deals in that space. So I think that's, that's pretty common. You know, in public equity markets too, I think having a differentiated view on a stock or, or, you know, in credit markets on a bond, it creates kind of this unique entry point that, you know, if you're right, you can earn an excess return, you know, to a

• 9:36Speaker 00

  different degree. So I think definitely having a differentiated viewpoint, you know, is important. Having a differentiated viewpoint amongst kind of your investment committee, I think is helpful for conversation. But obviously, at the end of the day, you want everyone to kind of be on the same boat. It's never great to know that, you know, if you're investing in a fund and there's dissension among the investment committee, but they're making the investment anyways. Like, that kind of opens up a whole swap of questions you want to ask about what their process is like, how do they construct the portfolio? So I think it's, yeah, having a, you know, contrarian view is great, but obviously you want kind of everyone on your, that you're investing in the fund is to be really in the same boat or in the same direction.

• 10:15David Weisburd?

  What are some of the characteristics that makes the best investment committee member?

• 10:19Speaker 00

  Asking good questions, understanding of just the portfolio, the strategy, our process is, is really important. Being helpful where you can, I think. Pushing back where appropriate is important.

• 10:30David Weisburd?

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• 11:14David Weisburd?

  At Loyola, you have $1.2 billion under management and you have these ranges across your assets, meaning you could invest, it's not a fixed amount, but it's a range. How do you make the decision where the incremental dollar goes, whether it's private equity or venture capital or private credit or helicopter leases?

• 11:32Speaker 00

  Well, I think we're pretty well structured when it comes to deployment. I mean, we're, since on the private equity side, we're in the midst of growing that allocation. We have a unique position relative to some other allocators where we can lean in and we want to add exposure. And, you know, I think there's some bandwidth and capacity limits to, hey, could we do 10 venture funds? Like, I think that would be, in a given year, I think that would be a lot. So try to kind of have a good mix. I think in our private equity portfolio, we're going to lean more on the buyout side, but definitely want to keep doing venture and so kind of keep that balance. But, you know, within, you know, across the whole portfolio, when we think about kind of the incremental dollar, I think we know exactly, hey, this slight overweight that we have in public equities that can go help fund our growth

• 12:16Speaker 00

  in the private equity side, our hedge fund portfolio is fairly well built out. If we want to add something, that means something has to come out and kind of manage the portfolio from there. And then this opportunistic bucket, as I said, is kind of an area that we can, in a way, like scratch niche that we're seeing, you know, if it's an interesting opportunity coming through our network that we feel offers a nice risk-adjusted return for, you know, liquidity that we're giving up, we want to be able to pursue it.

• 12:41David Weisburd?

  You have a relatively new venture program. You started in 2022. Walk me through how you went about building your venture capital investment.

• 12:49Speaker 00

  Lots of meetings. It's just...

• 12:53Speaker 00

  I I I've never been one to manage my calendar well, but when it comes to venture, and we've we've decided to to kind of focus in on earlier stage, and I can talk a little bit about that about I as well. But there's a lot of GPs out there, a lot of new GPs, a lot of existing GPs. So I have done a lot of meetings. I've gone to conferences where I can and and just network. And so that's that's kind of been the been the been the process so far. We did early on, we have two fund to fund venture fund to fund commitments. One is a firm that one is focused on China VC, but they also have a US focused fund to fund strategy. And the other one is just a pure US focused strategy. So we lean on them to kind of help us maybe craft our asset,

• 13:38Speaker 00

  you know, our venture strategy. And then as we're seeing things that we think are interesting, maybe there's a shorter kind of fuse on the capital raise, we can reach out to these, you know, fund of funds managers and be like, hey, can you give me, you know, five minutes on this GP versus that? And really, we should be focusing on one or the other, you know, let us know. Or if both are kind of not interesting for various reasons, we want to know that, too. So we can kind of get to answers and refine our pipeline as quickly as possible. The other piece, too, is is my allocator network, folks that have had more experience and time investing in venture capital than me. I really try to pick their brain as much as I can on not not just like, you know, what are they investing in? But how are they evaluating managers?

• 14:20Speaker 00

  I think the way you look at a, you know, a seed stage fund that's raising $30 million is different from a seed stage fund that's raising $200 billion. That's different from a, you know, series A and B fund that wants to raise anywhere from 100 to 300 million. So a lot of nuances come that and there's, you know, I think there's not one perfect way to go about doing it. If you looked at our venture portfolio today, you'd see funds kind of ranging from that, what, 70 million up to 200, 250. And so we've kind of played across just take smaller ownership positions, we take bigger ownership position, what's their, you know, follow on policy, their reserve ratio, all that stuff. And a lot of that, like, just kind of due diligence questions and kind of understanding has just come from picking

• 15:02Speaker 00

  the brains of, you know, allocator friends that, you know, I should say thank you now because it's been a it's been a big help because it's it's helped us kind of get up to speed. It's been a steep learning curve. And so it's been just instrumental into our venture portfolio development.

• 15:16David Weisburd?

  What have been some of the most valuable lessons you've learned from your allocator friends as it relates to venture?

• 15:21Speaker 00

  With Reventure, I think it's again coming down to fund size and strategy. And what was a, you know, looking at a GP's previous track record, whatever that might be, whether it's angel investing or they've worked at a different fund and how to kind of frame that into what they're doing prospectively with their current funds. And you kind of talk a lot about, okay, if you're, if you're raising $50 million, like, what does that look like? How many companies? What's your ownership target? What's your follow on? Because, or if you want to raise, you know, $100 million. I think there's a big leap in what you have to do as a VC to kind of get allocation to, you know, when you're writing a $250,000 check into a round is a lot different than when

• 16:05Speaker 00

  you want to write a one to $2 million, you know, lead check into a C. Like, so it's, you know, and so it takes a different skill set. And that's something that at first I didn't quite realize. And a lot of the emerging managers that we talk about come from different backgrounds. And let's say they were working for a tech company, you know, like making angel investments in friends and colleagues. Like, that is great, but how translatable is that to what they want to do prospectively? You know, I think just, just kind of figuring out those nuances between, you know, does the VC kind of understand portfolio construction, portfolio management? How does their strategy scale? Has been, you know, it's been a big learning for us and something that we're just incorporating so much into our conversations with new VCs.

• 16:45David Weisburd?

  Let's move to hedge funds. Loyola has a pretty substantive hedge fund portfolio. What do you look for in hedge fund managers?

• 16:52Speaker 00

  We have, you know, event-driven managers. We have macro managers. Macro environment can be pretty dynamic depending on, you know, your breadth of focus. If you're looking at global markets or emerging markets, belt markets, things like that. We have some smaller kind of event-driven strategies that I think, you know, are looking at different corporate events from a unique lens. And so, yeah, so we also have some arbitrage plays and some relative value investments. So there's all these markets that I think are good hunting grounds. What we've done over the past few years is Trade out of managers that are, call it bigger, longshore, generalist strategies, where I'm not seeing a ton of differentiation in the returns. They might have a lower beta

• 17:34Speaker 00

  because they're running lower net exposure, but really when you do the analysis, you're seeing there's not a lot of excess return on their invested capital. So really looking for folks doing unique things. Given our public equity exposure being the biggest allocation, we certainly look for strategies that are going to provide some diversification to that public equity beta that we get. So I'd say we wouldn't really consider something that has a high beta, but a lot of our managers today are, call it, low beta, low correlation. It's all like a beta sub point four, which is great. So it adds some diversification. We're not giving up a ton on the return side. So that adds a lot of utility to the overall endowment portfolio. And then on the qualitative side, it's same across every manager we look

• 18:18Speaker 00

  at, but like a strong alignment. I mean, we need to see that there's, we're all kind of working for the same goal, which is the best risk adjusted return at the end of the day. And how are they getting there? I mean, if it's a, you got to walk through the process and walk through investment examples and have to really determine if this is something that is repeatable, if it's their discipline and their approach, which can have many factors. And obviously focusing on the same market, having a stable team is important. So how repeatable is this process? If they had success in the past, what's the likelihood that they can do it going forward? So really kind of dig it on that side too. So it's yeah, multi-factor approach. A lot of things that we look for, we take into account.

• 18:56David Weisburd?

  Do you believe in the Fisher market as it relates to the public markets?

• 19:00Speaker 00

  This is probably not the best answer, but I think there's different degrees of efficiency. I think that there's, if you're looking at, if you're trying to invest in

• 19:09Speaker 00

  large and mega cap US listed companies, that's going to be tough. If that's your bogey, it's going to be a tough bogey to beat because those companies are well covered, not only by the sell side, but just different publications, media, social media, everyone kind of has a view. And I think a lot of that information is priced in past and future. As you go down market into the small and micro cap space where you find things that aren't well covered. Then you see maybe more pockets of inefficiency. You can look outside of the US into emerging markets that's or just international stocks, because sometimes the street just doesn't know how to cover those appropriately.

• 19:45David Weisburd?

  Yeah, and it seems like the efficiency is correlated with the amount of capital in it. You even see this in around the election, you see the betting markets and the less liquid ones have seemed to have a higher spread than the more liquid ones, which are much tighter across platforms.

• 19:59Speaker 00

  For sure. Yeah.

• 20:00David Weisburd?

  What do you wish you knew before starting at Loyola's Endowment?

• 20:04Speaker 00

  Honestly, I think it was been nice to maybe have a few more reps with venture capital managers and a little more knowledge on the venture capital market and its history. You know, it's funny because when we started looking at venture, I sometimes felt like silly because there are certain firms I just I was like, who's that? Like, they would name, you know, a well-known VC fund and I'd be like, oh, I've never, who are they? What do they do? And maybe the people I were talking to looked at me like I was, who is this guy? So, you know, that was a bit of a learning curve for us, you know, understanding some of the dynamics that go into portfolio management and construction would have been helpful, but I'd say that, but I also, you know, believe that

• 20:44Speaker 00

  the time that we were investing in or starting to look at venture, so I started looking when I joined Loyola in early 2021 and then kind of more earnestly in 2022. You could make a strong argument that the market was fairly distorted at that point in time and our apprehension or maybe just our patience or just our way of still playing our deployment worked to our advantage because we didn't quote a lot of capital to work in those years. We really, you know, I think our commitment pacing has picked up in 2023 and now in 2024. So, knock on wood, we avoided some of the excess and maybe avoided investing in managers that might not have a fund too or a subsequent fund. So it'd be great to have maybe a more leg up on VC market history and underwriting, but maybe it worked for our benefit.

• 21:29David Weisburd?

  I think the one pattern that I hear across asset managers, especially the expert managers across multi-assets, is whenever they enter into a new market, they make sure to size their checks small. They know they're self-aware enough to know that they have ignorance in that space and that they're paying off their ignorance debt in the first two, four, five, 10 investments, you know, depending on how different of a market it is from asset testing. Well, Mike, I've really enjoyed our conversation. Thanks and look forward to sitting down soon.

• 21:59Speaker 00

  Thanks so much. This was a lot of fun. Appreciate the time.

• 22:01David Weisburd?

  Thank you, Mike.